In Pennsylvania, 42 Pa.C.S. § 8371 permits an insured to recover punitive damages, court costs, attorney’s fees and interest, on claims where an insurer has acted in bad faith. On September 28, 2017, the Supreme Court of Pennsylvania issued a ruling1 upholding the current bad faith standards and specifically noting that an insured does not need to prove malicious intent in order to prevail.
42 Pa.C.S. § 8371, states:
§ 8371. Actions on insurance policies
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.
In order to prove bad faith, an insured “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.”2
The case was Rancosky, et al. v. Washington National Ins. Co., et al., a health/disability insurance case, with an opinion written by Justice Max Baer. The basic details of the claim that led to this decision are: LeAnn Rancosky filed suit against her insurer, Conseco Health Insurance Company (“Conseco”), alleging breach of contract and bad faith pursuant to 42 Pa.C.S. § 8371, seeking interest, punitive damages and attorneys fees. The breach of contract claim and bad faith claim were bifurcated by the court and in the trial on the breach of contract action, the jury found for Rancosky and awarded her damages. Her bad faith claim proceeded to a non-jury trial, where the trial court noted that Conseco’s actions in handling the claim to be “sloppy and even negligent,” but ultimately found in favor of the carrier.
Following appeals by both parties, the Supreme Court of Pennsylvania limited the appeal to the following question:
Whether this Court should ratify the requirements of Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994), appeal denied, 659 A.2d 560 (Pa. 1995), for establishing insurer bad faith under 42 Pa.C.S. § 8371, and assuming the answer to be in the affirmative, whether the Superior Court erred in holding that Terketsky[’s] factor of a “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith?
Following a detail history of the development of 42 Pa.C.S. § 8371, Justice Baer noted that the court’s citation to the definition of bad faith included in the Terletsky decision,3 “inadvertently created confusion as to the relationship between the two-prong test and the seemingly additional requirement proving a subjectively improper motive on the part of the insurance company.”
After reviewing the competing theories of the parties as to whether the ill will language is a requirement under the Terletsky test, the court found:
[W]e hold that, to 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 a 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.
The court’s interpretation of 42 Pa.C.S. § 8371 should give hope to insureds seeking to hold their insurers accountable. The court noted:
[A]n 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.
While the standards previously set in Terletsky are unchanged, the opinion does provide clarification on what is required to prove bad faith in Pennsylvania.
On a personal note, Justice Max Baer was the commencement speaker at my law school graduation ceremony. Apart from doing a great job, Justice Baer said something that has stuck with me. Something that I repeat often and an adage that I try to make sure I follow. He said, “know what you know, know what you don’t know, and know when to ask for help.” In a profession where it’s impossible to know everything, and where much of what we do relies upon the help of other professionals, Justice Baer’s maxim is poignant advice that I suggest everyone try to remember.
As always, I’ll leave you with a (mildly) related tune. Here’s Grizzly Bear with Two Weeks:
1 Rancosky, et al. v. Washington National Ins. Co., et al., C.A. No: 28 WAP 2016, 2 (Pa. Super. September 28, 2017).
2 Rancosky, citing Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994).
3 “‘Bad faith’ on part of the insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest of or ill will; mere negligence or bad judgment is not bad faith.” Rancosky. at 16, citing Terletsky (quoting Black’s Law Dictionary)(emphasis in original).