Essentials: Vigilance Guards Against Short Fuse, Third-Party, Bad Faith Set-Ups

The claimant’s attorney forwards a policy limits demand to your insurance company with a short fuse deadline. The insurer has little time to react or assess the demand’s reasonableness. The demand may come before there has been adequate time for the insurer to perform a reasonable investigation or to discover the nature and extent of liability and damages. In some situations the drop dead date may be too soon for the offer to work its way through the insurance company bureaucracy by the time it expires. If the insurer fails to meet the drop dead date, the claimant then withdraws the offer. This is the prototypical bad faith set-up fact pattern. The claimant’s attorney anticipates that the insurer’s lack of information about the case will lead the insurer to let the offer expire without either responding or obtaining an extension.

Short fuse deadlines are not unreasonable per se. Some courts have held that the claimant has a right to set a reasonable time limit for acceptance of a settlement demand. See, e.g., Baton v. Transamerica Ins. Co., 584 F.2d 907, 913 (9th Cir. 1978); Critz v. Farmers Ins. Group, 41 Cal.Rptr. 401, 406 (Cal. App. 1964).

As an example, in Hartford Accident & Indem. Co. v. Mathis, 511 So.2d 601 (Fla. App. 1987), the claimant effectively set up a bad faith case by using a time limit policy demand. Six weeks after the accident, the claimant’s attorney orally requested the $25,000 policy limits. The insurer did not respond for almost a month. Subsequently, the claimant’s attorney issued a written policy limits demand with a ten-day deadline. The insurer failed to accept within the ten days. The insurer’s own intra-departmental reports indicated that it was clear from the day after the accident that the victim was a child who sustained a serious brain injury and the case was one of absolute or near absolute liability. Although the Court indicated its unhappiness with “ten day demand” letters, it affirmed the $2.9 million dollar jury verdict for bad faith failure to settle.

Another example is Phelan v. State Farm Mutual Auto. Ins. Co., 448 N.E.2d 579 (Ill. App. 1983), where the Court affirmed the jury’s finding of bad faith after an insurer failed to accept the plaintiff’s offer of settlement within a five-week deadline. The plaintiff in Phelan made both a verbal and a written offer to settle his claim within the insured’s policy limit. The insurer made a counteroffer. Over a month later, the insurer offered the policy limit, which the plaintiff refused. The insurer argued that the plaintiff’s refusal was unreasonable. To rebut the claim of unreasonableness, the plaintiff’s attorney produced evidence at trial which demonstrated that the plaintiff’s attorney had to secure the services of a trial specialist to try the case and that the plaintiff had incurred other expenses in preparation for trial which justified the plaintiff’s refusal to accept the insurer’s counteroffer.

Where the claimant’s self-imposed settlement time limit is unreasonable, or where the claimant has no legitimate reason to refuse the policy limits when ultimately offered, the insurer may be able to mount a successful “set-up” defense. See DeLaune v. Liberty Mutual Ins. Co., 314 So.2d 601 (Fla. App. 1975). Relevant factors in the inquiry of reasonableness can include 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 the deadline.

The insurer’s response to set-up tactics can make the difference between successful resolution of the underlying claim and bad faith/punitive damage liability. In the case of a time limit settlement demand, the insurer can and should document its efforts to determine whether damages are likely to be in excess of the policy limits. The insurer should inform its insured of the settlement demand and, if appropriate, involve the insured in the response decision.

It is not uncommon for set-up demand letters to discuss medical treatment and at the bottom of the letter say “Enclosures.” The implication is that all relevant medical records necessary to evaluate the claim have been provided. Sometimes they are intentionally omitted. Therefore, an inventory of enclosures sent with the demand should be done to determine if relevant documents are missing and have not been provided. An immediate call should be made to claimant’s attorney followed by correspondence identifying the missing documents and an extension on the demand should be secured for a reasonable period of time following production of the missing documents. The insurer should communicate to the claimant what additional information is needed to evaluate the claim value, why the information is needed, and request cooperation in providing the information. The claim notes should identify the missing information and why it is relevant to the evaluation. The insurer should not simply adopt a hard line and deny the claim based on the lack of substantiating information or request volumes of extraneous information.

Regardless of whether the insurer needs further information, it should respond within the claimant’s deadline and should not be afraid to ask for an extension where appropriate. In those situations where the claimant’s attorney refuses a reasonable request for an extension on the deadline, the insurer should ask claimant’s attorney why the extension is not being granted and then document the claim file accordingly.

Where the claimant’s lawyer has specified an unusual method of acceptance of the settlement demand, the claim professional should contact claimant’s attorney and ask if other more conventional methods of communication will be acceptable and then to confirm, in writing, what is agreed upon. If claimant’s attorney refuses to deviate from the methodology identified, the claims representative should ask the reasons for selection of that exclusive methodology. Do not assume an alternative method will suffice. Remember, you are being set up!

Some courts recognize “set-up” situations where claimants make settlement demands with unrealistic time limitations or otherwise force the insurance company to make a settlement decision without full access to information bearing on liability and damages. Where the court recognizes these factors, the insurance company may not be liable for failure to accept the settlement because the excess judgment or settlement was not due to the insurance company’s “unreasonable” conduct but was driven by the motives of the plaintiff. See, e.g., Wade v. Emcasco Ins. Co., 483 F.3d 657 (10th Cir. 2007) (plaintiff’s delay in providing promised medical records and manipulation of settlement deadlines was for the purpose of setting up a bad faith claim); Glenn v. Fleming, 799 P.2d 79 (Kan. 1990) (premature settlement offer, settlement offer had conditions attached to it, and was only open for two weeks; it was not bad faith for the insurer to reject the initial demand); Miel v. State Farm Mutual Auto. Ins. Co., 912 P.2d 1333, 1339 (Ariz. App. 1995) (insurance company sued for delaying acceptance of the plaintiff’s settlement offer until after it had expired. The Court held it was error for trial court to refuse to allow evidence regarding the plaintiff’s motives in setting a time limit for the settlement offer as “the reasons the Plaintiff adhered to the deadline are relevant to whether the insurer acted unreasonably; … [w]hat is reasonable on the part of the insurer … must be judged in light of all the facts surrounding the demand.”).

A properly documented claim file is the best evidence to prove the set-up and the claimant’s unreasonable conduct.

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Plitt is a licensed insurance agent and an attorney with the Phoenix law firm of Kunz Plitt Hyland Demlong & Kleifield practicing in the field of insurance law. Tel: (602) 331-4600. His column, Essentials, appears from time to time on ClaimsJournal.com and InsuranceJournal.com.