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Bad Faith Conduct: How Bad is Bad Enough Under PA Law?

Insurance Law360
September 30, 2016

By Christopher L. Troy and Megan E. Shutte
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As has been widely reported, the Pennsylvania Supreme Court recently granted a petition for allowance of appeal in the matter of Rancosky v. Washington Nat. Insurance Co. in order to address a challenge concerning the standard to be applied to claims for bad faith conduct under the Pennsylvania statute. The court framed the issue as follows:

Whether this Court should ratify the requirements of Terletsky v. Prudential Property & Casualty Insurance Co., 437 Pa.Super. 108, 649 A.2d 680 (1994), appeal denied, 540 Pa. 641, 659 A.2d 560 (1995), for establishing insurer bad faith under 42 Pa.C.S. § 8371, and assuming the answer to be in the affirmative, whether the Superior Court erred in holding that the Terletsky factor of a “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith?[1]

It has been more than 25 years since Pennsylvania’s bad faith statute was enacted — sans a definition of “bad faith,” or any method of determining what qualifies as bad faith insurance practice.[2] And it has been more than 20 years since Terletsky, which established both a definition of bad faith and a standard of proof that the vast majority of Pennsylvania courts cite and attempt to apply in deciding bad faith claims.[3] Arguably, a Supreme Court-level review of the standard is overdue.

In anticipation of the court’s decision, this article discusses (1) the Terletsky roots and meaning(s) of the “self-interest or ill will” language that is commonly cited in Pennsylvania bad faith case law; (2) the degree of culpability required under the Pennsylvania bad faith statute, again rooted in Terletsky; and (3) the legal impact — if any — should the court announce that a finding of “self-interest or ill will” is a necessary “third prong” of the Terletsky analysis, versus a mere discretionary consideration.

While difficult to predict with precision, there is reason to believe the court will find the specific phrase “self-interest or ill will” is not a necessary “third prong” of the Terletsky analysis. In so deciding, perhaps the court will offer some clarification as to whether a finding of bad faith in Pennsylvania requires a showing of some degree of malice on the part of an insurer. Because the Terletsky decision relies, at least in part, on Anderson v. Continental Insurance Co., there is a reasonable basis to anticipate that the court might shift the focus to “recklessness”[4] and away from intent-based conduct.

Terletsky — Formulation and Application

In Terletsky, the court, quoting from Black’s Law Dictionary, defined bad faith as:

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.[5]

Following this definition, Terletsky stated that a bad faith plaintiff must prove, by clear and convincing evidence, that:

[1] the insurer did not have (a) reasonable basis for denying benefits under policy, and

[2] the insurer knew or recklessly disregarded its lack of reasonable basis in denying claim.[6]

Tracing Terletsky’s citations, it is apparent that this test is based upon the seminal case of Anderson v. Continental Insurance Co., which identified bad faith as an intentional tort.[7] While many Pennsylvania courts describe Terletsky as a two-pronged test, they also routinely include the Terletsky/Black’s bad faith definition. See, for example, Brown v. Progressive Insurance Co.: “mere negligence or bad judgment is not bad faith…the insurer’s conduct must be such as to ‘import a dishonest purpose.’ In other words, the plaintiff must show that the insurer breached its duty of good faith through some motive of self-interest or ill will.”[8]

Commentators note that requiring some element of malice or ill will derives from an early bad faith standard — one that has evolved towards a “reasonableness” standard in many states.[9] Arguably, the common inclusion of the “self-interest or ill will” language in the litany of Pennsylvania cases addressing insurance bad faith has had the effect of elevating the bad faith standard above mere intentionality and into the realm of malice. (Complicating this consideration is the fact that the bad faith statute includes the potential award of punitive damages, with a higher degree of culpability required in usual cases.)[10] In all such cases, the line between these degrees of intent are not easily dissected. Hence, the need for a critical review by the Pennsylvania Supreme Court in Rancosky.

Is Finding “Motive of Self-Interest or Ill Will” a “Third Prong” of Terletsky?

Pennsylvania courts have occasionally considered whether “self-interest or ill will” is a separate “culpability” prong of the Terletsky test. In Klinger v. State Farm Automobile Insurance Co., a fairly extreme example, the Third Circuit rejected this conceptualization, and went so far as to call the Black’s definition of bad faith “mere dictum.”[11]

Klinger could be read to mean that the Third Circuit does not consider dishonest purpose or ill will to be part of the standard whatsoever — reducing the subjective second prong of Terletsky to the mere question of whether the insurer acted “recklessly.” The Superior Court has strived against this reading. In Green v. United Services Auto Ass’n, the court interpreted Klinger as not “finding that a motive or ill will was irrelevant in determining bad faith.” Per Greene, while “self-interest or ill will” is not a separate “third element,” it is “probative with respect to refusal to pay being frivolous or unfounded, and is probative of whether the insurer knew or recklessly disregarded its lack of reasonable basis in denying a claim.”[12]

In Barry v. Ohio Cas. Group (unreported), the Western District of Pennsylvania analyzed more closely the reasons why “self-interest or ill will” is so often cited in Pennsylvania bad faith jurisprudence. Specifically, the court observed that, “[g]iven the statutory silence as to what constitutes bad faith, many courts subsequently lifted this language from Terletsky without considering any possible tautology.”[13] Explaining further, Barry identified the “vitality” of the “self-interest or ill will” language as due to the “conceptual overlap between notions of self-interest, ill will and, and knowing or reckless disregard; each has become a touchstone for the ‘dishonest purpose’ that is also at the heart of the definition cited in Terletsky[.]”[14]

The third-prong issue ripened nicely in Rancosky, a case involving a deceased plaintiff who was denied cancer benefits by her carrier.[15] The Rancosky court held that the trial court improperly considered “dishonest purpose” and “self-interest or ill will” as part of the analysis of the first prong of the Terletsky test; i.e., that the insurer did not have a dishonest purpose or ill will in denying benefits. The Superior Court considered this analysis to improperly elevate “self-interest or ill will” to third prong status, essentially because it “umbrellaed” the whole analysis.

In sum, no court has affirmatively held that a third Terletsky prong exists. But many, like Greene, have included “self-interest or ill will” as a description of the type of subjective intent that may help inform the second prong of the test, the “recklessness” question. [16]

Pennsylvania on the Spectrum: An Outside Perspective

So where on the national “spectrum” does Pennsylvania’s evolved bad faith standard currently fall? New Jersey provides a helpful outsider’s interpretation of “self-interest or ill will” under Terletsky, and how Pennsylvania’s culpability requirement may compare with other states.

In the “early years” following enactment of § 8371, the Supreme Court of New Jersey viewed Pennsylvania as being on the “high end” of the proof bar, given its “subjective approach to the definition of bad faith.”[17] Pickett v. Lloyds (1993) rejected Pennsylvania’s formulation as extreme, in deciding to adopt what it viewed as the more moderate “fairly debatable” standard under Anderson and Bibeaut v. Hanover Insurance Co.[18] Under Pickett, bad faith is a two-pronged test with a recklessness level of culpability (“reckless…indifference to facts or to proofs submitted by the insured”). In a later case, Polizzi Meats Inc. v. Aetna Life & Cas. Co., the court agreed and stated that Pickett “rejected a standard that would equate “bad faith” with negligence… and a subjective standard that would make “bad faith” depend on a motive of self-interest or ill will… (citing Pennsylvania law).”[19]

Earlier this year, the District of New Jersey performed an interesting intersectional analysis of Pickett and Klinger. In Allegheny Plant Services Inc. v. Carolina Cas. Insurance Co. (unreported), the court compared New Jersey and Pennsylvania bad faith law for choice of law purposes, and held that the two states’ laws do not conflict. The court based its Pennsylvania analysis on Klinger, opining that after the removal of the “extraneous [ill motive] dictum,” Pickett’s “fairly debatable” standard was identical to the two-part Klinger formulation. The court noted, however, that “cases continue to reproduce the quotation from Terletsky in conjunction with the Klinger two-part test, without explaining how they interact.”[20]

By reading Pickett and Allegheny, all that becomes clear is that “self-interest or ill will” either carries heavy weight and significance — or means nothing at all.

Where Are We? Where Might We Be Headed?

As exemplified by these New Jersey cases, the supposed constructional difficulty of Terletsky is that it put a malice definition of bad faith alongside the two part Anderson test, without explaining their interaction. Pennsylvania courts have repeated this construct, whether they’ve “thought about it,” or not.

Again, at the heart of the appeal to the Supreme Court is whether “ill will” means conduct of a type that is more egregious than recklessness. While Klinger could be read to reject the notion of culpability — or, at least, to embrace a watered-down standard — scores of other decisions routinely emphasize the importance of “ill will” to an analysis of Pennsylvania bad faith, either stating or implying that it is something more than mere “recklessness.”[21] As the Superior Court has given heightened meaning to the term “ill will,” it is not a “throwaway” term. At a minimum, it has evolved. We note that the phrase “self-interest or ill will” is a distinctly Pennsylvanian bad faith case phenomenon, and is firmly engrained in Pennsylvania law.[22]

An alternative reading of the bad faith jurisprudence is the view put forth by Barry, which implies that Pennsylvania courts have restated the Terletsky “ill will” language in almost zombielike fashion, without actually considering the import of the quoted words. If the Superior Court has simply repeated the term, without fully explaining how it compares in degree to “recklessness” or “dishonest purpose” (all the “same thing,” per Barry), what can or will the Supreme Court do to clarify? There is no clear answer to this question; this theoretical trap is, in part, the result of a failure over the last two decades to shape or refine the definition of “bad faith.”

Instead of declaring “self-interest or ill will” a required element of proof, the Supreme Court could decide that “ill will” is a discretionary touchstone, one of many behaviors that may demonstrate an insurer “knew or recklessly disregarded its lack of reasonable basis in denying claim.” If it does so, the implication is that our standard would be lowered — i.e., the words must “mean something” for them to be “reduced” to the level of discretion. If the court chooses this route, it should set out additional “discretionary” words and phrases that may also apply to a subjective analysis of reckless intent.[23]

Of course, it may be off-base to suggest that making “self-interest or ill will” a discretionary consideration would lower the standard for finding bad faith. The court could, alternatively, determine that the “recklessly disregarded” prong of the test has always been infused with the need to establish conduct that is “less than” fraud but “greater than” the formulation established in Anderson. In other words, it may hold that ill will is already part of the second prong but that our standard remains elevated.

A final alternative is that the court could hold that Pennsylvania actually has a “reasonable basis” standard, as posited by Allegheny.[24] Given individual states’ evolution of their own bad faith standards — morphing in their own ways from Anderson and Bibeaut through the workings of common law — it may not be sensible to roll back the clock to 1990-1991 and start “fresh.” The Supreme Court’s recent agreement to hear the appeal in Rancosky suggests that it believes that “ill will” is, at a minimum, discretionary and tied up in the second prong of recklessness. Whether the court takes the opportunity to affirm Terletsky and provide a logical, forward-thinking analysis of and support for Pennsylvania’s well-conceived common law is what remains to be seen. These authors remain optimistic.

Authors’ Note: The court’s analysis may be complicated by the fact that the bad faith statute includes punitive damages as a potential remedy for bad faith conduct. 42 Pa. C.S.A. § 8371(2). Under general Pennsylvania law, punitive damages may be awarded if an elevated level of outrageous conduct is proven. Thus, part of the court’s analysis may be to segregate “regular” bad faith from bad faith that qualifies for punitive damages, i.e., is malicious or shows a level of ill will.

—By Christopher L. Troy and Megan E. Shutte, Zelle LLP

Christopher Troy was a partner at Zelle's Philadelphia and New York offices. Megan Shutte is counsel at Zelle's Minneapolis office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Rancosky v. Washington Nat. Insurance Co., No. 124 WAL 2016, (Pa. Aug. 30, 2016).

[2] The bad faith statute provides:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3 percent.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the insurer.

42 Pa. Stat. and Cons. Stat. Ann. § 8371 (West).

[3] Terletsky v. Prudential Property & Casualty Insurance Co., 437 Pa. Super. 108, 649 A.2d 680 (1994).

[4] 85 Wis.2d 675, 271 N.W.2d 368 (1978).

[5] Id. at 125 (citing Black’s Law Dictionary 139 (6th ed. 1990); Rottmund v. Continental Assurance Co., 813 F. Supp. 1104, 1108-09 (E.D. Pa. 1992); Coyne v. Allstate Insurance Co., 771 F. Supp. 673, 677-78 (E.D. Pa. 1991)) (emphasis added).

[6] Id.

[7] Terletsky cites Am. Franklin Life Insurance Co. v. Galati, 776 F. Supp. 1054, 1064 (E.D. Pa. 1991) and D'Ambrosio v. Pennsylvania Nat. Mut. Cas. Insurance Co., 494 Pa. 501, 510–11, 431 A.2d 966, 971 (1981) in stating the two-prong standard. Both cases cite Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978); D’Ambrosio also cites Bibeaut v. Hanover Insurance Co., 417 A.2d 313 (R.I.1980); another seminal case discussing the fairly debatable standard.

[8] Brown v. Progressive Insurance Co., ¶¶ 28-34, 860 A.2d 493, 500-01 (2004) (citing Adamski v. Allstate Insurance Co., 738 A.2d 1033, 1036 (Pa. Super. 1999), appeal denied, 563 Pa. 655, 759 A.2d 381 (2000). See also O’Donnell v. Allstate Insurance Co., 734 A.2d 901, 910 (Pa. Super 1999) (the absence of dishonest purpose or ill will, it is not bad faith for an insurer to aggressively investigate and protect its interests in the course of litigation).

[9] Stephen A. Cozen, Insuring Real Property, §42.01[2] (2008).

[10] As noted by the Bibeault court,

In regard to punitive damages, we would point out that the intent necessary to establish the tort of bad faith is not equivalent to the intent that would sustain an award for punitive damages. Punitive damages may only be awarded when an insurer has acted with malice, wantonness, or willfulness.

Bibeault v. Hanover Insurance Co., 417 A.2d 313, 319 (R.I. 1980) (citation omitted).

[11] Klinger v. State Farm Mut. Auto Insurance Co., 115 F.3d 230, 234 (3d Cir. 1997).

[12] Greene v. United Services Auto Ass’n, 2007 PA Super 344, ¶18, 936 A.2d 1178, 1189 (2007).

[13] Barry v. Ohio Cas. Grp., No. CIV.A.3:04 188, (W.D. Pa. Jan. 12, 2007) (accepting Klinger’s view that “the test for bad faith that Terletsky set forth did not require any motive of self-interest or ill will, but was instead stated more generally.”)

[14] Id. at *7. The “search” for self-interest or ill will “helps preserve the heightened scienter level of §8371.”

[15] Rancosky v. Washington Nat. Insurance Co., 130 A.3d 79 (2015).

[16] See, e.g., Greene v. United Services Auto Ass’n, 936 A.2d 1178, 1187 (Pa. Super. Ct. 2007), infra; Bonenberger v. Nationwide Mut. Insurance Co., 2002 PA Super 14, ¶ 5, 791 A.2d 378, 380 (2002) (to support a bad faith claim, the insurer's conduct must “import [ ] a dishonest purpose, and it must also be shown that “the insurer breached a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will”) (citations omitted).

[17] Pickett v. Lloyd’s, 31 N.J. 457, 472–74, 621 A.2d 445, 453–54 (1993) (citing Coyne v. Allstate Insurance Co., 771 F. Supp. 673 (E.D.Pa.1991)). Terletsky followed Coyne and Rottmund v. Continental in quoting from Black’s; see note 4, supra. Pickett cited Coyne’s bad faith definition taken from Black’s.

Pickett viewed California and Idaho as being at the opposite end of the “spectrum” from Pennsylvania, Id. (citing Lunsford v. American Guar. & Liab. Insurance Co., 775 F.Supp. 1574, 1583 (N.D.Cal.1991); State Farm Fire & Casualty Co. v. Trumble, 663 F.Supp. 317, 321 (D. Idaho 1987) (in Idaho “an inference of bad faith can almost always be suggested by the merest of showing that the insurer's conclusions …are or may be incorrect or that the insured's investigation was not complete in all details”).

[18] Per Anderson,

To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. “Bad faith” by definition cannot be unintentional. “Bad faith” is defined as “Deceit; duplicity; insincerity.” American Heritage Dictionary of the English Language (1969), p. 471. The same dictionary defines “deceit” as a “strategem; trick; wile” (p. 342), and duplicity as “Deliberate deceptiveness in behavior or speech.” (P. 405).

Anderson v. Cont'l Ins. Co., 85 Wis. 2d 675, 691–93, 271 N.W.2d 368, 376–77 (1978).

[19] 931 F. Supp. 328, 334 (D.N.J. 1996) (emphasis added).

[20] 2016 WL 1070671, *4, n. 2. (D.N.J. March 17, 2016). Allegheny interpreted the conflict perceived by Pickett as false. It admitted, however, that Klinger is “unstable precedent in the sense that it interprets state law and could be undermined by subsequent decisions of the Pennsylvania courts. But unless and until that happens, it is binding on me.”

[21] Based on a simple Westlaw search, there are hundreds of Pennsylvania state and federal cases that use the term “self-interest or ill will” in the context of bad faith.

On multiple occasions the Superior Court has said, quite explicitly, that “the insurer's conduct must be such as to ‘import a dishonest purpose.’ In other words, the plaintiff must show that the insurer breached its duty of good faith through some motive of self-interest or ill-will.” Brown v. Progressive Insurance Co., 2004 PA Super 346, ¶ 34, 860 A.2d 493, 501 (2004).

[22] Few other state courts make regular reference to Black’s definition in analyzing their own bad faith standard. Alabama is an outlier; it combined the fairly debatable standard with ill will language as follows.

That is, when the claim is not fairly debatable, refusal to pay will be bad faith and, under appropriate facts, give rise to an action for tortious refusal to honor the claim. Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978). When a claim is ‘fairly debatable,’ the insurer is entitled to debate it, whether the debate concerns a matter of fact or law. ‘Coupled with actual knowledge of that fact’ implies conscious doing of wrong. Bad faith, then, is not simply bad judgment or negligence. It imports a dishonest purpose and means a breach of known duty, i.e., good faith and fair dealing, through some motive of self-interest or ill will.

Gulf Atlantic Life Insurance. Co. v. Barnes, 405 So.2d 916, 924 (Ala.1981) (citations omitted).

[23] For example, Anderson provided several alternative definitions of bad faith. See note xvi, supra.

[24] 2016 WL 1070671, at *5. 

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