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Addressing a matter of first impression, the Supreme Court of Pennsylvania rejected an “ill-will” or motive requirement for statutory bad faith claims against an insurer.  Rancosky v. Washington National Ins. Co., 2017 WL 4296351 (Pa. Sept. 28, 2017).

The dispute arose out of health care coverage for a postal employee with cancer.  The employee sued the insurer, alleging breach of contract and bad faith under Pennsylvania’s bad faith statute, 42 Pa. C. S. § 8371.  Following a jury trial on the breach of contract claim (which resulted in an award in the employee’s favor), a trial court ruled that bad faith had not been established.  The court noted that although the insurer was “sloppy and even negligent” in its claim handling, the employee had failed to demonstrate that the insurer lacked a reasonable basis for denying coverage.  In particular, the trial court held that the employee failed to prove that the insurer acted out of “some motive or self-interest or ill will.” 

A Superior Court panel vacated the bad faith claim judgment, deeming the insurer’s subjective intent irrelevant to whether the insurer “lacked a reasonable basis for denying benefits.”  The Superior Court further held, based on its independent review of the record, that the insurer did not have a reasonable basis for denying benefits under the policy.  The Superior Court remanded the matter for a determination of whether the insurer knew it had recklessly disregarded a lack of a reasonable basis in denying benefits.

On discretionary review, the Supreme Court ruled that the proper method for evaluating statutory bad faith claims is the two-part test set forth in Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994).  Under this standard, a plaintiff must present clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy and (2) knew of or recklessly disregarded its lack of a reasonable basis.  The court held that proof of an insurer’s self-interest or ill will is not a prerequisite under § 8371, but is probative of the second prong.  In rejecting a culpability requirement, the court noted that requiring a showing of ill motive would “create an unduly high threshold for bad faith claims” by limiting recovery “to the most egregious instances only where the plaintiff uncovers some sort of ‘smoking gun’ evidence indicating personal animus towards the insured.”  The court remanded the matter for factual findings as to both prongs of the bad faith test.