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By Jonathan R. MacBride and Laura W. Bartlow
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In its recent decision in Rancosky v. Washington National Insurance Company, the Pennsylvania Supreme Court examined, for the first time, Pennsylvania’s standard for insurance bad faith. The court held that, while an insurer’s “self-interest” or “ill will” is a factor to be considered in applying the bad faith standard originally set forth in Terletsky v. Prudential Property & Casualty Insurance Co., it is not a third prong or a required finding for a bad faith award to be sustained. 

Although the initial response to the Rancosky decision may be that the decision significantly altered bad faith law in Pennsylvania, on closer examination, the opinion does little to change existing law on bad faith. The primary issue on appeal[1] — whether the “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith — presented the opportunity to greatly alter the bad faith landscape in Pennsylvania, but ultimately the court simply reaffirmed what was already the prevailing law in the lower courts. Although the court had the opportunity to create a heightened standard of bad faith, its decision did not, in fact, lower the bar for policyholders.

To the extent there was any prior confusion, it is now clear that it is not necessary for a plaintiff to prove an insurer’s “self-interest” or “ill will” to recover for bad faith under Pennsylvania law. The Pennsylvania Supreme Court adopted, for the first time, the two-part standard derived from Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994), holding that:

[T]o 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.

The court held that an insurer’s subjective motive of self-interest or ill will may be probative of the second prong of this test, but it is not a prerequisite. Under this standard, proof of an insurer’s knowledge or reckless disregard for its lack of a reasonable basis in denying the claim is sufficient to demonstrate bad faith under the second prong.

At first glance, the Rancosky decision appears to be a victory for policyholders. But the opinion, in fact, simply ratifies much of existing Superior Court precedent. The “self-interest or ill will” language that was central to the Rancosky decision derives from Terletsky. The Terletsky court, quoting from Black’s Law Dictionary, defined bad faith as:

any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence of bad judgment is not bad faith.[2]

The Terletsky court then outlined the two-part standard that has now been adopted by the Pennsylvania Supreme Court, requiring a bad faith plaintiff to prove by clear and convincing evidence that (1) the insurer did not have a reasonable basis for denying benefits and (2) the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim.[3] Some Pennsylvania courts restating this analysis have, at times, implied that Terletsky’s “ill will” language requires something more than mere recklessness for a finding of bad faith.[4] Rancosky has now clarified that ill will or malice by the insurer may be considered as part of the Terletsky test, but it is not a requirement for a finding of bad faith or obtaining an award of punitive damages for bad faith.

In reaching its decision in Rancosky, the court discussed the fact that, because Section 8371 appears to place punitive damages “on the same footing” as other categories of damages, the General Assembly did not intend to impose a higher standard of proof for bad faith claims seeking punitive damages when it created the bad faith cause of action. This also echoes the analysis of the Pennsylvania Superior Court (and other courts), which have previously held that a finding of bad faith under Section 8371 does not compel an award of punitive damages, but it does allow for the award without additional proof, subject to the trial court’s exercise of discretion.[5] In at least two cases, the Pennsylvania Superior Court has previously held that a finding of bad faith is the only prerequisite to a punitive damages award under Section 8371. Section 8371 authorizes an award of interest, punitive damages, court costs, and attorney fees upon a showing of bad faith. As the court observed in Rancosky, Section 8371 does not define “bad faith,” explain how a party may prove liability, or distinguish the manner of proof for punitive damages from other bad faith damages.

There remains an argument that, as a general rule, an elevated standard should still be applicable for an award of punitive damages for bad faith. As a matter of general Pennsylvania law, punitive damages may be awarded if an elevated level of outrageous conduct is proven — to punish “outrageous conduct” done with reckless indifference or bad motive. Under this general adoption of section 908 of the Restatement (Second) of Torts, the court may award punitive damages only when conduct was malicious, wanton, willful, oppressive, or exhibited a reckless indifference for the rights of others. Although Section 8371 does not expressly incorporate this outrageous conduct standard, the standard arguably remains viable as a guide for a court in the exercise of its discretion to award punitive damages once bad faith conduct is proven. In his concurring opinion in Rancosky, Chief Justice Saylor argued that punitive damages should be “adjudged according to conventional standards,” citing the protections of the due process clause of the Fourteenth Amendment, which requires a circumstance-specific assessment of the degree of reprehensibility where punitive damages are at issue.[6]

In the end, while the Rancosky court may have affirmed the Superior Court’s decision on the need to prove “self-interest” or “ill will” as part of the two-pronged Terletsky test, it did hand the insurer a win by finding that the Superior Court had erred in making a factual finding that the insurer lacked a reasonable basis for its denial of benefits and remanded the case to the trial court to consider both prongs of Terletsky.

Had the Rancosky court found that “self-interest,” or “ill will” was necessary to prove bad faith, or that the bad faith standard is different when an insured is seeking punitive damages, this would certainly have changed the landscape of bad faith law in Pennsylvania. As it stands, Rancosky simply appears to have clarified what was already the commonly applied standard for bad faith in Pennsylvania.

Jonathan MacBride is a partner with Zelle LLP in Philadelphia, and Laura Bartlow is an associate in the firm's Minneapolis office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The appeal came from the Superior Court’s reversal of a trial judge’s finding of no bad faith after a bench trial. In Pennsylvania state courts, bad faith is tried by a judge, not a jury.

[2] Terletsky, 649 A.2d at 125 (emphasis added).

[3] Id.

[4] See, e.g., Green v. United Services Auto Ass’n, 936 A.2d 1178, 1187 (Pa. Super. Ct. 2007); Bonenberger v. Nationwide Mut. Insurance Co., 2002 PA Super 14, 5, 791 A.2d 378, 380 (2002). See also Zelle’s prior article that attempted to predict the outcome of Rancosky on appeal. Christopher Troy & Megan Shutte, “Bad Faith Conduct: How Bad is Bad Enough Under PA Law?,” Insurance Law360, September 30, 2016.

[5] See, e.g., Hollock v. Erie Insurance Exchange, 842 A.2d 409, 418 (Pa. Super. Ct. 2004); Zimmerman v. Harleysville Mut. Insurance Co., 860 A.2d 167, 174 (Pa. Super. Ct. 2004).

[6] Rancosky v. Wash. Nat’l Insurance Co., No. 28 WAP 2016, 2017 WL 4296351, at *12 (Pa. S. Ct. 2017) (Saylor, C.J. concurring).