Federal PA Court Permits “Bad Faith Set-Up” as a Defense to Insured’s Bad Faith Claim

by Nelson Brown & Co.
Contact

A Pennsylvania federal court recently allowed an insurer to plead “bad faith set-up” as a defense to, or “avoidance” of, a bad faith cause of action. The plaintiffs in Shannon v. New York Central Mutual Insurance Company who were injured by the insured alleged that the insurer’s refusal to pay policy limits on behalf of its insured in a timely manner amounted to bad faith and sought punitive damages under Pennsylvania’s bad faith statute. (The plaintiffs acquired standing to bring the action against the insurer by assignment from the insured).

In its answer, the insurer responded that the cause for delay was not bad faith. It was due to the plaintiffs’ own actions in “creating pretexts and manufacturing conditions under which the main goal was not to settle the underlying matter at fair and reasonable value, but rather to manufacture the very bad faith claim the [plaintiffs] now [make].”

New York Central Mutual described the plaintiffs’ conduct as a “bad faith set-up,” which included making a settlement demand with an unreasonably quick deadline to accept and withholding necessary documentation making it impossible for the insurer to evaluate the claim before the lapse of the demand. The insurer claimed that by engaging in such conduct to allege bad faith, the plaintiffs purposefully put themselves in a position to collect punitive damages that dwarf the policy’s $25,000 limit of liability and far exceed the reasonable value of the injury. Although the insurer eventually offered policy limits upon the completion of its claim evaluation, the plaintiffs rejected the offer on grounds that they had already “incurred the time and expense of written discovery and depositions.”

The plaintiffs moved to strike these allegations from the answer, arguing that “bad faith set-up” is not a recognized affirmative defense. The U.S. District Court for the Middle District of Pennsylvania sided with the insurer reasoning that most of the insurer’s allegations of a “bad faith set-up” were “reasonably related” to its defense against the bad faith claim under FRCP 8(c), which sets forth the pleading rules. While the court refrained from discussing the merits and viability of such a defense under Pennsylvania law, it nevertheless ruled that if the allegations of a “bad faith set-up” were proven, it would assist in establishing an “avoidance” of the bad faith claim.

Notably, the court did strike certain portions of the insurer’s “bad faith set-up” defense for vagueness because those portions referred to violations of unspecified state and federal criminal statutes and did not satisfy the “fair notice” requirement of the federal pleading rules.

There is some case law already recognizing an insurer’s right to bring a claim against its insured for the breach of the duty of good faith and fair dealing, i.e. the so-called “reverse bad faith” claim, Garvey v. National Grange Mut. Ins. Co., 167 f.R.D. 391 (E.D. Pa. 1996). This recent decision green-lights a novel approach to combating a common practice of claimants who engage in “bad faith set-up” tactics for the sole purpose of obtaining punitive damages. In light of this decision, insurers would be prudent to maintaining good records and documentation of communications with claimants, especially with regards to settlement offers and timing.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nelson Brown & Co. | Attorney Advertising

Written by:

Nelson Brown & Co.
Contact
more
less

Nelson Brown & Co. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.