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Insurer self-interest, ill-will not prerequisites in Pennsylvania bad faith claims: Court

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In what is being described as a significant victory for policyholders, the Pennsylvania Supreme Court has held that proof of an insurer’s “motive of self-interest or ill-will” is not a prerequisite to prevailing in a bad faith claim.

The case involved the now-deceased LeAnn Rancosky, who had purchased a cancer insurance policy as a supplement to her primary employer-based health insurance, but whose coverage was cut off because of a doctor’s mistaken entry of a date, according to Thursday’s ruling by the Pennsylvania Supreme Court in Matthew Rancosky et al. v. Washington National Insurance Company et al.

The policy, which was issued by Conseco Health Insurance Company, predecessor company to Carmel, Indiana-based Washington National Insurance Co., included a waiver-of-premium provision that excused premium payments in the event Ms. Rancosky became disabled because of cancer.

After Ms. Rancosky became ill with uterine cancer in 2003, she stopped paying premiums on the policy, but because of a physician’s incorrect entry as to when she became disabled, the insurer cancelled her policy for failure to pay premiums.

Ms. Rancosky filed suit, charging the insurer with bad faith. A trial court in Washington, Pennsylvania, ruled in the insurer’s favor. An intermediate court, the Pennsylvania Superior Court, vacated the trial court’s judgment on the bad faith claim and remanded the case for further proceedings.

The Supreme Court’s ruling affirmed the intermediate court’s ruling, with a majority opinion voted on by five judges, plus two affirming opinions. 

“To recover in bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis,” said the ruling.

But, added the ruling, “we hold that proof of an insurance company’s notice of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim” under Pennsylvania law.

“We hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient,” said the decision, in affirming the Superior Court’s ruling and remanding the case for further proceedings.

Michael H. Sampson, a partner with Reed Smith L.L.P. in Pittsburgh, who had submitted an amicus brief in support of plaintiffs in the case, said more than 20 years ago, a state appellate court had reached a similar conclusion, but insurers had continued to argue that the additional burden of proving a motive of self-interest or ill-will was necessary.

This Supreme Court ruling lays that argument to rest, said Mr. Sampson. “The Supreme Court had never addressed the issue until yesterday, and yesterday’s decision confirmed what policyholders in the Commonwealth had understood for years, which is  that to recover under Pennsylvania’s bad faith statute a policyholder does not need to establish or prove that the insurer acted out of ill-will or self-interest.” This would have imposed a burden “that was almost impossible to meet,” he said.

Mr. Sampson also said the Pennsylvania ruling puts the state in line “with the majority of the jurisdictions in the U.S. that have considered this issue.”