Pennsylvania Supreme Court adopts test for bad faith insurance claims

It holds that the plaintiff must not prove ill-will or self-interest.

On September 28, 2017, the Pennsylvania Supreme Court issued an important decision clarifying the test in that state for whether an insurance company acted in bad faith toward an insured party. The court adopts a two-part test articulated by a lower court in 1994.

Specifically, the court holds in Rancosky v. Washington National Insurance Company that to succeed in a bad faith insurance lawsuit under Pennsylvania statute, the plaintiff must show by clear and convincing evidence that:

  • The insurance company had no reasonable basis to deny the insurance claim in question and
  • The insurer "knew of or recklessly disregarded its lack of a reasonable basis."

Notably, the court also says the plaintiff does not have to prove that the insurer was motivated by "self-interest or ill-will," although those motivations can be relevant to the test's second prong.

What is insurance bad faith?

Generally, state law defines insurer bad faith behavior. For example, Arizona regulation defines it as unreasonable delay, underpayment or termination of benefits. It also includes certain kinds of intentionally misleading behavior toward claimants as well as unreasonable interference with a claimant's choice of his or her own doctor, with narrow exception.

Arizona regulation also says it is bad faith for an insurer to bring a legal proceeding or assert a legal defense that is not factually grounded, not legally supported or that would not support a "good faith argument" that current law should be modified.

The Rancosky story

This case is about LeAnn Rancosky, a U.S. Postal Service employee who paid for a cancer-specific disability insurance policy as an employee benefit. The policy said that it would waive the requirement to pay premiums if the policyholder became disabled from cancer and unable to work. The duty to pay premiums ceased after 90 days of disability.

After Rancosky became disabled from cancer, her doctor submitted a statement to the insurance company that mistakenly claimed the wrong date of disability as being more than two months later than it actually was. Relying on her belief that the disability date had been correctly submitted, she stopped paying premiums. For two years, she submitted cancer claims under the policy, at which time the insurer said that her policy had lapsed based on the date her doctor had submitted.

A long-term dispute began about whether the coverage had lapsed based on this mistaken onset date. The insured continually asserted the correct disability date and referred the insurer to her physicians for proof. Eventually, the insurance company denied further claims based on its assertion that she had failed to pay premiums.

The claimant requested reconsideration, which was denied, allegedly without any investigation. She brought a bad-faith insurance claim (as well as breach of contract) in state court against the insurance company. The case ended up in the state Supreme Court to decide whether the "motive of self-interest or ill-will" is a requirement for insurance bad faith.

After looking at the history of the Pennsylvania bad-faith statute and court interpretations of it, the Supreme Court concludes that to require proof of self-interest or ill-will would be an "unduly high threshold for bad faith claims." In fact, the court believes that this requirement would make it "highly unlikely" any claimant could win a bad faith case, something the legislature could not have intended.

Anyone struggling with a wrongful denial of a disability insurance claim should speak immediately with an experienced lawyer to understand potential legal remedies.

The lawyers at Dawson & Rosenthal, P.C., with offices in Sedona, Arizona, and San Diego, California, represent people and businesses in bad faith insurance claims.