Background
LeAnn Rancosky bought a cancer insurance policy in 1992 through payroll deduction while working for the Postal Service. The policy waived premiums once she had been disabled by cancer for more than 90 days in a row.
She was hospitalized on February 4, 2003, diagnosed with ovarian cancer, and never returned to work. Her payroll deductions continued until June 2003 because she had unused leave. When she applied for the premium waiver, the physician’s statement sent to the insurer gave the wrong disability start date: April 21, 2003, instead of February 4. On the wrong date, her last deducted premium did not carry her through the 90-day waiting period.
In 2005 the insurer told her the policy had lapsed in May 2003. It still paid some claims for 2004 and 2005, but in 2006 it denied further benefits for nonpayment of premiums. She had given it eight separate authorizations to contact her doctors, her employer or anyone else who could confirm when her disability began. The insurer never used them. On reconsideration it looked only at its own file and kept relying on the wrong date.
At a non-jury trial on her Section 8371 claim, the trial court found the insurer “sloppy and even negligent” but ruled for it because she had not proved a motive of self-interest or ill will. The Superior Court vacated that ruling, and the insurer appealed. By the time the case reached the Supreme Court, it was being pursued by the administrator of her estate.
What the court held
This was the first time the Pennsylvania Supreme Court addressed the elements of a Section 8371 claim. Section 8371, enacted in 1990 after the Court declined in D’Ambrosio (1981) to create a common-law bad faith action, lets a court award interest at prime plus 3%, punitive damages, and costs and attorney fees when an insurer has acted in bad faith toward its insured. It does not define bad faith.
The Court adopted the two-part test from the Superior Court’s 1994 decision in Terletsky v. Prudential. A plaintiff must prove by clear and convincing evidence that:
- the insurer did not have a reasonable basis for denying benefits under the policy; and
- the insurer knew of or recklessly disregarded its lack of a reasonable basis.
The insurer argued that “bad faith” also required a dishonest motive of self-interest or ill will, relying on a Black’s Law Dictionary definition that Terletsky had quoted. The Court rejected that. Reckless disregard is enough. Evidence of self-interest or ill will can help prove the second element, but a plaintiff does not need it. The Court reasoned that an ill-will requirement would limit recovery to cases with “smoking gun” evidence of personal animus and could write the statute “out of the law altogether.” Both sides agreed that negligence alone is not bad faith and that the first element is objective: would a reasonable insurer have denied the claim on the facts it had?
The Court also found no basis for a higher standard when punitive damages are sought, because the statute lists punitive damages alongside interest, costs and fees on the same showing.
The Court affirmed the Superior Court’s decision to send the bad faith claim back, but said the Superior Court should not have decided the first element itself. The trial court was to apply both parts of the test anew.
Chief Justice Saylor concurred. He agreed that reckless disregard is the threshold, but said punitive damages must still meet the usual constitutional limits on amount. Justice Wecht also concurred, observing that “shoddy claims-handling, lack of diligence, non-responsiveness, haphazard investigation, unreasonable denials, and the like” can all amount to bad faith without any self-interest or ill will.
Why it matters
Rancosky is the governing test for any Section 8371 claim, including one over a denied or delayed life insurance claim. The facts are a familiar pattern in claim disputes. The insurer relied on a paperwork error it could easily have checked, and it never used the authorizations it had been given to check it. Under Rancosky, a beneficiary does not need to prove that a claims handler meant to cause harm. The question is whether the insurer had a reasonable basis for its denial and whether it knew or recklessly disregarded that it did not.
Two practical limits apply. The clear-and-convincing burden is higher than in an ordinary contract case. And a Section 8371 claim must be filed within two years. See our Pennsylvania page for that deadline and for how courts have treated beneficiaries suing under the statute. For how other states handle bad faith, compare Pickett v. Lloyd’s in New Jersey, and see our guide to delayed claims.
Read the opinion
Rancosky v. Washington National Ins. Co., 170 A.3d 364 (Pa. 2017) (CourtListener, with both concurring opinions).
Not legal advice. This page summarizes general rules and the specific statutes cited. Your policy's wording, the state whose law applies, and whether the coverage came through an employer can all change the result. See the disclaimer and editorial policy.