Rancosky v. Washington National Insurance Co.: Pennsylvania Supreme Court Finally Rules on Test for Insurance Bad Faith; Holds That Proof of an Insurer's Motive of Self-Interest or Ill Will Is Not Required
In Rancosky v. Washington Nat’l Ins. Co., No. 28 WAP 2016, 2017 Pa. LEXIS 2286 (Pa. Sept. 28, 2017), the Pennsylvania Supreme Court at long last ruled squarely on what must be proven to establish bad faith under 42 Pa. C.S.A. §8371, Pennsylvania’s “bad faith statute,” and, in doing so, held that proof of a motive of self-interest or ill will on the part of the insurer is not required.
After the 1990 passage of §8371, Pennsylvania courts struggled to find a definition of “bad faith” to be applied in the litigation of bad faith claims. In Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994), the Pennsylvania Superior Court, the state’s intermediate appellate court, established a two-part test for bad faith, holding that in order to recover under §8371, an insured must show by clear and convincing evidence that (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim. Id. at 689-90. The Terletsky decision relied, in part, upon a definition in Black’s Law Dictionary defining insurance bad faith as involving “a motive of self-interest or ill will,” and Terletsky’s two-part test became the standard of bad faith employed in state and federal court decisions over the subsequent two decades.
However, the Pennsylvania Supreme Court had never ruled on the validity of the Terletsky test. Over the years, some insurers, relying upon the language in Terletsky and several of the earliest common law bad faith cases in Pennsylvania, argued that the insured was obligated to prove a third element—the insurer’s “motive of self-interest or ill will”—in order to recover under §8371, at least if punitive damages were being sought. See, e.g., Greene v. United Servs. Auto. Ass’n, 936 A.2d 1178, 1189-91 (Pa. Super. 2007), appeal denied, 954 A.2d 577 (Pa. 2008) (holding that “the ‘motive of self-interest or ill will’ level of culpability is not a third element required for a finding of bad faith, but it is probative of the second element identified in Terletsky”).
Rancosky arose out of a dispute over the coverage provided by a cancer policy where Ms. Rancosky was initially diagnosed with cancer in 2003, but cancer recurred in 2004 and again in 2006. The insurer made payments following the 2003 and 2004 diagnoses, but denied payment following the 2006 recurrence, having concluded that the policy lapsed in 2003 for failure to pay a premium. Ms. Rancosky argued that her policy had not lapsed because she had a waiver of premium benefit under her policy, which provided that the policy remained in force without premiums due after the 2003 diagnosis. She had several physicians fill out various forms over the years, and the insurer ultimately relied upon dates showing that the policy lapsed prior to her being eligible for a waiver of premium status. A bad faith suit was filed in the Washington County Court of Common Pleas focusing primarily on the 2006 investigation that resulted in the denial of further benefits.
Rancosky Verdict and Appeal
Following a bench trial, the trial court entered judgment in favor of the insurer on the bad faith claim. On appeal, the Superior Court vacated the verdict in part and remanded for a new trial. Rancosky, 130 A.3d 79 (Pa. Super. 2015). In its opinion, the Superior Court discussed at length the trial court’s application of the Terletsky test and concluded that it had been erroneously used. Specifically, the appellate court held that the trial court had erroneously applied the “motive of self-interest or ill will” concept from prior case law as part of the showing required by the first prong of the Terletsky test when it should have applied the concept in a determination under the second prong of the test.
Pennsylvania Supreme Court Decision in Rancosky
The Pennsylvania Supreme Court allowed an appeal on the issue of whether the court should ratify the two-part Terletsky test and, if so, whether proof of a “motive of self-interest or ill will” was merely a discretionary consideration or rather a mandatory prerequisite to proving bad faith. In a majority opinion joined by five justices, and with two separate concurring opinions, the Supreme Court ratified the Terletsky test and affirmed the Superior Court decision.
Tracing the history of bad faith in Pennsylvania and the enactment of §8371, the majority opinion concluded that punitive damages could be awarded under §8371 upon proof of bad faith alone. “[A]s Section 8371 does not distinguish between the standard for finding ‘bad faith’ generally and ‘bad faith’ allowing for punitive damages,” the court reasoned, “we find no basis for concluding that the General Assembly intended to impose a higher standard of proof for bad faith claims seeking punitive damages when it created the right of action.” Rancosky, 2017 Pa. LEXIS 2286, at *33.
It followed, according to the majority, that proof that the insurer’s claims handling was engendered by a “motive of self-interest or ill will” was not a requirement under §8371:
Given our conclusion that there is no basis to distinguish between punitive damages and other categories of damages under Section 8371, an ill will level of culpability would limit recovery in any bad faith claim to the most egregious instances only where the plaintiff uncovers some sort of “smoking gun” evidence indicating personal animus towards the insured. We do not believe that the General Assembly intended to create a standard so stringent that it would be highly unlikely that any plaintiff could prevail thereunder when it created the remedy for bad faith. Such a construction could functionally write bad faith under Section 8371 out of the law altogether.
Id. at *33-34.
Deciding that the two-pronged Terletsky test was “an appropriate framework” for consideration of bad faith claims, the court explained that the “recklessness standard for liability under the second prong comports with the historical development of bad faith in Pennsylvania and effectuates the intent of the General Assembly in enacting Section 8371.” Id. at *34. Because proof of recklessness was sufficient to prove bad faith, any evidence of self-interest or ill will was no more than “potentially probative of the second prong [and] is not a mandatory prerequisite to bad faith recovery under Section 8371.” Id. at *35.
The majority summarized its holding as follows:
[T]o prevail in a bad faith insurance claim pursuant to Section 8371, a plaintiff must demonstrate, by 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 or recklessly disregarded its lack of reasonable basis in denying the claim. We further hold that proof of the insurer’s subjective motive of self-interest or ill will, while perhaps probative of the second prong of the above test, is not a necessary prerequisite to succeeding in a bad faith claim. Rather, proof of the insurer’s knowledge or reckless disregard for its lack of reasonable basis in denying the claim is sufficient for demonstrating bad faith under the second prong.
Id. at *36.
Analyzing Rancosky’s Impact
In the 27 years since the enactment of §8371, Rancosky marks only the fourth time that the Pennsylvania Supreme Court has directly addressed the statute. By contrast, Pennsylvania’s intermediate appellate court, the Superior Court, issued numerous published opinions regarding §8371 over that time period, and these decisions have generally been followed by practitioners and the state trial courts, and even many federal district courts. Viewed in that context, the Supreme Court’s decision in Rancosky did not render any sweeping change in the existing law of bad faith in Pennsylvania, and its impact should prove fairly limited.
Thus, Rancosky affirmed the law of the past 23 years that in order to recover for a claim of bad faith under §8371, the policyholder/insured must show that the insurer (1) did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim—the Terletsky test. Because the second prong of that test is subjective, the insured is still required to prove scienter—i.e., knowing or reckless conduct on the part of an insurer—in order to prevail in a bad faith action.
Rancosky affirmed that to meet this two-part burden, the policyholder/insured must prove bad faith by the “clear and convincing” evidentiary standard—i.e., with testimony must “so clear, direct, weighty and convincing as to enable the jury to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue….” In Re Estate of Fickert, 337 A.2d 592, 594 (Pa. 1975).
Rancosky also affirmed what the Superior Court held 13 years ago in Hollock v. Erie Ins. Exch., 842 A.2d 409, 418 (Pa. Super. 2004), that more than bad faith is not required before punitive damages may be imposed under §8371. Hollock had held that although “a finding of bad faith does not compel an award of punitive damages, it does allow for the award without additional proof, subject to the trial court’s exercise of discretion….” Id. A different panel of the Superior Court had arrived at the same conclusion in Zimmerman v. Harleysville Mut. Ins. Co., 860 A.2d 167 (Pa. Super. 2004).
The only real change effected by Rancosky is a modest one. To the extent that insurers, relying upon language from Terletsky and prior common law bad faith cases in Pennsylvania citing the Black’s Law Dictionary definition of bad faith, might have argued that the insured was obligated to prove a third element—the insurer’s “motive of self-interest or ill will”—such argument is no longer meritorious. The federal Third Circuit Court of Appeals had rejected such an argument 20 years ago in Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230 (3d Cir. 1997), but Rancosky has laid to rest any doubt as to the argument’s viability. As the Rancosky court put it, “[P]roof of the insurer’s subjective motive of self-interest or ill will, while perhaps probative of the second prong of the [Terletsky] test, is not a necessary prerequisite to succeeding in a bad faith claim.” Rancosky, 2017 Pa. LEXIS 2286, at *36.
In sum, the Rancosky decision will not significantly change the legal framework for bad faith cases in Pennsylvania.