                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-9-2007

Gallatin Fuels Inc v. Westchester Fire Ins
Precedential or Non-Precedential: Non-Precedential

Docket No. 06-3133




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                                                                NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT
                                 ____________

                                Nos. 06-3133 and 06-3141
                                      ____________

                               GALLATIN FUELS, INC.,

                                       Appellant No. 06-3141

                                            v.

                   WESTCHESTER FIRE INSURANCE COMPANY,

                                       Appellant No. 06-3133

              MON VIEW MINING CORPORATION (Intervenor in D.C.)
                              ____________

                     On Appeal from the United States District Court
                         for the Western District of Pennsylvania
                                 (D.C. No. 02-cv-02116)
                     District Judge: Honorable Donetta W. Ambrose
                                     ____________

                             Argued May 17, 2007
       Before: FISHER and ROTH, Circuit Judges, and RAMBO,* District Judge.

                                 (Filed: August 9, 2007)

John H. Williams, Jr. (Argued)
Eckert, Seamans, Cherin & Mellott
600 Grant Street, 44th Floor
Pittsburgh, PA 15219
       Attorney for Gallatin Fuels, Inc.



       *
        The Honorable Sylvia H. Rambo, United States District Judge for the Middle
District of Pennsylvania, sitting by designation.
Elizabeth C. Bailey
Stephen A. Cozen (Argued)
Richard M. Mackowsky
Cozen & O’Connor
1900 Market Street, 3rd Floor
Philadelphia, PA 19103

William M. Wycoff
Jacqueline O. Shogan
Thorp, Reed & Armstrong
301 Grant Street
One Oxford Centre, 14th Floor
Pittsburgh, PA 15219
       Attorneys for Westchester Fire
       Insurance Company

                                      ____________

                                OPINION OF THE COURT
                                     ____________

FISHER, Circuit Judge.

       This is a breach of contract and bad faith action based on an insurance company’s

behavior in failing to pay a claim for damaged mining equipment to a loss payee. After a

trial on the issues, the jury found for the loss payee and awarded compensatory and

punitive damages. The insurance company appeals, arguing that the verdict should be

reversed because, among other things, the insurance policy had been canceled at the time

of the loss. The loss payee cross-appeals, citing other errors by the District Court. For

the reasons that follow, we will reverse the District Court’s denial of judgment as a matter

of law on the breach of contract claim and vacate the corresponding compensatory




                                             2
damages award. We will affirm the remainder of the District Court’s judgments,

specifically the bad faith verdict and the corresponding punitive damages award.

                                            I.

      As we write only for the parties, we will forgo a lengthy recitation of the factual

and legal background to this case. This case arises out of a dispute between two

commercial entities regarding which should pay to protect mining equipment from water

damage. Joseph Tassone, the President, CEO, and majority shareholder of Gallatin Fuels,

Inc. (“Gallatin”), formerly owned Mon View Mining Corp. (“Mon View”), which

operated the Mathies Mine. Because Mon View was losing money, Tassone idled the

mine in June 2000 and left the mining equipment underground. On August 17, 2000,

Gallatin sold Mon View to John Hatch, but remained involved with the mine, acting

among other things as the “sole and exclusive agent” to represent Mon View in selling

coal from the mine.

      As a part of the sales agreement between Mon View and Gallatin, Gallatin leased

to Mon View the underground mining equipment it had left at the mine site. The lease

required Mon View to obtain insurance to cover the leased equipment in case of fire,

theft, and other risks. Pursuant to this agreement, Mon View obtained a Commercial

Inland Marine insurance policy from Westchester Fire Insurance Co. (“Westchester”).

This policy was obtained by Mon View acting through its insurance agent Ronald

Massari, who in turn obtained the policy through broker Cooney, Rikard & Curtin, Inc.



                                            3
(“CRC”). CRC accepted the payments of the premiums for the policy on behalf of

Westchester.

       Even under its new ownership, Mon View continued to experience financial

setbacks. When the mine’s original insurance policy expired in October 2001, it sought

to renew its policy with Westchester. Because Mon View could not afford to pay the

premium in full, it entered into an Insurance Premium Finance Agreement (“Agreement”)

with Universal Premium Acceptance Corporation (“UPAC”) on October 12, 2001. The

Agreement provided that Mon View “appoints any officer or employee of [UPAC] as [its]

Attorney-in-Fact with power to arrange payment for and/or cancellation of all policies

listed . . . .” UPAC Insurance Premium Finance Agreement, App.74. In case of default

of any payment, UPAC “may, after having given the 15 days (plus mailing) written notice

mailed to [Mon View] of intent to cancel, during which fifteen-day period [Mon View]

may cure default, thereafter cancel any policies mentioned . . . .” Id. Finally, the

Agreement gave UPAC a security interest in all unearned premiums during the period

subsequent to cancellation through the policy end date, which it was entitled to recover

from Westchester if UPAC canceled the policy under its power of attorney. Id. Pursuant

to the Agreement, UPAC paid the 2001-2002 premium amount to Westchester after Mon

View’s down payment.

       In late 2001, a further drop in coal prices exacerbated Mon View’s financial

difficulties. With the mounting debt, Mon View was unable to pay its electricity bills,

and despite Gallatin’s efforts, Allegheny Power terminated all electric power to the mine

                                              4
on April 8, 2002. As a result of the power being disconnected, all ventilation, water

removal, and maintenance of the underground mine stopped, and the mine filled with

water and toxic gases.

       Unfortunately, as all of this was happening, Mon View had also stopped making

its insurance premium payments to UPAC. Accordingly, on March 11, 2002, UPAC

issued to Mon View a Notice of Intent to Cancel. After Mon View failed to respond to

this notice, UPAC exercised its power of attorney and canceled the policy effective

March 28, 2002. UPAC’s records indicate that it mailed cancellation notices to Mon

View, Westchester, and CRC on March 28, 2002. However, no notice was sent to

Gallatin at that time. Upon cancellation, Westchester returned the unearned premium to

UPAC.

       Following the termination of power to the mine, Gallatin initiated the process of

invoking the insurance coverage for its equipment that was still underground. It

maintains that it was unaware that the insurance policy for its equipment had been

terminated. In fact, Gallatin apparently sought confirmation from CRC to determine

whether the policy insuring its property was still in effect. Gallatin claims that, both

before and after April 8, 2002, it was assured by CRC that the policy was still in effect

and had not been canceled. It also called Westchester directly to confirm this, but its calls

were never returned.

       Under the insurance policy that covered the mining equipment, Gallatin was

named as the loss payee. This meant that in the event of a loss relating to covered

                                              5
property in which both Mon View and Gallatin had an insurable interest, Westchester

would “pay any claim for loss or damage to [the insured] and the Loss Payee, as interests

may appear.” Westchester Fire Ins. Co. Policy, App.1704. The policy also required

notice to Gallatin in the event that Westchester canceled the policy. Id. at 1705.

       Unaware that the policy had been canceled, Gallatin wrote to Mon View’s agent,

Ronald Massari, on April 15, 2002, confirming a telephone conversation involving its

desire to file a claim under the policy for the loss of its mining equipment. On April 23,

2002, Brian Ferguson, a claims adjuster hired by Westchester from GAB Robins North

America, Inc., traveled to Gallatin’s offices to discuss the claim. During the meeting,

Gallatin representatives began completing a Sworn Statement in Proof of Loss for the

mining equipment. Ferguson acknowledged that they asked for his help in completing the

form, but that “[he] gave them virtually none.” When asked if he made a conscious effort

to provide minimal assistance, if any, to Gallatin, Ferguson responded “I think that’s very

fair, yes.”

       On April 24, 2002, Gallatin sent the Proof of Loss Statement to Westchester. The

statement indicated that the equipment was lost on April 8, 2002, due to a flood and/or

roof collapse in the mine. It also requested $5 million, what it believed to be the policy

limit, because the equipment was worth more than that amount.

       On April 30, 2002, Ferguson, working on behalf of Westchester, rejected and

returned the Proof of Loss Statement. He stated that no loss had occurred and that the



                                             6
claimed amount was undocumented and unsupported. He also cited to a “Sue and Labor”

provision in the policy, which Gallatin did not understand to be relevant in this situation.

       Following this rejection, Gallatin hired a professional engineer to conduct an

investigation into the conditions of the mine and how they affected Gallatin’s equipment.

On September 30, 2002, counsel for Gallatin sent this report to Ferguson, along with a

letter explaining why Westchester was obligated under the policy to pay the claim.

Ferguson forwarded these documents to Westchester. On October 25, 2002, Westchester

responded with a letter from its counsel notifying Gallatin for the first time that its policy

had been canceled by UPAC effective March 28, 2002, as a result of Mon View’s failure

to pay the premiums. Apparently, Westchester itself learned of the cancellation on

May 8, 2002, when CRC sent a fax to Westchester notifying it that UPAC had canceled

the policy effective March 28, 2002. According to the letter, Gallatin could maintain its

rights under the policy by paying the outstanding premium of $66,356.00. However, the

letter went on to indicate that Westchester was “not encouraging Gallatin Fuels to pay the

outstanding premium for this Policy, as a multitude of coverage defenses are being

specifically reserved by Westchester Fire,” including thirteen paragraphs of reserved

defenses, conditions, exclusions, and limitations by which Westchester could deny the

claim even after Gallatin paid the outstanding premium. Gallatin did not pay the

outstanding premium amount until the Magistrate Judge suggested during a status

conference after the initiation of this suit that Gallatin pay the money into an escrow



                                              7
account with Westchester’s counsel. However, after Gallatin sent a check for

$66,356.000 to Westchester’s counsel, it was rejected and returned to Gallatin.

       On December 10, 2002, Gallatin filed a complaint in the United States District

Court for the Western District of Pennsylvania alleging breach of contract and requesting

a declaratory judgment against Westchester. Gallatin also alleged that Westchester’s

actions constituted bad faith in violation of Pennsylvania law. Both sides moved for

summary judgment before the trial. Westchester sought summary judgment based on the

pre-loss cancellation and Gallatin’s subsequent failure to reinstate its rights under the

policy. On March 11, 2004, Magistrate Judge Robert Mitchell issued a Report and

Recommendation that was adopted by the District Court. It declined to grant summary

judgment because Westchester had failed to give proper notice to Gallatin under the

policy. It also determined that there were disputed facts regarding Gallatin’s bad faith

claim and whether the loss was fortuitous.

       A trial was held from February 6 to 21, 2006. On February 21, 2006, the jury

returned a verdict against Westchester on the breach of contract and bad faith claims, and

the District Court ruled that the loss was fortuitous as to Gallatin. The jury awarded

$1.325 million in compensatory damages, which represented a finding of $1.925 million

in covered losses minus $600,000 for failure to mitigate. It also awarded $20 million in

punitive damages. On March 28, 2006, the District Court reduced the jury’s punitive

damages award to $4.5 million. Following the verdict, Westchester argued that it was

entitled to judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50 on,

                                              8
among other things, the ground that Gallatin was not covered under the policy because it

had been canceled before the loss. On June 2, 2006, the District Court denied this

motion. This appeal and cross-appeal followed.

                                             II.

       We exercise jurisdiction over this appeal pursuant to 28 U.S.C. § 1291. We

exercise plenary review over a district court’s denial of judgment as a matter of law

pursuant to Federal Rule of Civil Procedure 50. Buskirk v. Apollo Metals, 307 F.3d 160,

165 (3d Cir. 2002). Judgment as a matter of law is proper where the record lacks the

minimum quantity of evidence from which liability could reasonably be found. In

making this determination, the evidence should be viewed in the light most favorable to

the nonmovant, giving the nonmovant the benefit of every reasonable inference. Id. at

166. In addition, we exercise plenary review over questions of law, such as the

interpretation of a contract. See, e.g., Epstein Family P’ship v. Kmart Corp., 13 F.3d 762,

765-66 (3d Cir. 1994).

                                            III.

                                             A.

       Westchester’s first argument on appeal is that the District Court erred by refusing

to hold as a matter of law that the insurance policy had been canceled at the time of the

loss. Gallatin, on the other hand, contends that the loss payable provision in the policy

was a “standard loss payable clause,” which created a separate contract between it and

Westchester that could not be canceled without ten days notice.

                                             9
       The difference between a “standard loss payable clause” and an “ordinary loss

payable clause” has been explained well by the United States Court of Appeals for the

Fifth Circuit:

       Insurance policies regularly have one of two sorts of mortgagee payment
       clauses. Where the loss is paid to the loss payee named as its interest may
       appear this constitutes a simple or open-mortgage clause [also called an
       “ordinary loss payable clause”] under which the mortgagee is a mere
       appointee of the fund whose right of recovery is not greater than that of the
       mortgagor. . . . Conversely, where the loss payable clause contains language
       stipulating that, as to the mortgagee, the insurance shall not be invalidated
       by any act or neglect of the mortgagor or owner of the property, the effect
       of such language, referred to as the New York standard, or union mortgage
       clause is to create a separate and distinct contract on the mortgagee’s
       interest and give to it an independent status. . . . Thus, under the standard
       clause, the mortgagee may frequently recover although the insured owner
       could not.

Bus. Dev. Corp. of Ga., Inc. v. Hartford Fire Ins. Co., 747 F.2d 628, 630 (5th Cir. 1984)

(quoting Decatur Fed. Sav. & Loan Ass’n v. York Ins. Co., 250 S.E.2d 524, 526 (Ga. Ct.

App. 1978)) (internal quotation marks omitted). Accord Overholt v. Reliance Ins. Co. of

Phila., 179 A. 554, 556 (Pa. 1935).1

       To determine whether the loss payable clause in the policy at issue in this case was

a standard clause or an ordinary clause, we must look at whether Gallatin, as the loss

payee, had rights greater than Mon View, as the insured. Bus. Dev. Corp., 747 F.2d at

630. In Business Development Corp., for example, the court determined that the loss

payable clause at issue was a standard one because it “extend[s] to [the loss payee] an



       1
        Neither party disputes that Pennsylvania law applies in this case.

                                            10
independent right to ten days’ notice upon cancellation. This second half of the Loss

Payable Clause states that the insurance shall remain in force only for the benefit of the

lender during the ten-day notice period.” Id. at 631.

       A review of the loss payable clause in the instant case reveals that it does indeed

extend greater rights to Gallatin, as the loss payee, than it does to Mon View, as the

insured. For example, there is an independent notice provision with respect to Gallatin,

which provides that

       If we [Westchester] cancel this policy, we will give written notice to the
       Loss Payee at least:
       a. 10 days before the effective date of cancellation if we cancel for [Mon
       View’s] nonpayment of premiums; or
       b. 30 days before the effective date of cancellation if we cancel for any
       other reason.

Westchester Fire Ins. Co. Policy, App.1705. The policy also provides that, even if Mon

View

       fail[s] to comply with the terms of the Coverage Part, the Loss Payee will
       still have the right to receive loss payment if the Loss Payee:

              (1) Pays any premium due under this Coverage Part at our
              request if [the insured] ha[s] failed to do so;
              (2) Submits a signed, sworn proof of loss within 60 days after
              receiving notice from us of your failure to do so; and
              (3) Has notified us of any change in ownership occupancy or
              substantial change in risk known to the Loss Payee.

Id. at 1704-05. Thus, because Gallatin as the loss payee has rights greater than those of

Mon View as the insured, it appears that this is a standard loss payable clause.




                                             11
       But the fact that the loss payable provision in the policy at issue is a standard one

does not necessarily mean that Gallatin can recover under the policy. Although courts

have uniformly held that standard loss payable provisions effectively create two distinct

contracts within the insurance policy, a court must still examine the terms of those

contracts to determine whether a loss payee can recover. We have repeatedly emphasized

that “policy terms must be given their plain and ordinary meanings where the language

used is clear and unambiguous.” Intermetal Mexicana, S.A. v. Ins. Co. of N. Am., 866

F.2d 71, 76 (3d Cir. 1989) (citing Pa. Mfrs. Ass’n Ins. Co. v. Aetna Cas. & Sur. Co., 233

A.2d 548, 551 (Pa. 1967)). Thus, we must turn to the policy terms in this case to

determine whether Westchester followed the proper procedure under its “separate,

distinct, and independent” contract with Gallatin.

       In examining the separate contract between Westchester and Gallatin, the first

issue is whether Westchester was required to give notice of cancellation to Gallatin under

the facts of this case. As noted above, the policy provides that “[i]f we [Westchester]

cancel this policy, we will give written notice to the Loss Payee at least . . . 10 days

before the effective date of the cancellation if we cancel for [Mon View’s] nonpayment of

premiums” or 30 days “if we cancel for any other reason.” Westchester Fire Ins. Co.

Policy, App.1705 (emphasis added).2 Westchester argues that this provision was not


       2
        In view of the plain language used in the policy, the District Court’s reliance on
40 Pa. Cons. Stat. § 3310 is unavailing. That section provides that “[w]hen an insurance
premium finance agreement contains a power of attorney enabling the insurance premium
finance company to cancel any insurance contract or contracts listed in the agreement, the

                                              12
triggered because it was Mon View – through its agent UPAC – that canceled the policy,

not Westchester.

       Gallatin, however, disputes this version of the facts. It contends that UPAC

merely requested cancellation and it was Westchester that ultimately canceled the policy.

Indeed, a representative from UPAC testified that “[y]ou have to understand, again, that

we are only the premium finance company. We can only request [that] the polic[ies be]

canceled and/or [ask for them to be] reinstated. We send out those notices [requests for

cancellation] and then we look to the carriers to tell us what they’re going to do, if

[they’re] going to cancel the policy or if they’re going to have to give notice to the

leinholder.” Trial Transcript, App.1423.

       Although this may be UPAC’s view of what it did, that view is certainly not

controlling as a matter of law. In this case, the policy provides that “[t]he first Named

Insured shown on the Declarations [Mon View] may cancel this policy by writing or

giving notice of cancellation.” Westchester Fire Ins. Co. Policy, App.1702. Thus,


insurance contract or contracts shall not be canceled by the insurance premium finance
company unless the cancellation is effectuated in accordance with this section.” 40 Pa.
Cons. Stat. § 3310(a). In terms of notice, the section provides that “[a]ll statutory,
regulatory and contractual restrictions providing that the insurance contract may not be
canceled unless notice is given to a governmental agency, mortgagee or other third party
shall apply where cancellation is effected under the provisions of this section.” Id.
§ 3310(d). Thus, had there been a requirement that Westchester notify Gallatin when the
insured canceled the policy, section 3310 says that it would apply even though UPAC
was the actual party who canceled the policy. But section 3310 only preserves notice
requirements that already exist; it does not create new ones. The only notice requirement
in the policy at issue in this case applies when Westchester cancels the policy, not when
the insured does.

                                             13
UPAC, which was acting as an agent for Mon View, had the authority to cancel the

policy. Indeed, because UPAC had already paid the premium for the entire term of the

policy, Westchester itself had no reason to cancel the policy. As UPAC’s representative

explained, had there been some provision in the policy whereby a certain notice period

was required, or whereby only Westchester could cancel the policy, the facts might have

been different. See, e.g., Standard Fire Ins. Co. v. United States, 407 F.2d 1295, 1298

(5th Cir. 1969) (explaining that an insurance contract containing a standard loss payable

clause could not be canceled without notice to the loss payee where Texas law provided

that “[t]he interest of a mortgagee or trustee under any fire insurance contract . . .

covering any property situated in th[e] State shall not be invalidated by any act or neglect

of the mortgagor or owner of said described property”); Bus. Dev. Corp., 747 F.2d at

630-31 (explaining that notice was due to the loss payee when the insured canceled the

policy because the contract provided that “this insurance shall not be affected by . . . any

act or neglect of the mortgagor or owner of the described buildings”). But that was not

the case here: the policy allowed Mon View to cancel, and the notice provision only

applied when Westchester canceled the policy. Thus, the insurance policy in this case

was canceled on March 28, 2002, when UPAC acting for Mon View canceled it.

       In sum, although Gallatin is correct that the loss payable provision in this case is a

standard loss payable provision that creates a separate contract between Gallatin and

Westchester, that does not mean that a court is free to invent terms for that separate

contract. Rather, the terms of that separate contract between Gallatin and Westchester are

                                              14
defined in the policy. Under those terms, it appears that Westchester is only required to

notify Gallatin when Westchester cancels the policy. Westchester did not cancel the

policy here, the insured did (through its agent UPAC). Thus, the lack of notice to

Gallatin did not prevent the policy from being terminated.3

       Finally, Gallatin argues that even if a valid cancellation of the policy had been

effected, Westchester is estopped from relying on this fact in court based on its

representations.4 Pennsylvania courts have explained that “[t]o establish a promissory

estoppel cause of action, a party must prove that: (1) the promisor made a promise that he



       3
         Gallatin also argues that Westchester should have covered the loss under the
provision in the policy that provided that even “if [Westchester] den[ies] [Mon View’s]
claim because of [Mon View’s] acts or because [Mon View] ha[s] failed to comply with
the terms of the Coverage Part, the Loss Payee will still have the right to receive loss
payment if the Loss Payee . . . [p]ays any premium due under this Coverage Part at
[Westchester’s] request if [the insured has] failed to do so.” Westchester Fire Ins. Co.
Policy, App.1704-05. However, this is not a case where the policy remained in effect but
the insured simply missed a payment or failed to comply with some provision of the
policy. This is a case where the insured canceled the policy. If this clause could be
invoked in the present situation, it would essentially allow a loss payee to recover
indefinitely by simply paying the unpaid premium. Even if this clause did apply in the
present situation, the evidence is clear that Gallatin did not tender the unpaid premium
amount to Westchester until after the start of this litigation. Gallatin argues that it did not
do so because it did not actually owe the amount being requested by Westchester since it
only had an interest in some of the insured property. Thus, when that equipment was
destroyed, Gallatin argues that it did not owe Westchester any more money. However,
there is no basis for this argument. The contract clause at issue does not speak of the
premium in terms of the loss payee’s interest, rather it is the premium that the insured
owed under the policy. Id. at 1704 (“Pays any premium due under this Coverage Part at
our request if [the insured] ha[s] failed to do so.” (emphasis added)).
       4
        Although Gallatin refers to an estoppel theory generally, it did not bring a cause
of action for promissory estoppel.

                                              15
should have reasonably expected would induce action or forbearance on the part of the

promisee; (2) the promisee actually took action or refrained from taking action in reliance

on the promise; and (3) injustice can be avoided only by enforcing the promise.”

Shoemaker v. Commonwealth Bank, 700 A.2d 1003, 1006 (Pa. Super. Ct. 1997).

According to Gallatin, CRC – the insurance broker in this case – repeatedly assured

Gallatin that coverage was in place and that Gallatin’s interests were secure. On

March 20, 2002, Gallatin employee John Hart contacted CRC to ensure that the policy

was still in place and to request a copy of the policy. Later, on April 3, 2002, Gallatin

contacted Massari, Mon View’s insurance broker, who assured Gallatin that the policy

remained in force. Indeed, Massari testified that he did not know about the cancellation

until April 8. The final instance asserted by Gallatin as a basis for estoppel occurred on

April 15, when Hart again called CRC to discuss a possible claim that it had because of

the power having been shut off on April 8.

       As an initial matter, the March 20 and April 15 contacts in this case would not

support any estoppel theory. The policy had not yet been canceled on March 20, and it

does not appear that CRC promised that it would not be canceled in the future. By

April 15, the power had already been shut off and the damage done. Thus, even if CRC

informed Gallatin that the policy had been canceled on that date, the outcome would not

have been different in this case. That is, Gallatin could not have reinstated the insurance

to cover a past event. Accordingly, the only relevant contact appears to be the April 3

conversation between Massari and Gallatin. However, it is far from clear that Massari is

                                             16
Westchester’s agent, who could bind the insurance company with his assurances. Indeed,

Gallatin explains that “Massari was an insurance broker for Mon View Mining

Corporation and that Massari obtained the policy of insurance at issue in this case through

CRC, another insurance broker.” (Gallatin’s Br. 46.) It is unclear why Mon View’s

agent could bind Westchester. As Gallatin explains, under Pennsylvania law, an

insurance broker may be an agent for both the insured and the insurer depending on the

circumstances. See Benevento v. LifeUSA Holding, 61 F. Supp. 2d 407 (E.D. Pa. 1999).

A broker is deemed to represent the insurer where there is evidence of authorization, or

some fact from which a fair inference of authorization might be deduced. Id. at 416;

Joyner v. Harleysville, 574 A.2d 664 (Pa. Super. Ct. 1990). Gallatin, however, points to

no evidence in the record from which such authorization might be deduced. That is, there

is no reason why Gallatin should have relied on the word of Mon View’s broker to

represent Westchester. Accordingly, there is simply no basis for this Court to hold that

Westchester is estopped from asserting that the policy in this case was canceled at the

time of the loss.

       In sum, we conclude that the District Court erred by failing to hold under Federal

Rule of Civil Procedure 50 that the insurance policy had been canceled before the loss.

Although Gallatin is correct that the loss payable clause in this case was a standard one,

that conclusion does not absolve a court of following the terms of that clause to the extent

they are unambiguous. Intermetal Mexicana, S.A., 866 F.2d at 76. Here, it is plain from

the language of the contract that the loss payee was not owed any notice when the insured

                                            17
canceled the policy. That is precisely what happened in this case. Thus, when UPAC,

acting for Mon View, canceled the policy and demanded the return of unused premiums

on March 28, 2002, that ended Gallatin’s ability to file a claim under the policy, and the

District Court erred by holding otherwise.

                                              B.

       Next, Westchester argues that it is entitled to judgment as a matter of law on

Gallatin’s bad faith claim because the policy had been canceled, and even if it had not

been canceled, its actions in handling the claim were reasonable.

       Gallatin’s claim for bad faith is premised on section 8371 of the Pennsylvania

code, which provides that “[i]n 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 . . . [a]ward

punitive damages against the insurer . . . .” 42 Pa. Cons. Stat. Ann. § 8371. As we have

explained, “[b]ad faith is a frivolous or unfounded refusal to pay, lack of investigation

into the facts, or a failure to communicate with the insured.” Frog, Switch & Mfg. Co.,

Inc. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999). In addition,

Pennsylvania courts have explained that in order to make out a statutory cause of action

for bad faith in the denial of a claim, a plaintiff must establish “(1) that the insurer lacked

a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly

disregarded its lack of a reasonable basis.” Booze v. Allstate Ins. Co., 750 A.2d 877, 880

(Pa. Super. Ct. 2000) (citing Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680,

688 (Pa. Super. Ct. 1994), appeal denied, 659 A.2d 560 (Pa. 1995)).

                                              18
       Under this standard, Westchester’s first argument is that failure to provide

coverage cannot be bad faith where there is no duty to provide coverage. Although this is

surely correct, most of the actions on which Gallatin’s bad faith claim rests occurred long

before Westchester’s October 25, 2002 letter explaining that the policy had been

canceled. Thus, while it is certainly true that it is reasonable as a matter of law for an

insurer to deny a claim on a certain ground where the policy precludes coverage on that

ground, see J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 358 (3d Cir. 2004), settling

the issue in this case involves a closer look at the law surrounding statutory bad faith

claims.

       In March v. Paradise Mutual Insurance Co., 646 A.2d 1254 (Pa. Super. Ct. 1994),

the Pennsylvania Superior Court considered whether an insured’s bad faith claim could

proceed despite the fact that its underlying contract claim was barred by the statute of

limitations. The court determined that it could: “While section 8371 provides relief only

in actions ‘arising under’ an insurance policy, the statute does not indicate that success on

the bad faith claim is reliant upon the success of the contract claim.” Id. at 1256. Indeed,

“[a]s 42 Pa.C.S. § 8371 was promulgated to provide additional relief to insureds and to

discourage bad faith practices of insurance companies, we would be reluctant to impose

any limitations of claims brought under section 8371 which do not appear in the plain

language of the statute.” Id.; see also Nealy v. State Farm, 717 A.2d 1028 (Pa. Super. Ct.

1997) (“In interpreting [section 8371], this [c]ourt has consistently held that claims



                                              19
brought thereunder are distinct from the underlying contractual insurance claims from

which the dispute arose.”).

       In Frog, Switch & Manufacturing Co., however, we distinguished a situation

where there was no underlying duty under the insurance policy from cases like March,

where the statute of limitations had run. 193 F.3d at 751 n.9. In Frog, Switch &

Manufacturing Co., an insured sued its primary and excess insurance providers for breach

of contract and bad faith for denying coverage and refusing to defend the insured against

a competitor’s claim that the insured misappropriated design drawings for dipper buckets

and then advertised the buckets it produced using the drawings. After concluding that

there was no duty to defend under the policy, the Court explained:

       Frog argues that a bad faith claim is not contingent on success on the
       underlying breach of contract claim, citing Doylestown Electrical Supply
       Co. v. Maryland Casualty Insurance Co., 942 F. Supp. 1018, 1020 (E.D. Pa.
       1996). But that case involved a situation in which the statute of limitations
       had expired on the breach of contract claim; a breach of a duty to defend
       was unredressable for procedural reasons, but it was still possible that a bad
       faith claim could succeed. Here, where there was no duty to defend, there
       was good cause to refuse to defend against a suit.

Id.

       There are two distinctions between Frog, Switch & Manufacturing Co. and the

instant case. First, the sole basis for the bad faith claim in Frog, Switch & Manufacturing

Co. was the refusal to provide coverage. Thus, we merely held that if the insurer was

correct as a matter of law in denying coverage, there is no basis for the claim. In the

instant case, however, the bad faith claim is based largely on behavior beyond


                                             20
Westchester’s denial of the claim. As Gallatin argues, Westchester also misrepresented

the terms of the policy, dragged its feet in the investigation of the claim, hid information

from Gallatin, and continued to shift its basis for denying the claims. (Gallatin’s Br. 79.)

Thus, unlike in Frog, Switch & Manufacturing Co., a finding that the insured did not

ultimately have a duty to cover the plaintiff’s claim does not per se make the insured’s

actions reasonable. See 193 F.3d at 751 n.9 (“Bad faith is a frivolous or unfounded

refusal to pay, lack of investigation into the facts, or a failure to communicate with the

insured.” (emphasis added)).

       A second distinction between the instant case and Frog, Switch & Manufacturing

Co. is the fact that, in that case, the reason asserted for the denial of coverage was the

reason found to be legally sound by the Court. That is, the insurers refused to cover the

plaintiff because they consistently maintained that the claim was not covered under the

policy, and we agreed. In the instant case, however, the insurer did not assert the

cancellation of the policy until October 25, 2002 – well after Gallatin first attempted to

make a claim in mid-April. As such, it would be odd to allow an insurer to assert its good

faith by pointing to a defense to coverage that it did not even use for a large part of the

relevant time period.

       Thus, we conclude that Frog, Switch & Manufacturing Co. does not bar us from

following Pennsylvania’s rule that “[s]ection 8371 allows punitive damages awards even

in the absence of other successful claims brought by the plaintiff.” See Willow Inn, Inc. v.

Pub. Serv. Mut. Ins. Co., 399 F.3d 224, 235 (3d Cir. 2004). Rather, we find that this is

                                              21
one of the exceedingly rare cases in which an insurer can be liable for bad faith even after

the insured cancels the policy. Here, the bad faith allegations were not based simply on

the insurer’s representations that there was not a valid policy. Indeed, both parties

believed that a policy existed for a large part of the relevant time period, and acted

accordingly. Based on the evidence in the record, a jury could have found – and, indeed,

did find – that Westchester acted in bad faith given its working assumption that the policy

had not been canceled.5 Therefore, we will affirm the bad faith verdict against

Westchester.


       5
         Westchester argues that there is not sufficient evidence to support a bad faith
claim against it, and that it was therefore entitled to judgment as a matter of law. We
disagree. First, although the Insurance Code requires insurers to provide assistance and
instruction in completing any requirement of the company in making out a claim, 31 Pa.
Code § 146.2, the record contains evidence that Gallatin requested help repeatedly in
filling out its Proof of Loss Statement, but was given virtually none. In addition,
Westchester’s April 30, 2002 letter rejecting the Proof of Loss Statement was unhelpful to
say the least, and a jury could have found that it violated Pennsylvania’s Unfair Insurance
Practices Act, which prohibits an insurance company from “[f]ailing to promptly provide
a reasonable explanation of the basis in the insurance policy in relation to the facts or
applicable law for denial of a claim or for the offer of a compromise settlement.” 40 Pa.
Cons. Stat. § 1171.5(a)(10)(xiv). Also, section 146.6 of the Pennsylvania Insurance Code
provides that “[e]very insurer shall complete investigation of a claim within 30 days after
notification of the claim, unless the investigation cannot reasonably be completed within
that time. If the investigation cannot be completed within 30 days, every 45 days
thereafter, the insurer shall provide the claimant with a reasonable written explanation for
the delay and state when a decision on the claim may be expected.” 31 Pa. Code § 146.6.
There is ample evidence that Westchester did not comply with this regulation, and indeed
responded to none of Gallatin’s communications between April 30, 2002 and October 25,
2002, when it asserted for the first time that the policy had been canceled. Although, as
Westchester points out, violations of the Unfair Insurance Practices Act and the Unfair
Claim Settlement Practices Regulations are not per se violations of the bad faith standard,
they are admissible and relevant to support claims of bad faith. See, e.g., Romano v.
Nationwide Mut. Fire Ins. Co., 646 A.2d 1228, 1233 (Pa. Super. Ct. 1994).

                                             22
                                              C.

       Finally, Westchester argues that the punitive damages verdict is unconstitutionally

excessive and should be vacated. As an initial matter, Gallatin contends that Westchester

waived any challenge to the constitutionality of the punitive damages award because,

rather than filing a post-trial challenge to the punitive damages award, it filed a

perfunctory brief asking for a hearing on the award, and then set forth its actual argument

in reply to Gallatin’s response brief.

       But even if Westchester has not waived a challenge to the punitive damages, its

arguments are unavailing. First, it argues that, because “punitive damages may not be

based on conduct independent of the injury-causing conduct on which liability is based”

(Westchester’s Br. 53.), it was unconstitutional to base the punitive damages award here

in part on violations of Pennsylvania’s regulations governing the handling of insurance

claims. This argument misses the point. The punitive damages award was not based on

the claims-handling violations, but rather on the bad faith that they helped establish.

Because “[b]ad faith is a frivolous or unfounded refusal to pay, lack of investigation into

the facts, or a failure to communicate with the insured,” any violation by Westchester that

helped establish such conduct is not independent of the injury-causing conduct. See

Frog, Switch & Mfg. Co., 193 F.3d at 751 n.9 (emphasis added).

       Second, Westchester argues that “[t]he reduced $4,500,000 amount remains

excessive, as it is more than five times the $873,780 average of reported bad faith

punitive damage verdicts assessed between 1996 and the present, excluding this case.”

                                              23
(Westchester’s Br. 54.) There is no basis for this kind of analysis when considering the

constitutionality of a punitive damages award. Indeed, it would make no sense to

compare awards across cases that have utterly dissimilar facts. Rather, the relevant

guideposts for determining whether or not a punitive damages award is unconstitutionally

excessive were laid out by the Supreme Court in BMW of North America v. Gore, 517

U.S. 559 (1996). They are (1) “the degree of reprehensibility of the [defendant’s

behavior],” (2) “the disparity between the harm or potential harm suffered by [the

plaintiff] and his punitive damages award,” and (3) “the difference between this remedy

and the civil penalties authorized or imposed in comparable cases.” Id. at 575.

Westchester has not argued that the award fails based on any of these three guideposts.

       However, in light of our holding above that the insurance policy had been canceled

at the time of the loss, we must examine whether or not the punitive damages award can

still stand. Specifically, given the absence of a compensatory damages award, we must

figure out some way to evaluate the punitive damages award under Gore’s second

guidepost, “the disparity between the harm or potential harm suffered by [the plaintiff]

and his punitive damages award.” 517 U.S. at 575. Our holding in Willow Inn, Inc. v.

Public Service Mutual Insurance Co. offers some guidance on this question. There, in

considering the constitutionality of punitive damages awarded under the same

Pennsylvania bad faith statute, 42 Pa. Cons. Stat. Ann. § 8371, “we conclude[d] that the

attorney fees and costs awarded as part of the [section] 8371 claim [was] the proper term

to compare to the punitive damages award for ratio purposes.” 399 F.3d at 235. Thus,

                                            24
we sustained a large punitive damages award even though only nominal damages were

awarded for breach of contract.

       In the instant case, although we are vacating the compensatory damages award, the

District Court awarded $1,100,000 in attorneys’ fees to Gallatin pursuant to section

8371.6 Under Willow Inn, it appears that this award can be considered as part of the

“harm or potential harm” when considering the constitutionality of the punitive damages

award under that section. Accordingly, given the findings of the jury and the lack of

arguments to the contrary by Westchester, we conclude that the resulting ratio of 4.09:1 is

not constitutionally excessive.7

                                           IV.

       For the foregoing reasons, we will reverse the District Court’s denial of judgment

as a matter of law on the breach of contract claim and vacate the corresponding

compensatory damages award. We will affirm the remainder of the District Court’s

judgments, specifically the bad faith verdict and corresponding punitive damages award.




       6
        Westchester has not appealed this award.
       7
       Given our holdings above, we need not address the remainder of the claims raised
on appeal and cross-appeal.

                                            25
