Appeal from the United States District Court for the Eastern District of Pennsylvania
(D.C. Civ. No. 91-cv-01365)
Before: STAPLETON and MANSMANN, Circuit Judges and RESTANI, Judge. *fn*
In this case of first impression, we must decide whether a plaintiff who prevails on a claim for bad faith conduct, pursuant to 42 Pa. Cons. Stat. Ann. Section(s) 8371, may recover attorney's fees against an insurer for time spent prosecuting the bad faith claim itself, in addition to those fees attributable to prosecuting the underlying insurance contract claim, under section 8371(3). We conclude that such fees may be assessed.
We are also faced with the issue of whether, and under what circumstances, a court may enhance a fee under Pennsylvania law to reflect the contingent risk of nonpayment assumed by the plaintiff 's attorney in accepting the case on a contingent-fee basis. We conclude that a court may enhance a fee in such circumstances, but only to the extent that the enhancement (1) reflects the contingent risk of the particular case and (2) is not based on factors already considered in calculating the lodestar amount.
We will reverse the judgment of the district court in part and will remand for further proceedings.
After a fire destroyed her home, Regina Polselli sued Nationwide Mutual Fire Insurance Company for benefits due under her insurance contract with Nationwide and for damages under 42 Pa. Cons. Stat. Ann. Section(s) 8371 for
Nationwide's alleged bad faith in handling her claims. *fn1 On the day of trial, the parties settled Polselli's contract claims for building loss, personalty loss, and additional living expenses. The court conducted a bench trial on the bad faith claim, the only remaining claim.
The court found, by a preponderance of the evidence, that Nationwide had acted in bad faith with respect to Polselli's personalty and living expense claims and awarded $90,000 in punitive damages. Polselli v. Nationwide Mut. Fire Ins. Co., No. CIV.A.91-1365, 1992 WL 247271 (E.D. Pa. Sept. 23, 1992). The court did not assess attorney's fees at that time, or upon motion for reconsideration, because Polselli had not presented evidence at trial to establish a reasonable assessment. Id., 1992 WL 247271, at *8; Polselli v. Nationwide Mut. Fire Ins. Co., No. CIV.A.91-1365, 1993 WL 137376, at *1 (E.D. Pa. Apr. 30, 1993).
Polselli subsequently filed a Motion to Assess Costs and Attorney's Fees accompanied by a verified statement signed by Polselli's counsel, Harry P. Begier, Jr. After an evidentiary hearing, the court assessed costs and attorney's fees against Nationwide. Polselli v. Nationwide Mut. Fire Ins. Co., No. CIV.A.91-1365, 1993 WL 479050 (E.D. Pa. Nov. 12, 1993). Begier submitted a list of billable hours totaling 346.9 hours, and Nationwide did not dispute the reasonableness of this claim. Id., 1993 WL 479050, at *4. The court determined that Begier's regular hourly rate was $300. The court thus calculated the "lodestar" amount to be $104,070 ($300 per hour multiplied by 346.9 hours). Finding the case to be unique in that it was based upon the "relatively new" Pennsylvania bad faith statute, the court concluded that Begier faced a "substantial risk of a minimal recovery and [an] extensive number of hours risked . . . with no guarantee of remuneration." Id. Citing what it called the "closely analogous" provisions of Pa. Stat. Ann. tit. 41, Section(s) 503, which permit a court to enhance a fee award based on the "contingency or the certainty of compensation," the court found it appropriate to increase the lodestar amount by sixty percent, or $62,442. Id. The court assessed a total attorney's fee against Nationwide in the amount of $166,412. Id.
Nationwide appealed both the merits determination of bad faith and the subsequent assessment of fees and costs. We reversed the merits determination and remanded for application of the "clear and convincing evidence" standard to the bad faith claim. Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 750-51 (3d Cir. 1994); see also Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994) (bad faith must be proven by clear and convincing evidence). We did not reach the issue of attorney's fees.
On remand, the district court found that Polselli satisfied the higher burden of proof. Polselli v. Nationwide Mut. Fire Ins. Co., No. CIV.A.91-1365, 1995 WL 430571 (E.D. Pa. July 20, 1995). We affirmed by judgment order. Polselli v. Nationwide Mut. Fire Ins. Co., No. 95-1715 (3d Cir. May 3, 1996).
Polselli filed a Renewed Motion to Assess Attorney's Fees, and the district court heard oral argument on the motion. At that time, Nationwide conceded that $300 per hour was a reasonable rate for Begier's services. *fn2 Likewise, Nationwide did not challenge the hours claimed by Begier. Rather, Nationwide argued that section 8371 allows for the award of attorney's fees only with respect to those hours expended on the underlying insurance contract claim and not on the bad faith claim itself.
The district court agreed with Nationwide. The court concluded that section 8371 creates a new cause of action, independent and distinct from the underlying policy action. Further, the court found that "[t]o allow attorney['s] fees for prosecuting bad faith claims would reimburse plaintiff for costs beyond those necessitated by the insurer's conduct, indirectly augmenting the punitive damages already awarded." Polselli v. Nationwide Mut. Fire Ins. Co., No. CIV.A.91-1365, 1995 WL 678212, at *3 (E.D. Pa. Nov. 14, 1995). The court assessed fees in favor of Polselli only for work related to the insurance contract claims for personalty losses and living expenses, and not for the time spent litigating the bad faith claim. Id.
The parties subsequently filed a stipulation allocating 154.9 hours for the time Begier dedicated to the contractual claims as to personalty losses and living expenses. The revised lodestar amount was therefore $46,470 ($300 per hour multiplied by 154.9 hours).
Nationwide also argued that the court should not enhance the fee as it did in its November 1993 order. The court agreed: "Given the decision not to assess fees for work on plaintiff's bad faith claim, the court's earlier rationale for enhancing the hourly rate no longer applies." Id. The court reasoned that its earlier justification for the sixty percent enhancement -- the complexity of the bad faith claim and the uncertainty of prevailing on that claim -- did not apply to an award of fees premised solely on time spent prosecuting a straightforward insurance contract claim. Id., 1995 WL 678212, at *2-3. The court assessed attorney's fees in the amount of $46,470 against Nationwide.
Nationwide appealed from the court's order of attorney's fees on the ground that Polselli was not entitled to fees because Nationwide had not acted in bad faith in its handling of the underlying insurance claims, a position still then pending in Nationwide's appeal from the merits of the district court's finding of bad faith. Polselli cross-appealed from the district court's calculation of the fee assessment. When we affirmed the district court's finding of bad faith, Polselli v. Nationwide Mut. Fire Ins. Co., No. 95-1715 (3d Cir. May 3, 1996), Nationwide withdrew its appeal. The only matter presently before us is Polselli's appeal from the assessment of attorney's fees. *fn3
In 1981, the Pennsylvania Supreme Court refused to create a common law "bad faith" cause of action for a plaintiff whose insurance company wrongfully refused to pay a claim under an insurance policy. D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981); see also Johnson v. Beane, 664 A.2d 96, 99 n.3 (Pa. 1995) (there is no common law remedy in Pennsylvania for insurer bad faith). In 1990, in what some call a delayed response to D'Ambrosio, the Pennsylvania legislature enacted 42 Pa. Cons. Stat. Ann. Section(s) 8371, entitled "Actions on Insurance Policies." The statute reads as follows:
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 fees against the insurer.
42 Pa. Cons. Stat. Ann. Section(s) 8371. In this case of first impression, we must decide whether a cause of action for bad faith under section 8371 is itself an "action arising under an insurance policy."
Although the issue of whether a section 8371 cause of action arises under an insurance policy is an open question, in other contexts a Pennsylvania intermediate appellate court has held that claims brought under section 8371 are "distinct from the underlying contractual insurance claims from which the dispute arose." Nealy v. State Farm Mut. Auto. Ins. Co., 695 A.2d 790, 792 (Pa. Super. Ct. 1997) (deciding that unlike contract cause of action, "distinct" bad faith cause of action could not be decided by arbitration panel but had to be decided by court); accord March v. Paradise Mut. Ins. Co., 646 A.2d 1254, 1256 (Pa. Super. Ct. 1994) (deciding that bad faith cause of action was not barred by policy's limitations clause since it was "separate and distinct" from underlying contract cause of action, which was barred); Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d 1228, 1231 (Pa. Super. Ct. 1994) (permitting "separate and distinct" bad faith cause of action to be based on alleged violation of Unfair Insurance Practices Act); see also Winterberg v. Transportation Ins. Co., 72 F.3d 318, 326 (3d Cir. 1995) (noting that "Pennsylvania case law shows an intent to allow a separate action on the `bad faith' statute").
Section 8371 provides an "independent cause of action to an insured that is not dependant upon success on the merits, or trial at all, of the contract claim." Nealy, 695 A.2d at 793; accord March, 646 A.2d at 1256 (insured's claim for bad faith is "independent of the resolution of the underlying contract claim"); Doylestown Elec. Supply Co. v. Maryland Cas. Ins. Co., 942 F. Supp. 1018, 1020 (E.D. Pa. 1996) (insured may bring bad faith claim prior to resolution of contract dispute). While not obvious from the language of section 8371, it is apparent that Pennsylvania courts have interpreted ...