The Pennsylvania Supreme Court’s decision in Rancosky v. Washington National Insurance, 170 A.3d 364 (Pa. 2017), was one of the court’s most eagerly anticipated commercial cases of 2017 due to its possible repercussions for the insurance industry. It would be the first time the commonwealth’s high court would opine on the standard for proving bad faith—a punitive statute that can impose stiff penalties on insurers that mishandle insurance claims. Despite the hype, the opinion was first viewed as a bit of a snooze as the court predictably adopted a test first articulated by the Superior Court more than 20 years ago and seemingly left the status quo in place. As Rancosky sinks in, though, there are indications that it may reverberate in unexpected ways and be the rare case with dicta that is more significant than its holding. Most notably, the Rancosky decision has called into question the standard for imposing punitive damages against insurers.

The General Assembly passed Pennsylvania’s bad faith insurance statute, 42 Pa. C.S. Section 8371, nearly 30 years ago. The statute provides that a court may award interest, attorney fees and punitive damages “if the court finds that the insurer has acted in bad faith toward the insured.” The legislature did not define “bad faith,” however, leaving it to the courts to infer the contours of the statutory tort. The Pennsylvania Superior Court did so in 1994 in Terletsky v. Prudential Property & Casualty Insurance, 649 A.2d 680 (Pa. Super. Ct. 1994). Terletsky held that plaintiffs must prove by clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and the insurer knew of, or recklessly disregarded, its lack of a reasonable basis. Under this two-prong test, negligence was not enough to establish bad faith.

Twenty-three years later, Rancosky formally adopted that two-part test and acknowledged that mere negligence cannot amount to bad faith. Rancosky involved questions about when an insured became disabled. The plaintiff claimed she had been disabled under the disputed policy since Feb. 3, 2003, but the insurer limited its review to its own inconsistent in-house documentation, which included a physician’s statement that incorrectly stated the disability date.

While the trial court found that the insurer was “sloppy and even negligent” in handling the claim, the court held that Rancosky failed to prove her bad faith claim because there was no evidence that the company demonstrated “self-interest or ill will.” That reasoning was rejected by the Superior Court and, ultimately, the Pennsylvania Supreme Court, which reasoned that an insurer’s subjective motivation “while potentially probative of the second prong, is not a mandatory prerequisite to bad faith recovery under Section 8371.” And that recovery, according to dicta in Rancosky, can include punitive damages. This is where Rancosky potentially upends well-established legal standards.

In Pennsylvania, it is axiomatic that punitive damages are available only when the defendant’s conduct was “outrageous.” “Conduct is outrageous when it is malicious, wanton, willful, or oppressive, or shows reckless indifference to the interests of others.” In Rancosky, however, the Pennsylvania Supreme Court seemed to carve out an exception for bad faith cases. The court noted that while Section 8371 allows for three types of damages—interest, costs and fees, as well as punitive damages—it does not distinguish between those remedies. “Consequently,” the court wrote, “as Section 8371 does not distinguish between the standard for finding ‘bad faith’ generally 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.”

Given the paucity of legislative history surrounding the adoption of the bad faith statute, the court could just as easily have concluded that the legislature intended to require proof of the traditional grounds for punitive damages as a prerequisite to an award of such damages under the statute, even if the lower standard was sufficient for an award of interest and attorney fees.

As trial courts have begun applying Rancosky to bad faith claims, they are noting, at least at early stages of the litigation, that messy investigative work by insurers—as opposed to outrageous behavior—may be enough to sustain bad faith claims and, potentially, punitive damage awards.

U.S. District Judge Wendy Beetlestone of the U.S. District Court for the Eastern District of Pennsylvania recently denied a motion to dismiss a bad faith claim, citing Rancosky for the proposition that a plaintiff need not show ill will by the insurer in Grossman v. Metropolitan Life Insurance, No 17-2940, 2018 U.S. Dist. LEXIS 4672 (E.D. Pa. Jan. 10, 2018). Instead, she said, the insurer should have investigated a discrepancy in the documentation used to evaluate a claim, and its failure to do so warranted a ruling that the plaintiff’s bad faith claim could proceed.

In the U.S. District Court for the Middle District of Pennsylvania, Judge A. Richard Caputo recently cited an older Superior Court case for the proposition that “mere negligence or bad judgment does not constitute bad faith” in Fuller v. Allstate Property & Casualty Insurance., No. 3:17-CV-0955, 2018 U.S. Dist. LEXIS 7930 (M.D. Pa. Jan. 18, 2018) (citing Condio v. Erie Insurance Exchange, 899 A.2d 1136 (Pa. Super. Ct. 2006)). However, he denied a motion to dismiss the bad faith claim in that case because the insurer did not adequately investigate a claim for benefits, demonstrating the type of knowledge or reckless disregard required under Terletsky and Rancosky.

After Rancosky, Judge Mark Kearney of the Eastern District dismissed a bad faith claim where the plaintiff made only conclusory allegations about the insurer’s conduct, Sherman v. State Farm Insurance, No. 17-4822, 2017 U.S. Dist. LEXIS 190363 (E.D. Pa. Nov. 17. 2017). However, he explicitly stated that no “higher standard of proof” is needed to sustain a bad faith case. “An insured need not meet the punitive damages standard to succeed on a bad faith claim.”

The Rancosky decision is still young, and its full effect will not be realized for some time. As these and other cases interpret Rancosky, we will see whether the Pennsylvania courts formally embrace the dicta regarding punitive damages, whether the application of a lower threshold for awarding punitive damages in cases typically involving little or no physical or economic harm passes constitutional muster, and whether such a rule prompts legislative reconsideration of the bad faith statute. For now, it is still too early to know if the Rancosky decision will reinforce the world order everyone had long adhered to or represent a sea change in bad faith jurisprudence.