Punitive and other damages for emotional distress in third party bad faith actions

Horstman, James K

I. INTRODUCTION

In the last few decades insurance litigation has undergone drastic changes. Until just recently it focused almost entirely on issues relating to policy interpretation and technical coverage defenses. Damages were essentially limited by the insurance contract. Today insurers must grapple with many new theories of liability, chief among them is insurer bad faith. Not only have theories like insurer bad faith changed the legal principles under which plaintiffs pursue a cause of action, they have increased the nature and extent of damages that plaintiffs can expect to recover in insurance litigation.

The truly disturbing aspect of bad faith cases for insurers is the fact that these claims allow for the recovery of “extra contractual” damages – monies in excess of the stated limit of first-party or third-party insurance. These extra contractual damages, such as punitive damages and damages for emotional distress, have become an attractive source of recovery for both personal injury plaintiffs and insureds who believe that claims against them have been improperly handled. The purpose of this article is to explore the ability of plaintiffs in bad faith actions to recover punitive damages or damages for emotional distress in five influential jurisdictions: California, New York, Texas, Illinois and Pennsylvania.

II. FIRST-PARTY AND THIRD-PARTY BAD FAITH CLAIMS

Bad faith claims can be divided into two different categories: claims arising from first-party insurance and those stemming from third-party insurance. First-party insurance is purchased to protect one against some casualty, such as premature death, accident, health, disability, fire or damage to one’s home. The insurance company, in exchange for the payment of a stated premium, agrees to indemnify the insured for harm sustained due to predefined casualties or injurious events.1

A first-party bad faith action is predicated on proof that an insurer intentionally embarked on a course of misconduct in order to avoid the payment of a proper claim made by the insured party. The gravamen of this cause of action is the wrongful denial of coverage and involves only two parties: the insurer and the insured.’ First-party bad faith claims typically involve:

(1) Questions of coverage;

(2) Questions of cause or origin of damage;

(3) Substantial differences of opinion as to amounts, scope, or cost;

(4) Adjustment problems, including personality conflicts between the insured and the adjuster;

(5) Policy violations; and

(6) Long delays in the adjustment of the claim.3

According to one commentator, first-party bad faith claims generally look and act like breach of contract claims, which put in issue the post-loss conduct of the insurer with respect to the handling of the claim.4

Third-party insurance refers to insurance that protects the insured against liability for injury caused to the person or property of another (the third person).’ Third-party bad faith claims frequently involve an insurer’s alleged failure to provide its insured with a proper defense in the underlying action, or a failure to settle the underlying third-party tort claim against the insured within the limits set forth in the insured’s policy of insurance. A bad faith failure-to-settle claim is predicated on proof that the insurer wrongfully failed to settle a claim against the insured within the policy limits and that this failure resulted in a judgment that exceeds the policy limits, causing the insured to be liable for the difference.6 Although the target of third-party bad faith claims is usually the primary insurer, third-party bad faith claimants may be insureds, underlying tort claimants, other assignees or equitable subrogees of the insured, or excess carriers,7 The third-party bad faith cause of action has largely developed by way of analogy to the first-party cause of action. As such, in many jurisdictions the third-party cause of action continues to evolve and expand. Although extra contractual damages can be sought in first or third-party actions, the threat is increasingly serious in the third-party context. The authors have chosen five influential jurisdictions to evaluate the availability of extra contractual damages in third-party bad faith actions nationwide.8

III. THE CALiFoRNiA ExPERIENCE

In California, a plaintiff in a third-party bad faith action may recover both punitive damages and damages for intentional infliction of emotional distress.

A. Emotional Distress Damages

The Supreme Court of California first recognized the tort of bad faith refusal to settle in 1967 with the case of Crisci v. Security Insurance Co.’ The court reasoned that every contract, including policies of insurance, contains an implied covenant of good faith and fair dealing and that this obligation requires an insurer to settle when there is “great risk of recovery beyond the policy limits.”10 Significantly, the court in Crisci clearly classified this breach of duty as an independent tort, rather than a breach of contract. Crisci was a seminal case in that, along with recognizing the tort of bad faith refusal to settle, it also established a plaintiff’s ability to recover damages for mental distress.11

The plaintiff in Crisci owned an apartment building that she insured under a general liability policy issued by the defendant. One of Crisci’s tenants severely injured herself when the staircase in the building gave way. The tenant sued Crisci for negligence in inspecting and maintaining the staircase, seeking $400,000 as compensation for her physical and mental injuries and medical expenses. Crisci’s insurer, despite numerous settlement demands within the policy limits, offered only $3,000 of the $10,000 available in coverage under the policy. When a final pretrial demand of $9,000 was made, Crisci offered to contribute $2,500 of her personal funds to settle the case, but still the insurer refused to settle.

At trial, the jury awarded the tenant$ 100,000. Crisci, an immigrant widow of 70, became indigent attempting to satisfy the excess judgment against her. The change in her financial condition was accompanied by a decline in her physical health, hysteria, and suicide attempts. As a result, Crisci brought an action against her insurance company and was awarded $25,000 in damages for mental suffering. In upholding the mental distress damages award, the court ruled that “nervousness, grief, anxiety, worry, shock, humiliation and indignity” were all compensable as elements of damages proximately caused by the insurer’s refusal to settle the case against Crisci.12

In the two decades that followed, the Appellate Courts in California did not elaborate on the holding in Crisci. Instead, they sought to answer whether the California Insurance Code created a private cause of action against insurers for deceptive acts and practices, including the failure to attempt in good faith to effectuate prompt, fair, and equitable settlements.” During this period, the California Supreme Court overruled one of its prior decisions” and decided in Moradi-Shalal v. Fireman’s Fund Insurance Co.,” that the legislature did not intend for the Insurance Code to offer a private civil cause of action against an insurer. In Moradi-Shalal, the Supreme Court specifically recognized that even though its decision precluded statutory recovery for bad faith, courts retained jurisdiction to impose civil damages against insurers in appropriate common law actions. In dicta, the court listed intentional infliction of emotional distress as one such traditional theory upon which a plaintiff could secure a commonlaw recovery.

The California Court of Appeal capitalized on this dicta three years later in Weiner v. Fireman’s Fund Insurance Co.” Herman Weiner suffered severe injuries when an employed caregiver failed to engage his wheelchair’s antitipping device. Weiner fell from the chair, struck his head on a concrete walkway, was paralyzed, and died six months later. The caregiver’s employer was insured by Fireman’s Fund. Although that insurer was allegedly aware that the decedent’s wife and one of his sons were also confined to wheelchairs, it ignored communications from them, intentionally delayed responding to settlement offers, and continually raised unfounded questions about liability and damages. In addition, Fireman’s waited until twenty-one months after the accident to make an initial settlement offer of $105,000. Ultimately, the case went to trial and the jury awarded the decedent’s family $650,000.

In their subsequent action against Fireman’s, the plaintiffs in Weiner (the decedent’s wife and children) did not specifically plead the tort of bad faith refusal to settle. Instead, they sought recovery for intentional infliction of emotional distress as an independent tort. The court, extending the Supreme Court’s dicta in Moradi-Shalal, determined that the plaintiffs stated a cause of action for intentional infliction of emotional distress based upon Fireman’s outrageous conduct in failing to engage in good faith settlement negotiations with them.”

Despite the fact that in Weiner the court displayed an eager willingness to allow plaintiffs to recover for intentional infliction of emotional distress in thirdparty bad faith actions, California appellate courts have since erected a hurdle for plaintiffs seeking this recovery. Emotional distress damages are recoverable in third-party18 bad faith cases only when the plaintiff has also suffered some financial loss.19 In conditioning the recovery of emotional distress damages upon proof of economic damages, California courts hope to reduce the danger of frivolous claims.20

B. Punitive Damages

Punitive damages are also available to California plaintiffs in third-party bad faith actions. In Cain v. State Farm Mutual Automobile Insurance Co.,” the court squarely held that because the violation of an insurer’s duty to act reasonably and in good faith to settle claims against the insured sounds in tort, rather than contract, punitive damages may be awarded in such actions.

The plaintiff in Cain was injured in an automobile accident involving an individual insured by State Farm. During negotiations, State Farm rejected several settlement offers, even though each was well within the policy limit of $25,000. At trial, the jury returned a verdict in the amount of more than $57,000 against State Farm’s insured. Subsequently, Cain brought an action against State Farm alleging bad faith failure to settle and was awarded $115,000 in punitive damages. In upholding the punitive damages award, the court noted that State Farm was aware of the strong probability of an excess judgment against its insured. Nevertheless, contrary to advice of its own counsel, it rejected offers to settle within the policy limits even though it was aware that the personal assets of its insured would be wiped out by an excess verdict. On these facts the court concluded that State Farm acted in conscious disregard of its insured’s interests and was therefore liable for punitive damages.

California has a statute governing the availability of punitive damages.22 It makes those damages available to a plaintiff when the defendant is guilty of oppression, fraud, or malice.” Courts applying this statute in third-party bad faith cases have concluded that punitive damages are available under the following circumstances: when the insurer acts in conscious disregard of the insured’s rights,24 when there is “substantial evidence of an intent to vex, injure, and annoy,”25 and when there is evidence of conduct by the insurer which is “so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people.”26

IV. THE NEW YORK EXPERIENCE

In the state of New York the availability of punitive damages and recovery for intentional infliction of emotional distress in third-party bad faith actions is profoundly unclear. New York’s highest court has ruled that the section of the state’s insurance law” that prohibits insurers from engaging in unfair claims settlement practices does not confer a private cause of action on an individual.21 Thus actions for third-party bad faith are limited to the common law.

Much of the New York insurance bad faith standard originated in Gordon v. Nationwide Mutual Insurance Co.19 In Gordon, the New York Court of Appeals first recognized that an insurer may be held liable for bad faith breach of an insurance contract based upon its dealings with a third party.10 The court noted that every contract contains an implied covenant of good faith and fair dealing and that damages for an insurer’s breach of that obligation may exceed the policy limits. Significantly, the court in Gordon did not treat this breach as a tort, but instead chose to classify it as a contract action.

Four years later, the same court specifically recognized that the obligation it acknowledged in Gordon included a duty to consider, in good faith, the insured’s interests as well as its own when making decisions as to settlement. In Knobloch v. Royal Globe Insurance Co.,” the court awarded the plaintiff the amount of the judgment against him in excess of his policy’s limits, but did not address the availability of either punitive damages or damages for mental distress.

A. Punitive Damages

The New York Court of Appeals has never confronted the issue of punitive damages in a third-party bad faith case. However, three lower court cases have faced the question with differing results. In Kulak v. Nationwide Mutual Insurance Co.32 and DiBlasi v. Aetna Life & Casualty Insurance Co.,33 the court denied punitive damages because the insurer’s conduct did not evince malice or an intent to harm, which is the level of culpability necessary to support a punitive damages award in New York. Thus, these cases appear to leave open the possibility of punitive damages when the insurer’s conduct does involve malice or intent to harm the insured.

However, in AFIA v. Continental Insurance Co.,34 the court arguably went a step further and held that an insurer’s bad faith breach of contract for refusing to settle provides a “[legally] insufficient basis” for a punitive damages award because such an award would be “irreconcilable with well known and firmly established principles regulating the circumstances under which punitive damages may be recovered.”35 Thus, the court in AFIA seemed to preclude the recovery of punitive damages in third-party bad faith actions regardless of the culpability of the insurer’s conduct.

Although the New York Court of Appeals has yet to alleviate confusion by ruling on the availability of punitive damages for an insurer’s bad faith in the third-party context, its treatment of the issue in the first party context is instructional. In two recent cases, the court stated that punitive damages are available for an insurer’s bad faith breach of contract in the first party context. However, the following conditions must be met: “(1) The defendant’s conduct is actionable as an independent tort; (2) The tortious conduct is of an egregious nature; (3) The egregious conduct is directed at the plaintiff; and (4) The egregious conduct is part of a pattern of similar conduct directed at the public generally.”36

In providing examples of conduct it would consider actionable as an independent tort, the court, in New York University v. Continental Insurance Co.,” listed fraudulent inducement to enter into a contract, and instances in which a party engages in conduct outside a contract intended to defeat it. Because these examples do not apply in third-party actions, they are of little help here. However, the court stressed that its examples were in no way exhaustive, and that “[t]he very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim.”38 This statement seems to leave open the possibility of conduct in the third-party context that could be actionable as an independent tort, and thus support the recovery of punitive damages.

B. Emotional Distress Damages

The availability of damages in New York in the third-party context for emotional distress is likewise unclear. As with punitive damages for thirdparty bad faith, the Court of Appeals in New York has yet to squarely address the issue. However, a lower New York court addressed it in DiBlasi v. Aetna Life & Casualty Insurance Co.39 In DiBlasi, the court squarely held that the plaintiff was not entitled to recover damages for emotional distress, ruling that “there is no authority in this state to award such damages in a bad faith case, and we decline to extend the law to do so.”40

However, it is significant that the plaintiff in DiBlasi did not sue for the independent tort of intentional infliction of emotional distress. Rather, she was claiming emotional distress damages as an element of the compensation she was entitled to resulting from the insurer’s bad faith refusal to settle. Because insurance bad faith is treated as a breach of contract action in New York, it follows that emotional distress damages would not be available when they are sought in this fashion. However, in light of the Court of Appeals’ acknowledgment that an insurer’s bad faith conduct can form the basis of an independent tort,41 it seems highly possible that a plaintiff could recover damages for emotional distress in a third-party bad faith action if they were sought via the independent tort of intentional infliction of emotional distress.

V. THE TEXAS ExPERIENCE

The Texas experience is somewhat complex in that third-party bad faith actions may be grounded in both statute and in the common law. Punitive damages and emotional distress damages are available through both avenues.

Texas courts have recognized tort liability for an insurer’s negligent failure to settle within policy limits for nearly seventy years. In G.A. Stowers Furniture Co. v. American Indemnity Co.,42 the court determined that an insurer may be held liable for any judgment rendered against the insured, when the insurer fails or refuses to settle when an ordinarily prudent person in the exercise of ordinary care, as viewed from the standpoint of the insured, would settle the case.

A. Punitive Damages

Texas courts have expanded this holding to allow for the recovery of punitive damages for bad faith refusal to settle when an insurer is guilty of gross negligence.43 Gross negligence is defined as “such an entire want of care as to indicate that the act or omission in question was the result of conscious indifference to the rights, welfare, or safety of the persons affected by it.”” However, although Texas courts are in agreement that punitive damages are available in the third-party bad faith context when the insurer’s conduct constitutes gross negligence, Texas Farmers Insurance Co. v. Soriano” is the only case in the third-party context in which punitive damages were actually awarded at common law.

In Texas Farmers, the plaintiff, Soriano, was involved in an automobile accident while driving under the influence of alcohol. His head-on collision with an oncoming vehicle resulted in the death of one woman, and severe injuries to her surviving husband and children. Soriano was insured under a policy with Farmers having limits for any one injury of $10,000, with the aggregate not to exceed $20,000. Farmers refused to tender a settlement offer to the husband until the eve of trial, at which time it offered $15,000 to settle all claims, including that for his wife’s wrongful death. The offer was refused and the case went to trial. The jury returned a verdict in excess of $172,000 against Soriano.

In response to the excess judgment against him, Soriano sued Farmers for breach of the duty of good faith settlement and was awarded $5 million in punitive damages. Although the appellate court found the award excessive and reduced it to $1 million, it affirmed the propriety of punitive damages, reasoning that Farmers’ conduct rose to the level of gross negligence.46

B. Emotional Distress Damages

Wheelways Insurance Co. v. Hodges47 holds that, in addition to punitive damages, a Texas plaintiff in a third-party bad faith action at common law may recover for mental anguish that results from the insurer’s breach. The court in Hodges recognized that mental anguish damages, when sought under a negligence theory, are recoverable in connection with the defendant’s breach of a duty to settle. Although Hodges is the only Texas case addressing the availability of mental distress damages in the third-party context, its holding is buttressed by the fact that the Texas Supreme Court has ruled that mental anguish damages are available in first-party bad faith cases as well.”

C. Statutory Remedies

In addition to actions at common law, the Texas Insurance Code and the Deceptive Trade Practices Act each provide a private cause of action for a plaintiff claiming unfair settlement practices.” Article 21.21, Section 4(10), of the Insurance Code enumerates unfair practices under the Code and specifically provides that unfair settlement practices are prohibited. Section 16 of Article 21.21 creates a private cause of action for any person who has been injured by any of the practices listed in Section 4 as well as any practice prohibited by the Deceptive Trade Practices Act. In addition, Section 16(b)(1) specifically allows the recovery of punitive damages in the amount of three times actual damages when the defendant knowingly commits any of the prohibited acts.

Similarly, the Deceptive Trade Practices Act (“DTPA”) includes violations of Article 21.21 of the Insurance Code as a basis upon which a plaintiff can recover under the DTPA.111 Moreover, like Article 21.21, the DTPA allows a plaintiff to recover punitive damages in the amount of three times actual damages.” However, Article 21.21 of the Insurance Code and the DTPA differ in two respects. First, only a consumer may recover under the DTPA. 12 This distinction is somewhat mitigated by the fact that Texas courts have concluded that purchasers of insurance policies are consumers under the DTPA.” More significantly, unlike Article 21.21, the DTPA specifically allows for the recovery of mental anguish damages,54 if the insurer’s conduct was committed knowingly.15 Although a plaintiff may sue under both statutes, multiple punitive damages awards based on the same conduct are precluded.” vi.

THE ILLINOis EXPERIENCE

In Illinois, common law punitive damages and damages for emotional distress are available in an action involving insurer misconduct, when the conduct rises to the level of an independent tort. In addition, in cases involving a nontortious “unreasonable and vexatious” refusal or delay in payment, statutory punitive damages may be available.

In 1996, the Illinois Supreme Court substantially narrowed the scope and redefined the third-party bad faith cause of action for the state. In Cramer v. Insurance Exchange Agency,” the court overruled two decades of appellate court decisions and held that the third-party action for bad faith in Illinois is limited to situations in which an insurer breaches its duty to act in good faith in responding to settlement offers. Other conduct of an insurer may be actionable if the elements of an established tort can be pleaded and proved, but the scope of the bad faith cause of action is narrowly drawn.

A. Punitive Damages

When an insurer breaches its duty of good faith by refusing to settle, it may be liable for the full amount of a judgment against the policyholder, regardless of policy limits. Under Illinois law the cause of action for bad faith is a tort, and as such damages in a post-Cramer Illinois bad faith action could include punitive damages, on the same basis that punitive damages are recoverable in other tort actions. Punitive damages generally are not available for mere breach of contract, but they are available where an independent tort is found.” In tort actions generally, punitive damages are available where the conduct of the defendant is willful or in wanton disregard of the rights of others.’9

Illinois has a statute that specifically authorizes limited punitive damages against an insurer for a “vexatious and unreasonable” failure to pay.60 Prior to Cramer, the various districts of the Illinois Appellate Court debated as to whether the statute preempted claims for punitive damages at common law. However, in Cramer the supreme court determined that the statute would not preempt a recovery of punitive damages against an insurer. Rather, the statute provides an additional punitive remedy for cases in which an insurer’s conduct does not rise to the level of an established tort but constitutes a “vexatious and unreasonable” refusal or delay in payment.

B. Emotional Distress Damages

Because bad faith is a tort, a successful bad faith claimant would be entitled to recover damages for all provable loss proximately caused by the insurer’s improper conduct. Theoretically, this could include damages for emotional distress. But, regardless of whether a post-Cramer action for bad faith can be successfully maintained against an insurer, an action for intentional infliction of emotional distress can be maintained if its elements can be pleaded and proved as an independent tort. Pre-Cramer Illinois Appellate Court rulings specifically recognized that an action for intentional infliction of emotional distress can be prosecuted by a policyholder against its insurer.61

To establish a right to recover for intentional infliction of emotional distress in Illinois, four elements must be proved:

(1) Extreme and outrageous conduct on the part of the defendant;

(2) Intent by the defendant to cause, or reckless disregard of the probability of causing emotional distress;

(3) Severe or extreme emotional distress suffered by the plaintiff, and

(4) An actual and proximate causation of emotional distress by the defendant’s outrageous conduct.62

There do not appear to be any published decisions upholding awards for intentional infliction of emotional distress against liability insurers in Illinois. In McCarter v. State Farm Mutual Automobile Insurance Co.,61 the court ruled that the policyholder failed to properly plead the cause of action against his automobile liability insurer, because the complaint was devoid of allegations that the defendant’s conduct was reckless or intentional, or that the plaintiff suffered severe or extreme emotional distress.

In Miller’s Mutual Insurance Association of Illinois v. House,64 the court reversed a judgment against an uninsured motorist insurer for intentional infliction of emotional distress, finding that the award was contrary to the manifest weight of the evidence. The court found that the record failed to support the award for emotional distress, because there was no evidence that the insurer either knew or should have known that its delay in paying an uninsured motorist claim was “substantially certain” to cause the policyholder to experience emotional distress.

However, applying a close analogy to the third-party insurance context, the court affirmed an award for intentional infliction of emotional distress in Salvatore v. Admiral Merchants Motor Freight.” In Salvatore, the defendant motor carrier contractually agreed to maintain liability insurance for the plaintiff truck driver. Unknown to the driver, however, the defendant had a selfinsured retention of $25,000. After the driver was in an accident, he tendered the claim, and the defendant told him they were taking care of the matter. Unfortunately, the defendant did not take steps to defend the driver, a default judgment was entered, and the plaintiff’s professional driving license was suspended.

The plaintiff driver in Salvatore brought an action for damages against the defendant motor carrier to recover his lost income and emotional damages. He argued that the defendant’s undertaking of a self-insured retention made the defendant an insurer. A jury awarded the plaintiff over $138,000 in compensatory damages and $50,000 in punitive damages. The appellate court affirmed, finding the defendant to be in bad faith. Because the conduct of the defendant constituted a tort as well as a breach of contract, and the evidence supported the plaintiff’s allegations of malice, wantonness and oppression, the appellate court affirmed the compensatory award for emotional distress damages as well as the punitive damages award.

The critical inquiry under Illinois law is whether the conduct of the insurer constitutes a tort, either a Cramer-type failure-to-settle bad faith or an independently established tort. If a tort can be established, then common law emotional distress damages and punitive damages can be sought, if supported by the evidence. If the insurer’s conduct consists of a non-tortious “vexatious and unreasonable” failure or delay in payment, then statutory punitive remedies are available.

In addition, an independent action for intentional infliction of emotional distress may lie against an insurer if the elements of that free standing cause of action can be pleaded and proved by the evidence.

VII

THE PENNSYLVANIA EXPERIENCE

Third-party bad faith actions in Pennsylvania appear to be rather straightforward. Plaintiffs in third-party bad faith actions may recover punitive damages, but to date, have been stymied in their attempts to recover damages for intentional infliction of emotional distress.

A. Punitive Damages

In 1997, the Pennsylvania legislature erased any ambiguity that may have existed regarding whether plaintiffs could recover punitive damages in thirdparty bad faith actions when it passed Section 8371 of the Pennsylvania Consolidated Statutes. It provides:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorneys fees against the insurer.66

It is clear, based upon this statute, that plaintiffs who are successful in proving that the insurer acted in bad faith may be allowed to recover punitive damages.

B. Damages For Intentional Infliction of Emotional Distress

The authors are unaware of any published third-party bad faith case involving a discussion of the availability of damages for the intentional infliction of emotional distress under Pennsylvania law. There are, however, several first-party bad faith cases in which plaintiffs made claims for intentional infliction of emotional distress. An analysis of those cases indicates that, should a plaintiff in a third-party bad faith case bring a claim for intentional infliction of emotional distress, he or she will have a difficult time in prevailing on that cause of action.

The seminal Pennsylvania case regarding a plaintiff’s ability to recover damages for intentional infliction of emotional distress in a first-party setting is D’Ambrosio v. Pennsylvania National Mutual Casualty Insurance CO.67 The plaintiff alleged that his motor boat and outboard motor were damaged as a result of a severe storm. He claimed that the damage was covered by the contract of insurance with Pennsylvania National then in effect, but that the insurer failed to honor his claim. Following the denial of his claim, the insured filed a two-count complaint, one in assumpsit and the other in trespass, against Pennsylvania National. In his count in assumpsit, he sought a money judgment of almost $1000, reflecting the cost of necessary repairs to the boat, as well as interest, attorney’s fees and costs. In his count in trespass, the plaintiff sought punitive damages and damages for intentional infliction of emotional distress because of the defendant’s alleged bad faith in denying his claim.

The defendant filed preliminary objections to the count in trespass and, after oral argument, the trial court sustained the preliminary objections and dismissed the count in trespass. On appeal, the intermediate appellate court divided evenly and affirmed. The Pennsylvania Supreme Court then took the appeal.

It upheld the dismissal of the plaintiff’s trespass claim seeking punitive damages and damages for intentional infliction of emotional distress. The court noted that although the seriousness of bad faith conduct by insurance carriers could not go unrecognized, the Pennsylvania legislature had made dramatic, sweeping efforts to curb the bad faith of insurers. The court observed that Section 4 of the state Unfair Insurance Practices Act provided: “No person shall engage in this state in any trade practice which is defined or determined to be an unfair method of competition or an unfair or deceptive act or practice in the business of insurance pursuant to this Act.”68 It was the opinion of the court that the Unfair Insurance Practices Act served adequately to deter bad faith. It had no reason to believe that the system of sanctions established under the Unfair Insurance Practices Act needed to be supplemented by a judicially created cause of action for either punitive damages or damages for intentional infliction of emotional distreSS.69

It is important to note that the D’Ambrosio court recognized that, “[t]he possibility cannot be ruled out that emotional distress damages may be recoverable on a contract where, for example, ‘the breach is of such a kind that serious emotional disturbance was a particularly likely result.'”70 The D’Ambrosio court relied on Section 367 of a tentative draft of the Restatement (Second) of Contracts in support of that proposition. The court did not believe that the record before it established that the breach was “of such a kind that serious emotional disturbance was a particularly likely result.'”71 Accordingly, it declined to allow the plaintiff to pursue his claim for intentional infliction of emotional distress pursuant to the limited exception set forth in Section 367 .72

Other first-party bad faith cases which have followed the rationale set forth in D’Ambrosio include Rodgers v. Nationwide Mutual Insurance Co.” and Fennel v. Nationwide Mutual Fire Insurance Co.” The Rodgers case is instructive in that the court recognized that plaintiffs may cite a second section of the Restatement of Contracts which could possibly allow for the recovery of damages for intentional infliction of emotional distress. The Rodgers court recognized that Section 341 of the Restatement of Contracts states:

In actions for breach of contract, damages will not be given as compensation for mental suffering, except where the breach was wanton or reckless and caused bodily harm and where it was the wanton or reckless breach of a contract to render a performance of such a character that the defendant had reason to know when the contract was made that the breach would cause mental suffering for reasons other than mere pecuniary loss.”

The Rodgers court seemed to recognize that a plaintiff may be able to recover damages for intentional infliction of emotional distress in a bad faith action in one of two situations. One occurs when the breach caused bodily harm. The other occurs when the breach was of the character that the insurer had reason to know, at the time the parties made the contract, that the breach would cause mental suffering for reasons other than pecuniary loss.

It appears that plaintiffs pursuing a third-party bad faith action, who seek to recover damages for intentional infliction of emotional distress under either Section 367 of the Restatement (Second) of Contracts or Section 341 of the Restatement of Contracts, will face an almost insurmountable challenge. Pennsylvania case law appears to suggest that before plaintiffs will be able to recover those damages in third-party bad faith actions, they must either prove that the breach was of such a kind that (1) serious emotional disturbance was a particularly likely result; or (2) that they suffered bodily harm; or (3) that the breach was of such a character that the insurer had reason to know, at the time the parties made the contract, that the breach would cause mental suffering. This is a burden that third-party bad faith plaintiffs, who are in reality one step removed from the insurance contract, may rarely be able to meet.” viii.

CONCLUSION

Defense practitioners can expect to see ever increasing numbers of bad faith actions being filed across the country. In many of those actions, plaintiffs will undoubtedly request an award of punitive damages, damages for emotional distress, or both. Achieving a successful result in regard to claims for these types of damages requires an understanding of what the courts expect plaintiffs to prove in order to recover them. By understanding those requirements, defense counsel can go a long way towards successfully defending legitimate claims and receiving a dismissal of specious claims.

1 Frank J. Cavico, Jr., Punitive Damages for Breach of Contract – A Principled Approach, 22 ST. MARY’s L.J. 357, 399 (1990).

2Id.

3C . Lee Cusenbary, Jr., The Tort of Bad Faith: Leaving Insurers Defenseless, 34 So. TEx. L. RFv. 299, 302 (August, 1993).

4See David S. Lill, Arnold v. National County Mutual Fire Insurance Co.: Texas Adopts First-Party Bad Faith, 39 BAYLOR L. REv. 835 (1987).

‘Cavico, supra note 1, at 399. 61d.

‘Neal A. Goldberg et al., Can The Puzzle be Solved: Are Punitive Damages Awardable in New York for First-Party Bad Faith?, 44 SYRACUSE L. REV. 723 (1993). The authors of this article describe an excess carrier’s ability to pursue a third-party bad faith claim as follows:

Often a primary insurer may be attacked by the excess carrier on the same risk, based on the implied covenant of good faith and fair dealing owed by the primary carrier to the insured. Recovery is often premised on the theory of equitable subrogation. The excess carrier is equitably subrogated to the rights of the insured against its primary carrier. In other words, the excess carrier stands in the shoes of the insured and may pursue a claim against the primary carrier for wrongful refusal to settle.

Id. at 725 n.5.

gThe authors will discuss first-party bad faith actions only in those limited instances in which such a discussion may shed some light on how the state courts may act in an as yet undetermined third-party setting.

9426 P. 2d 173 (Cal. 1967). IOM. at 176.

“The plaintiff in Crisci did not attempt to recover damages for the separate tort of intentional infliction of emotional distress. Instead, she was awarded damages for mental distress as a component of the compensatory damages she suffered as a result of the insurer’s bad faith refusal to settle.

“Id. at 178.

“CAL. INS. CODE 790.03(g)(5) (West 1997).

“Royal Globe, Ins. Co. v. Superior Court, 592 P.2d 329 (Cal. 1979). `758 P.2d 58 (Cal. 1988).

16 284 Cal. Rptr. 340 (Ct. App. 1991).

“In California, the elements of a cause of action for intentional infliction of emotional distress are:

(1) Extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress;

(2) The plaintiff’s suffering severe or extreme emotional distress; and

(3) Actual and proximate causation of the emotional distress by the defendant’s outrageous conduct.

Servantez v. J.C. Penny Co., 595 P.2d 975, 983 (Cal. 1979).

“This requirement applies to first-party bad faith actions as well,

“Waters v. United Services Auto Ass’n., 48 Cal. Rptr.2d 910, 913 (Ct. App. 1996).

“Maxwell v. Fire Insurance Exchange, 70 Cal. Rptr. 866, 869 (Ct. App. 1998). Interestingly, in Maxwell, the court ruled that a third-party plaintiff’s loss of use of anticipated funds before a delayed settlement does not meet the financial loss requirement necessary for recovery. ” 121 Cal Rptr. 200, 206 (Ct. App. 1975).

22CAL. CIV. CODE 3294 (West 1999). 21 Id. 3294(a).

21Miller v. Elite Ins. Co., 161 Cal. Rptr. 322, 332 (Ct. App. 1980). 2’Betts v. Allstate Ins. Co., 201 Cal. Rptr. 528, 540 (Ct. App. 1984).

‘Kransco v. Am. Empire Surplus Lines Ins. Co., 63 Cal. Rptr.2d 532, 547 (Ct. App. 1997).

“N.Y. INs. LAw 2601 (McKinney 1999).

2’Rocanova v. Equitable Life Assurance Soc. of the U.S., 634 N.E.2d 940,944 (N.Y. 1994). -285 N.E.2d 849 (N.Y. 1972).

‘Gordon involved an insurer’s failure to defend its insured in a suit brought against him. 3-344 N.E.2d 364 (N.Y. 1976).

-366 N.Y.S.2d 927, 930 (App. Div. 1975), reversed on other grounds, 351 N.E.2d 735 (N.Y. 1976).

33542 N.Y.S.2d 187,192 (App. Div. 1989).

m527 N.Y.S.2d 420 (App. Div.1988). -VId. at 421.

“New York Univ. V Contin ental Ins. Con@ Im Co., 662 REM 763,767-68 (N.Y. 1995)(enqdmis added); Rocanova v. Equitable Life Assurance Soc. of the U.S., 634 NE,2d 940, 944 (N.Y. 1994).

. 371d.

Nd. at 767.

39542 N.Y.S.2d 187 (App. Div. 1989). 40M. at 194.

4’New York Univ., 762 N.E.2d at 767.

41 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved).

“Texas Farmers Ins. Co. v. Soriano, 844 S.W.2d 808 (Tex. Ct. App. 1992). 44M. at 828.

45jd.

4’For cases in which the insurer’s conduct was held to fall short of the gross negligence standard so as to preclude an award of punitive damages, see Smith v. Transit Cas. Co., 281 F. Supp. 661 (E.D. Tex. 1968); Linkenhoger v. American Fidelity & Cas. Co., 260 S.W.2d 884 (Tex. 1953).

47872 S.W.2d 776 (Tex. Ct. App. 1994).

41Arnold v. Nat’l County & Mut. Fire Ins. Co., 725 SW.2d 165, 168 (Tex. 1987). The authors are unaware of any published Texas cases in which a plaintiff sought to recover damages for mental anguish in a third-party bad faith action by pleading the separate tort of intentional infliction of emotional distress.

4qEX. REV. CIV. STAT. ANN. art. 21.21 (West 1999); TEX. Bus. & Com. CODE ANN., 17.45 and 17.50 (West 1987).

“Texas Deceptive Trade Practices Act 17.50(a)(4) (1999). 51jd. 17.50(b)(1).

12 Id. 17.50(a).

“Allstate Ins. Co. v. Kelly, 680 SW.2d 595, 603 (Tex. Ct. App. 1984).

“Mental anguish damages are calculated under the DTPA as three times the amount of economic damages. Texas Deceptive Trade Practices Act 17.50(b)(1).

55 Id. 17.50(b)(1). Note also that the treble punitive damages award is calculated by multiplying the total amount of damages for mental anguish and economic damages by three. Id. 5’Kelly, 680 S.W.2d at 606.

57675 N.E.2d 897, 904 (111. 1996).

“See Ledingham v. Blue Cross Plan for Hosp. Care, 330 N.E.2d 540 (111. App. Ct. 1975), rev. on other grounds, 356 N.E.2d 75 (111. 1976); Florsheim v. Travelers Indem. Co., 393 N.E.2d 1223 (111. App. Ct. 1979).

19Burke v. 12 Rothschild’s Liquor Mart Inc., 593 N.E.2d 522 (111. 1992).

1215 ILL. Comp. STAT. 5/155 (West 1999) provides: Attorney fees.

(1) In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:

(a) 25% of the amount which the court or jury finds such a party is entitled to recover against the company, exclusive of all costs;

(b) $25,000;

(c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.

(2) Where there are several policies insuring the same insured against the same loss whether issued by the same or by different companies, the court may fix the amount of the allowance so that the total attorney fees on account of one loss shall not be increased by reason of the fact that the insured brings separate suits on such policies.

6’Miller’s Mut. Ins. Ass’n v. House, 675 N.E.2d 1037 (111. App. Ct. 1997); McCarter v. State Farm Mut. Auto. Ins. Co., 473 N.E.2d 1015 (111. App. Ct. 1985).

62Miller’s, 675 N.E.2d at 1044-45; McCarter, 473 N.E.2d at 1019-120. 63 473 N.E.2d 1015 (111. App. Ct. 1985).

-675 N.E.2d 1037 (111. App. Ct. 1997). 65 509 N.E.2d 1349 (Ill. App. Ct. 1987).

142 PA. CONS. STAT. 8371 (1999).

67 431 A.2d 966 (1981).

‘1140 PA. CONS. STAT. 1171.4 (Supp. 1980). Section 59(a)(10) of the Pennsylvania Unfair Insurance Practices Act sets forth fifteen acts that constitute unfair claims settlement or compromise practices. Section 5(a)(10) of the Act provides:

Any of the following acts if committed or performed with such frequency as to indicate a business practice shall constitute unfair claim settlement or compromise practices:

Misrepresenting pertinent facts or policy or contract provisions relating to coverages at issue.

(ii) Failing to acknowledge and act promptly upon written or oral communications with respect to claims arising under insurance policies.

(iii) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies.

(iv) Refusing to pay claims without conducting a reasonable investigation based upon all available information.

(v) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed and communicated to the company or its representative.

(vi) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which the company’s liability under the policy has become reasonably clear.

(vii) Compelling persons to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts due and ultimately recovered in actions brought by such persons.

(viii) Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.

(ix) Attempting to settle or compromise claims on the basis of an application which was altered without notice to or knowledge or consent of the insured of such alteration at the time such alteration was made.

(x) Making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which payments are being made.

(xi) Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants to induce or compel them to accept settlements or compromises less than the amount awarded in arbitration.

(xii) Delaying the investigation or payment of claims by requiring the insured, claimant or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.

(xiii) Failing to promptly settle claims, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage or under other policies of insurance.

(xiv) Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.

(xv) Refusing payment of a claim solely on the basis of an insured’s request to do so unless:

(a) The insured claims sovereign, eleemosynary, diplomatic, military service, or other immunity from suit or liability with respect to such claim;

(b) The insured is granted the right under the policy of insurance to consent to settlement of claims; or

(c) The refusal of payment is based upon the insurer’s independent evaluation of the insured’s liability based upon all available information.

“D’Ambrosio, 431 A.2d at 970. Interestingly, the D’Ambrosio court noted that it was for the legislature to determine whether sanctions beyond those created under the Act were required to deter conduct which was less than scrupulous. The Pennsylvania legislature appears to have responded when, in 1997, it passed Section 8371 of the Pennsylvania Consolidated Statutes which, as the authors have previously acknowledged, allows the court to award punitive damages against an insurer if the court finds that the insurer acted in bad faith towards the insured. It appears as if the legislature has not enacted a provision which would allow plaintiffs to recover damages for intentional infliction of emotional distress and it further appears, pursuant to D’Ambrosio, that that recovery is beyond the reach of plaintiffs pursuing a bad faith cause of action against an insurer.

“Id. at n.5. 711d.

12 One Pennsylvania case states that in order for a plaintiff to recover under this limited exception not only must the subject matter of the contract be fundamental, but the defendant’s conduct must be something close to outrageous. According to the court, even in a case where the contract is crucial to a particularly vulnerable plaintiff, merely negligent conduct on the part of the defendant will not support an award of damages for emotional distress. See Harrison v. Nationwide Mut. Fire Ins. Co., 580 F. Supp. 133, 135 (E.D. Penn. 1983).

11496 A.2d 811 (Pa. Super. Ct. 1985). 14 603 A.2d 1064 (Pa. Super. Ct. 1992).

7’Rodgers, 496 A.2d at 814-15 (quoting RESTATEMENT OF CONTRACTS 341 (1932)).

‘The reader should also note that the Rodgers court recognized one further impediment for claimants who sought to recover damages for intentional infliction of emotional distress under Section 367 of a tentative draft [No. 14, March 1, 1979] of the Restatement (Second) of Contracts. The Rodgers court recognized that the language contained in that section is now found in Section 353 of the Restatement (Second) of Contracts and that Section 353 of the Restatement has not been adopted in the state of Pennsylvania. Accordingly, the Rodgers court believed that it would be extremely difficult, to say the least, for a plaintiff to recover damages for intentional infliction of emotional distress based on Section 353 of the Restatement (Second) of Contracts.

JAMEs K. HORSTMAN

BRADLEY C. NAHRSTADT

BETHANY L. HENGSBACH

James K. Horstman is the managing partner of the Chicago firm of Iwan, Cray, Huber, Horstman and VanAusdal, where he maintains a national practice in insurance and appellate law. He received his B.A. from DePauw University, his M.A.R. from Yale University, and his J.D.from Washington University. He is a frequent speaker and author on insurance and litigation topics. Mr. Horstman is a member of the Federation of Insurance & Corporate Counsel, the Defense Research Institute, Appellate Lawyers Association, Illinois Association of Defense Trial Counsel, and the Illinois Bar Association.

Bradley C. Nahrstadt is an associate at the firm of Williams & Montgomery. He received his B.A., summa cum laude, from Monmouth College and his J.D., cum laude, from the University of Illinois College of Law. Mr. Nahrstadt’s current areas of practice are in medical malpractice, product, and general liability. He is licensed to practice law in Illinois and is a member of the Bar of the United States District Court for the Northern District of Illinois, the United States District Court for the Eastern District of Michigan, and the United States Supreme Court. Mr. Nahrstadt is a member of the Illinois State and the Chicago Bar Associations.

Bethany L. Hengsbach is an associate at the Chicago firm of Williams & Montgomery Ltd. She received her B.A. from the University of Illinois and her J.D. from the DePaul University College of Law. Ms. Hengsbach’s current areas of practice are in medical malpractice, construction liability, and general liability. She is licensed to practice in Illinois and is a member of the bar of the Supreme Court of Illinois and the United States District Court for the Northern District of Illinois. Ms. Hengsbach is a member of the Chicago Bar Association, Illinois Bar Association, the Illinois Association of Defense Trial Counsel and the Defense Research Institute.

Using the special verdict form for equitable distribution of fault

Participation in School-Based Extracurricular Activities and Adolescent Adjustment