A $1.75 million bad faith verdict against Erie Insurance in Pennsylvania has put a spotlight on the high stakes of claims handling missteps for insurers.
On Oct. 17, the Pennsylvania Superior Court issued its decision in the dispute between Erie Insurance Exchange and policyholders Dina Devincenzo-Gambone and Anthony R. Gambone. The case arose from a 2004 automobile accident, after which the Gambones, insured by Erie, settled with the tortfeasor and later filed a claim for underinsured motorist (UIM) benefits. The parties agreed to submit the UIM claim to binding arbitration in Montgomery County.
The arbitrator awarded the Gambones $300,000, applying the stacking provisions of their insurance policy. Erie Insurance paid $250,000 but withheld $50,000, challenging the arbitrator’s stacking determination and filing a petition to modify the award. In response, the Gambones filed a complaint alleging, among other claims, bad faith and breach of fiduciary duty.
The trial court found in favor of the Gambones on the bad faith claim and awarded $1,754,188.24, which included $659,007.90 in interest, $217,100.00 in attorneys’ fees, $986.22 in court costs, and $877,094.12 in punitive damages. The court determined that Erie Insurance had agreed to binding arbitration on all issues, including stacking, and did not communicate any reservation of rights to the Gambones.
On appeal, the Superior Court affirmed the trial court’s finding of bad faith, concluding that Erie Insurance’s conduct – participating in binding arbitration and then withholding part of the award and contesting the result – was not supported by a reasonable basis and constituted bad faith under Pennsylvania law. The court specifically noted that Erie Insurance failed to communicate its position regarding the reservation of rights.
However, the Superior Court vacated the damages and interest awards, finding that the trial court erred in its calculation methods. The court held that attorneys’ fees must be calculated using the lodestar approach – multiplying reasonable hours by a reasonable hourly rate – rather than relying on a contingency fee percentage. The court also found that interest under 42 Pa.C.S.A. § 8371 should not be compounded unless expressly authorized by statute or agreement, and that the trial court had erred in awarding compound interest.
The case was remanded for further proceedings to recalculate attorneys’ fees and interest in accordance with the Superior Court’s decision. The Oct. 12, 2022 verdict on bad faith stands, but the Jan. 10, 2024 damages award is vacated in part pending recalculation.
This decision underscores the importance for insurers of clear communication and adherence to agreed procedures in claims handling, particularly when arbitration and policy provisions like stacking are involved. The outcome serves as a reminder to insurance professionals that process and transparency are critical in managing both risk and client relationships.
Erie Insurance Group is one of the top 10 personal auto insurance companies in Pennsylvania. Learn more in this guide.
