Pa. Supreme Court Update: Is Ill Will A Required Element of Bad Faith?

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PITTSBURGH, April 4  — This week, the  Pennsylvania Supreme Court heard oral argument on whether intentional ill will or malice was a required element to make out a claim for insurance bad faith in Pennsylvania, exposing insurers to punitive damages.

In Rancosky v. Conseco, the Pa. Superior court reversed a trial court ruling in favor of an insurer on bad faith claims following a bench trial.  The Superior Court held that the insurer  did not have a reasonable basis to deny benefits to LeAnn Rancosky following her diagnosis of ovarian cancer in 2003.  The intermediate appeals court relied on its 1994 ruling in Terletsky v. Prudential, and held that while it was a consideration, ill will and malice was not a stand-alone requirement to establish insurer bad faith.

Ms. Rancosky and her husband sued Conseco in the Washington County Court of Common Pleas in 2008,  and eventually won a $31,000 jury verdict on breach-of-contract claims.  Conseco prevailed, however, on the bad faith claims.

During argument this week, Conseco argued to the state Supreme  Court  that Pennsylvania’s bad faith statute does not contemplate punitive damage awards against carriers without evidence of a malicious motive.  In response, Rancosky’s estate argued that proving ill will was exceptionally difficult, and that making bad motive a requisite element would allow insurers to handle claims recklessly and carelessly without fear of penalty.

Law360.com reported that during argument earlier this week,  Justice Max Baer saw the appeal of Rancosky’s arguments, stating “It’s hard to prove that kind of motive, and if you’re going to hold the insured to that burden then you tend to put the rabbit in the hat and the insurance company wins because they say, ‘We’re the most incompetent organization in the world. We were dead wrong, but we had no motive of ill will.’”

A ruling is anticipated later this year.

Editor’s note:  Justice Baer’s comments during oral argument this week are emblematic of a trending misconception that the Pa. Bad Faith Statute created anything beyond an intentional tort cause of action.  There is a large body of case law in both Pa. state and federal courts holding that mere negligence is not bad faith, and that an insurer has the legal right to be wrong on claims decisions, as long as the decision can be supported by a reasonable basis. 

There should be no real dispute that reasonable but negligenct claims decisions are not actionable, and that intentionally malicious claims decisions are actionable , under the bad faith statute.  The  current battleground in Pennsylvania appears to be the class of claims decisions which lie in the twilight between these two signposts, i.e., claims decisions made recklessly, and wanton disregard to the insured’s rights.   Rancosky is an attempt to find clarity in this twilight.

 

 

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BREAKING NEWS — Pa. Supreme Court To Consider Whether Ill Will Is Prerequisite To Establishing Bad Faith

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HARRISBURG, Aug. 30 – The Pa. Supreme Court issued a ruling granting  appeal in a bad faith case to consider whether proof of ill will or motive is a prerequisite to establishing liability under the Pa. Bad Faith Statute, 42 Pa.C.S.A. §8371.

In Rancosky v. Wash. National Ins. Co. , 2016 Pa. LEXIS 1910 (Pa. Aug. 30, 2016), the state’s highest court ruled it will undertake limited review of a Pa. Superior Court ruling which granted a new trial to a bad faith plaintiff, an estate executor, after the trial court found for Washington National following a non-jury trial in a dispute over a cancer insurance policy.

The Supreme Court Order indicates it will review only the following issue:

“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 Terletsky factor of a “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith?

While recognizing that the state legislature did not define bad faith, the Superior Court held that a statutory bad faith claim under Pennsylvania’s bad faith statute had two elements:  (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.  According to the Superior Court opinion, the trial court granted judgment to the insurer in part because the Plaintiff “failed to prove that Conseco [predecessor to Washington Mutual]  had a dishonest purpose” or a “motive of self-interest or ill-will.”

The Superior Court ruled it was sending the case back to the trial court for a new trial because the trial court’s finding that Plaintiff failed to prove the first element of the bad faith claim was in part premised upon  the Plaintiff’s failure to prove that the insurer in the case acted will ill will or a dishonest purpose.

The following passage from the Superior Court opinion, which could be seen as exalting form over substance, refers to an insurer’s ill will or dishonest purpose as  merely “probative.”  This aspect of the opinion could be what drew the Supreme Court’s attention:

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. 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.. . .  The trial court could not have considered whether Conseco had a dishonest purpose or a motive of self-interest or ill-will unless it had first determined that Conseco lacked a reasonable basis for denying benefits to LeAnn under the Cancer Policy. However, because the trial court made no such determination, its consideration of a dishonest purpose or a motive of self-interest or ill-will was improper. Accordingly, we conclude that the trial court erred as a matter of law by using standards applicable to the second prong of the test for bad faith in its determination of whether Rancosky had satisfied the first prong of the test for bad faith.

Rancosky v. Wash. National Ins. Co. , 2016 Pa. LEXIS 1910 (Pa. Aug. 30, 2016)