The Pennsylvania Supreme Court issued an opinion in the case of Rancosky v. Washington National Insurance Company No. 28 WAP 2016 in which it clarified a longstanding controversy regarding evidence necessary to establish statutory bad faith. In this decision issued September 28, the Supreme Court affirmed an earlier decision in the Pennsylvania Superior Court holding that it was not necessary for policyholders to prove that the insurance company had a motive of self-interest or ill will in order to establish a claim for statutory bad faith.
When statutory bad faith was established by the legislature approximately 25 years ago, the act did not provide a clear definition of bad faith or specifics on proof necessary by the plaintiffs to establish bad faith. This was left to the courts to determine. The Superior Court decision of Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. App. 1994) set forth a two-prong test for establishing bad faith. The Court held that the plaintiff/policyholder must establish by clear and convincing evidence that (1) the insurer did not have a reasonable basis for denying benefits under the policy and (2) the insurer knew of or recklessly disregarded its lack of a reasonable basis. The Court, in Terletsky, cited the Black's Law Dictionary definition of bad faith as involving self-interest or ill will. As a result, some courts have applied a standard that evidence of a motive of self-interest or ill will is necessary to establish statutory bad faith.
At the trial level this case was bifurcated. A breach of contract claim was tried before a jury, with the jury finding in favor of the policyholder. In State Court, under the statute bad faith is tried as a bench trial. After the jury trial, a non-jury trial was held on bad faith. The Judge entered a verdict in favor of the insurer. The Superior Court reversed the trial court finding in favor of the insurer on bad faith.
The Superior Court found that the Terletsky decision did not establish a third prong for proving bad faith of a dishonest purpose of motive of self-interest or ill will. A new trial was remanded on bad faith. With this recent decision, the Supreme Court affirmed the decision of the Superior Court.
Comment: With the Rancosky decision, the Supreme Court clarifies that self-interest or ill will can be used to establish the second prong of the Terletsky test, but is not a necessary element.
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