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News Room

* SPECIAL UPDATE * Combating Third Party Bad Faith Actions With Affirmative Defense of “Bad Faith Set Up”

February 3, 2014


Dear Ladies and Gentlemen:

This correspondence is to advise you of a recent Pennsylvania Federal Court’s ruling allowing an insurer to plead “bad faith setup” as an affirmative defense in a bad faith cause of action.  Shannon v. New York Central Mutual Insurance Company, No. 3:13-CV-01432 (M.D. P.a. May 28, 2013).  Although the case is not binding in Florida, it is our opinion that some of the defenses raised by the insurer could be used by insurers in Florida to combat third-party bad faith claims which appear to be used as a “set-up.”[1]


On March 6, 2003, the Plaintiffs, Cheryl and Robert Shannon, were involved in a motor vehicle accident with a vehicle owned by Hildergarber Lopez and operated by Marcial Gonzalez.  At the time of the accident, New York Central insured the vehicle operated by Mr. Gonzalez.[2]  On June 9, 2003, Plaintiffs notified New York Central that they had retained counsel.  On July 1, 2003, Plaintiffs advised New York Central that Plaintiff, Cheryl Shannon, was receiving medical care and treatment for a head injury suffered in the accident and that said treatment would be extensive.  On September 2, 2003, Plaintiffs’ counsel informed New York Central that Plaintiff, Ms. Shannon’s first party medical benefits in the amount of $10,000.00 had been exhausted and demanded that New York Central tender the bodily injury liability limits of $25,000.00 of its policy.[3]

On November 26, 2013, Plaintiffs provided New York Central with medical records for treatment Ms. Shannon had received and again demanded that New York Central tender the policy limits within thirty (30) days. By way of correspondence, New York Central responded to the demand by making an offer of $7,500.00.  On December 17, 2003, Plaintiff rejected the $7,500.00 offer and advised New York Central that the offer to settle for the bodily injury policy limits would be withdrawn and a lawsuit would be filed on December 29, 2003 if the policy limits were not tendered by that date.

On December 23, 2003, New York Central responded to Plaintiffs’ December 17, 2003 correspondence and indicated that its settlement offer remained unchanged.  On January 16, 2004, Plaintiffs provided New York Central medical reports indicating that the Plaintiff, Ms. Shannon’s injuries were permanent and again demanded tender of the bodily injury policy limits.[4]  On February 19, 2004, New York Central made a final settlement offer of $12,500.00.  Plaintiffs rejected the $12,500.00 offer and withdrew its offer to settle for $25,000.00. On March 8, 2004, the Plaintiffs filed suit against Mr. Gonzalez for the injuries sustained in the accident.  New York Central hired defense counsel to represent Mr. Gonzalez in the lawsuit.

During the litigation proceedings, New York Central, on two separate occasions, offered to settle the Plaintiffs’ claims for the $25,000.00 policy limits.[5]  Plaintiffs rejected these offers indicating that it “had incurred the time and expense of written discovery and depositions.”[6]  On May 18, 2010, Plaintiffs advised Mr. Gonzalez’s counsel that Plaintiffs would settle their claims for $200,000.00 and advised that if the offer was not accepted by May 20, 2010 at 5:00p.m., the offer would be withdrawn.  On May 29, 2009, Mr. Gonzalez’s defense counsel requested that Plaintiff accept the policy limits of $25,000.00 for full settlement and release of their claims.  On September 13, 2010, Plaintiffs’ counsel informed Mr. Gonzalez’s counsel that the $200,000.00 offer would remain in effect until October 15, 2010.

The case proceeded to trial and the jury awarded the Plaintiffs $1,106,000.00 against Mr. Gonzalez.  On April 19, 2012, a judgment in favor of the Plaintiffs and against Mr. Gonzalez was entered in the amount of $906,000.00.[7]  Thereafter, Mr. Gonzalez assigned all of his rights for breach of contract and statutory and common law bad faith that he had against New York Central to the Plaintiffs.


After the assignment was given to the Plaintiffs, the Plaintiffs filed suit against New York Central alleging, inter alia, that the insurer’s refusal to pay the policy limits on behalf of its insured in a timely manner amounted to bad faith.  In their Amended Complaint, Plaintiffs asserted a count for breach of contract and bad faith and sought punitive damages under Pennsylvania’s bad faith statute.[8]

In its Answer and Affirmative Defenses to Plaintiffs’ Amended Complaint, New York Central responded by stating that it negotiated the claim reasonably and in compliance with its duty of good faith.  As an affirmative defense, contained in paragraph 120 of New York Central’s Answer and Affirmative Defenses (hereinafter “bad faith setup defense”), New York Central asserted that Plaintiffs’ claims were barred and/or limited due to Plaintiffs’ unlawful conduct including “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].”[9]

New York Central described Plaintiffs’, and their agents, unlawful conduct as a “bad faith setup.” This conduct included, inter alia, undertaking a course of action from the beginning of the claim wherein Plaintiffs central aim was to manufacture the bad faith claim in order to increase Plaintiffs’ monetary recovery far in excess of the reasonable value of the underlying injury.  Other conduct which was part of their “bad faith setup” included the following:

b) Making unreasonably early and/or accelerated time limit settlement demands, the actual goal of which was to make compliance with such demand impossible, thereby assisting the [Plaintiffs] in manufacturing a bad faith claim;

c) Refusing to accept offers of the policy limits, making settlement of the underlying claim impossible, thereby assisting the [Plaintiffs] in manufacturing the bad faith claim;

d) Making settlement demands in the underlying litigation in excess of the maximum allowed contractual policy limit, thereby creating a pre-textual settlement demand which [New York Central] could not possibly satisfy consistent with its insuring obligations, and which [New York Central] was not required to satisfy, under the terms of the insuring agreement.

Moreover, New York Central claimed that the Plaintiffs made demands while failing to provide documentation which would have allowed New York Central to make a timely evaluation of the Plaintiff, Ms. Shannon’s injuries.  Plaintiffs’ failure to provide the necessary documentation caused New York Central to “negotiate blindly,” thereby increasing Plaintiffs’ chances of making a bad faith claim. [10]

The Plaintiffs moved to strike these allegations from the Answer arguing that the there was no legal or factual “bad faith setup” recognized defense.[11]  In opposition, New York Central argued that the allegations in their Answer and Affirmative Defense with respect to Plaintiffs’ conduct, paragraph 120 of the Answer, stated a valid defense and satisfied the pleading requirements of Rule 8 of the Federal Rules of Civil Procedure.  New York Central argued that “bad faith setup defense” set forth a defense to Plaintiffs’ assertions that the bad faith claim was due in part to New York Central’s failure and refusal to offer the policy limits until after Plaintiffs’ offer to settle for the policy limits had expired.  New York Central asserted that it was not attempting to change Pennsylvania law regarding the insurer’s good faith obligations but rather the “bad faith setup defense” set forth a defense to Plaintiffs’ allegations that New York Central’s conduct was the cause of the underlying case not settling for the policy limits.[12]

The US District Court for the Middle District of Pennsylvania sided with New York Central’s reasoning that most of New York Central’s allegations contained in its “bad faith setup defense” were “reasonably related” to the maintenance of its defense against the bad faith action under Federal Rule of Civil Procedure 8(c), which sets forth the pleading rules.  The court ruled that if the allegations contained in the “bad faith setup defense,” were proven, the allegations would assist in establishing an “avoidance” under the terms of Rule 8(c).  The court proceeded to strike certain portions that were contained in New York Central’s “bad faith setup defense” related to Plaintiffs’ counsel’s violations of unspecified state and federal statutes for failure to comply with the “fair notice” pleading requirements of Rule 8(a)(2).

Plaintiffs filed a Motion for Reconsideration of the Court’s Order and Clarification of the Court’s Memorandum denying the Motion to Strike.  The Plaintiffs requested the court to reconsider the court’s order denying Plaintiffs’ Motion to Strike the “bad faith setup defense” paragraph 120 of the Defendant’s Answer and Affirmative Defenses contending that the court committed error in failing to strike the defense.  Plaintiffs argued that their conduct or the conduct of their counsel in the underlying third party action could not, as a matter of law, form the basis of a defense or avoidance of Plaintiff’s claims.  Plaintiffs asserted that New York Central’s duty of good faith was owed to the insured, not the third party claimant, thus New York Central could not avoid liability for bad faith or breach of contract based upon the conduct of the Plaintiffs and her counsel.[13]   The Plaintiffs’ Motion for Reconsideration of the Court Order denying Plaintiff’s Motion to Strike is currently pending.


We will continue to monitor this case and will prepare a subsequent update depending on the Court’s decision on the Plaintiffs’ Motion for Reconsideration.  Although the specific case referenced relates to the Pennsylvania Bad Faith statute which is somewhat different from third-party bad faith claims in Florida brought under the common law and by statute, which is acknowledged to be a codification of common law, the rationale utilized by the Federal Court in permitting the “bad faith setup” defense can, with slight modification, in our opinion be used in Florida.  Please note that we have already plead the “bad faith setup” on behalf of one of our clients.  Lastly, it is our opinion that the defense may be permitted under Florida law to establish by affirmative defense that there was no reasonable opportunity to settle because of the actions taken by claimant or his or her counsel.[14]

We hope you find the above-referenced case helpful and insightful.  Should you have any questions with respect to the foregoing, please do not hesitate to contact the undersigned at your earliest convenience.

Very truly yours,




[1]We note that a cause of action for bad faith in Pennsylvania is brought pursuant to Pennsylvania’s Bad Faith Statute, 42 Pa. C.S.A. section 8371, which provides the following:

In an action arising under an insurance policy, if the Court find that the insurer 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 of 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’s fees against the insurer.

[2] Since Mr. Gonzalez was operating the vehicle with the consent of Mr. Hildergarber, Mr. Gonzalez was an insured pursuant to the terms of the New York Central insurance policy.

[3]At this time, Plaintiffs’ had only provided “office notes” of Plaintiffs’ expert and an EMG report dated June 6, 2003.

[4] According to New York Central, at the time of this letter, Plaintiffs’ counsel had not presented Ms. Shannon for either an examination under oath or an independent medical examination, nor had he provided any pre-accident medical records or wage documentation upon which an earnings loss claim could have been calculated.

[5] On September 1, 2004, defense counsel for Mr. Gonzalez sent correspondence to Plaintiffs’ counsel offering to settle the Plaintiffs’ claims for the bodily injury policy limits.

[6] See Brief in Opposition to Plaintiffs’ Motion to Strike at 6, Shannon v. New York Central Mutual Insurance Company, No. 3:13-CV-01432 (M.D. P.a. August 20, 2013)

[7] This amount included an offset of $200,000.00 which the Plaintiff, Cheryl Shannon received in uninsured motorist benefits from her insurance carrier, USAA.

[8] 42 Pa. C.S.A. section 8371.

[9] See Answer and Affirmative Defenses at paragraph 120, Shannon v. New York Central Mutual Insurance Company, No. 3:13-CV-01432 (M.D. P.a. July 8, 2013).

[10] New York Central further stated that Plaintiffs: attempted to take advantage of claims representatives through the use of intimidation in an effort to generate monetary recovery in excess of the value of the Plaintiff’s injury and violated rules and regulations governing the conduct of making insurance claims including both state and federal civil and criminal statutes, and regulations.

[11] See Plaintiffs’ Brief in Support of Motion to Strike Pursuant to 12(f), Shannon v. New York Central Mutual Insurance Company, No. 3:13-CV-01432 (M.D. P.a. August 6, 2013).

[12] New York Central contended that Plaintiffs erroneously argued that there was no legal authority for the “bad faith setup defense” and cited to DeWalt v. Ohio Casualty, 513 F.Supp.2d 287 (E.D. Pa., 2007).  In that case, a district court in Pennsylvania had recognized that it was appropriate to consider a third party claimants’ conduct in a bad faith case.  In DeWalt, the court considered the third party claimants conduct in providing medical records in determining whether the insurer could be liable for bad faith.

[13] The Plaintiffs further argued that the court committed error by “limiting the scope of the Plaintiffs’ allegations of bad faith and potentially barring Plaintiffs’ from presenting evidence as to the allegations of bad faith and breach of contract” by including in its Memorandum that the examination of the communications between Plaintiff’s counsel and the insurer were the only way that the fact finer could concluded the Defendant breached the duty of good faith. (Brief in Support of the Motion for Reconsideration of the Court Order Dated November 20, 2013).

[14] See Barnard v. Geico, 448 Fed. Appx.940 (11th Cir. 2011)(affirming summary judgment in favor of insurer because no reasonable jury could conclude that the insurer’s failure to settle was due to the insurer’s bad faith when claimant’s attorney “thwarted settlement attempts by being unavailable and ignoring nearly all [the insurer’s] communications.”); Noonan v. Vermont Mutual Insurance Company, 761 F. Supp. 2d. 1330 (M.D. Fla. 2010)(noting that an insurer’s delay in tendering the policy limits was not caused by the insurer’s willful misconduct, “but rather by [claimant’s] attempt to “setup” the insurer by withholding pertinent information concerning the Plaintiff’s claim.”).

 Max Garcia Jersey