The opinion
MURNAGHAN, Circuit Judge,
concurring in part and dissenting in part:
I fully concur in the majority’s thoughtful disposition of most of the issues raised in the appeal. However, I disagree with the majority’s conclusion in Part V that Virginia does not recognize the tort of “bad faith” in the third-party insurance context. Because I believe that the issue should at the very least be certified to the Virginia Supreme Court for resolution, I dissent from that portion of the majority opinion.
As this Court noted in A & E Supply Co. v. Nationwide Mutual Fire Insurance Co., 798 F.2d 669 (4th Cir.1986), cert. denied, — U.S. —, 107 S.Ct. 1302 , 94 L.Ed.2d 158 (1987), the Virginia Supreme Court has expressly stated that in Virginia, a breach of contract may support an award of punitive damages “[o]nly if the breach establishes the elements of ‘an independent, wilful tort.’” Id. at 672 (quoting Kamlar Corporation v. Haley, 224 Va. *1018 699, 705 , 299 S.E.2d 514, 517 (1983)). I wholeheartedly agree that, as this Court ruled in A & E Supply, Virginia does not recognize the tort of bad faith in a first-party 1 insurance claim, and that punitive damages are therefore not awardable in that situation. While I am not personally particularly enamored of punitive damages awards, which too often only provide a windfall to a victorious litigant and do not serve much of a public purpose, I recognize that a federal court sitting in diversity is charged with applying state law and not with passing judgment on the wisdom of that law. Because I believe Virginia’s recognition of the special fiduciary duty present in the third-party context establishes that Virginia law recognizes a tort action alleging a breach of that duty, I think punitive damages can be claimed here by Bettius & Sanderson.
I.
The Virginia Supreme Court expressly adopted the special fiduciary duty rule in Aetna Casualty & Surety Co. v. Price, 206 Va. 749 , 146 S.E.2d 220 (1966), where it held that an insurer may be held liable to the insured for the whole amount of a judgment exceeding the policy limits, because
in the usual liability insurance contract, control of the defense of any claim covered by the contract is vested in the insurer and it is permitted, as the language of the policy before us permitted Aetna, to “make such investigation, negotiation, and settlement of any claim or suit as it deems expedient.” In such a situation, a relationship of confidence and trust is created between the insurer and the insured which imposes upon the insurer the duty to deal fairly with the insured in the handling and disposition of any claim covered by the policy.
206 Va. at 760-61 , 146 S.E.2d at 227-28 . The Virginia Supreme Court later referred to the rule as “the bad faith rule.” Id. at 761 , 146 S.E.2d at 228 . The court specifically discussed the choice between a negligence rule and a bad faith rule, and concluded that “sound reason compels the adoption of the bad faith rule, rather than the negligence rule, for this type of case.” Id.
While I agree that Aetna Casualty is not dispositive of this case, because here the plaintiff law firm wants punitive damages for bad faith actions and does not simply seek full satisfaction of a judgment against it, I think the majority unfairly minimizes the importance of the Virginia Supreme Court’s ruling. The majority acknowledges that in Aetna Casualty “[t]he Supreme Court of Virginia has recognized that a contract of liability insurance, which vests in the insurer control of the defense, creates a relationship of confidence and trust between insurer and insured, imposing on the insurer the duty to deal fairly with the insured in the disposition of third-party claims.” Supra at 1016. To me, the creation of a special relationship of confidence and trust and the imposition of a special duty necessarily go beyond the usual relationship and duty that are present in any purely contractual situation. The very distinction was articulated by the Utah Supreme Court in Beck v. Farmers Insurance Exchange, 701 P.2d 795, 799 (Utah 1985), where the court noted that in the third-party context the insured is “wholly dependent upon the insurer to see that, in dealing with claims by third parties, the insured’s best interests are protected.” The court also stressed that in many third-party insurance situations, “the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf.” Id. 2 Here, the situation is somewhat unusual; it appears that National Union controlled and properly handled the legal defense of its insured, but National Union played almost no role in negotiating and structuring a settlement among the defendants and with *1019 the plaintiffs once the adverse judgment was rendered and refused to satisfy the adverse judgment within the court’s deadline. If that conduct constituted a breach of National Union’s special fiduciary duty to Bettius & Sanderson, as alleged, then Bettius & Sanderson has made out a tort violation and should be entitled to seek punitive damages.
I disagree with the conclusion reached by the majority, and subscribed to in dictum by Judge Wilkinson in A & E Supply, 3 that there is no support in Virginia law for the third-party tort claim. In addition to the clear language recognizing a fiduciary duty in Aetna Casualty, we have an opinion from a Virginia circuit judge expressing complete disagreement with the conclusion in A & E Supply that Virginia does not recognize a tort of bad faith in first -party claims. See Hutson v. State Farm Mutual Automobile Insurance Co., Law No. 72773 (19th Jud.Cir.Va., June 23, 1986). While, as the majority notes, Judge Brown in Hutson relied heavily on the district court decision in A & E Supply that was subsequently reversed by this Court, I do not think that makes Judge Brown’s conclusion any less important where we are limited to ascertaining and applying the law of the Commonwealth of Virginia.
When hearing a case pursuant to diversity jurisdiction, a federal court “must determine issues of state law as it believes the highest court of the state would determine them.” 19 Wright, Miller & Cooper, Federal Practice and Procedure § 4507 at 89 (1982). While the best evidence of how the state’s highest court would rule would be relevant holdings of that court, intermediate appellate decisions and even state trial court decisions should be looked to if there are no high court holdings to guide the federal court’s inquiry. Id. at 94, 96. Although a federal court sitting in diversity is not bound by the ruling of a lower state court, the federal court should defer to the state court unless it has excellent reason to believe the highest state court would rule otherwise if presented with the question. See Maryland Casualty Co. v. Burley, 345 F.2d 138, 139-40 (4th Cir.1965) (Sobeloff, J.) (“A state trial judge, however, has ruled that the clause is void.... While in the absence of a ruling by the highest court of the state we are not bound to follow this decision, we nevertheless join the District Court in deferring to the only available judicial interpretation of Virginia law....”); cf. Louthian v. State Farm Mutual Insurance Co., 493 F.2d 240, 241 (4th Cir.1973).
In a letter opinion denying a Motion to Reconsider in Hutson, Judge Brown explicitly rejected this Court’s analysis in the appellate decision in A & E Supply and reaffirmed his decision:
I find the reasoning of Judge Williams in A & E Supply v. Nationwide Mutual Fire Insurance Co., 612 F.Supp. 760 (W.D.Va.1985), and that of Judge Turk in Morgan v. American Family Life As surance Co. of Columbus, 559 F.Supp. 477 (W.D.Va.1983) persuasive. In short, I think Judge Wilkinson is wrong.
Letter Opinion, Hutson (Brown, J., Dec. 31, 1986). When we sit in diversity, we have a responsibility to ascertain state law. The decisions in Aetna Casualty and Hutson are strongly indicative of the existence of a tort of bad faith in Virginia in the third-party context.
At the same time, I do not agree with the majority that there are countervailing indications in Virginia law. The majority concludes that punitive damages are unnecessary in Virginia because after Aetna Casualty, the insurer may be forced to satisfy a judgment in excess of the policy limit. That may be true in some cases, and in those cases the usual goals of punitive damages (punishment and deterrence) may be met; but where, as here, the eventual judgment against the insured is within the policy limits, the insurer may escape punishment and feel no incentive to honor its special fiduciary duty to its insured. Similarly, while the ability of the Commonwealth of Virginia to impose minor fines on *1020 insurers may be a good policy argument in a debate about whether Virginia should be held to recognize the tort, the statutory provisions do not provide us with guidance as to whether the tort exists in Virginia.
II.
While I think this Court could find the existence of the tort of bad faith in the third-party insurance context from existing Virginia law, chiefly from Aetna Casualty, the governing precedents are sufficiently sparse that I would certify the question.
The Virginia Supreme Court has the power to answer a question of law certified to it by a United States Circuit Court of Appeals “if a question of Virginia law is determinative in any proceeding pending before the certifying court and it appears there is no controlling precedent on point in the decisions of the Supreme Court or the Court of Appeals of Virginia.” Va.Sup.Ct. R. 5:42 (1987). Except for Aetna Casualty, which imposes a special fiduciary duty on insurers in the third-party context (the breach of which is logically a tort), there is no precedent from the Supreme Court of Virginia or the Court of Appeals of Virginia to guide us.
The present case is not controlled by A & E Supply, because that case dealt with a first-party insurance claim. A & E Supply, where additional fiduciary duty did not intrude, was much easier than the instant case. Because the Virginia Supreme Court has adopted the theory of additional fiduciary duty in the third-party context, providing a basis on which the bad faith tort is grounded, we are faced here with a very different case. There is no more to go on for ascertaining Virginia law now than there was last year when the A & E Supply dictum was uttered. Absent additional guidance, this Court will largely be speculating about what the Virginia Supreme Court will do when it is squarely presented with the question. We have recognized the appropriateness of certifying such unresolved issues to the highest state court for decision. See Jones v. Heckler, 754 F.2d 519, 520 (4th Cir.1985) (“developing and potentially enormously helpful procedure under which certification of unresolved and important questions of [Maryland] state law may be referred to the court best equipped to provide answers to them”). The case satisfies the rule laid down in Boyter v. Commissioner of Internal Revenue Service, 668 F.2d 1382 (4th Cir.1981), that a question will not be certified to a state court “unless and until it appears that the answer is dispositive of the federal litigation or is a necessary and inescapable ruling in the course of the litigation.” Id. at 1385 . To decide the appeal, it is necessary to decide an unanswered question of state law: whether Virginia recognizes the tort of bad faith for breaches of third-party insurance contracts.
Because I would certify the far from resolved question of whether Virginia recognizes the tort of bad faith for third-party insurance claims to the Virginia Supreme Court, I respectfully dissent from Part V of the majority opinion.
. A first-party claim involves an insurer’s duty to compensate the insured for direct losses. A third-party claim by contrast concerns the insurer’s duty to defend and indemnify the insured against claims by a third party.
. The Utah Supreme Court held in Beck that a first-party claimant could not sue his insurer in tort for breaching its duties under the insurance contract. 701 P.2d at 798 . Analysis of the first-party/third-party distinction was essential in Beck because Utah does recognize the tort of *1019 bad faith in the third-party context. See Ammerman v. Farmer’s Ins. Exchange, 19 Utah 2d 261 , 430 P.2d 576 (1967).
. The holding in A & E Supply dealt exclusively with a first party claim. To reach out and decide what need not be decided is frequently denigrated as dictum.