The Pennsylvania Supreme Court Considers Whether to Add a “Bad Motive” Element to Its Bad Faith Standard

Since 1995, the seminal Terletsky decision governed “bad faith” liability under Pennsylvania law, which requires clear and convincing evidence of two elements: (1) the insurer’s lack of a reasonable basis for denying benefits under the policy, and (2) the insurer’s knowledge or disregard of the lack of reasonable basis.¹  Twenty-two years later, the Terletsky standard is now under reconsideration by the Pennsylvania Supreme Court, which granted review in August 2016 to consider whether “motive of self-interest or ill-will” should be added as a “mandatory prerequisite” to proving bad faith as opposed to “merely a discretionary consideration” under the second element, as applied by the appellate court below.²

With the appellate briefs and several amicus curiae briefs filed, and oral arguments from April 4, 2017, submitted, this issue is now under submission with the Court to determine the fate of the bad faith standard under Terletsky. Because adding “motive of self-interest or ill-will” as an element will heighten any insured’s burden of proof, insureds and insurers alike eagerly await the Court’s decision.

In Terletsky, the insureds, who were involved in a motor vehicle accident with an uninsured motorist, filed a lawsuit against their insurer for bad faith after the latter made low settlement offers on the insureds’ claims, among other things.  The trial court entered judgment in favor of the insureds. However, the appellate court reversed, holding that the insurer “had a reasonable basis” for providing the low settlement offers, which took into account the probable liability of each driver, the credibility of witnesses, and other factors.

The Terletsky appellate court then set forth the two elements for proving bad faith: (1) “that the defendant did not have a reasonable basis for denying benefits under the policy,” and (2) “that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim.”³  Both elements require “clear and convincing evidence.” The Court also provided a definition of “bad faith,” as provided by Black’s Law Dictionary, which is still cited by many Pennsylvania courts today alongside the Terletsky test:

“Bad faith” on part of insurer is any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.       

Most recently, in Rancosky, the insured sued her insurer for bad faith after it denied her coverage for losses arising from her diagnosis with ovarian cancer.⁴  The insurer not only delayed its investigation of the insured’s claim but also failed to conduct a thorough or otherwise proper investigation.  Following a bench trial, the trial court entered judgment in favor of the insurer, given that the insured “failed to show by clear and convincing evidence that [the insurer] did not have a reasonable basis for denying benefit under the cancer policy.”  The trial court reached its conclusion, at least in part, based on the fact that insured “failed to prove that [the insurer] had a dishonest purpose” through “evidence of motive of self-interest or ill-will against [the insured].” 

The appellate court reversed the judgment, holding that a “dishonest purpose” or “motive of self-interest or ill will” is not part of the first element or otherwise a separate third element for establishing bad faith.  Rather, it is a factor that “may be considered in determining the second prong of the test.”  The appellate court concluded that “the competent evidence of record clearly and convincingly established that [the insurer] lacked a reasonable basis to deny [the insured] benefits under the Cancer Policy.”  It remanded the case to the trial court to determine “whether the evidence of record support[ed] a finding regarding the second prong” of the bad faith test.

On August 30, 2016, the Supreme Court granted the insured’s appeal to settle the ongoing dispute.  As a result, several third parties have filed amicus curiae briefs in favor of and against the issue.  For example, the Pennsylvania Defense Institute filed a brief in support of adding the third element, stating that bad faith cannot be established with clear and convincing evidence in general without evidence of self-interest or ill will.  Making this requirement explicit simply gives bad faith the “peculiar and appropriate meaning” and attention it deserves.  Moreover, since punitive damages are an “extreme” remedy, they should be reserved for the select cases warranting punishment.  The Pennsylvania Association for Justice, the Insurance Federation of Pennsylvania, Property & Casualty Insurers Association of America, and the Mine Safety Appliances Company, LLC also have filed briefs and voiced their opinions on the issue.

Whether the Supreme Court will ultimately raise the burden of proof for bad faith is unknown.  Meanwhile, industry professionals are heavily weighing in on both sides of the issue.  Only time will tell, as both insurers and the insured alike anxiously await the Court’s decision.