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Pennsylvania Supreme Court Defines Elements of Bad Faith Claims,
Malice Not Required
October 2017 
William F. O'Brien
Lucas and Cavalier, LLC  
William F. O'Brien 

A.        Overview

In a matter of first impression, The Pennsylvania Supreme Court unanimously refused to rule a plaintiff is required to provide evidence of an insurance company's malicious intent or ill-will to prevail on a bad faith claim under 42 Pa.C.S. 8371 in Rancosky v. Washington Nat'l. Ins. Co., No. 28 WAP 2016 (Pa. Sept. 28, 2017). The Rancosky court adopted the two-pronged test used for establishing bad-faith claims outlined in the 1994 decision Terletsky v. Prudential Property and Casualty Insurance, which requires a plaintiff to present clear and convincing evidence (1) the carrier did not have a reasonable basis for denying benefits under the policy, and (2) the carrier knew of or recklessly disregarded its lack of a reasonable basis. As part of its decision, the Supreme Court rejected the insurance carrier's argument that, as part of the requirements set forth in Terletsky, plaintiffs must prove a carrier was motivated by self-interest or ill-will in denying coverage to its insured.
"We do not believe that the [Pennsylvania] 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," Justice Max Baer wrote. "Such a construction could functionally write bad faith under Section 8371 out of the law altogether." While the justices' refusal to add a third prong requiring a showing of ill will on the insurance company's part is a win for policyholders, insureds still face a substantial threshold to overcome to prove bad faith in Pennsylvania.
B.           Rancosky Decision

The Pennsylvania justices affirmed the underlying Superior Court decision that an insurance carrier's motive of self-interest or ill will is merely one factor that may be considered in an analysis of potential bad faith conduct - and the attendant punitive damages that could follow - under Section 8371, rather than a mandatory prerequisite for such a claim. The case involved a policyholder's dispute with Conseco Health Insurance Company over coverage for cancer treatments.
In refusing to require a showing of ill-will or malice, the Rancosky holding effectively protects insureds from outrageous conduct by insurers. In Rancosky, the plaintiff bought a health insurance policy with Conseco focusing on cancer, but was later denied benefits after being diagnosed with ovarian cancer. The policy included a waiver provision allowing policy holders to stop making premium payments if they were disabled due to cancer for more than 90 days after being diagnosed.
The parties differed over the onset date of the plaintiff's disability due to conflicting dates provided on claim forms. The plaintiff was diagnosed with ovarian cancer on February 4, 2003 and did not return to work following the diagnosis. However, she remained on her employer's payroll for several months following the diagnosis because she had accrued unused vacation and sick days. Consequently, Conseco continued to receive payroll-deducted premiums from plaintiff until June 24, 2003, when she ultimately went on disability retirement. As the premium payments were made in arrears, and therefore paid for the prior month's coverage, the final premium payment extended coverage under her policy to May 24, 2003.
At Conseco's request, the plaintiff provided waiver-of-premium forms along with a required physician's statement. Unbeknownst to the plaintiff, the submitted physician's statement inaccurately specified her date of disability as beginning on April 21, 2003, rather than February 4, 2003. Over the next two and a half years, the parties disputed the plaintiff's coverage status. After denying coverage in 2006, and plaintiff's subsequent reconsideration request, Conseco's review was limited to its in-house documentation, which at that time included, among voluminous and inconsistent filings, the physician's statement erroneously indicating her disability onset date as April 21, 2003.
Conseco did not undertake any investigation to clarify the discrepancy between the plaintiff's claimed disability date of February 4, 2003, and the physician's erroneous statement. Instead, it merely accepted the inaccurate information in the physician's statement and took the position her policy lapsed due to non-payment of premiums prior to the 90 day waiting period under the waiver-of-premium provision and consequently denied her request for reconsideration.
Though the trial court found that Conseco was "sloppy and even negligent" in its handling of the plaintiff's claim, it ultimately found in favor of Conseco on the bad faith claim. In so doing, the trial court concluded Rancosky failed to demonstrate Conseco lacked a reasonable basis for denying benefits under the policy because she did not prove the insurer acted out of "some motive or self-interest or ill will." The Superior Court thereafter vacated the trial court's judgment, holding that the first prong of the Terletsky test is an objective inquiry and the subjective intent of the insurer has no relevance thereunder. In confirming the Superior Court decision, the Supreme Court's analysis focused solely on the legal test for bad faith claims under Section 8371 and remanded for further proceedings whether the test has been met by the existing record.
C.        Analysis

The Supreme Court agreed with the Superior Court's holding, concluding that had Conseco conducted any meaningful investigation into the onset date of plaintiff's cancer during its review of her reconsideration request, it would have discovered she was unable to work due to her diagnosis beginning on February 4, 2003, and that she made the required premium payments during the 90 day waiting period of her cancer policy.
The first prong of the Terletsky test, whether an insurer had a reasonable basis for denying benefits is an objective inquiry into whether a reasonable insurer would have denied payment of the claim under the facts and circumstances presented. Because Conseco failed to conduct any such investigation and merely accepted incorrect information from her physician, Conseco lacked a reasonable basis for denying plaintiff's benefits pursuant to the first prong of the Terletsky test.
Justice Baer opined, "proof 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. 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."
Although the Rancosky court declined to add a third prong to the Terletsky test, policyholders must still prove the two prongs by clear and convincing evidence. Resultantly, the insurer's "bad intent" is simply one factor to consider in determining whether the insurer's culpability amounted to recklessness, rather than simple negligence, in denying coverage. The policy holder must present clear and convincing evidence the carrier either knew or recklessly disregarded a lack of a reasonable basis for denying a claim. Thus, insurance carriers must pay particular attention to detail to adequately investigate policy holders' claims in order to avoid bad faith claims in Pennsylvania. Although a policy holder will not be required to present a "smoking gun" of bad faith - such as an internal email in which a claims handler admits denying a claim for no good reason, a coverage dispute between reasonable minds will not amount to bad faith under the Rancosky decision.

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