Sonnenschein, Nath & Rosenthal, LLP on Wade v. Emcasco Insurance Co: Tenth Circuit Provides Insurers With a New Way To Defend Against Bad Faith Set-Ups
Plaintiffs with claims exceeding defendants’ insurance policy limits have long sought to remove those limits by setting up the insurer for bad faith claims. A common method has involved making time-limited settlement demands while withholding information important to settlement evaluation. An insurer could argue that its conduct was reasonable in light of the information available to it but could not directly attack the plaintiff’s conduct in the attempted set-up.
In this Expert Commentary, William T. Barker, a partner in the Chicago office of Sonnenschein Nath & Rosenthal, LLP, discusses Wade v. Emcasco Insurance Co., 483 F.3d 657 (10th Cir. 2007), where the court rejected a bad-faith set-up and offered insurers a way to directly attack the plaintiff’s conduct.
Barker writes: “The jurisprudence of bad faith claims is intended as a shield for insureds, protecting them from unnecessary excess judgments. Instances of gamesmanship, however, have arisen in which third-party plaintiffs attempt to manufacture bad faith claims and use them as a sword. Insurers will generally be in a better financial position than their insureds, creating an incentive for an injured third-party plaintiff to find ways to hold an insurer liable for the entire judgment. To this end, plaintiffs have made attempts to induce insurers to stumble into bad faith claim traps. By using manipulative conduct such as settlement offers with unreasonably short deadlines, withholding information necessary to evaluate a claim, or arbitrarily withdrawing offers, claimants have been able to set traps for insurers in which any misstep may lead to a bad faith claim.”
Barker continues: “Because bad faith claims arise out of the insurer’s duty of good faith and fair dealing, much of the analysis has centered around whether the insurer’s conduct was reasonable. While this allows for arguments that a third-party plaintiff’s conduct justified the refusal by the insurer, the focus in these cases is still squarely on the insurer’s conduct.”
In Wade, the Tenth Circuit focused on the legal cause of the failure to settle, reasoning:
“It is . . . necessary to take into consideration, in addition to the other pertinent … factors, relevant aspects of the third-party plaintiff’s conduct, including any responsibility the plaintiff might have for the insurer’s lack of adequate information upon which to judge a proposed settlement offer and the reasons the plaintiff had for declining to entertain an offer after expiration of a deadline.”
Barker concludes: “Wade is a clear case of a third-party plaintiff attempting to set-up an insurer for a bad faith claim. Rather than just find that the insurer acted reasonably under these circumstances, the Wade court pointed the finger at the third-party plaintiff. Doing so opens up the possibility for insurers to mount successful attacks on third-party plaintiffs’ attempts to manufacture bad faith claims in the future. Rather than merely pleading innocence and defending their conduct, insurers in the future may be able to shift the analysis of blame to third-party plaintiff’s improperly using an insured’s shield as their sword.”
Readers may purchase the full text of this Expert Commentary here.