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The Birth Center case grew out of a medical malpractice case brought by and on behalf of a child born with severe and permanent brain damage and alleging that those conditions were caused by negligence in the delivery process. At the time of the delivery, the defendant Birth Center maintained a $1 million liability insurance policy with St. Paul, and the insurer defended the case.

According to the Superior Court opinion – Birth Center v. St. Paul Companies, Inc., 727 A.2d 1144 (Pa. Super. 1999) – there were expert witnesses on both sides of the case on both liability and damages issues. Prior to trial, defense counsel for the Birth Center had reported that the insured had “at best, a fifty percent chance” of a defense verdict, and that the anticipated jury verdict range was between $1,250,000 and $1,500,000. Counsel for the co-defendant physician advised the insurer that there was a 35 percent chance of winning at trial and a verdict range of between $5 million and $6 million.

Prior to the trial, plaintiffs offered to settle their claims within the $1 million policy limit, and two separate judges who held pre-trial settlement conferences recommended the settlement. St. Paul refused the settlement demands and made no offer. Before the start of the trial, the trial judge recommended settlement, and again no offer was made. During the course of the trial, plaintiffs offered to settle on a $300,000 – $1,000,000 high-low agreement, but again no offer was made.

Also just prior to the trial, the executive director of the Birth Center advised the insurer of her “deep concerns” regarding the potential for an excess verdict and explained the “devastating effects” such a verdict could have on the facility. In response to those concerns, the claims representative reportedly informed her that the insurer tries “all of these bad baby cases, and we’re going to trial.” Back at the trial, when defense counsel reported St. Paul’s rejection of the high-low offer to the trial court, counsel did so stating, “They must be crazy. They’re not offering a dime. They won’t give me authority to offer any money in this case, you know I can’t believe it.”

The jury returned a verdict for $4,500,000, which when molded to include delay damages, increased to $7,196.238. As the Birth Center was held to be 60 percent liable, its liability amounted to $4,317,743. Approximately six months later, St. Paul decided to settle the plaintiff’s claims against the Birth Center. It first went to the insured, and asked for a release from the insured in exchange for its payment of plaintiffs’ claims. The insured refused to give the release. Nevertheless, St. Paul agreed to pay $5,000,000 to settle plaintiffs’ claims against the insured. About nine months later, the Birth Center filed its suit against St. Paul, asserting claims for breach of contract, breach of fiduciary duty, and bad faith under the Pennsylvania bad faith statute, 42 Pa. C.S.A. section 8371.

Post-Trial Prodceedings

At the conclusion of the trial of the bad faith case, the jury concluded that St. Paul had engaged in bad faith. Although the jury elected not to award any punitive damages under the statute, it did award $700,000 in compensatory damages due to a lost opportunity to carry out a planned expansion project by the insured. St. Paul filed post-trial motions and the trial court granted the insurer’s motion for judgment .o.v. In doing so, the trial court concluded that St. Paul’s payment of the excess verdict extinguishing the insured’s liability nullified any bad faith claim. The trial court also concluded that section 8371 was an exclusive remedy, and that, since this section did not include compensatory damages as a remedy, the insured could not recover them. The insured then appealed to the Superior Court.

In that court, the panel reversed the trial court. It reversed the j. .o.v. on the bad faith claim by concluding that there had been sufficient evidence of bad faith conduct to warrant submission of that claim to the jury, and that the trial court could not substitute his findings on that claim for those of the jury. The Superior Court also reinstated the $700,000 compensatory award. It did so by finding that, contrary to the trial court’s suggestion, the trial court had charged the jury on a breach of contract claim. It then concluded that, apparently without a jury interrogatory specific to a contract claim, the fact that the jury found bad faith necessarily meant they had found a breach of contract. Significantly, although not significantly enough, the quoted jury instruction on the compensatory damages available for a breach of contract stated that plaintiffs could recover compensation for damages which “were a direct and foreseeable result of the breach by St. Paul which the parties could have reasonably foreseen at the time of the [St. Paul]‘s breach of the contract.” (Emphasis added).

Accordingly, the panel reinstated the jury verdict for $700,000 in compensatory damages and remanded the matter to the trial court to consider attorneys fees and interest under section 8371.

Birth Center in the Supreme Court