Rancosky v. Washington National Ins. Co., Aplt.
170 A.3d 364
| Pa. | 2017Background
- LeAnn Rancosky purchased a payroll-deducted supplemental cancer policy with a waiver-of-premium provision excusing premiums after 90 days of disability due to cancer.
- She was hospitalized and diagnosed February 4, 2003, stopped working thereafter, and her employer’s payroll deductions continued through June 24, 2003 (coverage through May 24, 2003 due to arrears).
- A physician’s statement later submitted inaccurately listed her disability start date as April 21, 2003; Conseco accepted that date, concluded the waiver waiting period had not been met, and declared the policy lapsed for nonpayment.
- Rancosky repeatedly authorized Conseco to obtain records and sought waiver status; Conseco did not adequately investigate the date discrepancy and eventually denied further benefits in 2006.
- Rancosky sued for breach of contract and bad faith under 42 Pa.C.S. § 8371; the trial court found Conseco sloppy but ruled for Conseco on bad faith because it required proof of insurer motive (self-interest or ill will).
- The Superior Court vacated the bad-faith verdict and remanded, applying the Terletsky two-prong test; the Pennsylvania Supreme Court granted review on whether Terletsky should be adopted and whether motive is a prerequisite.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper legal test and burden for bad-faith under 42 Pa.C.S. § 8371 | Terletsky two-prong test applies: (1) insurer lacked reasonable basis; (2) insurer knew or recklessly disregarded that lack; proof by clear and convincing evidence | Terletsky should be adopted but require proof of insurer motive (self-interest/ill will) as part of culpability | Court adopts Terletsky two-prong test; plaintiff must prove both prongs by clear and convincing evidence |
| Relevance of insurer’s subjective motive (self-interest or ill-will) | Motive is at most probative of prong two (knowledge/recklessness), not a separate prerequisite | Motive is part of the established meaning of "bad faith" and should be required (esp. tied to punitive damages) | Proof of motive is not required; motive may be probative of the second prong but knowledge or reckless disregard alone suffices |
| Standard for punitive damages under § 8371 | Punitive damages are available under statute without a separate (higher) statutory threshold beyond bad-faith finding | Because punitive damages are penal, a higher threshold (e.g., ill-will) should apply; interpret narrowly | The Court interprets § 8371 as placing punitive damages on the same footing as other remedies; no separate statutory higher threshold imposed, but constitutional limits still apply |
| Application to the record below (did Conseco have reasonable basis?) | Trial court erred by requiring proof of motive; record shows inadequate investigation so lack of reasonable basis | Conseco points to erroneous physician statement as a reasonable basis to deny | Court affirms remand: adopts legal standard and vacates trial court’s bad-faith ruling; remands for the trial court to reconsider both Terletsky prongs afresh |
Key Cases Cited
- Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994) (articulated two-prong test for first-party insurer bad faith)
- D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981) (discussed bad-faith development and prompted legislative response)
- Anderson v. Continental Ins. Co., 271 N.W.2d 368 (Wis. 1978) (formulated absence-of-reasonable-basis plus knowledge/recklessness test and distinguished punitive-damage proof)
- Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973) (recognized first-party bad-faith tort)
- State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (U.S. 2003) (constitutional limiting principles for punitive damages)