Case Bulletin – Pennsylvania Supreme Court holds 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.”
This appeal arose from a dispute between Conseco Health Insurance Company and its insured (LeAnn Rancosky) over a cancer insurance policy Rancosky had purchased in connection with her employment as a postal worker. The dispute centered on the policy’s waiver-of-premium provision, which excused Rancosky from paying premiums for the duration of a cancer-related disability, so long as she made payments during the first 90 days of that disability.
On February 4, 2003, Rancosky was admitted to the hospital with intense abdominal pain, and was ultimately diagnosed with ovarian cancer. Conseco received premium payments from Rancosky until June 24, 2003, when she went on disability retirement. Rancosky thus believed that she was entitled to a waiver of premium payments throughout the duration of this disability because she had made payments throughout the first 90 days. She submitted claims for treatment to Conseco under this impression for the next two years.
What Rancosky did not know is that her treating physician had submitted a statement to Conseco inaccurately reflecting her original disability date as April 21, 2003. Following a 2005 audit, Conseco denied coverage for Rancosky’s claims based on her failure to pay premiums. Rancosky sought reconsideration of this denial—pointing to her February 4, 2003 disability date, and claiming that she was entitled to the waiver-of-premium provision—but Conseco denied her request, relying on the April 21, 2013 injury date without conducting any investigation. Rancosky then filed suit, alleging breach of contract and bad faith (42 Pa. Cons. Stat. § 8371).
Following a bench trial, the trial court concluded that Rancosky had failed to prove the first prong of a bad-faith claim—that Conseco did not have a reasonable basis for denying benefits. The trial court reasoned that she had not established this prong because she had not proved that Conseco acted out of “some motive of self-interest or ill-will.”
Following denial of post-trial motions, Rancosky appealed to the Superior Court, arguing that proof of self-interest or ill will was not necessary to establish the first prong. The Superior Court agreed, recognizing that such subjective intentions of an insurer are relevant only to the second prong—whether it knew of or recklessly disregarded its lack of reasonable basis in denying benefits.
The Supreme Court granted Conseco’s petition for allowance of appeal to address the following questions: (1) whether it “should ratify the two-prong test established in Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. Ct. 1994),” and (2) whether a “motive of self-interest or ill-will is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith.” Majority Opinion, slip op. at 11.
Justice Baer, writing for the majority, concluded that that “the Superior Court’s longstanding two-pronged test, first articulated in Terletsky, presents an appropriate framework for analyzing bad faith claims.” Id. at 22. Recognizing that “imposition of a recklessness standard for liability under the second prong comports with the historical development of bad faith in Pennsylvania and effectuates the intent of the General Assembly,” Justice Baer held that proof of self-interest or ill-will might be probative of that prong, but is not a “mandatory prerequisite to bad faith recovery[.]” Id. at 22-23. According to Justice Baer, “an 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.” Id. at 22. He suggested that the General Assembly could not have intended such a standard because, on his view, it would “functionally write bad faith  out of the law altogether.” Id. at 22.
Justice Baer also concluded that there is no “higher standard of proof for bad faith claims seeking punitive damages[.]” Id. In other words, a court may award such damages if a plaintiff simply satisfies the two-part Terletsky test.
Chief Justice Saylor filed a concurring opinion in which he differed with Justice Baer’s assertion that an ill-will level of culpability would effectively require insureds to produce a “smoking gun” showing an insurer’s personal animus. Chief Justice Saylor observed that inferences about intent are often drawn from circumstantial evidence in the criminal law, and suggested that the General Assembly might well have intended similar inferences to be drawn in the bad-faith context.
Justice Wecht filed a concurring opinion to emphasize, as a matter of statutory interpretation, that the terms “self-interest” and “ill-will” are found nowhere in Pennsylvania’s bad-faith statute. He observed that these “terms not only are non-mandatory under Pennsylvania’s bad faith statute; they generally are analytically unhelpful as well.” According to Justice Wecht, “[m]any species of bad faith may flourish notwithstanding the absence of either ‘self-interest’ or ‘ill will.’”
 The two-part test governing bad-faith claims in Pennsylvania was first established by the Superior Court in Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994), and requires an insured to “show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim.”