Rancosky v. Washington National Insurance Company - PA Supreme Court to Decide Type of Conduct Necessary to Show Insurance Bad Faith
In order to hold insurance companies accountable for unfair insurance claims practices, in 1990, the Pennsylvania legislature passed 42 Pa.C.S.A. § 8371, otherwise known as Pennsylvania’s “bad faith” statute, 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.
Pennsylvania’s general assembly did not define “bad faith” conduct, instead leaving the issue for the Pennsylvania judiciary to decide. Pennsylvania courts have repeatedly held that mere negligent conduct, however harmful to the interests of the insured, is not sufficient to show bad faith. So what constitutes bad faith conduct? Since 1994, Pennsylvania courts have relied upon the framework established by the Superior Court in Terletsky v. Prudential Prop. And Cas. Ins. Co. 437 Pa.Super 108 (1994), which requires a plaintiff to satisfy a two-part test to prove bad faith conduct. To successfully sue an insurance company for bad faith, an insured must first show that the insurance company did not have a reasonable basis for denying benefits under the policy. Once this is shown, the insured must then satisfy the second prong of the test and prove that the insurance company knew or recklessly disregarded its lack of reasonable basis in denying the claim.
Rancosky v. Washington National Insurance Company
The Rancosky case arose out of a cancer insurance policy, which provides benefits to an insured diagnosed with an internal cancer while the policy is in effect including, inter alia, cash benefits and payment of surgical, hospitalization and treatment costs. In 2003, Ms. Rancosky was diagnosed with ovarian cancer and she attempted to collect benefits under the policy. When a dispute arose, she filed suit alleging bad faith in the Court of Common Pleas of Washington County.
The trial court entered judgment in favor Washington National Insurance Company finding that Ms. Rancosky failed to prove the first prong of the Terletsky test. Specifically, the trial court ruled that Ms. Rancosky failed to prove that Washington National Insurance Company had motive or self-interest or ill-will in denying her claim for benefits. Ms. Rancosky appealed to the Pennsylvania Superior Court, who disagreed with the trial court and remanded the case back to the trial court for a new trial on Ms. Rancosky’s bad faith claim. More specifically, the Superior Court held that the trial court erred in applying the Terletsky because the trial court used the “motive of self-interest or ill-will” language as part of the first prong of the Terletsky test, not the second and that because of this error, the verdict could not stand.
The Pennsylvania Supreme Court
The Pennsylvania Supreme Court will address two (2) questions: (1) Whether this Court should ratify the requirements of Terletsky v. Prudential Property & Casualty Insurance Co. for establishing insurer bad faith under 42 Pa.C.S. § 8371; and, assuming the answer to be in the affirmative, (2) whether the Superior Court erred in holding that Terletsky factor of a “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith?
Comment
The Supreme Court should ratify Terletsky and hold that factors of “motive of self-interest or ill-will” are discretionary considerations rather than a mandatory prerequisite to proving bad faith. At a bare minimum, the Court should rule that reasonable inferences of motive of self-interest or ill will is sufficient to prove bad faith conduct. This is true because insureds already face substantial obstacles in establishing a bad faith claim in Pennsylvania. As stated above, proof of the insurer’s “careless” conduct is insufficient to establish a claim for bad faith. Second, policyholders must prove bad faith by “clear and convincing” evidence, which is a higher burden of proof that the “preponderance of the evidence,” i.e. “more likely than not” standard typically used in civil damage lawsuits. Lastly, it is often very difficult, if not impossible, to offer direct evidence of an insurance company’s motive of self-interest or ill-will as serving the sole basis for a bad faith claim. However, there are occasions where the circumstances surrounding the insurer’s conduct substantially infers this level of intent. The Pennsylvania Supreme Court has held that a defendant acts recklessly when his conduct creates an unreasonable risk of harm to another and such risk is substantially greater than that which is necessary to make his conduct negligent. Hutchison v. Luddy, 870 A.2d 766, 771 (Pa.2005). In other words, an insurance company should be held accountable for conduct that it knows or should know is creating an unreasonable risk of harm to its insured and that such risk has a high degree of probability of occurring.
