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Willow Inn, Inc. v. Public Service Mutual Insurance Company

February 14, 2005


On Appeal From The United States District Court For The Eastern District Of Pennsylvania (Civ. No. 00–5481) District Judge: The Honorable Berle M. Schiller

Before: Roth, Smith, and Weis, Circuit Judges

The opinion of the court was delivered by: Smith, Circuit Judge


Argued November 16, 2004


The Willow Inn received the final payment on its property damage claim over two years after the building was damaged by a tornado. Having encountered sustained resistance to its insurance claim rather than cooperation in settling it, Willow Inn, Inc. sued its real and personal property insurance carrier, Public Service Mutual Insurance Company ("PSM"), asserting, inter alia, a $2,000 breach of contract claim and unspecified punitive damages, attorney fees, and costs pursuant to Pennsylvania's bad faith statute, 42 Pa. Cons. St. § 8371. Following a bench trial, the District Court awarded Willow Inn $2,000 in compensatory damages on the contract claim and $150,000 in punitive damages plus attorney fees and costs, later set at $128,075 and $7,372, respectively, on the bad faith claim.

On May 20, 2003, this Court upheld the compensatory award and the attorney fees and costs awards. We did not discuss, however, the District Court's findings that PSM had breached the insurance contract and had acted in bad faith under § 8371. Because the District Court had not addressed its punitive damages award in terms of the United States Supreme Court's guideposts enunciated in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), we vacated that award. We instructed the District Court to determine the appropriate punitive damages award in accordance with the Supreme Court's dictates in Gore and reinforced in State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408 (2003), which had been filed after the District Court's decision. The District Court's Gore/Campbell survey determined that its earlier award accorded with due process, and it reinstated the $150,000 punitive damages award. We affirm.


On June 1, 1998, a tornado caused severe damage to the Willow Inn, a bar/restaurant and residence in Willow Grove, Pennsylvania. Within days of the storm Willow Inn hired a public adjusting firm, Assured Adjustment, on a contingency fee to assist it in submitting its insurance claim to PSM. PSM retained McShea Associates to adjust the claim. On June 23, 1998, Assured Adjustment forwarded its initial claim estimate of $216,000 to McShea. On July 24, 1998, McShea countered with its initial claim estimate. Perhaps predictably, given their opposing incentives (Assured Adjustment to maximize the claim to increase its fee and Willow Inn's recovery, and McShea to minimize the claim to attract future PSM business), McShea's estimate of $90,000 was less than 45% of the one prepared by Assured Adjustment a month earlier.

At Willow Inn's request, on September 16, 1998, PSM advanced a $75,000 payment to its insured. Because of the variance between their estimates, Assured Adjustment and McShea retained a contractor to evaluate Willow Inn's loss and to facilitate negotiations. With the contractor's evaluation and following negotiations, Assured Adjusters and McShea agreed to a claim amount of $126,810, which McShea recommended to PSM on October 1, 1998. When PSM inexplicably failed to respond to its adjuster's correspondence for over a month, McShea iterated the recommendation on November 4, 1998.

On November 6, 1998, Willow Inn submitted to PSM a sworn Proof of Loss for $127,810, an amount that after the $1,000 deductible was the same as that agreed upon by Assured Adjustment and McShea. Willow Inn also claimed an additional $2,000 for costs associated with preparing the Proof of Loss, the maximum allowed under a separate policy provision. On November 10, 1998, PSM rejected the $127,810 Proof of Loss, and did not respond to the $2,000 preparations costs claim. By this time PSM had hired another estimator, Casson Associates, to evaluate the claim.

Casson estimated Willow Inn's loss to be $91,312. On December 15, 1998, PSM authorized McShea to offer Willow Inn $16,312 (i.e., the Casson estimate less the $75,000 advance) to settle the claim. Willow Inn rejected this offer. On January 25, 1999, Willow Inn withdrew its adherence to the $126,810 proposed settlement, and, per the policy, requested an appraisal within 20 days.

On February 1, 1999, PSM refused the appraisal request, stating that it did not have a sworn Proof of Loss statement from Willow Inn and that it could not go forward with an appraisal because it was no longer established that a dispute in fact existed. The District Court found PSM's stated rationale for refusing to participate in the appraisal process to be disingenuous. Willow Inn had merely retreated from the settlement offer; it had not withdrawn its Proof of Loss statement. Despite repeated requests from Willow Inn, PSM did not submit to an appraisal until October 7, 1999. During the appraisal process, PSM relied on materially identical documents it originally averred were insufficient to document the existence of a dispute. On July 5, 2000, the appraisal umpire fixed Willow Inn's property loss claim at $117,000, which, less the $75,000 advance, PSM paid on August 17, 2000. PSM did not pay the $2,000 preparations costs claim. Willow Inn filed this suit two months later.

The parties agreed to a bench trial. The District Court's January 2, 2002, Rule 52(a) Memorandum and Order awarded Willow Inn $2,000 on the breach of contract claim. The Court considered the policy provision defraying up to $2,000 of claimants' Proof of Loss preparations costs to be unambiguous, and found that the undisputed evidence at trial established that Assured Adjustment had reasonably expended "well in excess of the $2,000 policy limit" in preparing the Proof of Loss.

The District Court noted that bad faith under § 8371*fn1 must be proven by "clear and convincing evidence and not merely insinuated," Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994), such that it "enables a court to reach its decision with 'a clear conviction.'" Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 751 (3d Cir. 1993).

The District Court then wrote,

Mindful of this high standard, I find that PSM's conduct constituted "bad faith" as contemplated by section 8371. Specifically, unreasonable delays in the processing of the Willow Inn's claims were extraordinarily unwarranted such that there can be no conclusion except that PSM knowingly or recklessly disregarded the absence of a reasonable basis for its conduct. The record is replete with examples of PSM's failure to respond in a timely fashion to Willow Inn's various reasonable requests, and even to the requests of those working on PSM's behalf. As one egregious example, PSM's unjustified delay in appointing an appraiser prevented the appraisal from commencing, despite the Willow Inn's and its adjusters' diligent efforts, until more than eight months after the Willow Inn's initial appraisal request. Similarly, PSM failed to pay the Willow Inn for its costs incurred in preparing proof of the Willow Inn's loss, or to even acknowledge the Willow Inn's request for more than three months, despite ample evidence that the Willow Inn was entitled to this compensation. While each of these examples standing alone evinces bad faith, this conclusion becomes even stronger when one considers the abundance of ...

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