In rendering its decision in Rancosky, the Supreme Court effectively ratified the test that the Pennsylvania Superior Court had adopted in Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994). In its amicus brief, authored by George L. Stewart II, Michael H. Sampson, and M. Patrick Yingling, Reed Smith, on behalf of its client, had urged the Supreme Court to adopt the “Terletsky test.”

Since Terletsky, the insurance industry had repeatedly argued, including in this case, that to recover for statutory bad faith in Pennsylvania, a policyholder must prove, in addition to the two elements mentioned above, that the insurer also acted with a motive of self-interest or ill will in denying benefits due under the policy.

Yesterday, the Supreme Court flat out rejected that argument, finding that the insurer’s “proffered interpretation would create an unduly high threshold for bad faith claims.” The court explained:

Given our conclusion that there is no basis to distinguish between punitive damages and other categories of damages under Section 8371, 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. 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.

That conclusion echoed arguments made by Reed Smith in its amicus brief:

Indeed, [the insurer’s] suggested standard – which would require a policyholder to prove (by clear and convincing evidence, no less) the insurer’s bad motive (i.e., what was in the insurer’s head) – would make it exceedingly difficult to prove statutory bad faith, a task which is sufficiently difficult as is. This is especially true since insurers routinely seek to shield their true motives under the attorney-client privilege or attorney work product doctrine.

Trial Court Held Bad Motive Required; Pennsylvania Superior Court Disagreed

This dispute stemmed from Conseco Health Insurance Company’s (the “Insurer’s”) refusal to provide coverage to LeAnn Rancosky under a cancer insurance policy it had sold to her. As a result, Ms. Rancosky filed suit against the Insurer, alleging breach of contract and bad faith under Section 8371. The trial court concluded that Ms. Rancosky failed to demonstrate that the Insurer lacked a reasonable basis for denying benefits, because she did not prove that the Insurer acted out of “some motive of self-interest or ill will.”

On appeal, the Pennsylvania Superior Court, relying on its previous decision in Terletsky, held that the trial court erred as a matter of law in ruling against Ms. Rancosky based on its finding that she failed to demonstrate self-interest or ill will on the part of the Insurer. According to the Superior Court, Ms. Rancosky needed only to show that (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 a reasonable basis. Motive of self-interest or ill will was probative of the second prong, but not required to satisfy it.

Pennsylvania Supreme Court Holds No Bad Motive Require

The Pennsylvania Supreme Court granted the Insurer’s petition for allowance of appeal. After extensive briefing by the parties and amici, as well as oral argument, the court unanimously ruled in favor of Ms. Rancosky and policyholders across the Commonwealth:

[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.

Accordingly, the Supreme Court “affirm[ed] the judgment of the Superior Court, which vacated the trial court’s judgment in part and remanded for further proceedings on Appellee’s bad faith claim.”

A Victory for All

At the same time, the Supreme Court put an end, once and for all, to the insurance industry’s more-than-two-decade campaign to limit the reach of Pennsylvania’s bad faith statute by adding the unduly demanding requirement that a plaintiff prove self-interest or ill will.

Nonetheless, as Reed Smith observed in its amicus brief, proving bad faith can still be tricky, especially since insurers often try to hide behind the attorney-client privilege to shield their bad behavior. Therefore, experienced insurance coverage counsel well-versed in Pennsylvania law can provide great benefit to policyholders seeking to prove bad faith under Section 8371. Coverage counsel – such as those in Reed Smith’s Insurance Recovery Group – can work with a policyholder during discovery to obtain the information needed to satisfy Rancosky’s two-part test, and then help present that evidence at trial, or in briefs, in an understandable manner.

For the third time since 2014, U.S. News-Best Lawyers “Best Law Firms” named Reed Smith its 2017 “National Law Firm of the Year” in Insurance Law. In addition, the group is named among the best policyholder coverage practices by Chambers USA, Chambers UK, Legal 500 US and Legal 500 UK. The National Law Journal named Reed Smith’s Insurance Recovery Group in Chicago its 2016 “Chicago Litigation Department of the Year in Insurance.”

Client Alert 2017-230