Written by Attorneys Michael R. Nelson and Mark H. Rosenberg

In Jurinko v. The Medical Protective Co., No. 03-CV-4053 (E.D.Pa. Jun. 23, 2006), the Honorable Cynthia Rufe of the United States District Court for the Eastern District of Pennsylvania reinforced the use of the “lodestar” method in determining attorneys' fee awards for insurance bad faith cases, while rejecting Plaintiffs’ demand that a contingent fee approach be used. Judge Rufe’s decision is particularly notable in light of the fact that Jurinko concerned an award of over $7.9 million: the largest award ever entered in a Pennsylvania bad faith case.

Jurinko concerned allegations that a medical malpractice liability insurer improperly failed to settle a claim pending against a policyholder, thereby resulting in a judgment of $2.5 million (on policy limits of only $1.3 million). The policyholder subsequently brought a bad faith claim against the insurer, resulting in an award of $1,658,345.00 in compensatory damages and $6.25 million in punitive damages. Under the authority of the Pennsylvania bad faith statute, [1] Plaintiffs sought an award of attorneys’ fees of over $2.3 million, reflecting their contingent fee agreement to pay their attorneys one-third of the total amount recovered.

In analyzing Plaintiffs’ demand for attorneys’ fees, the Court first rejected the insurer’s argument that it was sufficiently punished by the substantial punitive damages award. In response, the Court emphasized that “[a]n award of attorneys’ fees serves to compensate a victorious plaintiff rather than punish a losing defendant.” [2]

The Court then turned its attention to whether the amount of attorneys’ fees sought by Plaintiffs was reasonable. Citing the opinion of the United States Court of Appeals for the Third Circuit in Polselli v. Nationwide Mut. Fire Ins. Co. [3] as well as the opinion of the Pennsylvania Superior Court in Birth Center v. St. Paul Companies, Inc., [4] the Court held that an award of attorneys' fees under the insurance bad faith statute should be based upon Pennsylvania Rule of Civil Procedure 1716, which in turn compels use of the “lodestar” method based upon the total hours worked multiplied by a reasonable hourly fee. Relying upon Polselli, the Court noted that the fact that insurance bad faith cases are typically taken on a contingent fee basis did not justify the use of a “percentage of recovery” approach in determining attorneys’ fee awards. [5] The Court also rejected the argument that applying a percentage of recovery approach would make the policyholder whole by compensating him for all of the attorneys’ fees he was obligated to pay to counsel. In response, the Court stated that “[t]he fact that the Plaintiff and his attorney agreed upon a contingency fee agreement bears no relationship to the additional loss the insurer inflicted on the Plaintiff by making him pursue a bad faith claim.” [6]

Therefore, the Court determined the base amount of the attorneys’ fee award as equivalent to the hours worked multiplied by the standard hourly rates of the attorneys, resulting in a presumptive fee of $323,167.50. Although Pennsylvania Rule of Civil Procedure 1716 directs courts to examine a number of additional factors to determine whether a larger fee award would be appropriate, the Court declined to apply an “enhancement” to the fee award in the present case. While praising the “quality and professionalism of counsel’s work,” the Court held that this did not warrant an enhancement of the award. [7] Rather, the Court observed that “Plaintiffs were represented by top quality trial attorneys to litigate their bad faith claim with the expectation that their work would deliver the optimum result, commensurate with the rate they command on the open market.” [8] Accordingly, the Court awarded the presumptive “lodestar” fee of $323,167.50.

The benefit to the insurance industry of applying the “lodestar” methodology in insurance bad faith cases necessarily depends upon the size of the underlying verdict. In a case involving a comparatively small award, use of the “lodestar” method may result in an award of attorneys’ fees far in excess of the other damages awarded. However, cases such as Jurinko demonstrate that in the event of a sizable insurance bad faith award, application of the “lodestar” method will result in fee awards far lower than the standard one-third contingent fee.

[1] 42 Pa. C.S.A. § 8371.
[2] Jurinko at p. 8-9.
[3] 126 F.3d 525, 531 (3d Cir. 1997).
[4] 727 A.2d 1144, 1160 (Pa. Super. Ct. 1999), aff’d on other grounds, 787 A.2d 376 (Pa. 2001).
[5] Jurinko at p. 13-14 (citing Polselli, 126 F. 3d at 534, 536-37).
[6] Jurinko at p. 14.
[7] Jurinko at p. 16-17.
[8] Jurinko at p. 17.