UPDATED: PENNSYLVANIA SUPREME COURT RULES MOTIVE OF SELF-INTEREST OR ILL-WILL NOT AN ELEMENT OF STATUTORY BAD FAITH CASE (Pennsylvania Supreme Court)

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Since 2007, Pennsylvania’s Superior Court has taken the position that proving statutory bad faith includes two elements: (1) the absence of a reasonable basis to deny a benefit and (2) knowledge or reckless disregard of the fact there was no reasonable basis to deny coverage. The elements were originally stated in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1994). The Terletsky Court had also discussed the concepts of a carrier’s “motive of self-interest or ill-will,” and some courts concluded this was a third element of proof. The Superior Court rejected that position in 2007, holding that self-interest or ill-will (sometimes generically referred to as malice) can be evidence used to prove the second element, but was not an element of proof in itself. However, the position that self-interest or ill-will was a required third element of proof has continued in some Pennsylvania Federal District Court opinions.

Today, in Rancosky v. Washington National Ins. Co., Pennsylvania’s Supreme Court adopted the Superior Court’s position.

The Supreme Court stated:

we adopt the two-part test articulated by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), which provides that, 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. Additionally, we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.

The Court instructed the Superior Court to remand the action to the Trial Court for factual findings. “However, because it is unclear to what extent the trial court’s findings on the reasonable basis prong of Terletsky were intertwined with its erroneous belief that proof of Conseco’s motive of self-interest or ill-will was required, upon remand the trial court should consider both prongs of the Terletsky test anew.”

Some of the other key points in the opinion include:

  1. Punitive Damages. The Bad Faith Statute provides for attorneys’ fees, super-interest, and punitive damages. There is no higher standard of proof for plaintiffs seeking to prove bad faith with punitive damages, i.e., self-interest or ill-will do not become elements of proof where the plaintiff demands punitive damages as part of the statutory bad faith claim. The Court stated, “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.”
  2. No Effect of Prior Supreme Court Precedent. In footnote 10, the Court cites to three of its bad faith opinions: Toy, Birth Center and Mishoe. The Court makes clear that these “prior decisions interpreting Section 8371 do not directly control our disposition of the instant matter. Moreover, nothing we say here should be read as casting doubt on the validity of the holdings in those cases. As we have stated over the years on this blog, Toy can be interpreted to limit cognizable bad faith claims to those cases where there has been a denial of benefits in a first party case, or denial of a defense or coverage in third party cases. That issue was not addressed in Rancosky.
  3. Statutory Interpretation. The Court offers general instruction on how to apply principles of statutory construction under Pennsylvania law. In this case, the focus was on the history of bad faith law leading up to the 1990 adoption of the 42 Pa.C.S. § 8371, and the contemporaneous meanings of bad faith at the time of its adoption. The driving factor was the universal understanding that the legislation was in response to the Pennsylvania Supreme Court’s 1981 D’Ambrosio decision, and how the issue of what constitutes bad faith was framed in that case.
  4. Interesting Comments in Justice Wecht’s Concurrence. Justice Wecht’s concurrence focuses of how inclusion of ill-will/self-interest as an element would functionally swallow the Terletsky test. In describing this flaw, he makes an interesting point about the relationship between poor claims handling being tied into the denial of benefits to make out a bad faith claim: “Knowing or reckless claims-handling leading to objectively unreasonable denial of benefits, if proven by clear and convincing evidence, embodies the principle that a patent absence of good faith is tantamount to the presence of bad faith.” 

    Date of Decision:  September 28, 2017

    Rancosky v. Washington National Insurance Company, Pennsylvania Supreme Court, 28 WAP 2016 (Pa. Sept. 28, 2017)

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