Birth Center v. St. Paul Companies, Inc.
567 Pa. 386, 787 A.2d 376, 2001 Pa. LEXIS 2759 (2001)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An insurer that breaches its contractual and fiduciary duty by refusing in bad faith to settle a claim is liable for all known and/or foreseeable compensatory damages that reasonably flow from its conduct. The insurer's subsequent payment of an excess verdict does not bar the insured from recovering these separate compensatory damages.
Facts:
- Gerald and Denise Norris sued The Birth Center, alleging its negligence during their daughter's birth caused her severe and permanent injuries.
- The Birth Center was insured by The St. Paul Companies, Inc. under a professional liability policy with a $1,000,000 limit.
- The Norris family offered to settle the case within the policy limits, and The Birth Center demanded that St. Paul accept the offer.
- Despite its own defense counsel's advice that The Birth Center had at best a 50% chance of winning and faced a verdict far exceeding the policy limits, St. Paul repeatedly refused all settlement offers.
- Three different judges involved in the case recommended settlement within the policy limits, but St. Paul refused to negotiate or make any offer.
- A St. Paul claims representative informed The Birth Center's director that St. Paul tries "all of these bad baby cases, and we’re going to trial."
- The jury in the underlying case returned a verdict that resulted in The Birth Center's liability totaling $4,317,743.
- St. Paul eventually paid the entire excess verdict after The Birth Center refused to sign a release waiving its right to sue St. Paul for bad faith.
Procedural Posture:
- The Birth Center sued St. Paul in the Court of Common Pleas of Delaware County (trial court), alleging bad faith.
- A jury found in favor of The Birth Center and awarded it $700,000 in compensatory damages.
- St. Paul filed a motion for judgment notwithstanding the verdict (J.N.O.V.).
- The trial court granted St. Paul's motion, nullifying the jury's verdict.
- The Birth Center, as appellant, appealed to the Superior Court of Pennsylvania (intermediate appellate court).
- The Superior Court reversed the trial court's decision and reinstated the jury's verdict in favor of The Birth Center.
- St. Paul, as appellant, appealed the Superior Court's decision to the Supreme Court of Pennsylvania (highest court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an insurer's payment of an excess verdict, which resulted from its bad faith refusal to settle, preclude the insured from recovering additional foreseeable compensatory damages caused by the insurer's bad faith conduct?
Opinions:
Majority - Newman, J.
No. An insurer’s payment of an excess verdict does not bar an insured's claim for other foreseeable compensatory damages resulting from the insurer's bad faith refusal to settle. An insurer's obligation to act in good faith is a contractual duty, and its breach entitles the insured to recover damages sufficient to return it to the position it would have been in but for the breach. St. Paul’s payment of the excess verdict was not a voluntary act of good faith but an attempt to mitigate its own exposure to a punitive damages award in the inevitable bad faith lawsuit. The Pennsylvania bad faith statute, 42 Pa.C.S.A. § 8371, provides additional remedies such as punitive damages and attorney's fees; it does not abrogate or replace the insured's common law right to recover compensatory damages for a breach of contract.
Dissenting - Zappala, J.
Yes. The insured should be precluded from recovering compensatory damages because a claim for bad faith refusal to settle sounds in tort, not contract. The remedies available for this tort are limited to the recovery of the excess verdict under common law and the specific statutory remedies of interest, punitive damages, and attorney fees under 42 Pa.C.S.A. § 8371. Because neither of these sources provides for consequential or compensatory damages for harm to business reputation, such damages are barred. The majority relies on a prior case, Gray, that erroneously characterized this type of claim as a contract action.
Concurring - Nigro, J.
No. The claim for compensatory damages is proper because Pennsylvania law recognizes two separate types of bad faith claims an insured can bring. First, there is a common law contract claim for breach of the implied duty of good faith, under which an insured can recover traditional contract damages, including foreseeable compensatory damages. Second, there is a separate statutory tort claim under 42 Pa.C.S.A. § 8371, which allows for the specific remedies of punitive damages, attorney fees, and costs. The Birth Center properly recovered its compensatory damages under the contract-based cause of action.
Analysis:
This decision solidifies that an insurer's bad faith liability extends beyond merely covering an excess verdict. It establishes that insurers cannot strategically refuse to settle, let the insured suffer reputational and business harm during litigation, and then erase all additional liability by simply paying the verdict post-trial. The ruling clarifies that Pennsylvania's bad faith statute supplements, rather than supplants, common law contract remedies, ensuring insureds can be made whole for all foreseeable damages flowing from an insurer's breach. This precedent significantly strengthens the insured's position in settlement negotiations by increasing the potential cost to an insurer for unreasonably forcing a case to trial.
