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The 3rd U.S. Circuit Court of Appeals has spoken on a deceptively simple question that has divided both the federal and state court judges in Pennsylvania: How long is the statute of limitations for Pennsylvania’s bad-faith insurance law — two years or six years? But some lawyers were wondering yesterday why the court spoke so softly. In an “unreported” 10-page memorandum opinion in McCarthy v. ScottsdaleInsurance Co., a unanimous three-judge panel held that a bad-faith claim sounds in tort and is therefore governed by Pennsylvania’s two-year statute of limitations. At first glance, the ruling appears to cure a rift that has developed among the federal judges of the Eastern District of Pennsylvania and that has spread to judges in the common pleas courts across the state. But since the opinion states on the first page that it is “not precedential,” its value is questionable. According to the 3rd Circuit’s “internal operating procedures,” opinions are designated as “unreported” when they “appear to have value only to the trial court or the parties.” Since the question of the statute of limitations for Pennsylvania’s bad-faith statute has created a split in the lower courts, it wouldn’t seem to fall into that category. Unfortunately, the bad-faith statute, Section 8371, does not contain a limitations period, and the Pennsylvania Supreme Court has never ruled on the issue. As a result, federal judges were forced to predict how the state’s high court would decide the issue if it were ever confronted with the problem. Two schools of thought have emerged — one led by U.S. District JudgeStewart Dalzell, the other by U.S. District Judge Anita B. Brody. Brody’s decision came first when she held in Woody v. State Farm Fire & Casualty Co. that a claim for bad faith sounds in both tort and contract and is therefore governed by Pennsylvania’s six-year “catchall” statute of limitations. Since then, Brody’s reasoning has been adopted by Senior U.S. District Judge Marvin Katz and Lancaster County Common Pleas Judge Lawrence Stengel. But Judge Dalzell took a different view, holding in Nelson v. State Farm that an action for bad faith is really a tort claim subject to Pennsylvania’s two-year statute of limitations. Dalzell’s logic was followed by U.S. District Judges James McGirr Kelly, Herbert J. Hutton and Charles R. Weiner. In Nelson, Dalzell flatly rejected Brody’s reasoning, saying “it is hard to conceive that the Pennsylvania General Assembly could have intended to provide a six-year limitations period for a bad faith claim . . . if the cause of action sounded in areas of the law with only two- and four-year limitations periods.” In other words, Dalzell said, “given the option of two or four years, it does not strike us as a reasonable reading to add the two periods together.” Weiner, who authored the lower court opinion in McCarthy, said he was impressed by Dalzell’s reasoning for several reasons. First, he said, Dalzell noted that bad-faith causes of action have “historically” been treated as torts. The Nelson opinion went on to take note of an “emerging jurisprudence” among Pennsylvania’s lower courts to treat bad-faith claims as “a separate and distinct cause of action from the underlying contract claim.” Dalzell also parsed out the differences between torts and contracts, Weiner said, and concluded that torts are concerned mostly with the standards of conduct that society imposes, while contracts focus on the promises that parties themselves make to each other. Bad faith is more akin to a tort, Dalzell found, “because it is precisely such an exogenous standard.” Weiner decided to follow Dalzell in predicting that the state Supreme Court would impose a two-year statute of limitations. That ruling was fatal to the claims of Elizabeth J. McCarthy, the widow of a police officer who was hoping to collect on the $2 million judgment she holds against a bar that served alcohol to a visibly drunk man who later crashed his truck into her husband’s squad car, killing him. In January 1989, McCarthy filed suit against the driver, Charles Loughran, and the bar that served him, the Connor Club. The bar sought a defense and indemnification from Scottsdale but was rejected. A jury in 1994 found that Loughran and the bar were each 50 percent negligent and awarded $2.65 million. When delay damages were added, McCarthy’s claim against the bar was more than $2 million. In February 1997, the bar assigned all of its rights and claims against its insurer to McCarthy who filed suit two years later. Scottsdale’s lawyers moved to dismiss, arguing that all of the claims were time barred. Weiner agreed, saying the four contract claims would all be subject to a four-year statute of limitations that began to run in February 1992 when Scottsdale first declined coverage. McCarthy’s argument pointed to several later dates as possible points for the limitations period to begin, including occasions when the insurer reaffirmed its denial of coverage. The duty-to-indemnify claim, she said, didn’t accrue until the judgment was entered in 1994. But Weiner found that even with those dates, more than four years had elapsed before McCarthy filed suit and that her only hope was to persuade the court that the bad-faith claim should be allowed six years. Now the 3rd Circuit has upheld Weiner’s ruling, saying he had “properly elected to follow the Nelson line of reasoning in predicting how the Pennsylvania Supreme Court would conclude that an action under Section 8371 would be governed.” Judge Richard L. Nygaard wrote the opinion and was joined by Judges Dolores K. Sloviter and Julio Fuentes. But attorney Louis E. Bricklin, who represented the insurer in Nelson, said he “would have preferred” that the 3rd Circuit publish the McCarthy opinion in order to set a controlling precedent. Bricklin said he suspects that the court chose not to publish the decision since it concerns an issue of state law. The judges, he said, may have decided to allow the Pennsylvania courts to go first in tackling the question. But since the “vast majority” of insurance disputes are litigated in the federal courts, Bricklin said, “we don’t know when we will ever get an opinion from the Pennsylvania Supreme Court on this issue.” Under most court rules, Bricklin said, it is improper to cite a 3rd Circuit opinion that is labeled “unreported.” But Bricklin offered a creative solution to get around the rule. “I would cite Judge Weiner’s original opinion in McCarthy and note in parentheses that it was �affirmed’ on appeal,” Bricklin said. “That would show most federal district judges which was the wind is blowing, and it’s well within the rules.” Bricklin said he was not involved in the McCarthy case, but that he would not be surprised if the winning lawyer petitioned the 3rd Circuit to have the decision published. The winning lawyer, James C. Haggerty of Swartz Campbell & Detweiler, said he agreed with Bricklin that the court possibly decided not to publish the opinion because the issue is “purely one of state law.” But Haggerty said he will be “strongly considering” asking the 3rd Circuit to publish the opinion because “this is an extremely important issue in Pennsylvania.” Haggerty noted that at the beginning of the appeal he had asked the 3rd Circuit to certify the question and send it to the Pennsylvania Supreme Court. The 3rd Circuit denied that motion, he said. McCarthy was represented by attorney Lawrence D. Finney of Levy AngstreichFinney Mann Baldante & Burkett.

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