## Facts

- Mark Klinger and Linda Neyer were seriously injured in an August 1992 head-on collision while in Klinger's van, insured under two State Farm auto policies.
- The tortfeasor’s liability limits were insufficient, so Klinger and Neyer sought underinsured motorist (UIM) benefits under both policies.
- The parties bifurcated coverage and damages and submitted coverage to arbitration.
- In October 1993, arbitrators determined $115,000 in UIM coverage was available.
- In November 1993, plaintiffs’ counsel sent demand letters to State Farm’s counsel seeking tender of the limits; State Farm later asserted it was not informed because its counsel did not relay the letters.
- In January 1994, plaintiffs’ counsel told a State Farm claims representative about the arbitration result and the demands.
- Plaintiffs sued under Pennsylvania’s bad-faith statute, 42 Pa. Cons. Stat. § 8371; a jury found bad faith and awarded punitive damages.
- Post-verdict, the district court denied plaintiffs’ requests for costs and attorney’s fees and awarded prejudgment interest, but less than plaintiffs sought.

## Issues

1. Whether § 8371’s remedies for attorney’s fees and court costs are substantive in federal diversity cases, and whether the district court properly denied additional awards.
2. Whether § 8371 authorizes prejudgment interest, and whether the district court erred in limiting the interest award.
3. How federal courts should apply § 8371’s remedial scheme alongside federal rules governing taxation of costs.

## Decision

- The Third Circuit affirmed the district court’s post-verdict orders.
- The court treated § 8371’s remedial provisions (interest, punitive damages, costs, and attorney’s fees) as substantive and applicable in diversity cases.
- The court held the district court used the correct legal standards and did not abuse its discretion in denying additional attorney’s fees and costs.
- The court upheld the district court’s limited prejudgment interest award as a permissible exercise of discretion under § 8371.

## Legal Principles

- Pennsylvania’s bad-faith statute, 42 Pa. Cons. Stat. § 8371, creates substantive remedies that federal courts must apply in diversity actions absent a direct conflict with a federal rule.
- Under § 8371, a court may award interest (from the date the insured made the claim), punitive damages, court costs, and attorney’s fees upon a finding of insurer bad faith; the selection and amount of such awards are discretionary.
- Appellate review of awards or denials of fees, costs, and interest under § 8371 is deferential; reversal generally requires legal error affecting the result or an abuse of discretion.
- Although § 8371 authorizes “court costs,” taxation of specific cost items in federal court remains governed by the federal cost framework (including Rule 54(d) and 28 U.S.C. § 1920), applied consistently with the state-created entitlement.

## Conclusion

The Third Circuit left intact the jury’s bad-faith finding and punitive damages while affirming the trial court’s discretionary decisions to deny additional attorney’s fees and costs and to award a limited amount of prejudgment interest, concluding that § 8371’s remedies are substantive yet discretionary in federal diversity litigation.


Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230 (3d Cir. 1997)