                                    [J-27-2017]
                      IN THE SUPREME COURT OF PENNSYLVANIA
                                 WESTERN DISTRICT

     SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.


MATTHEW RANCOSKY,                                 :   No. 28 WAP 2016
ADMINISTRATOR DBN OF THE ESTATE                   :
OF LEANN RANCOSKY AND MATTHEW                     :   Appeal from the Order of the Superior
RANCOSKY, EXECUTOR OF THE                         :   Court entered December 16, 2015 at
ESTATE OF MARTIN L. RANCOSKY,                     :   No. 1282 WDA 2014, affirming in part
                                                  :   and vacating in part the Judgment of the
                       Appellee                   :   Court of Common Pleas of Washington
                                                  :   County entered August 1, 2014, at No.
                                                  :   2008-11797, and remanding.
                v.                                :
                                                  :   ARGUED: April 4, 2017
                                                  :
WASHINGTON NATIONAL INSURANCE                     :
COMPANY, AS SUCCESSOR BY                          :
MERGER TO CONSECO HEALTH                          :
INSURANCE COMPANY, FORMERLY                       :
KNOWN AS CAPITAL AMERICAN LIFE                    :
INSURANCE COMPANY,                                :
                                                  :
                       Appellant                  :


                                            OPINION


JUSTICE BAER                                          DECIDED: SEPTEMBER 28, 2017
         In this discretionary appeal, we consider, for the first time, the elements of a bad

faith insurance claim brought pursuant to Pennsylvania’s bad faith statute found at 42

Pa.C.S. § 8371.1 For the reasons set forth below, we adopt the two-part test articulated



1
    Section 8371 provides, in full, as follows:
         § 8371. Actions on insurance policies
(continued…)
by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680

(Pa. Super. 1994), which provides that, in order to recover in a 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. Additionally, we hold that proof

of an insurance company’s motive of self-interest or ill-will is not a prerequisite to

prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such

evidence is probative of the second Terletsky prong, 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. Therefore, we affirm the judgment of the Superior Court,

which partially vacated the trial court’s judgment and remanded for further proceedings

on Appellee’s bad faith claim.

                                    I. Background2




(…continued)
     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%.
         (2) Award punitive damages against the insurer.
         (3) Assess court costs and attorney fees against the insurer.
42 Pa.C.S. § 8371.
2
  The lengthy factual and procedural history underlying the instant dispute involves
several interrelated claims and parties not relevant to the narrow question upon which
review was granted. Accordingly, we recite only those facts necessary for resolution of
the discrete legal issue currently before this Court.



                                     [J-27-2017] - 2
       In March of 1992, while working for the United States Postal Service (“USPS”)

Appellee LeAnn Rancosky (“Rancosky”) purchased a cancer insurance policy as a

supplement to her primary employer-based health insurance. The cancer policy was

issued by Appellant Conseco Health Insurance Company (“Conseco”).3 To pay for the

policy, Rancosky’s employer automatically deducted bi-weekly payments of $22.00 from

her paycheck.

       Of particular importance to the case sub judice, the policy contained a waiver-of-

premium provision, which excused premium payments in the event Rancosky became

disabled due to cancer. The waiver-of-premium provision read, in relevant part, as

follows:

       Subject to the conditions of this policy, you will not be required to make
       premium payments if:

              you are diagnosed as having cancer more than 30 days after the
               Effective Date; and

              you are disabled due to cancer for a continuous period of more
               than 90 consecutive days beginning on or after the date of
               diagnosis.

       After it has been determined, as shown below that you are disabled, we
       will waive your premium payments for the period of disability, except those
       during the first 90 days of such period.

       PROOF OF DISABILITY

       You must send us a physician’s statement containing the following:

3
   Washington National Insurance Company, Conseco’s successor in interest, was
ultimately substituted as the defendant in this matter. However, because the lower
courts and the parties have referred to “Conseco” throughout these proceedings, we will
continue the convention of referring to Appellant as “Conseco.” Additionally, though
Rancosky died during the pendency of the instant litigation and her estate was
substituted as plaintiff in this matter, for ease of discussion we will continue to refer to
Appellee as “Rancosky.”



                                      [J-27-2017] - 3
            the date you were diagnosed as having cancer;

            the date you were disabled due to such cancer; and,

            the expected date, if any, such disability will end.
Plaintiff’s Complaint In Civil Action, Exhibit 5, Conseco Cancer Policy at Section 5

(Reproduced Record (“R.R.”) Vol. I at 115a). Additionally, Rancosky’s policy provided

that “disabled” means that:

            for the first 24 months you are unable to perform all the
             substantial and material duties of your regular occupation; and,

      After 24 months, “disabled” means that:

            you are unable to work at any job for which you are qualified by
             reason of education, training or experience;

            you are not working at any job for pay or benefits; and

            you are under the care of a physician for the treatment of cancer.
Plaintiff’s Complaint In Civil Action, Exhibit 5, Conseco Cancer Policy at Section 1 (R.R.

Vol. I at 109a).    Thus, pursuant to the above provisions, a policyholder who is

“disabled,” in that she is unable to work due to cancer, is excused from paying

premiums on her policy following ninety days of such disability.

      On February 4, 2003, Rancosky was admitted to the hospital due to intense

abdominal pain.    She was ultimately diagnosed with ovarian cancer and, over the

subsequent months, underwent surgery and chemotherapy. Though, Rancosky did not

return to her job with USPS following her February 4, 2003, hospital admission, she

remained on her employer’s payroll for several months because she had accrued

unused vacation and sick days. Consequently, Conseco continued to receive payroll-

deducted premiums from Rancosky until June 24, 2003, when Rancosky went on

disability retirement. As the premium payments were made in arrears, and therefore




                                      [J-27-2017] - 4
paid for the prior month’s coverage, the final premium payment extended coverage

under her policy to May 24, 2003.4

      Beginning in April 2003, Rancosky made several attempts to obtain waiver-of-

premium status, claiming that she was unable to work and was thus “disabled” under

her policy since her admission to the hospital in February of 2003. Upon Conseco’s

request, on November 18, 2003, she submitted waiver-of-premium forms along with the

required physician statement.    Unbeknownst to Rancosky, however, the submitted

physician’s statement inaccurately specified her date of disability as beginning on

April 21, 2003, rather than on February 4, 2003.5 Believing that the premiums had been

waived and that no further premiums were due on the policy because of her disability

from cancer, Rancosky’s final premium payment came from her June 24, 2003, payroll-

deducted premium. Thus, over the next two years, as Rancosky experienced several

recurrences of her cancer, she continued to submit claims to Conseco.




4
  Utilizing February 4, 2003 as the inception of Rancosky’s disability, the trial court
determined that, by the time her final payroll-deducted premium was received by
Conseco, the ninety-day waiting period under the waiver-of-premium provision expired.
Accordingly, Rancosky did not pay any premiums following her final payroll-deducted
premium on June 24 2003, believing that she was on waiver-of-premium status
pursuant to her policy. As will be discussed in further detail infra, however, Conseco
erroneously determined that her disability start date was April 21, 2003, and deemed
her policy to have lapsed as of May, 24 2003, based upon her final premium payment of
June 24, 2003, for non-payment of premiums within the ninety-day waiting period of the
waiver-of-premium provision.
5
  Conseco did not receive this documentation until July of 2006. It is unclear, from the
available record, why Conseco did not receive this correspondence until several years
after Rancosky sent it. As will be discussed in further detail infra, the Superior Court
ultimately concluded that Conseco lacked a reasonable basis for denying Rancosky
benefits due to its failure to investigate adequately the discrepancy between the actual
start date of her disability and the erroneous start date indicated on the physician’s
statement.



                                     [J-27-2017] - 5
      In early 2005, during an audit of its payroll-deducted premium policies, Conseco

discovered, apparently for the first time, that Rancosky ceased making premium

payments on her policy in June of 2003. Despite Rancosky’s prior submissions and

inquiries regarding her waiver-of-premium status in which she indicated the start date of

her disability as February 4, 2003, and authorized Conseco to obtain information from

her physicians and employer about her disability, Conseco informed Rancosky on

January 28, 2005, that it deemed her policy to have lapsed as of May 24, 2003, the date

to which her final payroll-deducted premium payment extended her coverage. Over the

following months and years, Rancosky had an ongoing disagreement with Conseco as

to whether she was on waiver-of-premium status, and thus entitled to continued

coverage under her cancer policy.       During this time, Rancosky, again reflecting

February 4, 2003, as her disability start date, submitted numerous claim forms, waiver-

of-premium requests, and authorizations permitting Conseco to contact her physicians,

employer, or anyone else who might have information regarding her disability start date.

Notwithstanding its contention that her policy had lapsed in May of 2003, Conseco paid

for cancer related treatment Rancosky received in 2004 and 2005.

      In 2006, however, following yet another recurrence of her cancer, Conseco

denied Rancosky’s claim for further benefits based upon her failure to pay premiums. In

response, Rancosky sought reconsideration of Conseco’s denial of benefits, again

reiterating her oft-stated assertion that she was excused from paying premiums past her

final payroll-deducted premium on June 24, 2003, because she was disabled within the

meaning of her policy beginning on February 4, 2003, and made all required premium

payments throughout the ninety-day waiting period of the waiver-of-premium provision.

In evaluating Rancosky’s reconsideration request, however, Conseco’s review was

limited to its in-house documentation, which at that time included, among voluminous




                                     [J-27-2017] - 6
and inconsistent filings, the physician’s statement that erroneously indicated the start

date of her disability as April 21, 2003.

       Notwithstanding Rancosky’s eight separate authorizations permitting Conseco to

contact her employer or any other person with information as to the actual start date of

her disability, Conseco did not undertake any investigation to clarify the discrepancy

between Rancosky’s claimed disability date of February 4, 2003, and the physician’s

statement erroneously indicating April 21, 2003, as the start date of disability. Instead, it

merely accepted the inaccurate information in her physician’s statement that the start

date of her disability was April 21, 2003, and took the position that her policy lapsed due

to non-payment of premiums prior to the ninety-day waiting period under the waiver-of-

premium provision. Consequently, it denied her request for reconsideration.6

       Rancosky subsequently brought suit against Conseco, alleging, inter alia, breach

of contract and bad faith pursuant to Section 8371. In her bad faith claim, Rancosky

sought interest on her claim, punitive damages, and attorney’s fees, as provided in

Section 8371. The contract and bad faith claims were bifurcated, and Rancosky’s bad

faith claim eventually proceeded to a non-jury trial.7 Though the trial court found that

6
  Conseco contends that the erroneous information from Rancosky’s physicians
regarding the start date of her disability supports its argument that it had a reasonable
basis for denying her claim. Rancosky, in turn, argues that Conseco lacked a
reasonable basis for its actions because it failed to conduct an adequate investigation to
resolve the discrepancy between the erroneous physician’s statement and her oft-stated
assertion that she was disabled as of February 4, 2003, notwithstanding her eight
separate authorizations permitting Conseco to contact her physicians and employer
regarding her disability. However, as will be discussed in further detail infra, our
analysis focuses on the legal test for bad faith claims under Section 8371 only and we
remand for further proceedings so that the trial court can consider anew whether that
test has been met based upon the existing record.
7
  A jury found in favor of Rancosky on her breach of contract claim and awarded
damages in the amount of $31,144.50. There is no issue regarding Rancosky’s
contract claim currently before this Court.



                                       [J-27-2017] - 7
Conseco was “sloppy and even negligent” in its handling of Rancosky’s claim, it

ultimately found in favor of Conseco on the bad faith claim.            Trial Court Verdict,

7/3/2014, at 1 (R.R. Vol. VII at 2500a). In particular, the trial court concluded that

Rancosky failed to demonstrate that Conseco lacked a reasonable basis for denying

benefits under the cancer policy, i.e., the first prong of the Terletsky test, because she

did not prove that the insurer acted out of “some motive or self-interest or ill will.” Trial

Court Verdict, 7/3/2014, at 1 (R.R. Vol. VII at 2500a).         Accordingly, the trial court

returned a verdict in favor Conseco on Rancosky’s bad faith claim.

       Rancosky filed a post-trial motion in which she, inter alia, requested that the trial

court vacate its verdict in favor of Conseco and enter judgment in her favor. Following

denial of Rancosky’s post-trial motions, the trial court entered judgment on both the

contract and bad faith claims. Rancosky appealed to the Superior Court, arguing, inter

alia, that the trial court misapplied the well-settled test for bad faith claims under Section

8371, namely, (1) that the defendant did not have a reasonable basis for denying

benefits under the policy, and (2) that the defendant knew or recklessly disregarded its

lack of a reasonable basis in denying the claim.         See Terletsky, 649 A.2d at 689.

According to Rancosky, the trial court erred as a matter of law by requiring proof that

Conseco acted out of a motive of self-interest or ill-will. In Rancosky’s view, the first

Terletsky prong is an objective inquiry into whether a reasonable insurer would have

denied payment of the claim under the facts and circumstances presented. She further

argued that, to the extent the insurer’s subjective motivation has any relevance, it is

merely potentially probative of the second Terletsky prong, rather than a requirement for

prevailing in a bad faith claim in toto under Section 8371. Thus, Rancosky maintained

that the trial court erred in concluding that she failed to satisfy the first Terletsky prong




                                       [J-27-2017] - 8
based upon her failure to demonstrate that Conseco denied her benefits due to its

subjective motive of self-interest or ill-will.

       In a published opinion, a three judge panel of the Superior Court vacated the trial

court’s judgment as to Rancosky’s bad faith claim and remanded for further proceedings

on that claim. Rancosky v. Washington Nat’l Ins. Co., 130 A.3d 79 (Pa. Super. 2015).

The Superior Court agreed with Rancosky that the first prong of the Terletsky test,

whether the insurer lacked a reasonable basis for denying benefits, is an objective

inquiry and that the subjective intent of the insurer has no relevance thereunder.8 Thus,

it held that the trial court erred as a matter of law in denying Rancosky’s claim under the

reasonable basis prong of the Terletsky test premised upon the court’s holding that she

failed to demonstrate self-interest or ill-will on the part of Conseco.

       Consistent with its prior precedent, the Superior Court further held that, to the

extent an insurer’s motive of self-interest or ill-will is relevant in a bad faith claim, it is

merely probative of the second Terletsky prong, rather than a prerequisite to

succeeding altogether. See, e.g., Greene v. United Services Auto. Ass’n, 936 A.2d

1178, 1191 (Pa. Super. 2007) (holding “that the motive of self-interest or ill will level of

culpability is not a third element required for a finding of bad faith, but it is probative of

the second element identified in Terletsky, i.e., the insurer knew or recklessly

disregarded its lack of reasonable basis in denying the claim”) (citation and internal

quotations omitted), appeal denied, 954 A.2d 577 (Pa. 2008). Thus, the Superior Court

reiterated the Terletsky framework for analyzing bad faith claims under Section 8371



8
  As will be discussed in further detail infra, in its brief to this Court Conseco
acknowledges that the first prong of the Terletsky test is an objective inquiry but
maintains that proof of the insurer’s subjectively improper motive is a prerequisite to
prevailing in a bad faith action under Section 8371.



                                         [J-27-2017] - 9
and held that proof of self-interest or ill-will, while potentially probative of the second

prong, is not required under either prong of the Terletsky test.

       Next, the Superior Court determined, based upon its independent review of the

record, that the evidence did not support the trial court’s determination that Conseco

had a reasonable basis for denying Rancosky benefits under her cancer policy. The

Superior Court believed it could make such a determination based upon the factual

findings and credibility determinations made by the trial court in its Pa.R.A.P. 1925(a)

opinion. The Superior Court concluded that if Conseco had conducted any meaningful

investigation into the starting date of Rancosky’s cancer disability during its review of

Rancosky’s reconsideration request, it would have discovered that she was unable to

work due to her cancer diagnosis beginning on February 4, 2003, and that she made

the required premium payments during the ninety-day waiting period of her cancer

policy. Thus, the court opined, Conseco would have understood that her failure to pay

premiums after her final payroll-deducted premium on June 24, 2003, was excused

pursuant to the waiver-of-premium provision. Because Conseco failed to conduct any

such investigation and merely accepted the incorrect information from Rancosky’s

physicians that her disability began on April 21, 2003, the Superior Court determined

that Conseco lacked a reasonable basis for denying Rancosky benefits pursuant to the

first prong of the Terletsky test.

       As to the second prong of the Terletsky test, whether Conseco knew or

recklessly disregarded its lack of a reasonable basis in denying benefits, the Superior

Court remanded to the trial court to make a determination in the first instance.

Accordingly, it vacated the trial court’s judgment as to Rancosky’s bad faith claim and

remanded for further proceedings.




                                     [J-27-2017] - 10
       This Court subsequently granted Conseco’s petition for allowance of appeal

limited to the following question, as phrased by Conseco:

       Whether this Court should ratify the requirements of Terletsky v.
       Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super.
       1994), appeal denied, 659 A.2d 560 (Pa. 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 Terketsky[’s]
       factor of a “motive of self-interest or ill-will” is merely a discretionary
       consideration rather than a mandatory prerequisite to proving bad faith?

Rancosky v. Washington Nat’l Ins. Co., 144 A.3d 926 (Pa. 2016).9
                                          II. Analysis

       In order to answer the question presented in this appeal, an issue of first

impression for this Court, we must interpret Pennsylvania’s bad faith insurance statute

at 42 Pa.C.S. § 8371, which provides, in full, as follows:

       § 8371. Actions on insurance policies

       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%.
         (2) Award punitive damages against the insurer.
         (3) Assess court costs and attorney fees against the insurer.

42 Pa.C.S. § 8371.

       Issues of statutory interpretation present this Court with questions of law;

accordingly, our standard of review is de novo and our scope of review is plenary. See

9
  The Superior Court further held that Rancosky’s bad faith claim is not time-barred
under the applicable statute of limitations. This Court did not ultimately grant further
review of the statute of limitations issue raised by Conseco. Thus, it is finally decided in
favor of Rancosky.



                                     [J-27-2017] - 11
Pennsylvania Pub. Util. Comm’n v. Andrew Seder/The Times Leader, 139 A.3d 165,

172 (Pa. 2016). This Court’s interpretation of Section 8371, and indeed of all statutes,

is guided by the Statutory Construction Act, 1 Pa.C.S. §§ 1501-1991. Pursuant to the

Statutory Construction Act, the object of all statutory construction is to ascertain and

effectuate the General Assembly’s intention. 1 Pa.C.S. § 1921(a). When the words of a

statute are clear and free from ambiguity, the letter of the statute is not to be

disregarded under the pretext of pursuing its spirit. 1 Pa.C.S. § 1921(b). However,

when the words of a statute are not explicit, the General Assembly’s intent may be

ascertained by considering matters other than the statutory language, such as the

occasion and necessity for the statute, the circumstances of the statute’s enactment,

the object the statute seeks to attain, and the consequences of a particular

interpretation. 1 Pa.C.S. § 1921(c). Moreover, technical words and phrases that have

acquired a peculiar and appropriate meaning shall be construed according to such

peculiar and appropriate meaning. 1 Pa.C.S. § 1903(a).

      Critically, when read in a vacuum, the plain language of Section 8371 provides

little guidance in answering the discrete legal question raised herein, namely, the level

of proof required to prevail in a bad faith claim. In enacting Section 8371, the General

Assembly did not define “bad faith” or otherwise set forth the manner in which a party

must prove liability. Therefore, in order to understand the meaning of “bad faith,” and

thus ascertain and effectuate the intent of the General Assembly in enacting

Section 8371, we must utilize the additional tools of statutory construction outlined

above. In particular, we look to the occasion and necessity for the statute and the

circumstances of the statute’s enactment. 1 Pa.C.S. § 1921(c).

      In this regard, we observe that Section 8371 is widely considered a delayed

legislative response to this Court’s 1981 decision in D’Ambrosio v. Pennsylvania Nat’l




                                    [J-27-2017] - 12
Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981), in which we declined to recognize the

common law right of action that had been adopted by a number of courts throughout the

United States at that time related to an insurer’s failure to act in good faith when

refusing to cover a loss under an insured’s policy. See id. at 968-70 (opining that it is

the role of the General Assembly, rather than the courts, to create a cause of action for

bad faith conduct); see also Mishoe v. Erie Ins. Co., 824 A.2d 1153, 1160-61 (Pa. 2003)

(observing that Section 8371 was a delayed legislative response to D’Ambrosio).

Accordingly, consideration of the circumstances leading to the enactment of Section

8371 necessarily requires that we analyze the historical development of bad faith claims

in the United States generally, and the D’Ambrosio Court’s understanding of such

claims in particular.

         In 1973, the Supreme Court of California became the first court in the United

States to recognize a right of action, sounding in tort, for bad faith denial of insurance

policy benefits. Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973). Specifically,

the California high court held that when an insurer “fails to deal fairly and in good faith

with its insured by refusing, without proper cause, to compensate its insured for a loss

covered by the policy, such conduct may give rise to a cause of action in tort for breach

of implied covenant of good faith and fair dealing.” Id. at 1037. Thereafter, a number of

state courts throughout the country recognized the Gruenberg court’s common law

remedy for insureds claiming bad faith. See, e.g., Grand Sheet Metal Products Co. v.

Protection Mut. Ins. Co., 375 A.2d 428 (Conn. Super. 1977); Chavez v. Chenoweth, 553

P.2d 703 (N.M. App. 1976); Christian v. American Assurance Co., 577 P.2d 899 (Okla.

1977).

         Of particular importance in the development of the law in this area, the Supreme

Court of Wisconsin, after expressly adopting the Gruenberg right of action for bad faith,




                                     [J-27-2017] - 13
expanded upon it by outlining the facts one must allege to support such a claim.

Anderson v. Continental Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978).          Specifically, the

Anderson Court held that, in order to succeed in an action 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.” Id. The Anderson Court further held that while mere knowledge or

recklessness is sufficient to demonstrate bad faith liability in general, additional proof of

ill-will is required if the plaintiff specifically seeks punitive damages for the established

bad faith conduct. Id. at 379 (stating “[w]e do not conclude, however, that the proof of a

bad faith cause of action necessarily makes punitive damages appropriate” and that

punitive damages requires “something in the nature of special-ill-will”).

       Gruenberg and Anderson were both recognized as seminal cases in the

development of bad faith claims in the United States by the time this Court was

presented with the opportunity to acknowledge the judicially-created right of action in

1981. See Richard L. McMonigle, Jr., Insurance Bad Faith in Pennsylvania § 2:05 at

20-21 (8th ed. 2007) (stating that “[t]he decisions in Gruenberg and Anderson judicially

created a tort of first party bad faith based upon the covenant of good faith and fair

dealing implied in every insurance contract”). In D’Ambrosio, this Court was expressly

urged by the plaintiff to adopt the right of action first recognized in Gruenberg. Id. at

968. We declined to do so, however, concluding that the General Assembly, rather than

the courts, should create a cause of action for bad faith conduct in denying benefits

under an insurance policy. Id. at 970. In describing the right of action it ultimately

declined to recognize, the D’Ambrosio Court cited to both Gruenberg and Anderson and

specifically quoted the above language from Anderson. See D’Ambrosio, 431 A.2d at

971 (stating that “those jurisdictions which have recognized a cause of action for bad




                                      [J-27-2017] - 14
faith conduct have cautioned . . . that ‘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’”) (quoting Anderson,

271 N.W. 2d at 376). Though punitive damages were specifically sought by the plaintiff

in D’Ambrosio, unlike the Wisconsin high court in Anderson, the D’Ambrosio Court

made no distinction between bad faith liability generally and bad faith claims seeking

punitive damages.

       Responding to the D’Ambrosio Court’s invitation to create a right of action for bad

faith, the General Assembly enacted Section 8371 in 1990. See Mishoe, 824 A.2d at

1160-61 (observing that Section 8371 was a delayed legislative response to

D’Ambrosio). Section 8371 provides that if a court finds “bad faith,” it may take all of the

following actions: award interest on the claim; award punitive damages against the

insurer; assess court costs and attorney fees against the insurer. 42 Pa.C.S. § 8371

(supra, at pg. 10-11). Section 8371 does not define “bad faith,” set forth the manner in

which plaintiffs must prove bad faith, or distinguish the manner of proof for punitive

damages from other bad faith damages.         To the contrary, Pennsylvania’s bad faith

statute provides for the award of interest, attorney’s fees, and punitive damages upon a

showing of bad faith.

       As noted, this Court has not had occasion to consider the precise contours of

bad faith claims arising under Section 8371 since its enactment.10 Consequently, the

10
   We observe, however, that this Court has considered other aspects of claims brought
pursuant to Section 8371. See Toy, 928 A.2d at 200 (holding that the General
Assembly did not intend to give relief to an insured who alleged that his insurer engaged
in unfair or deceptive practices in soliciting the purchase of an insurance policy when it
enacted Section 8371); Birth Center v. St. Paul Companies, Inc., 787 A.2d 376 (Pa.
2001) (holding that in creating additional remedies for bad faith under Section 8371, the
General Assembly did not intend to prohibit an award of compensatory contractual
damages that were otherwise available at common law); Mishoe, 824 A.2d at 1160
(continued…)

                                     [J-27-2017] - 15
Superior Court’s 1994 decision in Terletsky has been the preeminent ruling on this

issue. There, the Superior Court observed that in the insurance context, bad faith had

acquired a particular meaning, citing the following definition from the 6th edition of

Black’s Law Dictionary:

       “Bad faith” on part of the 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 of or ill will; mere negligence or bad judgment is not bad
       faith.
Terletsky, 649 A.2d at 688 (quoting Black’s Law Dictionary 139 (6th ed. 1990)

(emphasis added)); see also 1 Pa.C.S. § 1903(a) (providing that words shall be

construed in accordance with the peculiar and appropriate meaning they have

acquired). Citing to D’Ambrosio, the Superior Court articulated the test for bad faith as

follows: “to recover under a claim of bad faith, the plaintiff must show [1] that the

defendant did not have a reasonable basis for denying benefits under the policy and [2]

that the defendant knew or recklessly disregarded its lack of reasonable basis in

denying the claim.” Id. (citing, inter alia, D’Ambrosio, 431 A.2d at 971).

       Though the Terletsky court did not reference self-interest or ill-will in its test, or

application thereof, its citation to Black’s Law Dictionary inadvertently created confusion


(…continued)
(holding that the Pennsylvania Constitution does not provide for the right to a jury trial
for bad faith claims arising under Section 8371). While these cases are instructive in
terms of their overview of the development of bad faith insurance claims in
Pennsylvania, none of them addressed the issue presented today, namely, the legal
test for bad faith under Section 8371. See, e.g., Toy, 928 A.2d. at 200 n.16 (stating “we
do not consider what actions amount to bad faith.”). Consequently, our prior decisions
interpreting Section 8371 do not directly control our disposition of the instant matter.
Moreover, nothing we say here should be read as casting doubt on the validity of the
holdings in those cases.



                                     [J-27-2017] - 16
as to the relationship between the two-prong test and the seemingly additional

requirement of proving a subjectively improper motive on the part of the insurance

company. See Greene, 936 A.2d at 1189. However, when squarely presented with the

issue in subsequent cases, the Superior Court has consistently clarified, as it did in the

case sub judice, that the Terletsky test did not establish a self-interest or ill-will level of

culpability for bad faith. See Greene, 936 A.2d at 1190 (stating that “the motive of self-

interest or ill will level of culpability is not a third element required for a finding of bad

faith, but it is probative of the second element identified in Terletsky, i.e., the insurer

knew or recklessly disregarded its lack of reasonable basis in denying the claim”)

(citation and internal quotations omitted); Nordi v. Keystone Health Plan West Inc., 989

A.2d 376, 384-85 (Pa. Super. 2010) (stating that the Terletsky court’s reference to

Black’s Law Dictionary did not create a self-interest or ill-will level of culpability for bad

faith claims). Accordingly, while this issue has evaded appellate review from this Court,

the longstanding standard in Pennsylvania has been the Superior Court’s two-pronged

test in Terletsky and its subsequent clarification that self-interest and ill-will, while

probative, is not required.

       With this historical backdrop in mind, we turn to the parties’ arguments and their

competing interpretations of Section 8371. Initially, we observe that the parties are in

substantial agreement on several aspects of bad faith claims under Section 8371. Both

parties generally agree with the Terletsky test and that the first prong, whether the

insurer had a reasonable basis for denying benefits, is an objective inquiry into whether

a reasonable insurer would have denied payment of the claim under the facts and

circumstances presented. See Anderson, 271 N.W.2d at 377 (stating that the absence

of a reasonable basis is an “objective standard, . . . i.e., would a reasonable insurer




                                      [J-27-2017] - 17
under the circumstances have denied or delayed payment of the claim under the facts

and circumstances”) (citation omitted).

       Consequently, both parties agree that mere negligence is insufficient for a finding

of bad faith under Section 8371 and the primary point of contention relates to the

relevance, if any, of the insurance company’s subjective motivation under the second

Terletsky prong. In this regard, both parties contend that the General Assembly did not

specifically define “bad faith” or set forth the manner in which an insured must

demonstrate a bad faith claim because the phrase had acquired a peculiar and

universally acknowledged meaning by the time Section 8371 was enacted in 1990. See

1 Pa.C.S. § 1903(a) (providing that words shall be construed in accordance with the

peculiar and appropriate meaning they have acquired). While Conseco maintains that

the acquired meaning of “bad faith” includes whether the insurer had a subjectively

improper motive, Rancosky argues that self-interest and ill-will are merely probative and

that knowledge or recklessness is sufficient.

       In support of its position that an insurance company’s subjectively improper

motive is part of the well-established meaning of bad faith, Conseco relies, inter alia,

upon the definition of “bad faith” from the 1990 edition of Black’s Law Dictionary, which

was cited by the Terletsky court and includes “motive of self-interest or ill will” as part of

its definition. Conseco observes that this edition of Black’s Law was published the

same year Section 8371 was enacted and that it is therefore an appropriate barometer

of bad faith as it was understood at that time. Conseco further highlights that the

Wisconsin Supreme Court’s decision in Anderson, which was cited by the D’Ambrosio

Court, described bad faith as an intentional tort. See Anderson, 271 N.W.2d at 376

(stating “[i]t is apparent, then, that the tort of bad faith is an intentional one”.).

Additionally, Conseco maintains that the punitive damages provision of Section 8371 is




                                      [J-27-2017] - 18
penal in nature, designed to punish and deter bad faith conduct. Therefore, Conseco

argues that it must be construed narrowly in favor of defendants pursuant to the rule of

lenity.    See 1 Pa.C.S. § 1928(b)(1) (providing that penal statutes are to be strictly

construed).11

          In response, Rancosky observes that the version of Black’s Law Dictionary cited

by Conseco was not published until July of 1990, after Section 8371 was signed into law

on February 7, 1990. Thus, she maintains that it could not have informed the General

Assembly’s understanding of bad faith. Rather, she highlights that in D’Ambrosio, this

Court indicated that recklessness is sufficient in a bad faith cause of action.         See

D’Ambrosio, 431 A.2d at 971 (stating that “those jurisdictions which have recognized a

cause of action for bad faith conduct have cautioned . . . that ‘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.’”) (citing Anderson, 271 N.W.2d at 376). Because Section 8371 is widely viewed

as a legislative response to this Court’s decision not to recognize a common law right of

action for bad faith conduct in D’Ambrosio, she argues that the General Assembly

intended to incorporate that Court’s definition of bad faith into Section 8371. As to

Conseco’s argument that Section 8371 is a penal statute, Rancosky counters that, in

enacting Section 8371, the General Assembly intended to create a private right of action

in order to address the unequal bargaining power between insurance companies and

policyholders. Accordingly, Rancosky argues that Section 8371 should be construed

broadly in favor of plaintiffs to effectuate its remedial purpose. See 1 Pa.C.S. § 1928(c)

(providing for liberal construction of statutes to effect their objects and promote justice).

11
  Conseco does not specifically reference the Anderson Court’s holding that a higher
manner of proof is required where the plaintiff seeks punitive damages.



                                      [J-27-2017] - 19
Thus, while Rancosky acknowledges that mere negligence is insufficient, she argues

that a recklessness standard effectuates the intent of the General Assembly in enacting

Section 8371.

       Given the historical development of bad faith claims and the context in which the

General Assembly enacted Section 8371, we agree with the parties that in responding

to the D’Ambrosio decision the General Assembly intended to incorporate that Court’s

understanding of bad faith.       As stated supra, this Court’s citation to Grunberg and

Anderson in D’Ambrosio, and in particular to the test from Anderson, suggests that

those cases were critical to this Court’s understanding of the nature of such claims.

While the Wisconsin high court in Anderson did indeed describe the tort of bad faith as

“an intentional one,” Anderson, 271 N.W.2d at 376, it reiterated throughout its opinion

that knowledge or recklessness is sufficient for demonstrating liability in a bad faith

cause of action. See, e.g., id. (stating that “[t]o 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”); see also id. at 377 (reiterating its two-prong test and stating “implicit

in that test is our conclusion that the knowledge or the lack of a reasonable basis may

be inferred and imputed to an insurance company where there is a reckless disregard of

a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs

submitted by the insured”). Consequently, we conclude that the Anderson Court spoke

with clarity as to the standard of proof for liability in a bad faith action.

       Importantly, however, the Anderson Court went on to state that a higher standard

of proof is necessary where the plaintiff specifically seeks punitive damages related to

bad faith denial of insurance benefits.         Id. at 379 (stating “[w]e do not conclude,

however, that the proof of a bad faith cause of action necessarily makes punitive




                                        [J-27-2017] - 20
damages appropriate”). Specifically, it held that for punitive damages to be awarded,

“there must be a showing of an evil intent deserving of punishment or of something in

the nature of special ill-will or wanton disregard of duty or gross or outrageous

misconduct.” Id. Thus, it appears that the inclusion of an ill-will level of culpability in

bad faith claims has its genesis in the Anderson Court’s distinction between bad faith

liability in general and a bad faith claim specifically seeking punitive damages.

Consequently, the gravamen of our inquiry is whether the D’Ambrosio Court, and thus

the General Assembly, similarly understood that an award of punitive damages carried

a higher evidentiary threshold in the bad faith context.

       In this regard, we observe that punitive damages were specifically pled in the

D’Ambrosio case. D’Ambrosio, 431 A.2d at 967. Notwithstanding its reliance upon

Anderson, however, the D’Ambrosio Court made no reference to a higher threshold for

punitive damages when describing the bad faith right of action, stating only that “a

plaintiff must show the absence of a reasonable basis for denying benefits of the policy

and the defendant’s lack of a reasonable basis for denying the claim.” Id. at 971. While

we acknowledge that the D’Ambrosio Court ultimately did not to recognize the right of

action at common law, we nonetheless find it important that the D’Ambrosio Court

provided no indication of a higher threshold for punitive damages in its far reaching

discussion of the development of bad faith claims.

       Indeed, in responding to D’Ambrosio, the General Assembly seemingly put

punitive damages on the same footing as other categories of damages when it enacted

Section 8371. Specifically, the statute sets forth that, upon a finding of bad faith on the

part of the insurer, a court may award interest, punitive damages, and/or court costs

and counsel fees.     42 Pa.C.S. § 8371 (supra, at pg. 10-11).          Consequently, as

Section 8371 does not distinguish between the standard for finding “bad faith” generally




                                     [J-27-2017] - 21
and “bad faith” allowing for punitive damages, we find no basis for concluding that the

General Assembly intended to impose a higher standard of proof for bad faith claims

seeking punitive damages when it created the right of action.

       Moreover, looking to the consequences of the competing interpretations of

Section 8371, see 1 Pa.C.S. § 1921(c)(6), we find that Conseco’s proffered

interpretation would create an unduly high threshold for bad faith claims. Given our

conclusion that there is no basis to distinguish between punitive damages and other

categories of damages under Section 8371, an ill-will level of culpability would limit

recovery in any bad faith claim to the most egregious instances only where the plaintiff

uncovers some sort of “smoking gun” evidence indicating personal animus towards the

insured. We do not believe that the General Assembly intended to create a standard so

stringent that it would be highly unlikely that any plaintiff could prevail thereunder when

it created the remedy for bad faith. Such a construction could functionally write bad

faith under Section 8371 out of the law altogether.

       For the reasons set forth above, we conclude that the Superior Court’s

longstanding two-pronged test, first articulated in Terletsky, presents an appropriate

framework for analyzing bad faith claims under Section 8371. In particular, we conclude

that the Terletsky test, and its imposition of a recklessness standard for liability under

the second prong, comports with the historical development of bad faith in Pennsylvania

and effectuates the intent of the General Assembly in enacting Section 8371.12

Accordingly, we hold that proof of an insurer’s motive of self-interest or ill-will, while


12
   Given our conclusion that the General Assembly had a particular understanding of
bad faith when it enacted Section 8371 and did not distinguish between punitive and
other categories of damages, the phrase “bad faith” is sufficiently clear within the
context of the statute. Accordingly, we need not address the parties’ arguments as to
whether Section 8371 is a penal or remedial statute.



                                     [J-27-2017] - 22
potentially probative of the second prong, is not a mandatory prerequisite to bad faith

recovery under Section 8371.

       Because we agree with the legal test for bad faith claims under Section 8371

articulated by the Superior Court in this case and agree that the trial court misapplied

that test by considering Conseco’s subjective motivation in determining whether it had a

reasonable basis for denying Rancosky’s claim, we affirm the Superior Court’s ultimate

disposition to vacate the trial court’s judgment and remand for further proceedings on

Rancosky’s bad faith claim. However, we respectfully believe that the Superior Court

erred in making a specific determination as to whether the record in this case

demonstrates Conseco’s lack of a reasonable basis for denying Rancosky benefits, i.e.,

the first Terletsky prong. The Superior Court premised its holding in this regard upon

credibility determinations the trial court made in its Rule 1925(a) opinion. However,

because it is unclear to what extent the trial court’s findings on the reasonable basis

prong of Terletsky were intertwined with its erroneous belief that proof of Conseco’s

motive of self-interest or ill-will was required, upon remand the trial court should

consider both prongs of the Terletsky test anew.

                                      III. Conclusion

       In summary, we hold that, to prevail in a bad faith insurance claim pursuant to

Section 8371, a plaintiff must demonstrate, by 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 or recklessly disregarded its lack of a reasonable basis in denying

the claim. We further hold that proof of the insurer’s subjective motive of self-interest or

ill-will, while perhaps probative of the second prong of the above test, is not a necessary

prerequisite to succeeding in a bad faith claim. Rather, proof of the insurer’s knowledge

or reckless disregard for its lack of reasonable basis in denying the claim is sufficient for




                                      [J-27-2017] - 23
demonstrating bad faith under the second prong. For these reasons, we affirm the

judgment of the Superior Court, which vacated the trial court’s judgment in part and

remanded for further proceedings on Appellee’s bad faith claim. On remand, the trial

court should consider anew whether the above test has been met.


      Justices Todd, Donohue, Dougherty, Wecht and Mundy join the opinion.

      Chief Justice Saylor files a concurring opinion.

      Justice Wecht files a concurring opinion.




                                    [J-27-2017] - 24
