DarrasLaw’s experienced New York City Insurance bad faith lawyer vigorously advocates for clients across the country to resolve disability insurance claims that have been wrongfully delayed or denied, potentially in bad faith. The definition of bad faith behavior on the part of an insurer is largely a question of state insurance law.
The legal concept of bad faith
Certain words come to mind when considering the meaning of “bad faith” – unreasonableness, unjustified behavior, malice, neglect, negligence, lack of cooperation, misrepresentation, fraud, oppression – to name a few. Every insurance contract includes the legal duty of the parties to act in good faith and with fair dealing. When an insurer breaches its duty, the insured may have a legal claim for a lawsuit based on bad faith.
Pennsylvania Supreme Court on bad faith
On September 28, 2017, the Supreme Court of Pennsylvania handed down a new decision
that elaborates on the test that must be met in a bad faith case in that state. In Rancosky v. Washington National Insurance Company
, the court clarifies that in Pennsylvania, an insured party asserting a claim under the state’s bad faith statute against an insurance company does not need to prove “ill-will” or “self-dealing” – subjective evidence of the insurer’s motivation – to be successful.
These negative motives are still relevant to the claim, but are not prerequisites to prevailing in court.
Specifically, the Supreme Court reconsiders a legal test articulated in 1994 by a lower Pennsylvania court in Terletsky v. Prudential Property & Cas. Ins. Co. The Supreme Court holds in Rancosky that the Terletsky test appropriately applies in bad faith insurance claims.
To succeed in a bad faith case, the plaintiff must show with “clear and convincing evidence” both of these items:
- Prong 1: There was no reasonable basis to deny the claim under the terms of the policy.
- Prong 2: The insurance company “knew of or recklessly disregarded its lack of a reasonable basis.”
While evidence that the insurer was motivated by ill-will or self-interest is “probative of the second … prong,” showing that level of maliciousness in handling the claim is “not a prerequisite.”
The plaintiff’s story
LeAnn Rancosky worked for the U.S. Postal Service. In 1992, she purchased a cancer insurance policy offered by Conseco Health Insurance Company through her employer. The policy had a “waiver-of-premium provision,” which provided that if she became disabled from cancer, she would not have to pay premiums after 90 days of continuous disability, as long as the disabling illness continued. A doctor’s statement was required to establish the disabilities’ onset date.
More than a decade later, she contracted ovarian cancer that prevented her from returning to work after hospitalization and treatment that began on February 4, 2003. Her payroll deductions paid the policy through May 24, 2003, with the last payment paying retroactively in June 2003.
Rancosky’s doctor completed a statement to establish the date of disability, which she submitted to get her premiums waived after 90 days. Unfortunately, the doctor erroneously noted the onset date as April 21, 2003, rather than the correct date of February 4, 2003. She assumed that her premiums were waived after the payment that kept the policy current to May 24, 2003, more than 90 days after the onset date in February.
For two years, Rancosky’s cancer treatment claims with Conseco paid. In 2005, Conseco gave notice that the policy had lapsed on May 24, 2003, for nonpayment of premiums, counting the 90-day period from the mistaken April date the doctor had submitted.
Reportedly, Rancosky repeatedly tried to confirm whether she was in “waiver-of-premium status” and submitted a total of eight forms and authorizations to contact her doctors, employer or anyone else with information about her disability onset date. In 2006, the insurer stopped paying her cancer treatment claims based on the assertion that the policy had lapsed back in 2003.
She requested reconsideration and Conseco denied the request based on the erroneous doctor’s statement. Apparently, the insurer did not investigate the discrepancy between the date Rancosky said she became disabled and the wrong date on the doctor’s form.
The bad faith lawsuit
Rancosky filed a lawsuit for bad faith and breach of contract against Conseco. She won her breach of contract claim and the jury awarded her more than $30,000. In her bad faith claim, which was before a judge, she asked for interest, punitive damages (meant to punish the defendant) and legal fees under the bad faith statute.
The trial court ruled for the insurance company, saying that she had not met the first prong of the test. The court stated that she failed to show that Conseco had no reasonable basis for denying her claims because she had not shown insurer ill-will or self-interest.
She appealed to the Superior Court, which said that the trial court was wrong because ill-will or self-interest were not required to prove the objective question under the first prong – whether there was a reasonable basis to deny the claim. The court said the “subjective intent of the insurer has no relevance” and that any self-interest or ill-will were only important to the subjective question under the second prong.
The Superior Court said the plaintiff proved the first prong because the insurer did not investigate, which showed a lack of reasonable basis for denial. The trial court was ordered to determine whether the second prong was met. Instead, Conseco asked the Supreme Court to first answer whether self-interest or ill-will were required.
The Supreme Court holding
After a long review of the historical development of bad faith law in other states and in Pennsylvania courts, the Supreme Court concludes that the Pennsylvania statute allows recovery without a showing of insurance company motivation by self-interest or ill-will.
The court says eloquently states, “an ill-will level of culpability would limit recovery in any bad faith claim to the most egregious instances only where the plaintiff uncovers some sort of ‘smoking gun’ evidence indicating personal animus towards the insured. We do not believe that the General Assembly intended to create a standard so stringent that it would be highly unlikely that any plaintiff could prevail …”
The Supreme Court unanimously sent the case back to the trial court to apply the proper standard. The case provides detailed guidance to future litigants in Pennsylvania about what must be proved in a bad faith case.