It is hard to believe that Rancosky v. Washington National Ins. Co., No. 28 WAP 2016, 2017 Pa. LEXIS 2286 (Pa. Sept. 28, 2017) is the Pennsylvania Supreme Court’s first foray into the proof required for statutory insurer bad faith claims, particularly since it has been over twenty-five years since the Pennsylvania legislature created the private cause of action. 42 Pa. Cons. Stat. § 8371. It was the Pennsylvania Superior Court that first articulated the elements of statutory bad faith in Terletsky v. Prudential Property & Cas. Co., 649 A.2d 680 (Pa. Super. 1994), appeal denied, 659 A.2d 560 (Pa. 1995). Under Terletsky, a plaintiff claiming bad faith must prove by clear and convincing evidence that: 1) the insurer did not have a reasonable basis for denying policy benefits; and 2) that the insurer knew or recklessly disregarded the lack of reasonable basis for denying the benefits. 649 A.2d at 688.
Terletsky’s problem was not that it was out of step with bad faith jurisprudence. To the contrary, Terletsky’s test is similar to that in Anderson v. Continental Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978), a decision the Supreme Court in Rancosky described as “seminal.” 2017 Pa. LEXIS 2286 at *17-18. Rather, the problem was the somewhat vague structure of the Terletsky opinion. It seemingly relied primarily on the 1990 version of Black’s Law Dictionary to conclude that the “term [insurer] bad faith ha[d] acquired a particular meaning,” specifically a failure to pay a claim with “a dishonest purpose,” or “some motive of self-interest or ill will.” 649 A.2d at 688. As a consequence, Terletsky invited the argument that in addition to – or as a part of – the two-pronged test, an insured must prove that the insurer’s claims decision also involved some motive of self-interest or ill will.
Unsurprisingly, the insurer in Rancosky made just that argument to the trial court. After a bench trial, the court concluded that the plaintiff failed to satisfy the first Terletsky element – the lack of a reasonable basis for claim denial – because of the failure to establish that the insurer “acted out of ‘some motive or self-interest or ill will,’” 2017 Pa. LEXIS 2286, at *9. On appeal, the Pennsylvania Superior Court ruled that proof of an insurer’s self-interest or ill will is not a third element required under Terletsky, nor is it a part of the objective analysis contained in the first prong of Terletsky. Rancosky v. Washington National Ins. Co., 130 A.3d 79, 92-93 (Pa. Super. 2015), appeal granted in part, denied in part, 144 A.3d 926 (Pa. 2016). The Superior Court did allow that evidence of self-interest or ill will could be relevant to the second Tereletsky element – whether the insurer knowingly or recklessly disregarded its lack of reasonable basis for claim denial. Id. at 93. Finally, based on its own review of the record, the Superior Court concluded that no reasonable basis supported the denial of the insured’s claim for benefits. Id. at 93-94. It remanded for a determination of the second Terletsky prong.
The Pennsylvania Supreme Court granted allocatur in Rancosky on two issues: 1) to determine the level of proof required in statutory bad faith claims and 2) to clarify whether proof of self-interest or ill will is discretionary or mandatory. Rancosky v. Washington National Ins. Co., 144 A.3d 926 (Pa. 2016). After the house-keeping issue of adopting the Terletsky two-part test, the Supreme Court then proceeded to agree with the bulk of the Superior Court’s analysis. It found that Terletsky’s first prong involved an objective evaluation which did not require proof of self-motive or ill will, although it concurred that self-motive or ill will could be probative of Terletsky’s second, subjective prong. The Supreme Court stopped short requiring proof of self-motive or ill will in bad faith claims, noting that an “insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” 2017 Pa. LEXIS 2286, at *2. From there, however, the Supreme Court parted company with the Superior Court. It rejected the Superior Court’s independent conclusion from the record that the insurer had no reasonable basis for denying insurance benefits. The Supreme Court remanded for the trial court to determine under both Terletsky prongs whether the insurer lacked a reasonable basis for the denial of the claimed benefits, as well as whether the denial was knowingly or recklessly made.