CHAPTER 15 CASE STUDIES

• Jurisdiction: United States
• Publication year: 2018

A. Tort Damages for Failed Fraud Investigation

Insurance fraud investigations by Special Investigation Unit (SIU) have saved the insurance industry millions of dollars that would have been paid to fraud perpetrators without the SIU investigation. Even though states require the existence of an SIU, the law does not effectively protect the insurer from a suit by an insured who claims he or she has been wrongfully accused of fraudulent conduct.

The insured wrongfully accused of fraud will seek both contract and tort damages from the insurer that can wipe out the gains made by defeating hundreds of fraudulent claims. The measure of damages for a tort can include punitive damages. As a result of the availability of tort damages, every suit against an insurer claiming wrongful denial of a claim will include—if state law allows it—a suit for breach of the covenant of good faith and fair dealing, seeking contract and tort damages for the bad faith denial and punitive damages.

The U.S. Supreme Court has restricted on the extent of available punitive damages in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003),¹ where it overturned a $145 million verdict against an insurer. It said that a punitive damages award of $145 million was excessive and violated the Due Process Clause of the Fourteenth Amendment. Claims professionals can hope the Supreme Court's ruling gives insurers more courage to fight insurance fraud since their exposure to excessive and debilitating punitive damages is now limited.

Due process requires appellate courts to perform an "exacting" de novo review of the constitutionality of punitive damages awards to ensure "that an award of punitive damages is based upon an ‘application of law, rather than a decision maker's caprice.'"² In its review, a court must consider the Supreme Court's three guideposts: (1) "the degree of . . . reprehensibility or culpability" of the defendant's conduct, (2) "the relationship between the penalty and the harm to the victim" that the defendant caused, and (3) the sanctions other courts imposed for comparable misconduct.

ZALMA OPINION

The Campbell opinion causes the operation of an SIU to lose its effectiveness. If the SIU errs and wrongfully charges an insured with fraud or is unable to prove to a court that the insured was a fraud, it will be punished with tort damages and punitive damages.

B. Insurance for Punitive Damages Against Public Policy

In most states insurance against awards of punitive damages are against the public policy of the state because it will allow the insured to defer his wrongful conduct onto an insurer. The deterrent effect of punitive damages would be eliminated. Rather, the evil conduct that would allow for punitive damages would be encouraged.

In Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487 (3d Cir. 2015), the Third Circuit dealt with the dispute between Allstate Property & Casualty Insurance Co. ("Allstate") and appellee Jared Wolfe to affirm a judgment against an insurer who refused to pay punitive damages assessed against its insured.

The Third Circuit noted that

it is Pennsylvania's public policy that insurers cannot insure against punitive damages, and therefore predicted that the Pennsylvania Supreme Court would answer that question in the negative.

BACKGROUND

Karl Zierle finished his fifteenth or sixteenth beer for the night and drove off until he rear-ended Wolfe. Zierle's blood alcohol level tested at 0.25 percent. Zierle also had three prior DUIs. Wolfe was injured in this accident, and he required treatment at the emergency room.

Zierle was insured by Allstate. Zierle's policy provided liability coverage up to $50,000, and the policy required Allstate to defend Zierle in suits by third parties arising out of automobile accidents. The policy stated that Allstate would "not defend an insured person sued for damages which are not covered by this policy." Zierle's policy expressly excluded coverage for punitive damages.

Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate's adjuster. Allstate valued Wolfe's claim at $1,200 to $1,400, and Allstate responded with a counteroffer of $1,200. Wolfe rejected this offer, and neither party moved from those numbers.

Wolfe then filed suit against Zierle. Allstate informed Zierle that, because Wolfe's complaint did not indicate the extent of the damages he was claiming, the possibility remained that Zierle could face damages in excess of the $50,000 protection afforded by his policy. If the verdict did exceed the policy limit, Zierle was warned that he would be personally liable for the excess. Zierle was advised that he could hire an attorney at his own expense to cooperate with Allstate's counsel. Zierle did hire his own counsel, but that attorney was not actively involved in the case.

During discovery, Wolfe learned of the extent of Zierle's intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.

Settlement attempts failed. The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate

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