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Ruling on an issue that has divided both the state and federal trial courts, the 3rd U.S. Circuit Court of Appeals has held that Pennsylvania’s bad-faith statute has a two-year statute of limitations because it “sounds in tort.” The decision in Haugh v. Allstate Insurance Co. effectively settles an issue that has been percolating in the state and federal trial courts since 1997. Since the Pennsylvania Legislature failed to include any limitations period in the bad-faith statute, � 8371, trial judges have grappled with the difficult question of whether the law sounds in tort or contract or both. Those distinctions make a difference because Pennsylvania law calls for a two-year limitations period for torts and a four-year period for contract claims. And the state’s “catch-all” provision calls for a six-year limitations period for laws that don’t fit in either category. Two schools of thought quickly developed. U.S. District Judge Anita B. Brody led the way with her 1997 decision in Woody v. State Farm Fire & Casualty Co., holding that a claim for bad faith sounds in both tort and contract and is therefore governed by the six-year “catch-all” statute of limitations. But later that year, U.S. District Judge Stewart Dalzell rejected Brody’s reasoning, 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 said he found it “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.” Since then, Dalzell’s view has won over a majority of the federal judges, with five more decisions calling for a two-year period, while Brody’s view was adopted by just one of her Eastern District colleagues — Senior Judge Marvin Katz. But in the state courts, a slim majority of Common Pleas judges ultimately sided with Brody, including Philadelphia Judge John Herron in Trujillo v. State Farm Mutual Automobile Insurance Co. Herron’s decision in the Trujillo case was reversed by the Pennsylvania Superior Court in a decision that said a two-year limitations period applied. But just one day after the opinion was released, the court withdrew it, apparently because the case had settled prior to the court’s decision. Now the 3rd Circuit has ruled that Dalzell was correct in holding that � 8371 sounds in tort and therefore has a two-year limitations period. But while the 3rd Circuit’s decision settles the question for the federal bench, it is not binding on state court judges who must still wait for a definitive ruling from either the superior or state supreme court. Ironically, while the 3rd Circuit’s decision means that Dennis Haugh cannot pursue his � 8371 claim, the court nonetheless revived his suit after finding that he may have a valid claim for bad faith under common law that would be subject to a four-year limitations period. According to court papers, Haugh was driving in McKeesport, Pa., in September 1993 when he was struck by a car driven by Theodore Uher. Allstate, Uher’s insurer, told Haugh that it would not pay any claim because it had determined that Uher was not at fault in the accident. Haugh’s lawyers insisted they had several witnesses who supported their claim that Uher was at fault because he was speeding and had crossed the center line of the roadway where he hit Haugh. In what ultimately proved to be a critical step in the case, Haugh’s lawyers offered to settle the case for Uher’s $15,000 policy limit, but Allstate rejected the offer, allegedly without informing Uher. In March 1998, an Allegheny County jury later awarded Haugh $740,000. The verdict led to negotiations between Haugh and Uher resulting in the execution of an assignment agreement in May 1999, in which Haugh acquired Uher’s right to any potential bad-faith claims against Allstate in exchange for Haugh’s promise to refrain from executing on the judgment against Uher. Haugh then filed a bad-faith suit in U.S. District Court in the Western District of Pennsylvania claiming that Allstate exhibited bad faith in failing to settle the claim against Uher for the $15,000 policy limits. The suit also alleged a separate common law cause of action for breach of Allstate’s contractual duty to act in good faith. Allstate’s lawyers moved for summary judgment arguing that Haugh’s claim brought under the Pennsylvania bad-faith statute was subject to a two-year statute of limitations and was time barred and that Pennsylvania did not recognize a separate common-law bad-faith action predicated on Allstate’s initial refusal to settle the case. U.S. District Judge Gary Lancaster agreed, finding that the bad-faith claim accrued at the latest when Haugh’s lawyer informed Allstate that he was withdrawing the offer to settle for $15,000. Now the 3rd Circuit has ruled that Lancaster erred by not looking at the case through Uher’s eyes. Haugh’s lawyer, Vincent A. Coppola of Pribanic & Pribanic in Pittsburgh, argued that Uher was unaware of Allstate’s breach of fiduciary responsibility until 1998, well within the two-year statute of limitations, and that Lancaster should have applied the discovery rule and tolled the running of the statute of limitations until that time. Third Circuit Judge Morton I. Greenberg agreed, saying it was proper to view the issue from Uher’s perspective because “Haugh brings this suit as assignee of Uher’s cause of action against Allstate and thus stands in Uher’s shoes.” Allstate argued that the discovery rule was not applicable because Uher “was aware that the claim had not been settled.” Greenberg disagreed, saying “while it is true that Uher knew that the claim was proceeding to trial and therefore had not been settled in 1994, or indeed anytime before trial, the critical question is when Uher knew or should have known that Haugh had offered to settle for the policy limits and Allstate rejected this offer.” A jury must decide the issue, Greenberg found, because “the question of when Uher knew or should have known of Allstate’s breach of fiduciary obligation so that the statute of limitations would start running is a question of fact.” But Greenberg found that Lancaster was correct in holding that � 8371 is subject to a two-year limitations period, and that Haugh’s claim under the bad-faith statute was therefore filed too late. Coppola urged the court to follow Herron’s opinion in Trujillo and apply the six-year catch-all statute. Greenberg, in an opinion joined by 3rd Circuit Judges Dolores K. Sloviter and Marjorie O. Rendell, disagreed. “While we regard certain aspects of the Trujillo court’s reasoning as convincing, for example its criticism that some courts that have found that � 8371 sounds in tort have failed to highlight the similarities between bad faith claims and contract claims, more significant aspects of its reasoning are inconsistent with our precedents,” Greenberg wrote. Coppola argued that the Pennsylvania Supreme Court’s decision in Birth Center v. St. Paul Companies Inc. supported his argument by recognizing a contractual basis for a bad-faith claim. Greenberg disagreed, saying the central holding in Birth Center was that a plaintiff has the right to pursue two bad-faith claims at once — a � 8371 statutory claim and a common-law claim. Although the Birth Center court found that the common-law claim sounds in contract, Greenberg found there were very strong hints that the court would apply a two-year limitations period to a � 8371 claim. “Three of the seven justices in Birth Center made clear their belief that section 8371 sounds in tort, a conclusion that suggests that a two-year statute applies,” Greenberg wrote. Greenberg found there were numerous reasons for applying a two-year statute of limitations to � 8371. “Courts historically have treated bad faith causes of action as torts,” Greenberg wrote. “The nature of a bad faith action suggests that it is based upon a standard of conduct imposed by society and is therefore similar to a tort,” he wrote. The “vast majority” of states which have recognized a cause of action for bad faith “have chosen to characterize the cause of action as a tort,” Greenberg noted. And under Pennsylvania law, Greenberg said, “punitive damages are typically a remedy only in tort actions.”

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