                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-5-1994

Polselli v. Nationwide Mutual Fire Insurance
Precedential or Non-Precedential:

Docket 93-1499




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                 UNITED STATES COURT OF APPEALS

                      FOR THE THIRD CIRCUIT

                             ____________

                            NO. 93-1499
                             ____________


                           REGINA POLSELLI;
                         RUDOLPH T. POLSELLI,
                                        Plaintiff-Intervenor

                                  v.

            NATIONWIDE MUTUAL FIRE INSURANCE COMPANY,
                                     Appellant

                             ____________

          Appeal from the United States District Court
            for the Eastern District of Pennsylvania
                        D.C. No. 91-01365
                           ____________

                      Argued March 10, 1994
      Before:   GREENBERG, ROTH, and ROSENN, Circuit Judges
                     Opinion Filed May 10, l994
                           ____________

R. BRUCE MORRISON, ESQUIRE (Argued)
Marshall, Dennehey, Warner, Coleman and Goggin
1845 Walnut Street
Philadelphia, PA 19103
  Attorney for Appellant

HARRY P. BEGIER, JR., ESQUIRE (Argued)
Harry P. Begier, Jr., Ltd.
1735 Market Street, 30th Floor
Philadelphia, PA 19103-7592
  Attorney for Appellee
                           ____________

                         OPINION OF THE COURT

ROSENN, Circuit Judge.




                                  1
           Regina Polselli brought a diversity action in the

United States District Court for the Eastern District of

Pennsylvania alleging, inter alia, bad faith on the part of the

insurer, Nationwide Mutual Fire Insurance Company (Nationwide),

in its handling of her fire loss claim.      Following a bench trial,

the district court concluded that Nationwide did act in bad faith

and awarded Polselli $90,000 in punitive damages pursuant to

Pennsylvania's bad faith statute, 42 Pa. Cons. Stat. Ann. § 8371

(Supp. 1993).1    Nationwide filed a motion for reconsideration,

which the district court denied.       Nationwide appeals.   We

reverse.

                              I.

           On January 1, 1991, a fire occurred at the Polselli

home causing considerable damage.       Regina's husband Rudolph was

the sole titled owner of the premises and the sole named insured

on a homeowner's insurance policy entered into with Nationwide.

Under the policy, Nationwide had the responsibility to reimburse

the insured for damage to the building (Building claim), its
contents (Contents claim), along with additional living expenses

(ALE claim).     Rudolph moved out of the Polselli home in April

1988 and currently resides in Florida.       In May 1988 he filed a

divorce action, described as bitter, which was still pending at

the time of the fire.     When the fire happened, Regina, along with




1
The insured lived in Pennsylvania where the damages to her
property and the negotiations occurred. The district court and
the parties applied substantive Pennsylvania law, as do we.


                                   2
her daughter, solely occupied the Polselli property.     The fire

forced them to vacate the home.

          Immediately upon being notified of the fire, Nationwide

assigned Joseph DiDonato to handle the adjustment for it.

DiDonato's supervisor instructed him to deal only with Rudolph.

Regina retained Steven H. Smith as her public adjuster to prepare

and adjust her claims.   In the aftermath of the fire,

considerable confusion reigned among the parties as to their

rights and responsibilities due to the title ownership of the

premises, the pending divorce action between Regina and Rudolph,

the mutual distrust and dislike between Regina and Rudolph and

questions of Regina's insurable interest and right to possession

of the property.

          On January 3, 1991, Smith sent DiDonato a letter which

set forth the basis for Regina's insurable interest and requested

immediate funds to alleviate Regina's desperate living conditions

and to satisfy Regina's claim.    On January 14, 1991, DiDonato

replied that Nationwide was still in the process of

investigating.   DiDonato also wrote to Rudolph and his attorney

asking for information necessary for the investigation, and for

permission to enter the premises.     In the meantime, Harry P.

Begier, Jr., Regina's attorney, wrote three letters to Nationwide

in January 1991, requesting that it proceed to process and adjust

Regina's ALE claim.

          On January 28, 1991, Smith filed a proof of loss of

$120,642 for the Building claim, $64,385 for the Contents claim,

and $960 per month to rent an unfurnished home, to which Regina


                                  3
later admitted that she had no intention of moving, for the ALE

claim.   Smith later revised the ALE claim to $1,666.66 monthly,

based on the rental of an apartment on the New Jersey shore.

Rudolph also asserted claims for the building and a portion of

the contents.    In response to the letters sent and claims made in

behalf of Regina, DiDonato reiterated Nationwide's position that

no funds would be forthcoming until it completed inspecting,

investigating and evaluating the loss.   After entering the

Polselli home on February 7, 1991, and discovering evidence

suggesting that the fire had been deliberately set, DiDonato, on

February 11, requested a cause and origin investigation by an

outside investigator.    Although the Fire Marshall had previously

opined, on the day of the fire, that the fire was accidental,

Nationwide's policy is not to talk to the Fire Marshal until its

own investigation is complete.

            Begier claims that on February 8, John R. Riddell,

Nationwide's attorney, orally agreed to adjust Regina's ALE claim

without further delay.   Begier telecopied a letter to Riddell

confirming this information.   On February 13, Nationwide engaged

INS Investigations Bureau, Inc. to investigate the cause and

origin of the fire.   After making a number of additional requests

for an advance payment on her ALE and Contents claims, Regina

filed suit against Nationwide on March 4, 61 days after the fire,

alleging, among other things, bad faith in Nationwide's handling

of her claims.   Two days after the suit was filed, Begier wrote

to Riddell to confirm their agreement that Riddell would meet

with Smith on the following week to review Regina's Contents


                                 4
claim, and that the ALE claim would be adjusted promptly so that

it could be paid the following week.

          On March 12, 1991, Nationwide received a written report

that determined that the origin of the fire was accidental.

DiDonato testified that the ALE claim could have been paid

immediately upon receipt of the fire report.   He did not know why

an advance payment was not made until July 17, 1991.    He

testified, however, that once Regina filed suit, he transferred

the file to the insurer's attorney and no longer had control over

the adjustment of the claim.   Begier notified Riddell on March

12, that the deposition of Regina scheduled for March 15, 1991

would be cancelled if an advance payment on the ALE claim was not

made as promised.   No payment was made and the deposition was

cancelled.

          On April 16, after a month of inaction, Riddell advised

Begier of Nationwide's offer to settle the ALE claim for $11,130.

On the same day, Riddell also advised Begier that Rudolph had

made an oral claim on the contents of the home, and that

Nationwide intended to interplead the Contents claim.    In light

of Begier's contention that Nationwide reneged on an earlier

promise to make a payment on the ALE claim, he requested

confirmation in writing of Nationwide's offer.    On May 9, Begier,

not having received confirmation from Nationwide, requested that

settlement of Regina's claim be expedited and that an advance

payment be made.    Riddell expressed surprise at Begier's letter,

inasmuch as Nationwide was awaiting a reply on its $11,130 offer

made to Begier for the ALE claim.


                                 5
          On March 16, Begier rejected the offer and notified

Nationwide that due to a judgment lien in excess of $600,000 on

the property, Regina was no longer interested in rebuilding the

Polselli home.   On May 17, and 23, 1991, Begier advised Riddell

that Regina would be evicted from her temporary housing, unless

Nationwide made an advance payment.   In light of Begier's

disclosure that Regina would not rebuild her house, and in

accordance with its policy that an insured who permanently

relocates is entitled to less money, Nationwide advised Begier on

May 23, that it was revising its offer to $5,000 in settlement of

the ALE claim.   On March 31, Begier requested information

relating to the basis of the settlement offer.    Riddell responded

with the information almost three weeks later.   On June 24,

without accepting the offer, Begier asked for $3,880 as an

advance on the ALE claim pending settlement.   Nationwide agreed

and made the payment on July 17, 1991.

          Regina was deposed on August 28, and September 5, 1991.

DiDonato testified that he could not accurately evaluate Regina's

Contents claim because, at the deposition, Regina could not

identify most of the damaged items or give additional information

concerning their date of purchase and price.   On September 12,

Begier notified Riddell that Regina was evicted from her

temporary housing for non-payment of rent.   Nationwide promptly

made arrangements, at its expense, for Regina to stay at an

apartment complex.   Prior to these arrangements, Regina stayed at

five different places because she did not have the funds to rent

suitable housing.    On October 24, 1991, Nationwide issued a check


                                 6
for $7,250 to pay for the ALE claim.    The parties eventually

settled all claims before trial except for Regina's bad faith

claim against Nationwide.

           The district court found that Nationwide acted in bad

faith in its handling of the ALE and Contents claim.    The court

awarded Regina $75,000 and $15,000, respectively, in punitive

damages.   Damages for bad faith were not awarded on the Building

claim as Regina had no claim on the building.    The court found

that Nationwide knew that Regina had an insurable interest with

respect to the ALE claim, and that after the fire was labelled

accidental it had absolutely no reason or justification for not

making timely payments on the claim, especially in view of

Regina's virtually destitute condition.    The court also found

that, considering that it was clear that Regina was virtually

destitute and had a substantial Contents claim, Nationwide should

have proceeded with more dispatch in evaluating and settling the

claim, from the date the fire was labelled accidental.

                                 II.

             On appeal, Nationwide's primary contention is that the

district court erred in determining that bad faith need only be

proven by a preponderance of the evidence rather than by clear

and convincing evidence.    Additionally, Nationwide asserts that

the court erroneously defined bad faith too broadly.     Finally, it

argues that the district court's factual findings are clearly

erroneous.

                  Whether the trial court applied the proper

standard is a question of law subject to plenary review.       See


                                  7
Tudor Dev. Group v. United States Fidelity & Guar. Co., 968 F.2d

357, 359 (3d Cir. 1992).   Because Nationwide contends that the

court failed to apply the proper standards with respect to the

burden of proof for bad faith and the legal construction of the

phrase bad faith, our review is plenary.   The district court's

findings of fact are reviewed under a clearly erroneous standard.

Ezold v. Wolf, Block, Schorr and Solis-Cohen, 983 F.2d 509, 525

(3d Cir. 1992), cert. denied, 114 S. Ct. 88 (1993).     Alleged

errors in applying the law to the facts, however, are subject to

plenary review.   Id.

          In D'Ambrosio v. Pennsylvania National Mutual Casualty

Insurance Company, 431 A.2d 966 (Pa. 1981), The Supreme Court of

Pennsylvania held that there is no common law remedy under

Pennsylvania law for bad faith on the part of insurers.    In

response, the Pennsylvania legislature enacted 42 Pa.C.S.A. §8371

which creates a statutory remedy for bad faith conduct.    The

statute 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 attorney's fees
          against the insurer.

42 Pa.C.S.A. § 8371.


                                8
            In determining whether bad faith existed, the district

court held, contrary to Nationwide's assertion, that the clear

and convincing standard is not applicable.    It noted that the

clear and convincing standard would not apply in every instance

where punitive damages are imposed, but only in specific types of

cases, such as defamation actions.    The district court correctly

held that, generally, under Pennsylvania law, punitive damages

may be imposed even without demonstrating with clear and

convincing evidence that the claim is met.      See Martin v. Johns-

Manville Corp., 494 A.2d 1088, 1098 (Pa. 1985) (holding that

preponderance of the evidence sufficient to support punitive

damages claim).    In the context of bad faith, however, the court

erred in proclaiming that a heightened standard is unnecessary.

            In the seminal decision of Cowden v. Aetna Casualty and

Surety Co., 134 A.2d 223, 229 (Pa. 1957), the Supreme Court of

Pennsylvania pronounced that, under Pennsylvania law, bad faith

on the part of an insurer must be proven by clear and convincing

evidence.   See also Hall v. Brown, 526 A. 2d 413, 416 (Pa. Super.

1987).   We too have reaffirmed this holding.    See United States
Fire Insurance Co. v. Royal Insurance Co., 759 F.2d 306, 309 (3d

Cir. 1985).    There being no change in Pennsylvania law, we once

again iterate that, under Pennsylvania law, clear and convincing

evidence is necessary to prove bad faith.

            Although the district court did state that it "clearly"

found Nationwide's conduct outrageous, that language is an

insufficient indication that the court used the correct standard

in finding bad faith, especially in light of the court's

                                 9
rejection of Nationwide's arguments that a heightened standard of

proof is appropriate.

           That the bad faith claim advanced by Polselli is

predicated on a recently enacted statutory provision does not, in

any way, undermine our conclusion.    In enacting a statute, the

legislature is presumed to have been familiar with the law as it

then existed and the judicial decisions construing it.    See

Raymond v. School Dist., 142 A.2d 749 (Pa.Super. 1958).       Had the

legislature intended to make changes in the law with respect to

the burden of persuasion necessary to prove bad faith, it could

have done so expressly.    See Harka v. Nabati, 487 A.2d 432, 435

(Pa.Super. 1985).    By failing to articulate any changes, the

legislature implicitly acknowledged that the existing standards

remain applicable.

            Nationwide next asserts that the district court

incorrectly defined bad faith.    The court stated that "Nationwide

knew or recklessly disregarded the lack of a reasonable basis for

denying the claims."    Nationwide contends that a reckless

standard is insufficient to constitute bad faith.   Section 8371

does not define the term "bad faith."    The Pennsylvania rules of

statutory construction provide that words and phrases that "have

acquired a peculiar and appropriate meaning. . . shall be

construed according to such peculiar and appropriate meaning. . .

."   1 Pa. Con. Stat. Ann. § 1903 (Supp. 1992).   In the insurance

context, the term "bad faith" has acquired a peculiar and

universally acknowledged meaning:



                                 10
          Insurance. "Bad faith" on part of insurer is
          any frivolous or unfounded refusal to pay
          proceeds of a policy; it is not necessary
          that such refusal be fraudulent. For
          purposes of an action against an insurer for
          failure to pay a claim, such conduct imports
          a dishonest purpose and means a breach of a
          known duty (i.e., good faith and fair
          dealing), through some motive of
          self-interest or ill will; mere negligence
          or bad judgment is not bad faith.


Black's Law Dictionary 139 (6th ed. 1990) (citations omitted).

See also Seeger by Seeger v. Allstate Ins. Co. 776 F. Supp. 986,

989 (M.D. Pa. 1991); Coyne v. Allstate Ins. Co., 771 F. Supp.
673, 677 (E.D.Pa. 1991).    Thus, only mere negligence on the part

of the insurer is insufficient to constitute bad faith;

recklessness, however, can support a finding of bad faith.

          Contrary to Nationwide's assertion, Martin does not

hold otherwise.    In analyzing Section 908(2) of the Restatement

of Torts (Second) dealing with punitive damages, Martin

distinguished between two distinct types of reckless conduct. The

court held that punitive damages are appropriate where a

defendant knows, or has reason to know, of facts which create a
high degree of risk of physical harm to another, and deliberately

proceeds to act in conscious disregard of, or indifference to

that risk.   Martin, 494 A.2d at 1097.   However, where the

defendant does not realize or appreciate the high degree of risk,

even though a reasonable person would, punitive damages are

inappropriate.    Id.   Thus, Nationwide contends that Martin stands

for the proposition that reckless behavior cannot support a

finding of bad faith.     Martin, however, is inapposite.



                                  11
            First, the discussion in Martin dealing with

recklessness was in the context of the tort of outrageous

behavior not in the context of bad faith.    Martin does not define

bad faith.    In any event, Martin does not hold that a finding of

recklessness is insufficient for a court to impose punitive

damages.    In fact, the court stated that "punitive damages are

awarded . . .    for acts done with a bad motive or with a reckless

indifference to the interests of others."    Id. (citation

omitted).    Martin merely held that the recklessness had to rise

to a more culpable level beyond gross negligence.     Id. at 1098.

Therefore, the court in the instant case did not err in

concluding that reckless behavior can constitute bad faith.

However, this in no way minimizes the plaintiff's duty to prove

bad faith by the clear and convincing standard.

            Finally, Nationwide contends that the district court

clearly erred in attributing virtually sole responsibility to it

for the delayed settlement payments for Regina's ALE and Contents

claims.    Specifically, Nationwide claims that, contrary to the

district court's findings, it had no obligation to make partial

or advance payments, and it had no knowledge of Regina's personal

circumstances.    Nationwide also claims that the court erroneously

concluded that it had no reasonable basis to contest Regina's

claims.

             In light of our disposition of this case, reversing

the district court's decision for failure to apply the correct

burden of proof, we do not reach this issue.    On remand, the

district court should examine the evidence to ascertain whether

                                 12
it is so "clear, direct, weighty and convincing" so as to enable

the court to make its decision with "a clear conviction."      United

States Fire, 759 F.2d at 309 (quoting In re Estate of Fickert,

337 A.2d 592, 594 (Pa. 1975)).   Without expressing an opinion as

to the result the district court should reach, we emphasize that

in making its determination the court should consider the unique

circumstances of this case.   Specifically, the court should

consider whether the early filing of the bad faith suit against

Nationwide, even before it completed it investigation, and the

cancellation of Regina Polselli's deposition by her attorney,

which would have aided Nationwide in computing the amount of the

claims, contributed to an atmosphere unconducive to settlement.

The court may want to consider whether once suit had been filed,

did it have a deterrent effect on the negotiations between the

adjusters or counsel for the parties.   Moreover, although it was

not unusual for Nationwide to make advances on pending insurance

claims, the court should ascertain whether failure to make an

advance in this case is evidence of bad faith, when the insurance

agreement did not require it.

          On the other hand, the court should consider whether

Nationwide's delay in responding to communications from Polselli,

its poor response time in engaging an investigator and in

conducting the investigation and its handling of the settlement

negotiations suggest that Nationwide did not "accord the interest

of its insured the same faithful consideration it gives its own

interest."   Cowden, 134 A.2d at 228.   On remand, the court should




                                 13
ascertain whether any of these factors militate for or against a

finding that Nationwide acted in bad faith.

          Accordingly, we hold that the district court erred

insofar as it held that under Pennsylvania law a preponderance of

the evidence standard is sufficient to prove bad faith on the

part of an insurer.   The judgment of the district court will be

reversed and the case remanded for further proceedings consistent

with this opinion.




                                14
