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In a decision that will benefit self-insured and governmental entities, the Commonwealth Court ruled yesterday that SEPTA cannot be sued for alleged bad faith claims handling. Because the self-insured Southeastern Pennsylvania Transportation Authority “is in the business of public transportation not insurance,” it cannot be liable for bad faith as an insurer under Section 8371 of the Judicial Code, Judge Mary Hannah Leavitt wrote in SEPTA v. Holmes.Thus, the court held, the plaintiffs’ claim did not fit within a statutory exception to sovereign immunity. The unanimous three-judge panel also concluded that the region’s mass transit operator could not be held liable for breach of the duty of good faith and fair dealing. Besides being good news for the transportation authority, “the decision has implications outside of SEPTA, such as other governmental entities that usually self-insure instead of going out and seeking an insurance policy,” said Michael A. Hamilton of Cozen O’Connor, who argued the case for SEPTA before the court. Hamilton worked on the case with Jennifer M. McHugh. As a result of a 1990 car accident, SEPTA paid $46,000 in first-party benefits and fees to Trudy Holmes and Gregory Holmes Jr. for medical costs and lost wages after litigation, according to the opinion. In 1992, the plaintiffs filed an action seeking damages for their injuries, which was later changed to an uninsured motorist benefits claim, according to the opinion. After arbitration in 1997, they were awarded $15,000 each — a decision SEPTA appealed. After many discussions, the transit authority agreed to pay the award with the stipulation of a broad release that would have prohibited the plaintiffs from filing a bad-faith claim, according to the opinion. The plaintiffs countered that the demand was outside of the arbitration agreement and sued to enforce their interpretation of the agreement. In 1999, before the issue went to trial, SEPTA agreed to pay the award without the release, according to the opinion. In 2001, the plaintiffs filed a complaint claiming that SEPTA’s filing of alleged meritless appeals, its attempt to add terms to the arbitration agreement and other conduct “created unnecessary delay, unnecessary litigation, and otherwise stalled attempts to obtain first-party coverage and uninsured motorist coverage to which [the plaintiffs] were both entitled,” according to the opinion. Specifically, the plaintiffs claimed the transit authority had acted in bad faith under Section 8371 of the state Judicial Code and had breached its contractual duty of good faith and fair dealing in its handling of their claims. In October 2002, SEPTA filed a motion for judgment on the pleadings, claiming it could not be held liable under either claim. The trial court denied the motion in its entirety. SEPTA appealed to the Commonwealth Court. The Commonwealth Court first noted that as a governmental entity, SEPTA has sovereign immunity shielding it from liability. To overcome that burden, the court said, the plaintiffs first would need to establish that, but for sovereign immunity, SEPTA could be held liable in tort under common law or statute. Then the plaintiffs would need to show that such tort claim falls within one of the enumerated exceptions to sovereign immunity. The plaintiffs here could not satisfy that burden, Leavitt concluded. Leavitt first stated that there is no common law tort of bad faith handling. “Our Supreme Court has refused to recognize the existence of a common law tort of bad faith against an insurer that refuses, without proper cause, to compensate an insured for a loss,” Leavitt wrote, referring to the 1981 case of D’Ambrosio v. Pennsylvania National Mutual Casualty Insurance Co. Thus, to overcome sovereign immunity, the plaintiffs’ claim would have to fall under Section 8371 of the state Judicial Code, the bad faith statute. Section 8371 says that “in an action arising under an insurance policy, if the court finds that an insurer has acted in bad faith toward the insured, the court may” award interest on the claim amount, punitive damages or assess court costs and attorney fees against the insurer. SEPTA argued that as a self-insured entity, it is not an insurance company subject to Section 8371. According to the opinion, the plaintiffs had claimed that SEPTA functions as an insurer because it is required by state law to demonstrate financial responsibility for losses caused by its vehicles by either purchasing insurance or establishing a self-insurance fund. Section 8371 does not define insurance policy, insurer or insured, Leavitt noted. Citing definitions from the Insurance Department Act, Black’s Law Dictionary and the Pennsylvania Motor Vehicle Financial Responsibility Law, Leavitt concluded “SEPTA is not licensed as an insurer, and it does not do, or even purport to do, the business of insurance in the commonwealth,” Leavitt wrote. “It does not issue policies; collect premiums; or agree to accept the liability of others in exchange for consideration. [The plaintiffs] are not ‘insureds’ because they have not produced a policy that names them as insureds.” Under this analysis, SEPTA cannot be held liable under Section 8371 of the Judicial Code, the court concluded. Frederic I. Weinberg, of Pepper Gordon Breen & Weinberg, represented Trudy and Gregory Holmes. He argued before the Commonwealth Court that the 1983 Supreme Court case Modesta v. SEPTA, in which the court held that SEPTA had to pay uninsured motorists benefits to injured passengers under the No-Fault Motor Vehicle Insurance Act, controlled this case. But the significance of Modesta“is uncertain in light of the repeal of the No-Fault Motor Vehicle Act,” Leavitt wrote in a footnote. Weinberg said yesterday that the Modestacase intended to hold SEPTA to the same standard as an insurer. “The decision is another blow to consumers in the commonwealth, and we are considering an appeal,” Weinberg said. Good Faith and Fair Dealing The trial court ruled last year that SEPTA could be held liable for its alleged mishandling of the plaintiffs’ claims under the doctrine of good faith and fair dealings in contract relationships under state law. SEPTA challenged this finding, arguing that no contract existed between it and the plaintiffs. The Commonwealth Court agreed, saying the plaintiffs couldn’t have had a contractual relationship with SEPTA because the transit authority’s obligations to the plaintiffs only arose from the Motor Vehicle Financial Responsibility Law, which doesn’t create a contractual relationship between them. Also, “in the absence of a written contract, appellees must establish an implied duty to act fairly and in good faith on the claims of its injured passengers,” Leavitt wrote. “However, appellants cannot satisfy the prerequisites for an implied duty because there is no confidential or fiduciary relationship between appellees and SEPTA.” Leavitt was joined in her opinion by Judge Dante R. Pellegrini and Senior Judge James R. Kelley. (Copies of the 16-page opinion inSEPTA v. Holmes , PICS NO. 03-1786, are available fromThe Legal Intelligencer . Please call the Pennsylvania Instant Case Serviceat 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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