Rancosky v. Washington National Ins. Co., Aplt. , 170 A.3d 364 ( 2017 )

[J-27-2017]
IN THE SUPREME COURT OF PENNSYLVANIA
WESTERN DISTRICT
SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.
MATTHEW RANCOSKY, : No. 28 WAP 2016
ADMINISTRATOR DBN OF THE ESTATE :
OF LEANN RANCOSKY AND MATTHEW : Appeal from the Order of the Superior
RANCOSKY, EXECUTOR OF THE : Court entered December 16, 2015 at
ESTATE OF MARTIN L. RANCOSKY, : No. 1282 WDA 2014, affirming in part
: and vacating in part the Judgment of the
Appellee : Court of Common Pleas of Washington
: County entered August 1, 2014, at No.
: 2008-11797, and remanding.
v. :
: ARGUED: April 4, 2017
:
WASHINGTON NATIONAL INSURANCE :
COMPANY, AS SUCCESSOR BY :
MERGER TO CONSECO HEALTH :
INSURANCE COMPANY, FORMERLY :
KNOWN AS CAPITAL AMERICAN LIFE :
INSURANCE COMPANY, :
:
Appellant :
OPINION
JUSTICE BAER DECIDED: SEPTEMBER 28, 2017
In this discretionary appeal, we consider, for the first time, the elements of a bad
faith insurance claim brought pursuant to Pennsylvania’s bad faith statute found at 42
Pa.C.S. § 8371.1 For the reasons set forth below, we adopt the two-part test articulated
1
Section 8371 provides, in full, as follows:
§ 8371. Actions on insurance policies
(continued…)
by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680
(Pa. Super. 1994), which provides that, in order to recover in a bad faith action, the
plaintiff must present 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 of
or recklessly disregarded its lack of a reasonable basis. Additionally, we hold 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 under Section 8371, as argued by Appellant. While such
evidence is probative of the second Terletsky prong, we hold that evidence of the
insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying
policy benefits is sufficient. Therefore, we affirm the judgment of the Superior Court,
which partially vacated the trial court’s judgment and remanded for further proceedings
on Appellee’s bad faith claim.
I. Background2
(…continued)
In an action arising under an insurance policy, if the court finds that the
insurer has acted in bad faith toward the insured, the court may take all of
the following actions:
(1) Award interest on the amount of the claim from the date the claim
was made by the insured in an amount equal to the prime rate of
interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
42 Pa.C.S. § 8371.
2
The lengthy factual and procedural history underlying the instant dispute involves
several interrelated claims and parties not relevant to the narrow question upon which
review was granted. Accordingly, we recite only those facts necessary for resolution of
the discrete legal issue currently before this Court.
[J-27-2017] - 2
In March of 1992, while working for the United States Postal Service (“USPS”)
Appellee LeAnn Rancosky (“Rancosky”) purchased a cancer insurance policy as a
supplement to her primary employer-based health insurance. The cancer policy was
issued by Appellant Conseco Health Insurance Company (“Conseco”).3 To pay for the
policy, Rancosky’s employer automatically deducted bi-weekly payments of $22.00 from
her paycheck.
Of particular importance to the case sub judice, the policy contained a waiver-of-
premium provision, which excused premium payments in the event Rancosky became
disabled due to cancer. The waiver-of-premium provision read, in relevant part, as
follows:
Subject to the conditions of this policy, you will not be required to make
premium payments if:
 you are diagnosed as having cancer more than 30 days after the
Effective Date; and
 you are disabled due to cancer for a continuous period of more
than 90 consecutive days beginning on or after the date of
diagnosis.
After it has been determined, as shown below that you are disabled, we
will waive your premium payments for the period of disability, except those
during the first 90 days of such period.
PROOF OF DISABILITY
You must send us a physician’s statement containing the following:
3
Washington National Insurance Company, Conseco’s successor in interest, was
ultimately substituted as the defendant in this matter. However, because the lower
courts and the parties have referred to “Conseco” throughout these proceedings, we will
continue the convention of referring to Appellant as “Conseco.” Additionally, though
Rancosky died during the pendency of the instant litigation and her estate was
substituted as plaintiff in this matter, for ease of discussion we will continue to refer to
Appellee as “Rancosky.”
[J-27-2017] - 3
 the date you were diagnosed as having cancer;
 the date you were disabled due to such cancer; and,
 the expected date, if any, such disability will end.
Plaintiff’s Complaint In Civil Action, Exhibit 5, Conseco Cancer Policy at Section 5
(Reproduced Record (“R.R.”) Vol. I at 115a). Additionally, Rancosky’s policy provided
that “disabled” means that:
 for the first 24 months you are unable to perform all the
substantial and material duties of your regular occupation; and,
After 24 months, “disabled” means that:
 you are unable to work at any job for which you are qualified by
reason of education, training or experience;
 you are not working at any job for pay or benefits; and
 you are under the care of a physician for the treatment of cancer.
Plaintiff’s Complaint In Civil Action, Exhibit 5, Conseco Cancer Policy at Section 1 (R.R.
Vol. I at 109a). Thus, pursuant to the above provisions, a policyholder who is
“disabled,” in that she is unable to work due to cancer, is excused from paying
premiums on her policy following ninety days of such disability.
On February 4, 2003, Rancosky was admitted to the hospital due to intense
abdominal pain. She was ultimately diagnosed with ovarian cancer and, over the
subsequent months, underwent surgery and chemotherapy. Though, Rancosky did not
return to her job with USPS following her February 4, 2003, hospital admission, she
remained on her employer’s payroll for several months because she had accrued
unused vacation and sick days. Consequently, Conseco continued to receive payroll-
deducted premiums from Rancosky until June 24, 2003, when Rancosky went on
disability retirement. As the premium payments were made in arrears, and therefore
[J-27-2017] - 4
paid for the prior month’s coverage, the final premium payment extended coverage
under her policy to May 24, 2003.4
Beginning in April 2003, Rancosky made several attempts to obtain waiver-of-
premium status, claiming that she was unable to work and was thus “disabled” under
her policy since her admission to the hospital in February of 2003. Upon Conseco’s
request, on November 18, 2003, she submitted waiver-of-premium forms along with the
required physician statement. Unbeknownst to Rancosky, however, the submitted
physician’s statement inaccurately specified her date of disability as beginning on
April 21, 2003, rather than on February 4, 2003.5 Believing that the premiums had been
waived and that no further premiums were due on the policy because of her disability
from cancer, Rancosky’s final premium payment came from her June 24, 2003, payroll-
deducted premium. Thus, over the next two years, as Rancosky experienced several
recurrences of her cancer, she continued to submit claims to Conseco.
4
Utilizing February 4, 2003 as the inception of Rancosky’s disability, the trial court
determined that, by the time her final payroll-deducted premium was received by
Conseco, the ninety-day waiting period under the waiver-of-premium provision expired.
Accordingly, Rancosky did not pay any premiums following her final payroll-deducted
premium on June 24 2003, believing that she was on waiver-of-premium status
pursuant to her policy. As will be discussed in further detail infra, however, Conseco
erroneously determined that her disability start date was April 21, 2003, and deemed
her policy to have lapsed as of May, 24 2003, based upon her final premium payment of
June 24, 2003, for non-payment of premiums within the ninety-day waiting period of the
waiver-of-premium provision.
5
Conseco did not receive this documentation until July of 2006. It is unclear, from the
available record, why Conseco did not receive this correspondence until several years
after Rancosky sent it. As will be discussed in further detail infra, the Superior Court
ultimately concluded that Conseco lacked a reasonable basis for denying Rancosky
benefits due to its failure to investigate adequately the discrepancy between the actual
start date of her disability and the erroneous start date indicated on the physician’s
statement.
[J-27-2017] - 5
In early 2005, during an audit of its payroll-deducted premium policies, Conseco
discovered, apparently for the first time, that Rancosky ceased making premium
payments on her policy in June of 2003. Despite Rancosky’s prior submissions and
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, Conseco informed Rancosky on
January 28, 2005, 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. Over the
following months and years, Rancosky had an ongoing disagreement with Conseco as
to whether she was on waiver-of-premium status, and thus entitled to continued
coverage under her cancer policy. During this time, Rancosky, again reflecting
February 4, 2003, as her disability start date, submitted numerous claim forms, waiver-
of-premium requests, and authorizations permitting Conseco to contact her physicians,
employer, or anyone else who might have information regarding her disability start date.
Notwithstanding 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 yet another recurrence of her cancer, Conseco
denied Rancosky’s claim for further benefits based upon her failure to pay premiums. In
response, Rancosky sought reconsideration of Conseco’s denial of benefits, again
reiterating her oft-stated assertion that she was excused from paying premiums past her
final payroll-deducted premium on June 24, 2003, because she was disabled within the
meaning of her policy beginning on February 4, 2003, and made all required premium
payments throughout the ninety-day waiting period of the waiver-of-premium provision.
In evaluating Rancosky’s reconsideration request, however, Conseco’s review was
limited to its in-house documentation, which at that time included, among voluminous
[J-27-2017] - 6
and inconsistent filings, the physician’s statement that erroneously indicated the start
date of her disability as April 21, 2003.
Notwithstanding Rancosky’s 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
between Rancosky’s claimed disability date of February 4, 2003, and the physician’s
statement erroneously indicating April 21, 2003, as the start date of disability. Instead, it
merely accepted the inaccurate information in her physician’s statement that the start
date of her disability was April 21, 2003, and took the position that her policy lapsed due
to non-payment of premiums prior to the ninety-day waiting period under the waiver-of-
premium provision. Consequently, it denied her request for reconsideration.6
Rancosky subsequently brought suit against Conseco, alleging, inter alia, breach
of contract and bad faith pursuant to Section 8371. In her bad faith claim, Rancosky
sought interest on her claim, punitive damages, and attorney’s fees, as provided in
Section 8371. The contract and bad faith claims were bifurcated, and Rancosky’s bad
faith claim eventually proceeded to a non-jury trial.7 Though the trial court found that
6
Conseco contends that the erroneous information from Rancosky’s physicians
regarding the start date of her disability supports its argument that it had a reasonable
basis for denying her claim. Rancosky, in turn, argues that Conseco lacked a
reasonable basis for its actions because it failed to conduct an adequate investigation to
resolve the discrepancy between the erroneous physician’s statement and her oft-stated
assertion that she was disabled as of February 4, 2003, notwithstanding her eight
separate authorizations permitting Conseco to contact her physicians and employer
regarding her disability. However, as will be discussed in further detail infra, our
analysis focuses on the legal test for bad faith claims under Section 8371 only and we
remand for further proceedings so that the trial court can consider anew whether that
test has been met based upon the existing record.
7
A jury found in favor of Rancosky on her breach of contract claim and awarded
damages in the amount of $31,144.50. There is no issue regarding Rancosky’s
contract claim currently before this Court.
[J-27-2017] - 7
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. Trial Court Verdict,
7/3/2014, at 1 (R.R. Vol. VII at 2500a). In particular, the trial court concluded that
Rancosky failed to demonstrate that Conseco lacked a reasonable basis for denying
benefits under the cancer policy, i.e., the first prong of the Terletsky test, because she
did not prove that the insurer acted out of “some motive or self-interest or ill will.” Trial
Court Verdict, 7/3/2014, at 1 (R.R. Vol. VII at 2500a). Accordingly, the trial court
returned a verdict in favor Conseco on Rancosky’s bad faith claim.
Rancosky filed a post-trial motion in which she, inter alia, requested that the trial
court vacate its verdict in favor of Conseco and enter judgment in her favor. Following
denial of Rancosky’s post-trial motions, the trial court entered judgment on both the
contract and bad faith claims. Rancosky appealed to the Superior Court, arguing, inter
alia, that the trial court misapplied the well-settled test for bad faith claims under Section
8371, namely, (1) that the defendant did not have a reasonable basis for denying
benefits under the policy, and (2) that the defendant knew or recklessly disregarded its
lack of a reasonable basis in denying the claim. See Terletsky, 649 A.2d at 689.
According to Rancosky, the trial court erred as a matter of law by requiring proof that
Conseco acted out of a motive of self-interest or ill-will. In Rancosky’s view, the first
Terletsky prong is an objective inquiry into whether a reasonable insurer would have
denied payment of the claim under the facts and circumstances presented. She further
argued that, to the extent the insurer’s subjective motivation has any relevance, it is
merely potentially probative of the second Terletsky prong, rather than a requirement for
prevailing in a bad faith claim in toto under Section 8371. Thus, Rancosky maintained
that the trial court erred in concluding that she failed to satisfy the first Terletsky prong
[J-27-2017] - 8
based upon her failure to demonstrate that Conseco denied her benefits due to its
subjective motive of self-interest or ill-will.
In a published opinion, a three judge panel of the Superior Court vacated the trial
court’s judgment as to Rancosky’s bad faith claim and remanded for further proceedings
on that claim. Rancosky v. Washington Nat’l Ins. Co., 130 A.3d 79 (Pa. Super. 2015).
The Superior Court agreed with Rancosky that the first prong of the Terletsky test,
whether the insurer lacked a reasonable basis for denying benefits, is an objective
inquiry and that the subjective intent of the insurer has no relevance thereunder.8 Thus,
it held that the trial court erred as a matter of law in denying Rancosky’s claim under the
reasonable basis prong of the Terletsky test premised upon the court’s holding that she
failed to demonstrate self-interest or ill-will on the part of Conseco.
Consistent with its prior precedent, the Superior Court further held 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, rather than a prerequisite to
succeeding altogether. See, e.g., Greene v. United Services Auto. Ass’n, 936 A.2d
1178, 1191 (Pa. Super. 2007) (holding “that the motive of self-interest or ill will level of
culpability is not a third element required for a finding of bad faith, but it is probative of
the second element identified in Terletsky, i.e., the insurer knew or recklessly
disregarded its lack of reasonable basis in denying the claim”) (citation and internal
quotations omitted), appeal denied, 954 A.2d 577 (Pa. 2008). Thus, the Superior Court
reiterated the Terletsky framework for analyzing bad faith claims under Section 8371
8
As will be discussed in further detail infra, in its brief to this Court Conseco
acknowledges that the first prong of the Terletsky test is an objective inquiry but
maintains that proof of the insurer’s subjectively improper motive is a prerequisite to
prevailing in a bad faith action under Section 8371.
[J-27-2017] - 9
and held that proof of self-interest or ill-will, while potentially probative of the second
prong, is not required under either prong of the Terletsky test.
Next, the Superior Court determined, based upon its independent review of the
record, that the evidence did not support the trial court’s determination that Conseco
had a reasonable basis for denying Rancosky benefits under her cancer policy. The
Superior Court believed it could make such a determination based upon the factual
findings and credibility determinations made by the trial court in its Pa.R.A.P. 1925(a)
opinion. The Superior Court concluded that if Conseco had conducted any meaningful
investigation into the starting date of Rancosky’s cancer disability during its review of
Rancosky’s reconsideration request, it would have discovered that 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. Thus, the court opined, Conseco would have understood that her failure to pay
premiums after her final payroll-deducted premium on June 24, 2003, was excused
pursuant to the waiver-of-premium provision. Because Conseco failed to conduct any
such investigation and merely accepted the incorrect information from Rancosky’s
physicians that her disability began on April 21, 2003, the Superior Court determined
that Conseco lacked a reasonable basis for denying Rancosky benefits pursuant to the
first prong of the Terletsky test.
As to the second prong of the Terletsky test, whether Conseco knew or
recklessly disregarded its lack of a reasonable basis in denying benefits, the Superior
Court remanded to the trial court to make a determination in the first instance.
Accordingly, it vacated the trial court’s judgment as to Rancosky’s bad faith claim and
remanded for further proceedings.
[J-27-2017] - 10
This Court subsequently granted Conseco’s petition for allowance of appeal
limited to the following question, as phrased by Conseco:
Whether this Court should ratify the requirements of Terletsky v.
Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super.
1994), appeal denied, 659 A.2d 560 (Pa. 1995), for establishing insurer
bad faith under 42 Pa.C.S. § 8371, and assuming the answer to be in the
affirmative, whether the Superior Court erred in holding that Terketsky[’s]
factor of a “motive of self-interest or ill-will” is merely a discretionary
consideration rather than a mandatory prerequisite to proving bad faith?
Rancosky v. Washington Nat’l Ins. Co., 144 A.3d 926 (Pa. 2016).9
II. Analysis
In order to answer the question presented in this appeal, an issue of first
impression for this Court, we must interpret Pennsylvania’s bad faith insurance statute
at 42 Pa.C.S. § 8371, which provides, in full, as follows:
§ 8371. Actions on insurance policies
In an action arising under an insurance policy, if the court finds that the
insurer has acted in bad faith toward the insured, the court may take all of
the following actions:
(1) Award interest on the amount of the claim from the date the claim
was made by the insured in an amount equal to the prime rate of
interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
42 Pa.C.S. § 8371.
Issues of statutory interpretation present this Court with questions of law;
accordingly, our standard of review is de novo and our scope of review is plenary. See
9
The Superior Court further held that Rancosky’s bad faith claim is not time-barred
under the applicable statute of limitations. This Court did not ultimately grant further
review of the statute of limitations issue raised by Conseco. Thus, it is finally decided in
favor of Rancosky.
[J-27-2017] - 11
Pennsylvania Pub. Util. Comm’n v. Andrew Seder/The Times Leader, 139 A.3d 165,
172 (Pa. 2016). This Court’s interpretation of Section 8371, and indeed of all statutes,
is guided by the Statutory Construction Act, 1 Pa.C.S. §§ 1501-1991. Pursuant to the
Statutory Construction Act, the object of all statutory construction is to ascertain and
effectuate the General Assembly’s intention. 1 Pa.C.S. § 1921(a). When the words of a
statute are clear and free from ambiguity, the letter of the statute is not to be
disregarded under the pretext of pursuing its spirit. 1 Pa.C.S. § 1921(b). However,
when the words of a statute are not explicit, the General Assembly’s intent may be
ascertained 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. 1 Pa.C.S. § 1921(c). Moreover, technical words and phrases that have
acquired a peculiar and appropriate meaning shall be construed according to such
peculiar and appropriate meaning. 1 Pa.C.S. § 1903(a).
Critically, when read in a vacuum, the plain language of Section 8371 provides
little guidance in answering the discrete legal question raised herein, namely, the level
of proof required to prevail in a bad faith claim. In enacting Section 8371, the General
Assembly did not define “bad faith” or otherwise set forth the manner in which a party
must prove liability. Therefore, in order to understand the meaning of “bad faith,” and
thus ascertain and effectuate the intent of the General Assembly in enacting
Section 8371, we must utilize the additional tools of statutory construction outlined
above. In particular, we look to the occasion and necessity for the statute and the
circumstances of the statute’s enactment. 1 Pa.C.S. § 1921(c).
In this regard, we observe that Section 8371 is widely considered a delayed
legislative response to this Court’s 1981 decision in D’Ambrosio v. Pennsylvania Nat’l
[J-27-2017] - 12
Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981), in which we declined to recognize the
common law right of action that had been adopted by a number of courts throughout the
United States at that time related to an insurer’s failure to act in good faith when
refusing to cover a loss under an insured’s policy. See id. at 968-70 (opining that it is
the role of the General Assembly, rather than the courts, to create a cause of action for
bad faith conduct); see also Mishoe v. Erie Ins. Co., 824 A.2d 1153, 1160-61 (Pa. 2003)
(observing that Section 8371 was a delayed legislative response to D’Ambrosio).
Accordingly, consideration of the circumstances leading to the enactment of Section
8371 necessarily requires that we analyze the historical development of bad faith claims
in the United States generally, and the D’Ambrosio Court’s understanding of such
claims in particular.
In 1973, the Supreme Court of California became the first court in the United
States to recognize a right of action, sounding in tort, for bad faith denial of insurance
policy benefits. Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973). Specifically,
the California high court held that when an insurer “fails to deal fairly and in good faith
with its insured by refusing, without proper cause, to compensate its insured for a loss
covered by the policy, such conduct may give rise to a cause of action in tort for breach
of implied covenant of good faith and fair dealing.” Id. at 1037. Thereafter, a number of
state courts throughout the country recognized the Gruenberg court’s common law
remedy for insureds claiming bad faith. See, e.g., Grand Sheet Metal Products Co. v.
Protection Mut. Ins. Co., 375 A.2d 428 (Conn. Super. 1977); Chavez v. Chenoweth, 553
P.2d 703 (N.M. App. 1976); Christian v. American Assurance Co., 577 P.2d 899 (Okla.
1977).
Of particular importance in the development of the law in this area, the Supreme
Court of Wisconsin, after expressly adopting the Gruenberg right of action for bad faith,
[J-27-2017] - 13
expanded upon it by outlining the facts one must allege to support such a claim.
Anderson v. Continental Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978). Specifically, the
Anderson Court held that, in order to succeed in an action for bad faith, “a plaintiff must
show the absence of a reasonable basis for denying benefits of the policy and the
defendant’s knowledge or reckless disregard of the lack of a reasonable basis for
denying the claim.” Id. The Anderson Court further held that while mere knowledge or
recklessness is sufficient to demonstrate bad faith liability in general, additional proof of
ill-will is required if the plaintiff specifically seeks punitive damages for the established
bad faith conduct. Id. at 379 (stating “[w]e do not conclude, however, that the proof of a
bad faith cause of action necessarily makes punitive damages appropriate” and that
punitive damages requires “something in the nature of special-ill-will”).
Gruenberg and Anderson were both recognized as seminal cases in the
development of bad faith claims in the United States by the time this Court was
presented with the opportunity to acknowledge the judicially-created right of action in
1981. See Richard L. McMonigle, Jr., Insurance Bad Faith in Pennsylvania § 2:05 at
20-21 (8th ed. 2007) (stating that “[t]he decisions in Gruenberg and Anderson judicially
created a tort of first party bad faith based upon the covenant of good faith and fair
dealing implied in every insurance contract”). In D’Ambrosio, this Court was expressly
urged by the plaintiff to adopt the right of action first recognized in Gruenberg. Id. at
968. We declined to do so, however, concluding that the General Assembly, rather than
the courts, should create a cause of action for bad faith conduct in denying benefits
under an insurance policy. Id. at 970. In describing the right of action it ultimately
declined to recognize, the D’Ambrosio Court cited to both Gruenberg and Anderson and
specifically quoted the above language from Anderson. See D’Ambrosio, 431 A.2d at
971 (stating that “those jurisdictions which have recognized a cause of action for bad
[J-27-2017] - 14
faith conduct have cautioned . . . that ‘a plaintiff must show the absence of a reasonable
basis for denying benefits of the policy and the defendant’s knowledge or reckless
disregard of the lack of a reasonable basis for denying the claim’”) (quoting Anderson,
271 N.W.2d at 376). Though punitive damages were specifically sought by the plaintiff
in D’Ambrosio, unlike the Wisconsin high court in Anderson, the D’Ambrosio Court
made no distinction between bad faith liability generally and bad faith claims seeking
punitive damages.
Responding to the D’Ambrosio Court’s invitation to create a right of action for bad
faith, the General Assembly enacted Section 8371 in 1990. See Mishoe, 824 A.2d at
1160-61 (observing that Section 8371 was a delayed legislative response to
D’Ambrosio). Section 8371 provides that if a court finds “bad faith,” it may take all of the
following actions: award interest on the claim; award punitive damages against the
insurer; assess court costs and attorney fees against the insurer. 42 Pa.C.S. § 8371
(supra, at pg. 10-11). Section 8371 does not define “bad faith,” set forth the manner in
which plaintiffs must prove bad faith, or distinguish the manner of proof for punitive
damages from other bad faith damages. To the contrary, Pennsylvania’s bad faith
statute provides for the award of interest, attorney’s fees, and punitive damages upon a
showing of bad faith.
As noted, this Court has not had occasion to consider the precise contours of
bad faith claims arising under Section 8371 since its enactment.10 Consequently, the
10
We observe, however, that this Court has considered other aspects of claims brought
pursuant to Section 8371. See Toy, 928 A.2d at 200 (holding that the General
Assembly did not intend to give relief to an insured who alleged that his insurer engaged
in unfair or deceptive practices in soliciting the purchase of an insurance policy when it
enacted Section 8371); Birth Center v. St. Paul Companies, Inc., 787 A.2d 376 (Pa.
2001) (holding that in creating additional remedies for bad faith under Section 8371, the
General Assembly did not intend to prohibit an award of compensatory contractual
damages that were otherwise available at common law); Mishoe, 824 A.2d at 1160
(continued…)
[J-27-2017] - 15
Superior Court’s 1994 decision in Terletsky has been the preeminent ruling on this
issue. There, the Superior Court observed that in the insurance context, bad faith had
acquired a particular meaning, citing the following definition from the 6th edition of
Black’s Law Dictionary:
“Bad faith” on part of the insurer is 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 of or ill will; mere negligence or bad judgment is not bad
faith.
Terletsky, 649 A.2d at 688 (quoting Black’s Law Dictionary 139 (6th ed. 1990)
(emphasis added)); see also 1 Pa.C.S. § 1903(a) (providing that words shall be
construed in accordance with the peculiar and appropriate meaning they have
acquired). Citing to D’Ambrosio, the Superior Court articulated the test for bad faith as
follows: “to recover under a claim of bad faith, the plaintiff must show [1] that the
defendant did not have a reasonable basis for denying benefits under the policy and [2]
that the defendant knew or recklessly disregarded its lack of reasonable basis in
denying the claim.” Id. (citing, inter alia, D’Ambrosio, 431 A.2d at 971).
Though the Terletsky court did not reference self-interest or ill-will in its test, or
application thereof, its citation to Black’s Law Dictionary inadvertently created confusion
(…continued)
(holding that the Pennsylvania Constitution does not provide for the right to a jury trial
for bad faith claims arising under Section 8371). While these cases are instructive in
terms of their overview of the development of bad faith insurance claims in
Pennsylvania, none of them addressed the issue presented today, namely, the legal
test for bad faith under Section 8371. See, e.g., Toy, 928 A.2d. at 200 n.16 (stating “we
do not consider what actions amount to bad faith.”). Consequently, our prior decisions
interpreting Section 8371 do not directly control our disposition of the instant matter.
Moreover, nothing we say here should be read as casting doubt on the validity of the
holdings in those cases.
[J-27-2017] - 16
as to the relationship between the two-prong test and the seemingly additional
requirement of proving a subjectively improper motive on the part of the insurance
company. See Greene, 936 A.2d at 1189. However, when squarely presented with the
issue in subsequent cases, the Superior Court has consistently clarified, as it did in the
case sub judice, that the Terletsky test did not establish a self-interest or ill-will level of
culpability for bad faith. See Greene, 936 A.2d at 1190 (stating that “the motive of self-
interest or ill will level of culpability is not a third element required for a finding of bad
faith, but it is probative of the second element identified in Terletsky, i.e., the insurer
knew or recklessly disregarded its lack of reasonable basis in denying the claim”)
(citation and internal quotations omitted); Nordi v. Keystone Health Plan West Inc., 989
A.2d 376, 384-85 (Pa. Super. 2010) (stating that the Terletsky court’s reference to
Black’s Law Dictionary did not create a self-interest or ill-will level of culpability for bad
faith claims). 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.
With this historical backdrop in mind, we turn to the parties’ arguments and their
competing interpretations of Section 8371. Initially, we observe that the parties are in
substantial agreement on several aspects of bad faith claims under Section 8371. Both
parties generally agree with the Terletsky test and that the first prong, 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. See Anderson, 271 N.W.2d at 377 (stating that the absence
of a reasonable basis is an “objective standard, . . . i.e., would a reasonable insurer
[J-27-2017] - 17
under the circumstances have denied or delayed payment of the claim under the facts
and circumstances”) (citation omitted).
Consequently, both parties agree that mere negligence is insufficient for a finding
of bad faith under Section 8371 and the primary point of contention relates to the
relevance, if any, of the insurance company’s subjective motivation under the second
Terletsky prong. In this regard, both parties contend that the General Assembly did not
specifically define “bad faith” or set forth the manner in which an insured must
demonstrate a bad faith claim because the phrase had acquired a peculiar and
universally acknowledged meaning by the time Section 8371 was enacted in 1990. See
1 Pa.C.S. § 1903(a) (providing that words shall be construed in accordance with the
peculiar and appropriate meaning they have acquired). While Conseco maintains that
the acquired meaning of “bad faith” includes whether the insurer had a subjectively
improper motive, Rancosky argues that self-interest and ill-will are merely probative and
that knowledge or recklessness is sufficient.
In support of its position that an insurance company’s subjectively improper
motive is part of the well-established meaning of bad faith, Conseco relies, inter alia,
upon the definition of “bad faith” from the 1990 edition of Black’s Law Dictionary, which
was cited by the Terletsky court and includes “motive of self-interest or ill will” as part of
its definition. Conseco observes that this edition of Black’s Law was published the
same year Section 8371 was enacted and that it is therefore an appropriate barometer
of bad faith as it was understood at that time. Conseco further highlights that the
Wisconsin Supreme Court’s decision in Anderson, which was cited by the D’Ambrosio
Court, described bad faith as an intentional tort. See Anderson, 271 N.W.2d at 376
(stating “[i]t is apparent, then, that the tort of bad faith is an intentional one”.).
Additionally, Conseco maintains that the punitive damages provision of Section 8371 is
[J-27-2017] - 18
penal in nature, designed to punish and deter bad faith conduct. Therefore, Conseco
argues that it must be construed narrowly in favor of defendants pursuant to the rule of
lenity. See 1 Pa.C.S. § 1928(b)(1) (providing that penal statutes are to be strictly
construed).11
In response, Rancosky observes that the version of Black’s Law Dictionary cited
by Conseco was not published until July of 1990, after Section 8371 was signed into law
on February 7, 1990. Thus, she maintains that it could not have informed the General
Assembly’s understanding of bad faith. Rather, she highlights that in D’Ambrosio, this
Court indicated that recklessness is sufficient in a bad faith cause of action. See
D’Ambrosio, 431 A.2d at 971 (stating that “those jurisdictions which have recognized a
cause of action for bad faith conduct have cautioned . . . that ‘a plaintiff must show the
absence of a reasonable basis for denying benefits of the policy and the defendant’s
knowledge or reckless disregard of the lack of a reasonable basis for denying the
claim.’”) (citing Anderson, 271 N.W.2d at 376). Because Section 8371 is widely viewed
as a legislative response to this Court’s decision not to recognize a common law right of
action for bad faith conduct in D’Ambrosio, she argues that the General Assembly
intended to incorporate that Court’s definition of bad faith into Section 8371. As to
Conseco’s argument that Section 8371 is a penal statute, Rancosky counters that, in
enacting Section 8371, the General Assembly intended to create a private right of action
in order to address the unequal bargaining power between insurance companies and
policyholders. Accordingly, Rancosky argues that Section 8371 should be construed
broadly in favor of plaintiffs to effectuate its remedial purpose. See 1 Pa.C.S. § 1928(c)
(providing for liberal construction of statutes to effect their objects and promote justice).
11
Conseco does not specifically reference the Anderson Court’s holding that a higher
manner of proof is required where the plaintiff seeks punitive damages.
[J-27-2017] - 19
Thus, while Rancosky acknowledges that mere negligence is insufficient, she argues
that a recklessness standard effectuates the intent of the General Assembly in enacting
Section 8371.
Given the historical development of bad faith claims and the context in which the
General Assembly enacted Section 8371, we agree with the parties that in responding
to the D’Ambrosio decision the General Assembly intended to incorporate that Court’s
understanding of bad faith. As stated supra, this Court’s citation to Grunberg and
Anderson in D’Ambrosio, and in particular to the test from Anderson, suggests that
those cases were critical to this Court’s understanding of the nature of such claims.
While the Wisconsin high court in Anderson did indeed describe the tort of bad faith as
“an intentional one,” Anderson, 271 N.W.2d at 376, it reiterated throughout its opinion
that knowledge or recklessness is sufficient for demonstrating liability in a bad faith
cause of action. See, e.g., id. (stating that “[t]o show a claim for bad faith, a plaintiff
must show the absence of a reasonable basis for denying benefits of the policy and the
defendant’s knowledge or reckless disregard of the lack of a reasonable basis for
denying the claim”); see also id. at 377 (reiterating its two-prong test and stating “implicit
in that test is our conclusion that the knowledge or the lack of a reasonable basis may
be inferred and imputed to an insurance company where there is a reckless disregard of
a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs
submitted by the insured”). Consequently, we conclude that the Anderson Court spoke
with clarity as to the standard of proof for liability in a bad faith action.
Importantly, however, the Anderson Court went on to state that a higher standard
of proof is necessary where the plaintiff specifically seeks punitive damages related to
bad faith denial of insurance benefits. Id. at 379 (stating “[w]e do not conclude,
however, that the proof of a bad faith cause of action necessarily makes punitive
[J-27-2017] - 20
damages appropriate”). Specifically, it held that for punitive damages to be awarded,
“there must be a showing of an evil intent deserving of punishment or of something in
the nature of special ill-will or wanton disregard of duty or gross or outrageous
misconduct.” Id. Thus, it appears that the inclusion of an ill-will level of culpability in
bad faith claims has its genesis in the Anderson Court’s distinction between bad faith
liability in general and a bad faith claim specifically seeking punitive damages.
Consequently, the gravamen of our inquiry is whether the D’Ambrosio Court, and thus
the General Assembly, similarly understood that an award of punitive damages carried
a higher evidentiary threshold in the bad faith context.
In this regard, we observe that punitive damages were specifically pled in the
D’Ambrosio case. D’Ambrosio, 431 A.2d at 967. Notwithstanding its reliance upon
Anderson, however, the D’Ambrosio Court made no reference to a higher threshold for
punitive damages when describing the bad faith right of action, stating only that “a
plaintiff must show the absence of a reasonable basis for denying benefits of the policy
and the defendant’s lack of a reasonable basis for denying the claim.” Id. at 971. While
we acknowledge that the D’Ambrosio Court ultimately did not to recognize the right of
action at common law, we nonetheless find it important that the D’Ambrosio Court
provided no indication of a higher threshold for punitive damages in its far reaching
discussion of the development of bad faith claims.
Indeed, in responding to D’Ambrosio, the General Assembly seemingly put
punitive damages on the same footing as other categories of damages when it enacted
Section 8371. Specifically, the statute sets forth that, upon a finding of bad faith on the
part of the insurer, a court may award interest, punitive damages, and/or court costs
and counsel fees. 42 Pa.C.S. § 8371 (supra, at pg. 10-11). Consequently, as
Section 8371 does not distinguish between the standard for finding “bad faith” generally
[J-27-2017] - 21
and “bad faith” allowing for punitive damages, we find no basis for concluding that the
General Assembly intended to impose a higher standard of proof for bad faith claims
seeking punitive damages when it created the right of action.
Moreover, looking to the consequences of the competing interpretations of
Section 8371, see 1 Pa.C.S. § 1921(c)(6), we find that Conseco’s proffered
interpretation would create an unduly high threshold for bad faith claims. Given our
conclusion that there is no basis to distinguish between punitive damages and other
categories of damages under Section 8371, an ill-will level of culpability would limit
recovery in any bad faith claim to the most egregious instances only where the plaintiff
uncovers some sort of “smoking gun” evidence indicating personal animus towards the
insured. 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. Such a construction could functionally write bad
faith under Section 8371 out of the law altogether.
For the reasons set forth above, we conclude that the Superior Court’s
longstanding two-pronged test, first articulated in Terletsky, presents an appropriate
framework for analyzing bad faith claims under Section 8371. In particular, we conclude
that the Terletsky test, and its imposition of a recklessness standard for liability under
the second prong, comports with the historical development of bad faith in Pennsylvania
and effectuates the intent of the General Assembly in enacting Section 8371.12
Accordingly, we hold that proof of an insurer’s motive of self-interest or ill-will, while
12
Given our conclusion that the General Assembly had a particular understanding of
bad faith when it enacted Section 8371 and did not distinguish between punitive and
other categories of damages, the phrase “bad faith” is sufficiently clear within the
context of the statute. Accordingly, we need not address the parties’ arguments as to
whether Section 8371 is a penal or remedial statute.
[J-27-2017] - 22
potentially probative of the second prong, is not a mandatory prerequisite to bad faith
recovery under Section 8371.
Because we agree with the legal test for bad faith claims under Section 8371
articulated by the Superior Court in this case and agree that the trial court misapplied
that test by considering Conseco’s subjective motivation in determining whether it had a
reasonable basis for denying Rancosky’s claim, we affirm the Superior Court’s ultimate
disposition to vacate the trial court’s judgment and remand for further proceedings on
Rancosky’s bad faith claim. However, we respectfully believe that the Superior Court
erred in making a specific determination as to whether the record in this case
demonstrates Conseco’s lack of a reasonable basis for denying Rancosky benefits, i.e.,
the first Terletsky prong. The Superior Court premised its holding in this regard upon
credibility determinations the trial court made in its Rule 1925(a) opinion. However,
because it is unclear to what extent the trial court’s findings on the reasonable basis
prong of Terletsky were intertwined with its erroneous belief that proof of Conseco’s
motive of self-interest or ill-will was required, upon remand the trial court should
consider both prongs of the Terletsky test anew.
III. Conclusion
In summary, we hold that, to 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. We further hold that proof of the insurer’s subjective motive of self-interest or
ill-will, while perhaps probative of the second prong of the above test, is not a necessary
prerequisite to succeeding in a bad faith claim. Rather, proof of the insurer’s knowledge
or reckless disregard for its lack of reasonable basis in denying the claim is sufficient for
[J-27-2017] - 23
demonstrating bad faith under the second prong. For these reasons, we affirm the
judgment of the Superior Court, which vacated the trial court’s judgment in part and
remanded for further proceedings on Appellee’s bad faith claim. On remand, the trial
court should consider anew whether the above test has been met.
Justices Todd, Donohue, Dougherty, Wecht and Mundy join the opinion.
Chief Justice Saylor files a concurring opinion.
Justice Wecht files a concurring opinion.
[J-27-2017] - 24