The Pennsylvania Supreme Court unanimously affirmed a decision by the state’s Superior Court that although ill-will or malice is one factor that can be used to assess insurer bad faith, it is not a prerequisite for policyholders to prevail in bad faith claims.
This comes as the state Supreme Court for the first time considered the elements of a bad faith insurance claim pursuant to Pennsylvania’s bad faith statute.
In its decision, the court adopted the two-part test laid out by the Superior Court in a 1994 case — Terletsky v. Prudential Property & Cas. Ins. Co. The test states that in order to recover in a bad faith action, the plaintiff must present clear evidence that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of, or recklessly disregarded, its lack of a reasonable basis.
While working for the United States Postal Service (USPS), Appellee LeAnn Rancosky purchased a cancer insurance policy as a supplement to her primary employer-based health insurance, according to Pennsylvania Supreme Court Justice Max Baer in his published opinion. The policy was issued by Appellant Conseco Health Insurance Company (Conseco).
The policy contained a waiver-of-premium provision, which excused premium payments if Rancosky became disabled due to cancer more than 30 days after the policy’s effective date and if she was disabled for more than 90 consecutive days beginning on or after the diagnosis. It also required Rancosky to send a physician’s statement with the date of the diagnosis, the first date of her disability period and the expected date, if any, that the disability would end.
Indeed, on Feb. 4, 2003, Rancosky was diagnosed with ovarian cancer. She did not return to her job with USPS, yet remained on her employer’s payroll for several months due to unused vacation and sick days, the opinion document said.
In April 2003, Rancosky attempted to obtain waiver-of-premium status by submitted waiver-of-premium forms along with the required physician statement. However, she didn’t realize that the physician’s statement inaccurately stated her date of disability began April 21, 2003.
Since Rancosky believed her premium payments had been waived, her final payment came from her June 24, 2003, payroll-deducted premium. Over the next two years, Rancosky experienced recurrences of cancer and continued to submit claims to Conseco.
During an audit of its payroll-deducted premium policies in early 2005, Conseco apparently discovered for the first time Rancosky had ceased making payments on her policy in June 2003. Conseco deemed her policy to have lapsed as of May 24, 2003, the date to which her final payroll-deducted premium payment extended her coverage, the opinion document added.
Following another recurrence of cancer, Conseco denied Rancosky’s claim for further benefits based upon her failure to pay premiums. Conseco did not investigate to clarify the discrepancy between Rancosky’s claimed disability date and the physician’s statement incorrectly indicating the start date, the opinion document said.
Bad Faith Lawsuit
Rancosky subsequently brought a suit against Conseco, alleging breach of contract and bad faith. Though the trial court found that Conseco was “sloppy and even negligent” in its handling of Rancosky’s claim, it ultimately found in favor of Conseco on the bad faith claim, the opinion document said.
In particular, the trial court concluded that Rancosky failed to demonstrate that Conseco lacked a reasonable basis for denying benefits under the cancer policy because she did not prove that the insurer acted out of a motive of self-interest or ill-will. Rancosky eventually appealed to the Superior Court, arguing the trial court misapplied the two-part test for bad faith claims established in the 1994 Terletsky case.
While Conseco argued that the meaning of bad faith includes whether the insurer had a subjectively improper motive, Rancosky argued that self-interest and ill-will are probative and that knowledge or recklessness is sufficient.
Because Conseco failed to conduct any investigation and instead accepted the incorrect information from Rancosky’s physicians, the Superior Court determined Conseco lacked a reasonable basis for denying Rancosky benefits.
In a published opinion, the Superior Court agreed with Rancosky, vacated the trial court’s judgment regarding Rancosky’s bad faith claim and remanded for further proceedings on that claim.
Supreme Court Decision
In its Sept. 28, 2017, decision regarding this case, the Pennsylvania Supreme Court concluded that the Superior Court’s two-part test laid out in the 1994 Terletsky case presents an appropriate framework for analyzing bad faith claims in Pennsylvania.
Additionally, the Supreme Court held 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.
It affirmed the previous judgment of the Superior Court, which partially vacated the trial court’s judgment and remanded for further proceedings. Upon remand, the Supreme Court noted that the trial court should consider again whether both portions of the Terletsky test have been met.