Pennsylvania Bad Faith Test upheld
November 6, 2017
Recently, the Supreme Court of Pennsylvania determined that proof of an insurer's self-interest or ill-will is not necessary in a claim of bad faith under the Pennsylvania bad faith statute. The case is Rancosky v. Wash. Nat'l Ins. Co., 2017 Pa. LEXIS 2286 (Sept. 28. 2017).
In 1992 the appellee, Leanne Rancosky (Rancosky) bought a cancer insurance policy to supplement her employer based health insurance. The cancer policy was issued by Conseco Health Insurance Company (Conseco), the appellate. In payment for the additional policy, the appellee's employer USPS, automatically deducted bi-weekly payments of $22.00 from her regular paycheck. The policy had a waiver-of-premium provision, which excused premium payments in the event that the appellee became disabled due to cancer. Soon after, Rancosky was admitted to the hospital for abdominal pain and was subsequently diagnosed with ovarian cancer. She underwent treatment, and although she did not return to her job after being admitted to the hospital, she remained on payroll at USPS for several months because she had accrued sick and vacation days. Because she remained on the payroll, the premiums were deducted from her paychecks until June 2003 when she went on disability retirement. Rancosky's physician accidentally put that her date of disability began on April 21, 2003 instead of February 4, 2003. Final payment came through in June of 2003. Conseco did not notice that Rancosky had failed to continue payment until 2005 when they deemed her policy to have lapsed. Notwithstanding this claim, Conseco paid for cancer related treatment for Rancosky's recurring cancer in 2004 and 2005.
In 2006, during yet another recurrence of her cancer, Conseco denied Rancosky's claim for further benefits based on a failure to pay premiums. Rancosky sought reconsideration of the denial of benefits asserting that she was excused from paying premiums past the June 2003 payment because she was disabled within the definition of her policy beginning in February of 2003 and had made all required payments through the 90-day waiting period dictated in the policy.
Despite receiving eight authorizations permitting Conseco to contact her employer to get the actual start date of her disability, Conseco did not investigate to clarify the discrepancy between the claimed disability start date in February 2003 and the date in the physician's statement that the disability began in April 2003. Conseco accepted the inaccurate information on the physician's statement saying the start date was April 2003 and took the position that the policy had lapsed due to non-payment of premiums prior to the ninety-day waiting period under the waiver-of-premium provision.
Rancosky sued, alleging breach of contract and bad faith. The trial court said that although Conseco was “sloppy and even negligent” in handling the claim, it ultimately found in favor of Conseco on the bad faith claim because Rancosky failed to demonstrate that Conseco had lacked a reasonable basis for denying benefits under the cancer policy because she did not demonstrate that Conseco had acted out of ill will, motive, or self-interest.
The Pennsylvania Supreme Court agreed with the Appellate Court and vacated the trial court's decision. Both parties agreed that whether or not the insurer had a reasonable basis for denying benefits was objective. The court also found that mere negligence was not sufficient for a finding of bad faith under Pennsylvania law.
Conseco maintained that “bad faith” required that the insurer had a subjectively improper motive. The court decided that this interpretation, if applied, “would create an unduly high threshold for bad faith claims” and would limit recovery to “the most egregious instances”. Such cases would be rare, and it would be even rarer still for a plaintiff to prevail.
The Pennsylvania Supreme Court vacated and sent the case back down to the trial court with specific instructions to follow the two prong rule that was detailed in the case Terletsky v. Prudential Property & Casualty Company.
Editor's Note:
The Terletsky test is as follows: A bad faith claim is established 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 of or recklessly disregarded its lack of a reasonable basis.
The Pennsylvania Supreme Court gave a detailed analysis of the General Assembly's intent when it enacted the bad faith statute. The court also considered the plaintiff's ability to prove bad faith noting that a requirement for an ill-will level of culpability would limit bad faith claim recovery to only the most egregious cases. The court also determined that evidence of an insurer's self-interest or ill-will would be admissible to establish that the insurer denied benefits knowingly or recklessly without a reasonable basis for doing so.
This decision went against the insurer, but maintained the standard for a bad faith claim which sets a standard that a plaintiff has to prove bad faith by clear and convincing evidence, which in itself is a relatively high bar to meet.