The Pennsylvania Supreme Court has, for the first time in the 37-year history of Pennsylvania's bad faith insurance statute, 42 Pa.C.S. § 8371, considered the necessary elements of such a claim, and it has determined that proof of an insurer's motive of self-interest or ill will are not required. See Rancosky v. Washington Nat'l Ins. Co., 28 WAP 2016 (Pa. Sept. 28, 2017).
The case arose from a supplemental cancer insurance policy that plaintiff LeAnn Rancosky purchased from Conseco Health Insurance Company. This policy contained a waiver-of-premium provision under which Rancosky would be excused from continuing to pay premiums 90 days after she became disabled due to cancer. Rancosky was diagnosed with cancer in February 2003 and sought to apply the waiver-of-premium provision in April 2003, claiming that she was disabled under the policy from the time of her diagnosis in February 2003. However, Rancosky's physician submitted a statement that incorrectly indicated that she became disabled in April 2003. Rancosky, thinking her premium waiver had been accepted, made her final premium payment in June 2003, and Conseco continued to pay claims under the policy into 2005.
In January 2005, however, Conseco informed Rancosky that her policy had lapsed as of May 2003. Rancosky responded by again asserting that she had become disabled in February 2003, and she authorized her employer and physician to release information to Conseco showing this. Despite these efforts, Conseco began denying Rancosky's claims for benefits under the policy in 2006. In denying Rancosky's request for reconsideration, Conseco relied on the erroneous statement from the physician that Rancosky first became disabled in April 2003, but it did no investigation to clear up the discrepancy between what was on that physician's statement and Rancosky's repeated claim that her disability started in February 2003.
Rancosky then filed a bad faith claim against Conseco under 42 Pa.C.S. § 8371, which provides:
In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:
(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
Per the statute, Rancosky sought interest on her claims, punitive damages, and attorney's fees. In considering her claim, the trial court applied a two part test established in 1994 by the Pennsylvania Superior Court (an intermediate appellate court) in Terletsky v. Prudential Property & Casualty Insurance Company. This test requires a plaintiff claiming bad faith to show:
- the defendant did not have a reasonable basis for denying benefits under the policy; and
- the defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim.
The trial court decided that the first prong of this test had not been satisfied because Rancosky did not prove that the insurer acted out of a "subjective motive of self-interest or ill will." However, neither Terletsky nor section 8371 explicitly required such a showing, and the superior court vacated this ruling on appeal.
The Pennsylvania Supreme Court granted Conseco's petition to hear an appeal to determine: (1) whether the two prong test of Terletsky was the appropriate one; and (2) whether "motive of self-interest or ill-will" was a requirement of a section 8371 claim or merely probative regarding whether an insurer lacked a reasonable basis for denying a claim.
The court reviewed the history of bad faith insurance claims in general and of section 8371 in particular in order to determine the legislature's intent in enacting the statute. This history began with Gruenberg v. Aetna Insurance Company, a 1973 California Supreme Court decision that recognized the tort of bad faith denial of insurance policy benefits. This was followed by the recognition of such a common law cause of action in a number of other states, including Wisconsin in the seminal case, Anderson v. Continental Insurance Co. In Anderson, the Wisconsin Supreme Court determined that, while knowledge or recklessness was sufficient to prove bad faith generally, proof of ill will was required an award of punitive damages.
In Pennsylvania, however, such a common law cause of action was explicitly rejected by the supreme court in 1981 in D'Ambrosio v. Pennsylvania National Mutual Casualty Insurance Company. Thus, the supreme court found that section 8371, which was enacted in 1990, was "a delayed legislative response" to the D'Ambrosio decision, making the history of bad faith causes of action elsewhere and the way in which the D'Ambrosio Court understood such causes of action relevant to understanding what the legislature intended when it enacted section 8371.
To support its contention that ill will or self-interest was required, Conseco relied on Terletsky's citation of the definition of "bad faith" in the 1990 edition of Black's Law Dictionary, which included the statement that bad faith required a showing of "some motive of self-interest or ill will; mere negligence is not enough." Conseco also relied on the Wisconsin Supreme Court's decision in Anderson, which found that such a showing was required for punitive damages, because Rancosky was seeking punitive damages. Rancosky countered that, despite Terletsky's use of that definition, it did not hold that such a showing was required. Further, Rancosky argued that while Anderson said such a showing was required for punitive damages, this distinction is not present in section 8371.
Ultimately, the Pennsylvania Supreme Court determined that no showing of ill will or motive of self-interest was required in order to succeed on a section 8371 claim, because reading this requirement into the statute's use of the term "bad faith" "would limit recovery in any bad faith claim to the most egregious instances only where the plaintiff uncovers some sort of 'smoking gun evidence,'" evidence the court found was highly unlikely to exist. The court further rejected imposing a distinction between what was required for showing bad faith generally and for proving entitlement to punitive damages, as the court had in Anderson, because section 8371 made no such distinction. The court also endorsed the two-part test described in Terletsky, such that a plaintiff claiming bad faith must show that an insurer lacked a reasonable basis for denying benefits and knew or recklessly disregarded this lack of a reasonable basis.
Plaintiffs asserting bad faith insurance claims in Pennsylvania will thus not be required to produce evidence of a motive of self-interest or ill will in order to prove their claims, even if they seek punitive damages, although such evidence will always be helpful if it exists. On the other hand, insurers defending such claims must focus their efforts on showing that they had a reasonable basis for denying benefits or, at the very least, that they did not know of or recklessly disregarded this lack of a reasonable basis; intentional bad conduct is not required, and mere good intentions are not enough.
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