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Pennsylvania Insurance Bad Faith

Prior to 1990, there was no Pennsylvania statutory bad faith law. Pennsylvania’s courts, however, had recognized common law bad faith in third-party liability claims since at least 1957.  Under the common law cases, insurers could be held responsible for the entire amount of a judgment against an insured, regardless of the policy limit if the insurer acted in bad faith in handling the liability claim against its insured.

In 1990, Pennsylvania adopted statutory insurance bad faith as part of amendments to Pennsylvania’s Motor Vehicle Financial  Responsibility Law, but made the bad faith amendment applicable to all lines of insurance. Section 8371 of Pennsylvania Title 75 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 three percent.
  2. Award punitive damages against the insurer.
  3. Award court costs and attorney fees against the insurer.”

The statute does not define bad faith conduct or the burden of proof in an insurance bad faith case. Pennsylvania’s courts have held that the insured must prove by clear and convincing evidence that the insurer did not have a reasonable basis for its actions and knew or recklessly disregarded its lack of a reasonable basis for its actions. The statute also does not specify who the trier of fact is in a bad faith action. Pennsylvania’s courts have defined the term “court” in the statute to be the trial judge, so that while bad faith actions in Pennsylvania’s federal courts are decided by jury, state court bad faith actions are tried by judge. It is also unclear whether the statute applies to both first-party actions by an insured against his insurer and to third-party liability actions against the insured where the insurer has acted in bad faith in the handling of the liability claim against the insured.

Experts are not required by statute or case law in Pennsylvania bad faith cases. Experts are employed by the parties at the discretion of the trial judge. Experts are to provide opinion on the reasonableness of the insurer’s conduct to assist the judge or jury in determining if the insurer acted in bad faith. Most courts permit such expert testimony. Insurers typically employ experts because of the potential risk of high awards in such cases.