Pennsylvania Insurance Bad Faith: Attorney Fees Recoverable?

are attorneys fees recoverable in Pennsylvania for insurance bad faith

In the United States, the American Rule dictates that each party in a lawsuit is responsible for covering their own legal fees. However, in Pennsylvania, attorney's fees are recoverable in cases where insurance companies are found to have acted in bad faith towards their clients. Pennsylvania's bad faith statute, 42 Pa. C.S. § 8371, outlines that if a court finds an insurer has acted in bad faith, it may award interest on the claim, punitive damages, and assess court costs and attorney's fees against the insurer. This statute ensures that insurance companies uphold their fiduciary duty to treat valid claims with fair consideration and protects individuals from insurance providers' superior power and financial resources.

Characteristics Values
Attorney fees recoverable in Pennsylvania for insurance bad faith? Yes, under Pennsylvania's bad faith statute, 42 Pa. C.S. § 8371.
Applicable to insureds or third parties? Only to insureds. Third parties do not have a direct action against the insurer unless there is an express written assignment from the insured.
Conditions for recovery of attorney fees The court must find that the insurer has acted in bad faith toward the insured.
Other recoverable damages Interest on the claim amount, punitive damages, and court costs.

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The 'American Rule' vs the 'English Rule'

In the United States, attorney's fees are recoverable in Pennsylvania for insurance bad faith. Pennsylvania's bad faith statute, 42 Pa. C.S. § 8371, allows a court to assess attorney's fees against an insurer found to have acted in bad faith toward the insured.

Now, here is an overview of the American Rule vs the English Rule:

The American Rule vs the English Rule

The American Rule and the English Rule are two contrasting approaches to the assessment of attorney's fees after litigation. Under the American Rule, each party in a legal dispute is generally responsible for paying their own attorney's fees, regardless of the outcome of the case. This rule is designed to ensure that individuals with legitimate legal grievances are not deterred from seeking justice due to the potential financial burden of having to pay their own and their opponent's legal fees if they lose. The American Rule is based on the principle of providing equal access to justice for all, regardless of economic status.

On the other hand, the English Rule states that the losing party in a lawsuit must bear the legal costs of both sides. The rationale behind this rule is that a successful litigant should not be left out of pocket by having to pay their own legal fees. However, critics argue that this rule can create a barrier to justice, particularly for plaintiffs who may be hesitant to pursue legal action due to the risk of having to pay substantial legal fees if they lose.

The American Rule is followed in the United States, with a few exceptions in certain states and for specific types of cases. For example, in patent cases, the losing party may be ordered to pay the attorney's fees of the winning party if the case is deemed "exceptional". Additionally, some states, like California and Nevada, have their own exceptions to the American Rule.

The English Rule, on the other hand, is followed by almost every Western democracy apart from the United States. This rule gives rise to concerns about frivolous lawsuits and the potential for wealthy defendants to be unfairly targeted. However, supporters of the English Rule argue that it ensures that successful litigants are not left financially burdened by the cost of legal proceedings.

The debate between the American Rule and the English Rule centres around the balance between ensuring access to justice and preventing frivolous or extortionate lawsuits. Both rules have their advantages and disadvantages, and the choice between them reflects a society's priorities and values regarding the legal system.

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Bad faith claims and the required standard of proof

Bad faith claims in Pennsylvania require the claimant to meet a standard of proof known as "clear and convincing evidence". This is a higher standard than the typical "preponderance of the evidence" standard.

To meet this standard, the claimant must satisfy a two-part test. First, they must show that the insurer did not have a reasonable basis for denying benefits under the policy. Second, they must demonstrate that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim. In other words, it must be proven that the insurer's conduct was unreasonable or unfair, and that they were aware or should have been aware of this.

Pennsylvania law defines bad faith as "any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent." There must be some motive of self-interest or ill will; mere negligence or bad judgment is not considered bad faith.

The key to establishing bad faith is providing clear and convincing evidence that the insurance carrier breached its fiduciary duty of good faith and fair dealing owed to its insured. This can be achieved by examining the claims file, company policies, and procedures to uncover potential areas of bad faith.

It is important to note that merely negligent conduct, no matter how harmful to the interests of the insured, is typically considered below the threshold required for a showing of bad faith.

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The duty of insurance companies to act in good faith

Insurance companies have a duty to act in good faith when handling claims. This means they must treat valid claims with the same consideration they give to their own interests. When an insurance company fails to uphold its responsibilities, it can be a sign of bad faith.

The duty of good faith is a fundamental principle of common law, which dictates that parties to a contract must perform their contractual duties honestly and reasonably. In the context of insurance, it is an implied obligation that both the insurer and the insured will deal with claims in good faith. This is distinct from a fiduciary duty, as it does not oblige the insurer to treat the insured's interests as paramount. Instead, the insurer must give as much consideration to the insured's interests as they do to their own.

The duty of good faith is a two-way street, with both parties obliged to act in good faith. While the power dynamic often favours the insurer, the insured also has opportunities to exert influence, such as during the pre-contractual stage when they are aware of all the variables relevant to the insurer's risk calculation.

Insurance companies that act in bad faith can face various repercussions, including contractual damages, punitive damages, and, in some cases, Fidler damages for mental distress.

In Pennsylvania, a successful bad faith case against an insurance company can result in compensation for the full amount of the original claim, interest on the claim amount from the date it was filed, attorney fees, and court costs.

To establish bad faith, clear and convincing evidence must be presented to satisfy a two-part test:

  • The insurer did not have a reasonable basis for denying benefits under the policy.
  • The insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.

Common forms of bad faith by insurance providers include:

  • Failing to properly investigate a claim
  • Denying a claim without investigation
  • Denying a claim based on unreasonable grounds
  • Failing to explain why a claim has been denied or the policy's limits
  • Unreasonably delaying payment of a claim
  • Implementing business policies that deviate from industry standards

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The types of damages that can be recovered

Pennsylvania follows the American Rule, which states that each party in a dispute must pay their own attorney fees, unless otherwise specified by a contract or statute. However, in cases of insurance bad faith, there are several types of damages that can be recovered.

Firstly, under Pennsylvania's bad faith statute, 42 Pa. C.S. § 8371, if a court finds that an insurer has acted in bad faith, it may award interest on the amount of the claim from the date it was made, at a rate equal to the prime rate of interest plus 3%. This is designed to compensate for the time value of money and the opportunity cost of not having access to the full amount of the claim when it was initially filed.

Secondly, the court may also award punitive damages against the insurer. These damages are intended to punish the insurer for their bad faith actions and deter similar behaviour in the future. The character of the act, the nature and extent of the harm caused, and the wealth of the defendant are all considered when determining the amount of punitive damages.

Thirdly, the court can assess court costs and attorney fees against the insurer, meaning the insured can recover the legal expenses incurred during the bad faith litigation process. This is a significant benefit, as legal fees can be costly and may deter some individuals from pursuing legal action.

Additionally, consequential damages arising from the bad faith handling of claims may also be available. These are damages that occur as a result of the insurer's bad faith actions and can include a range of financial and non-financial losses.

It is important to note that the court has discretion in awarding these damages, and not all requests for damages may be granted. The specific circumstances of each case will determine the types and amounts of damages that can be recovered.

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The 'Bad Old Days' and the creation of insurance bad faith law

The Bad Old Days and the Creation of Insurance Bad Faith Law

The "American Rule" in contract law states that if Party X performs a task and Party Y refuses to pay, Party X can sue to recover the promised sum but cannot claim for additional costs incurred in pursuing the lawsuit, such as attorney fees or the time spent on the suit. This creates an imbalance of power, as companies with more resources and lawyers can deny claims, knowing that even if sued, they will only have to pay the original amount owed.

In the context of insurance, this imbalance allowed insurance companies to deny valid claims, offering a fraction of the amount owed, or nothing at all, as they knew that many claimants could not afford to take the risk of suing. This practice became known as the "Bad Old Game".

The solution was to create a new law that forced insurance companies to pay the full amount of valid claims and also cover the claimant's legal fees and other costs. This new law also needed to address the insurance companies' fiduciary duty to treat valid claims with the same consideration as their own interests and to act in good faith.

The "English Rule" requires the losing side in a lawsuit to pay the winner's attorney fees and expenses. However, this was not adopted as it was seen to favour wealthy claimants who could force poorer people to settle for an extravagant amount.

California began the process of reform with a court case in 1958, and over the next 10-20 years, almost every other state in the US followed suit. Pennsylvania was one of the last to enact an Insurance Bad Faith Law, which came into force in 1990.

The new law made it clear that insurance companies had to pay valid claims and could not use their superior resources to avoid their obligations. It also established that insurance companies had a higher duty of good faith than most parties due to their sales pitch, their superior knowledge, and the fact that customers cannot negotiate specific terms.

The new law also provided for punitive damages in cases where insurance companies acted in bad faith, and claimants could now recover their legal fees.

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Frequently asked questions

Yes, attorney fees are recoverable in Pennsylvania for insurance bad faith. If an insurance company refuses to pay a claim that they know, or ought to know, they should pay, they have violated the Insurance Bad Faith Law and should be forced to pay the customer's attorney fees, along with interest and punitive damages.

The "American Rule" requires each party to pay their own attorney fees, unless a contract or statute states otherwise.

The "English Rule" is the opposite of the "American Rule". It requires the losing party in a lawsuit to pay the winner's attorney fees and other expenses.

The Insurance Bad Faith Law was created to address the power imbalance between individuals and insurance companies. It makes insurance companies pay the policyholder's attorney fees if they refuse to pay a claim they know, or ought to know, they should pay.

Bad faith in Pennsylvania includes unreasonable denials of coverage, failing to investigate and evaluate claims promptly, fairly, and fully, and failing to offer a fair and reasonable settlement amount.

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