Insurance Company's "Bad-Faith Setup" Affirmative Defense Recognized by Pennsylvania Federal Court as a Valid Pleading

According to a December 2, 2013 article in The Legal Intelligencer by Zack Needles entitled "Judge Allows Insurer's 'Bad-Faith Setup' Defense," Federal Middle District Judge Richard P. Conaboy issued a ruling in the case of Shannon v. New York Central Mut. Ins. Co., No. 3:13-CV-1432 (M.D.Pa. Nov. 20, 2013 Conaboy, J.), allowing an insurance company defendant in a bad faith case to move beyond the pleadings stage with its affirmative defense alleging the attorneys for the plaintiff in the underlying automobile accident litigation purposefully orchestrated a “bad-faith setup” in an attempt to garner a punitive damages award.

According to the Opinion, the insurance company defendant "define[d] this 'bad faith set-up' as 'a quick settlement demand, followed by a quick closing of the window before important information is provided so that any subsequent limits offers by the insurer are bemoaned as too late.'”

This case came before the court, in part, by way of a motion by the Plaintiff to strike certain allegations from Paragraph 120 of the carrier's Answer and Affirmative Defenses in the bad faith action.

More specifically, New York Central Mutual Insurance Company asserted in Paragraph 120 of its Answer and Affirmative Defenses that plaintiffs counsel in the underlying matter had engaged in a “bad-faith setup” by “making unreasonably early and/or accelerated time limit settlement demands, the actual goal of which was to make compliance with such demands impossible” and by “refusing to accept offers of the policy limits, making settlement of the underlying claim impossible.”

As also pointed out by Mr. Needle in his article in The Legal Intelligencer, the insurance company also averred in Paragraph 120 that the plaintiffs counsel in the underlying car accident case made settlement demands beyond the maximum allowable contractual policy limit in an attempt to create “a pre-textual settlement demand which the defendant could not possibly satisfy consistent with its insuring obligation(s), and which the defendant was not required to satisfy, under the terms of the insuring agreement."

  The carrier also asserted as part of its "bad-faith setup" defense noted in Paragraph 120 of its Answer and Affirmative Defenses that plaintiffs counsel attempted to “take unfair advantage of claims representatives through the use of intimidation and threat” and failed to provide records, evidence and other documentation that would have allowed the insurer to evaluate the plaintiff’s injury. 

In their motion to strike Paragraph 120, the plaintiff argued that the allegations contained therein constituted “scandalous and defamatory allegations” and further argued that such assertions were “inappropriate defenses not contemplated by Federal Rule of Civil Procedure 8(c).”

In his Memorandum Opinion, Judge Conaboy rejected these contentions of the Plaintiff, noting that Rule 8(c) states that a party must set forth affirmative defenses along with “‘any other matter constituting an avoidance or affirmative defense.’”

In his ruling, Judge Conaboy stated, “The court finds that, for the most part, the allegations contained in Paragraph 120 would, if proven, assist in establishing an ‘avoidance’ under the terms of Rule 8 (c).” 

While the court allowed the "bad-faith setup" defense to proceed beyond the pleadings stage in this federal court case, the judge did also state, in a footnote, that the insurance company defendant failed to cite any Pennsylvania appellate case law confirming the existence of a “bad-faith setup” defense was valid or could ultimately prevail in the litigation.

Notably, the court did also strike portions of Paragraph 120 in which the insurance company defendant generally asserted, without specific citation to any statutes or criminal code provisions, that the underlying plaintiff's attorney's actions amounted to violations of unspecified state and federal criminal statutes.

Anyone wishing to review Judge Conaboy's Memorandum Opinion may click this LINK.

The actual Order is a separate document which I was unable to locate a link to online.