Rancosky v. Washington Nat’l Ins. Co: Terletsky standard prevails for bad faith claims

The Pennsylvania Supreme Court adopted the Superior Court’s Terletsky v. Prudential Property & Cas. Ins. Co. standard for determining bad faith, ruling that no evidence of ill-will is required, nor is there a heightened leval of malice necessary for a finding of punitive damages under the 42 Pa.C.S. § 8371.

LeAnn Rancosky purchased a cancer treatment insurance policy from Washington National Insurance Company (which presumably has no connection to the baseball team that shares its name). A provision of the policy provided that, if she ever became disabled due to cancer, she could cease paying premiums on the policy and still collect the benefits of the policy, provided she submitted several documents. She did become so disabled, and submitted the documents, and stopped paying premiums (as permitted by the policy). Unbeknownst to Rancosky, her doctor made an error on a form, erroneously setting her disabled date to several months after she was disabled and ceased paying premiums.

Months went by, and Washington National failed to respond to multiple inquiries on her claim status. Rancosky gave Washington National multiple opportunities to speak with her doctor, employer and any other third party necessary to confirm her status. Finally, Washington National simply denied her ongoing treatment on the basis that she had ceased paying premiums, despite the policy language allowing her to take this course of action. Rancosky filed a “bad faith” claim under § 8371, which reads as follows:

Actions on insurance policies

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.

Id. A major dispute in this case is a major point of contention in most bad faith claims: must a plaintiff prove the insurance company had a motive of self-interest or ill-will to prevail in her claim, or is a showing of disregard of a duty under the contract sufficient?

 Majority by Baer: Terletsky Standard Prevails

The majority, speaking by Justice Max Baer, finds that the plain language of the statute had precious little to say about the standard of ill-will required. Relying on a past SCOPA case that ruled that the bad faith statute was a “delayed legislative response to this Court’s 1981 decision in D’Ambrosio v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 494 Pa. 501 (1981),” the Court reiterated that the best way to divine legislative intent in regards to the bad faith statute was to look at the Supreme Court case that declined to recognize bad faith under Pennsylvania law.

The majority opinion is written as a comprehensive examination of bad faith law, taking lengthy detours through the first opinions to recognize bad faith as a right of action in tort under California law, and the subsequent refinements of the standards of proof in a Wisconsin case. Ultimately, however, Justice Baer points back to SCOPA’s own caselaw, examining the denial of a common law right of action in D’Ambrosio, and the calls in that case for the legislature to consider passing a right of action where SCOPA felt it unwise to act.

Ultimately, the statute passed, and was interpreted by the Superior Court as early as 1992 to include a two part test. In order to recover in a bad faith action, the plaintiff must present clear and convincing evidence 1) that the insurer did not have a reasonable basis for denying benefits under the policy, and 2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Thus, the proof of an insurance company’s motive of self-interest or ill-will, which the Defendant in this case demanded, is not a prerequisite to prevailing in a bad faith claim under § 8371, but may be relevant to satisfying the second prong. Furthermore, the Court ruled, evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient to prove this second prong.

Secondly, the Court turned to the question of punitive damages, which usually require a heightened level of proof of recklessness under Pennsylvania law. Recognizing that the statute placed the three remedies on par with one another, the Court ruled that the General Assembly intended punitive damages to be equally available as a remedy. Indeed, though the majority does not mention it, even the positioning of punitive damages between the other two remedies demonstrates that the legislature did not view it as an extraordinary remedy.

Concurrence by Wecht: Evidence of Ill-will is rare

Justice Kevin Wecht concurs in the result, but notes that the inability to find evidence of ill-will will be common. “[S]uch strains of overt malfeasance often will be lacking and, in any event, will seldom be susceptible to establishment by competent proof of record.”

Concurrence by CJ Saylor: But direct evidence is always rare

Chief Justice Thomas Saylor writes the second concurrence, which is unusual in itself as the concurrences are normally placed in order of seniority. Presumably because the Chief Justice did not join the opinion in full, his thoughts come last. Noting his general approval of the holding, the Chief Justice adds two helpful insights. Observing that “inferences regarding intent are legitimately and regularly drawn from circumstantial evidence (including actions and inaction) in other contexts, including in the criminal law,” the Chief Justice would find that circumstantial evidence can be used, but that a finding of some sort of ill-will and recklessness should be required for a finding of bad faith. His second observation is that punitives generally require a proof of “malice,” and that federal constitutional jurisprudence under the due process clause is implicated where punitive damages come into play.

Conclusion: Bad Faith is a two-part test

The law doesn’t change in this area, but it is confirmed. For a quarter century, Pennsylvania has lived under a two-part analysis of bad faith, and that analysis remains. But the test is now confirmed by the Commonwealth’s highest court, and there will be no further concerns that the law could change tomorrow. If any fault is to be found in this opinion, it is the excessive reliance on other sources. Incorporating by reference an opinion from Wisconsin (but not all of it), and insistently attributing to the General Assembly the motive of responding to a Supreme Court case from ten years earlier without any supporting documentation, the Court takes a fairly straight-forward statutory analysis case and imbues it with a load of scholarly references that make this area of law a bit muddy. Regardless, the test for bad faith is now clear, and overall, this opinion is a welcome clarification.