Insurance Law Posts

Rancosky v. Washington National Insurance Co.: Pennsylvania Supreme Court to Rule on Long-Standing Test for Insurance Bad Faith

September 6, 2016

In granting allocatur in Rancosky v. Washington National Insurance Co., the Pennsylvania Supreme Court has at long last placed squarely in front of it whether to put its imprimatur on the test developed by the Superior Court in insurance bad faith cases.

Background

After the 1990 passage of Pennsylvania’s bad faith statute, 42 Pa. C.S.A. §8371, the courts struggled to find a definition of bad faith that would fit the litigation of these claims. Four years later, the Superior Court, in Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994), the appellate court settled on a framework that required an insured to prove that his insurer (1) had no reasonable basis to deny a claim and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim, in order to recover damages under the statute. In analyzing the second prong of the Terletsky test, the Superior Court and the Third Circuit have concluded that whether an insurer acts with a “motive of self-interest or ill will”, language seen in some early cases, can be considered. The Pennsylvania district courts and the Third Circuit Court of Appeals have concluded that the Pennsylvania Supreme Court would adopt this test, so courts presented with insurance bad faith claims have long relied upon this two-step analysis.

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 the cancer recurred in 2004 and again in 2006. The insurer made payments following the 2003 and 2004 diagnoses, but stopped following the 2006 recurrence, having concluded that the policy lapsed in 2003. Ms. Rancosky 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 waiver of premium status. The bad faith claim focused primarily on the 2006 investigation that resulted in the denial of further benefits.

Verdict and Appeal

The Washington County Court of Common Pleas held a bench trial, following which it entered judgment in favor of the insurer.  The Superior Court vacated the verdict in part and remanded for a new trial in its opinion. Rancosky, 130 A.3d 79 (Pa. Super. 2015). The appellate court discussed at length the trial court’s application of the Terletsky test and concluded that it had been erroneously used. The Superior Court concluded that 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 court explained:

We conclude that the trial court's verdict is faulty based on its erroneous determination that Rancosky failed to establish the first prong of the test for bad faith because he failed to prove that Conseco had a dishonest purpose or a motive of self-interest or ill-will against LeAnn [Rancosky]. As noted above, a dishonest purpose or a motive of self-interest or ill-will is probative of the second prong of the test for bad faith, rather than the first prong. See Greene [v. United Servs. Auto. Ass’n], 936 A.2d [1178] at 1191 [(Pa. Super. 2007)]; see also Nordi [v. Keystone Health Plan West Inc.], 989 A.2d [376] at 385 [(Pa. Super. 2010)].

Pennsylvania Supreme Court

The Pennsylvania Supreme Court limited its grant of allocator to two issues. First, the court will decide whether it will “ratify” the Terletsky framework.  Second, if it does, the court will decide whether proof that the insurer acted with “self-interest or ill-will” is an essential showing to recover for bad faith, or simply a factor that can be considered.

Over 25 years after passage, the Pennsylvania Supreme Court will finally weigh in on these issues vital to claims under the bad faith statute. Although no one can predict what the court will decide, it will be interesting to see whether the court continues along the path already created by the lower courts that have been deciding these issues or whether its decision will break with that path and engender development of an entirely new way of examining these cases.