Proof of Insurer’s Subjective Intent Not a Prerequisite to Bad Faith

The Pennsylvania Supreme Court, applying Pennsylvania law, held that in order to recover in a bad faith action under Pennsylvania’s bad faith statute there must be 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.  Furthermore, the Pennsylvania Supreme Court held that proof of an insurance company’s motive of self-interests or ill-will is not a perquisite for prevailing in a bad faith claim.

LeAnn Rancosky (“Rancosky”) purchased a cancer insurance policy issued by Conseco Health Insurance Company (“Conseco”).  The policy contained a waiver-of-premium provision, which excused premium payments in the event Rancosky became disabled due to cancer. Rancosky was diagnosed with cancer, and in 2003, she applied for a waiver of premiums.  She ceased making premium payments after 90 days from the date of her disability as allowed under the policy.  Conseco made several benefit payments to Rancosky from 2003 – 2005, but then in 2006, Conseco denied her claims due to her failure to pay premiums.  According to Conseco, Rancosky did not satisfy the 90 day requirement under the waiver-of-premium provision.  At that point, Rancosky had submitted eight separate authorizations permitting Conseco to contact her employer or any other person with information as to the actual start date of her disability.  Conseco did not undertake any investigation to clarify the discrepancy surrounding the start date of her disability.

Rancosky brought suit against Conseco for breach of contract and bad faith under the Pennsylvania statute.  The trial court found that although Conseco was “sloppy and even negligent” in its handling of Rancosky’s claim, Conseco did not act in bad faith.  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 “some motive or self-interest or ill will.”  Rancosky appealed to the Superior Court, arguing that the trial court misapplied the test for bad faith.  According to Rancosky, the first prong of the test was to be an objective inquiry into whether a reasonable insurer would have denied payment of the claim under the facts and circumstances presented.  The Superior Court agreed with Rancosky and remanded for further proceedings.

Conseco appealed to the Pennsylvania Supreme Court.  According to the Pennsylvania Supreme Court, the interpretation of the statute was to be guided by the Statutory Construction Act.  Pursuant to the Statutory Construction Act, the object of all statutory construction is to establish the General Assembly’s intention.  Under Pennsylvania law, when the words of a statute are not explicit, the General Assembly’s intent may be determined by considering matters other than the statutory language, such as the occasion and necessity for the statute, the circumstances of the statute’s enactment, the object the statute seeks to attain, and the consequences of a particular interpretation.  Thus, because the plain language of the bad faith statute did not provide the level of proof required to prevail on a bad faith claim, the Pennsylvania Supreme Court analyzed the evolution of bad faith law in the United States.   Conseco argued that the meaning of “bad faith” included whether the insurer had a subjectively improper motive, whereas Rancosky argued that self-interest and ill-will are merely probative to the analysis and that knowledge or recklessness is sufficient.  The Pennsylvania Supreme Court held that “Conseco’s proffered interpretation would create an unduly high threshold for bad faith claims … 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.”   The Pennsylvania Supreme Court concluded that to prevail in a bad faith insurance claim “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 reasonable basis in denying the claim. The case was remanded for further proceedings to determine if Conseco had indeed acted in bad faith. Rancosky v. Washington National Ins. Co., NO. 28 WAP 2016 (Pa. Sept. 28, 2017).