The opinion of the court was delivered by: CAHN
On February 27, 1992, George and Anne Marie Jung, through Nationwide agent Ralph Davis, applied for a Golden Blanket Homeowners' Policy for their residence in Lancaster, Pennsylvania. The policy was issued by Nationwide effective that day. The Jungs timely paid all required premiums. On August 23, 1994, the Jungs' home was vandalized and much of the Jungs' personal property was damaged or destroyed. The Jungs submitted a claim and Nationwide began an investigation.
Nationwide's investigation revealed that the Jungs misrepresented information on their insurance application. Specifically, the application asked, "Has insured or family member been sued, filed bankruptcy, had repossession/judgment within the last 7 years?" The question was followed by the letter "N," for no, and the application was signed by Anne Marie Jung. (A. Jung Depo. 11/14/96, page 117, lines 4 - 10). At the time the application was signed, there were nine lawsuits in the Court of Common Pleas of Lancaster County which had been filed or were pending within the past seven years, and to which the Jungs were defendants. Mrs. Jung admits that the answer to the question regarding lawsuits and judgments was incorrect. (A. Jung Depo. 11/14/96, page 117, lines 24 - 25). On October 20, 1994, Nationwide rescinded the Jungs' policy effective February 27, 1994, the date on which the policy had last been renewed. Other than a $ 1,000 advance, Nationwide did not pay the Jungs' claim for their vandalized property.
Section 8371, enacted by the Pennsylvania Legislature on February 7, 1990, and effective July 1, 1990, provides that, "if the court finds that the insurer has acted in bad faith toward the insured," the court may award interest, punitive damages, court costs and attorney fees. The Jungs allege that the rescission of the policy, in addition to various other actions by Nationwide in processing the Jungs' claim, constitutes bad faith.
Nationwide claims that summary judgment is appropriate on the issue of bad faith because (1) Nationwide had a reasonable basis to rescind the policy, (2) the language of the policy did not foreclose their common-law right to rescind ab initio, and (3) Nationwide's other actions were reasonable and do not amount to bad faith.
A. Summary Judgment Standard
Summary judgment is appropriate when the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The court's role is to determine whether the evidence is such that a reasonable jury could return a verdict for the non-moving party, with all reasonable inferences viewed in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). The moving party has the burden of demonstrating that no genuine issue of material fact exists, but if the non-moving party fails to produce sufficient evidence in connection with an essential element of a claim for which it has the burden of proof, then the moving party is entitled to summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).
Section 8371 does not define bad faith. However, in 1994, the Superior Court of Pennsylvania clarified the meaning of bad faith in Terletsky v. Prudential Property and Casualty Ins. Co. :
'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.
Terletsky, 437 Pa. Super. 108, 649 A.2d 680, 688 (Pa.Super. 1994), citing Black's Law Dictionary 139 (6th ed. 1990). The court continued, "bad faith must be proven by clear and convincing evidence and not merely insinuated," and completed its analysis by stating, "finally, to recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim." Id. (citations omitted). Recklessness is required to support a finding of bad faith; mere negligence or an incorrect analysis of the law is insufficient to sustain liability. Polselli v. Nationwide Mutual Fire Ins., 23 F.3d 747, 751 (3d Cir. 1994); Horowitz v. Federal Kemper Life Assur. Co., 861 F. Supp. 1252, 1262 (E.D.Pa. 1994), aff'd in relevant part, vacated in part, 57 F.3d 300 (3d Cir. 1995).
The Jungs contend that the act of rescission by Nationwide constituted bad faith. Nationwide contends that it had a reasonable basis for denying the ...