Yesterday, in the case of Matthew Rancosky, et al. v. Washington National Insurance, et al., the Pennsylvania Supreme Court ruled on what qualifies as insurer bad faith. In Rancosky, the decedent plaintiff purchased a cancer insurance policy as a supplement to her health insurance. Unfortunately, some 11 years after first purchasing this insurance, she was diagnosed with cancer. She battled cancer on and off for several years, but ultimately the insurer denied any additional benefits because of a mistake made by plaintiff’s physician as to when her disability began. The insurer, despite having access to forms, never sought to rectify or clarify the mistake although it had access to the information and was advised of the mistake’s existence.

An §8371 PA bad faith claim was ultimately brought. The trial court found for the insurer, but the appellate court found for the plaintiff. The question before the PA Supreme Court was whether under the Terletsky standard, a PA bad faith claim still turns on evidence that (1) 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.

The Supreme Court has answered that question in the affirmative. In answering that question, the Supreme Court made a few interesting observations. First, the Court noted that the first prong of the Terletsky test is an “objective inquiry into whether a reasonable insurer would have denied payment of the claim under the facts and circumstances presented.”

Second, in respect of the second prong of the Terletsky test (and the part of the opinion that will no doubt generate the most public comment), the Court held that “proof of an insurer’s motive of self-interest or ill-will, while potentially probative of the second prong, is not a mandatory prerequisite to bad faith recovery.” In other words, to prove the “reckless disregard” requirement, the insured need not prove almost intentional insurer misconduct.

Third, and perhaps most significantly, and almost as an aside, the PA Supreme Court also noted that “mere negligence is insufficient for a finding of bad faith under Section 8371.” This part of the opinion runs contrary to some recent federal case law that suggests that a bad faith claim can sound in mere negligence.

To us, the decision is good news for the insurance world. While it might have been nice to have the PA Supreme Court hold that intentional misconduct is a condition precedent to a bad faith claim, reconfirmation of the Terletsky standard and a repudiation of the idea that mere negligence can give rise to a bad faith claim are good, solid developments. As the Rolling Stones sang, you can’t always get what you want, but if you try sometimes, you might find, you get what you need.

For more information about this post please e-mail Bob Cosgrove.