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.
In this recent case, the state Supreme Court held that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient, and an insurance company’s motive of self-interest or ill-will is not a prerequisite to succeeding in a bad faith claim.
This case was brought about after a series of events beginning in March of 1992. 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. It stated that she would not be required to make premium payments if she was diagnosed as having cancer more than 30 days after the policy’s effective date and if she was disabled due to cancer for a continuous period of more than 90 consecutive days beginning on or after the date of diagnosis. The policy would waive premium payments for the period of her disability, except for the first 90 days. 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.
Rancosky’s policy defined being disabled as being unable to perform the duties of her regular occupation for the first 24 months of her diagnosis, and after 24 months, being unable to work at any job for which she is qualified for pay or benefits and being under the care of a physician for the treatment of cancer.
Indeed, on February 4, 2003, Rancosky was admitted to the hospital due to intense abdominal pain and ultimately diagnosed with ovarian cancer. She did not return to her job with USPS, yet remained on her employer’s payroll for several months because she had accrued unused vacation and sick days, the opinion document said.
Beginning in April 2003, Rancosky attempted to obtain waiver-of-premium status, claiming that she was disabled under her policy since her admission to the hospital in February of 2003. By Conseco’s request, she submitted waiver-of-premium forms along with the required physician statement. However, she didn’t realize that the submitted physician’s statement inaccurately listed her date of disability as beginning on April 21, 2003, rather than on February 4, 2003.
Since Rancosky believed her premium payments had been waived because of her disability, her final premium payment came from her June 24, 2003, payroll-deducted premium. Over the next two years, Rancosky experienced several recurrences of her cancer and continued to submit claims to Conseco.
In early 2005, during an audit of its payroll-deducted premium policies, Conseco apparently discovered for the first time that Rancosky had ceased making premium payments on her policy in June of 2003. Rancosky had made prior inquiries regarding her waiver-of-premium status, in which she indicated the start date of her disability as February 4, 2003, and authorized Conseco to obtain information from her physicians and employer about her disability, the opinion document stated. Despite this, Conseco informed Rancosky that it 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.
In the following years, Rancosky had an ongoing disagreement with Conseco as to whether she was on waiver-of-premium status and entitled to continued coverage under her cancer policy. Despite its contention that her policy had lapsed in May of 2003, Conseco paid for cancer-related treatment Rancosky received in 2004 and 2005.
In 2006, however, following another recurrence of her 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 of February 4, 2003, and the physician’s statement incorrectly indicating April 21, 2003, as the start date, the opinion document said.
Bad Faith Lawsuit
Rancosky subsequently brought a suit against Conseco, alleging breach of contract and bad faith. In her bad faith claim, Rancosky sought interest on her claim, punitive damages and attorney’s fees. Rancosky’s bad faith claim eventually proceeded to a non-jury trial. 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.
According to Rancosky, the trial court was wrong for requiring proof that Conseco acted out of a motive of self-interest or ill-will. In Rancosky’s view, the first part of the Terletsky test is a detached inquiry into whether a reasonable insurer would have denied payment of the claim under the facts and circumstances presented, the opinion document said. In a published opinion, a three-judge panel of the Superior Court vacated the trial court’s judgment regarding Rancosky’s bad faith claim and remanded for further proceedings on that claim.
The Superior Court agreed with Rancosky that the first part of the Terletsky test, whether the insurer lacked a reasonable basis for denying benefits, is an objective inquiry and that the intent of the insurer has no relevance. It held that the trial court erred as a matter of law in denying Rancosky’s claim under the reasonable basis portion of the Terletsky test.
The Superior Court concluded that if Conseco had conducted any meaningful investigation into the starting date of Rancosky’s cancer disability, it would have discovered she was unable to work due to her cancer diagnosis beginning on February 4, 2003, and that she made the required premium payments during the ninety-day waiting period of her cancer policy.
As a result of this discovery, the Superior Court believed Conseco would have understood Rancosky’s failure to pay premiums after her final payroll-deducted premium was excused pursuant to the waiver-of-premium provision. 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. It then vacated the trial court’s judgment and remanded for further proceedings.
Supreme Court Decision
In its September 28, 2017, decision regarding this case, The Pennsylvania Supreme Court noted that it has not had an opportunity to consider the details of bad faith claims arising under Section 8371 of Pennsylvania law since its enactment. Justice Baer noted in his opinion that the Superior Court’s 1994 decision in the Terletsky case has been the primary ruling on this issue in the past.
“Accordingly, while this issue has evaded appellate review from this Court, the longstanding standard in Pennsylvania has been the Superior Court’s two-pronged test in Terletsky and its subsequent clarification that self-interest and ill-will, while probative, is not required,” Baer wrote in the opinion document.
The Supreme Court opinion document explained that both parties generally agreed that the first portion of the Terletsky test, whether the insurer had a reasonable basis for denying benefits, is an objective inquiry into whether a reasonable insurer would have denied payment of the claim under the facts and circumstances presented. Both parties also agreed that negligence alone is insufficient for a finding of bad faith under Pennsylvania law, and the primary point of contention relates to the relevance of the insurance company’s motivation under the second portion of the Terletsky test.
While Conseco argued that the meaning of bad faith includes whether the insurer had a subjectively improper motive, Rancosky argues that self-interest and ill-will are probative and that knowledge or recklessness is sufficient.
The Supreme Court concluded in its decision that the Superior Court’s two-part test laid out in the Terletsky case indeed 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 on Rancosky’s bad faith claim. Upon remand, the Supreme Court noted that the trial court should consider again whether both portions of the Terletsky test have been met.