What almost every individual, business, and municipality have in common is that they have some sort of insurance coverage, and sooner or later they need to use it.  But if the insurance company won’t hold up its end of the bargain, how does an insured prove that an insurer acted in bad faith?

Although the issue has been well settled since the Superior Court decided Terletsky v. Prudential Property & Casualty Insurance Co. in 1994, there has been much confusion as to whether or not ill motive or ill will is required.  The Pennsylvania Supreme Court, however, recently weighed in, newly confirming the old standard.

In Terletsky, the court held that an insured must show: (1) the insurer did not have a reasonable basis for denying benefits under a policy; and (2) the insurer knew or recklessly regarded its lack of a reasonable basis in denying the claim.  The Terletsky court cited a Black’s Law Dictionary definition of bad faith which included self-interest and ill will.  When the court formulated the two-prong test later in the decision, however, it did not mention motive of self-interest or ill will as proof of bad faith.

Confusion then ensued, with many courts holding ill will or self interest was required to prevail on a bad faith claim.  In the 2007 case of Greene v. United Services Auto Association, the Superior Court attempted to right the ship, stating that, “the Terletsky [court] did not intend to include an element of ‘self-interest or ill-will’ within the test for establishing bad faith.”  Still, ill will and will motive were common discussed factors in bad faith actions.

The Pennsylvania Supreme Court has now stepped into the fray with the recent case of Rancosky v. Washington National Insurance Company.  There, Rancosky purchased a cancer insurance policy that provided for a waiver of premium payments if she was diagnosed with cancer more than 30 days after the effective date of the policy, and will be disabled for more than 90 consecutive days as a result of the disease.  Further, the insurer agreed to waive premium payments for the entire period of disability, less the 90-day initial period of disability after diagnosis.

Rancosky was diagnosed with cancer on February 4, 2003, and premium payments were paid for the required 90-day period. Rancosky then requested waiver-of-premium status, submitted the required evidentiary documents upon request of the insurer, and ceased making premium payments over the next two years.  In 2005, the insurer informed Rancosky that her policy had lapsed as of the last date she paid premium payments in 2003.  This decision was based on a physician’s erroneous statement that placed the date of her disability as April 21, 2003 instead of February 4, 2003.  When Rancosky advised the insurer of the error, the insurer made no effort to investigate the accuracy of the physician’s statement, which prompted Rancosky’s bad faith claim.

The trial court correctly stated that to prove the insurer’s bad faith under the Terletsky test, claimants must show: (1) the insurer did not have a reasonable basis for denying the benefits under the policy; and (2) the insurer knew or recklessly regarded its lack of a reasonable basis in denying the claim.  The court, however, misapplied the test by also requiring that Rancosky prove the first prong of the test by showing that the insurer acted out of self-interest or ill will.

Rancosky appealed to the Superior Court, which vacated the trial court’s judgment and remanded.  The Superior Court made clear that the first prong of the Terletsky test is an objective inquiry, and that the subjective intent of the insurer has no relevance.  Further, it stated that “to the extent an insurer’s motive of self-interest or ill-will is relevant in a bad faith claim, it is merely probative of the second Terletsky prong.”  The insurer then appealed the decision to the Pennsylvania Supreme Court to determine whether “a motive of self-interest or ill will” is a discretionary consideration or a mandatory prerequisite to proving bad faith.  In response, the Pennsylvania Supreme Court ratified the Terletsky test and definitively held that ill will or ill motive was not necessary to prevail on a bad faith claim.

Hopefully, the Rancosky decision cleared any lingering doubts as to the test for bad faith.   Such clarification should ensure that the lower courts will uniformly apply the test for bad faith insurance claims, paving the way for more successful bad faith actions.

The author extends a special thank you to Jo-Anne Thompson for assistance in preparing this post.