The Pennsylvania Supreme Court ruled today that the Pennsylvania bad faith statute does not require a plaintiff to prove that an insurer was motivated by self-interest or ill-will when denying benefits under an insurance policy. Instead, the court’s decision in Rancosky v. Washington National Insurance Company adopted the standard established by the Pennsylvania Superior Court 23 years ago in Terletsky v. Prudential Property & Casualty Company, under which a bad faith claim is established by clear and convincing evidence
- that the insurer did not have a reasonable basis for denying benefits under the policy; and
- that the insurer knew of or recklessly disregarded its lack of a reasonable basis
The court’s opinion provides an academic analysis of the Pennsylvania General Assembly’s intent when it enacted the bad faith statute, 42 Pa. C.S.A. § 8371, in 1990. But the court’s decision was also influenced by practical considerations related to a plaintiff’s ability to prove bad faith. The court stated that requiring “an ill-will level of culpability” (for which the insurer argued) would limit recovery in bad faith claims to only the most egregious cases — cases in which plaintiffs “uncover some sort of ‘smoking gun’ evidence indicating personal animus toward an insured.” The court stated that this standard would be “so stringent that it would be highly unlikely that any plaintiff could prevail” in a bad faith claim. Therefore, the court declined to adopt the heightened standard of self-interested motive or ill-will. Instead, evidence of an insurer’s self-interest or ill-will would be admissible to establish that the insurer knowingly or recklessly denied benefits under its policy without a reasonable basis for doing so.
In this case, Washington National Insurance Company had argued that the heighted standard of self-interest or ill-will was required to establish bad faith because the bad faith statute permits an award of punitive damages. Rejecting this argument, the Supreme Court stated that Section 8371 does not distinguish between the standard for finding bad faith generally and bad faith allowing for punitive damages. Therefore, according to the court, the legislature did not intend to impose a higher standard of proof for bad faith claims seeking punitive damages.
Insurers may seek to challenge or limit this aspect of the court’s decision in future cases. Insurers will find support for their arguments in the concurring opinion of Chief Justice Thomas Saylor, who cautioned that punitive damages should be awarded according to conventional standards, not the seemingly relaxed standard under the Terletsky bad faith test. Referencing the United States Supreme Court’s requirement that there be a “circumstance-specific assessment of the ‘degree of reprehensibility’ relative to punitive damages awards,” Chief Justice Saylor stated that trial courts must be sensitive to such concerns so that punitive damages awards are not applied in an unconstitutional manner.
Although the Pennsylvania Supreme Court’s decision went against the insurer in the Rancosky case, it maintained the Terletsky standard for establishing a claim under the Pennsylvania bad faith statute, which sets a relatively high bar for plaintiffs to meet. For example, the court reaffirmed that a plaintiff must prove bad faith by clear and convincing evidence. In addition, Chief Justice Saylor’s concurring decision on the constitutional limitations on punitive damages awards draws the lines for future skirmishes in the bad faith battlefield.