Attorney: Third Circuit's decision in punitive damages issue the right one

By Taryn Phaneuf | Apr 19, 2016

PHILADELPHIA — A Philadelphia attorney says the U.S. Court of Appeals was right to rule last year that drivers making certain claims against their insurers can't pursue punitive damages.

The court ruled in June that a driver suing Allstate for breach of contract and bad faith can’t base his claim for punitive damages awarded in a previous suit.

Based on the facts outlined in the suit, the court made the right call, said Cristin Cavanaugh, an attorney who litigates insurance coverage and bad faith claims at Marshall Dennehy in Philadelphia.

“The Third Circuit found that to hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy,” Cavanaugh said.

Wolfe v. Allstate Prop. & Cas. Ins. Co., followed a personal injury suit filed after a driver insured by Allstate caused a collision while intoxicated. The plaintiff, Jared Wolfe, stuck to his demand for $25,000 in compensatory damages and Allstate wouldn’t budge from its offer of $1,200.

After the plaintiff learned that the driver, Karl Zierle, who had three previous DUIs, was intoxicated at the time of the incident, the complaint was amended to also call for punitive damages against the driver.

The driver’s insurance policy doesn't cover punitive damages, which Allstate told the Wolfe. Still, it didn’t increase its settlement offer, and the case went before a jury, which awarded the plaintiff $15,000 in compensatory damages, which Allstate covered, and $50,000 in punitive damages, which it didn’t cover.

Following the suit, Wolfe agreed not to force Zierle to personally pay the $50,000 after Zierle agreed to assign his rights against Allstate to Wolfe, allowing him to sue for breach of contract and bad faith.

The second suit claimed that Allstate failed to negotiate a settlement of the compensatory damages in Wolfe’s personal injury claim. Wolfe tried to recover the $50,000.

The suit went to trial in the U.S. District Court for the Middle District of Pennsylvania, and a jury agreed with Wolfe that Allstate violated the state’s bad faith law and breached the contract it had with Zierle. It awarded $50,000 in punitive damages.

Allstate appealed to the Third Circuit, claiming that the punitive damages award from the personal injury suit shouldn’t have been included as evidence in the second suit because the insurance company is barred by law from paying punitive damages.

Pennsylvania law prevents insurance companies from covering punitive damages that arise in litigation following an incident to make sure that the reckless driver is personally punished.

The Third Circuit concluded that it’s up to a jury to decide if Allstate breached its contract and acted in bad faith, but the outstanding punitive damages can’t be used as evidence against the company.

Court decisions and public policy have maintained the importance of holding drivers accountable whose behavior is “reckless and grossly offensive,” Cavanaugh said, citing the court’s use of the decision in Esmond v. Liscio.

“It is Pennsylvania's longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law,” Cavanaugh said.

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