Insurance Alert - Pennsylvania's Highest Court Issues an Important Decision on Bad Faith Claims

On December 31, 2001, the Pennsylvania Supreme Court issued a decision that significantly changes insurance bad faith law in Pennsylvania.

In The Birth Center v. The St. Paul Companies, Inc., 787 A.2d 376 (2001), the Court held that where an insurer breaches its obligation of good faith under an insurance contract, the policyholder may  recover not only amounts due under the policy but also compensatory damages for other losses arising from the breach. In doing so, the Court recognized a common law action for bad faith—no doubt  surprising many lawyers and courts, since it had been widely assumed that bad faith actions in Pennsylvania were purely statutory in origin. Although the Court declined to resolve the question explicitly  in Birth Center, its opinion strongly suggests that this common law bad faith action sounds in contract. This decision may have significant implications for other bad faith issues, including questions  relating to the right to jury trial and the applicable statute of limitations.