Insurance Bad Faith: The “Set-Up” Myth

The Holt court observed that “[a]n insurance company does not act in bad faith solely because it fails to accept a settlement offer within the deadline set by the injured person’s attorney.” Quoting a federal district court applying Oregon law, the Holt court went on to state as follows:

Nothing in this decision is intended to lay down a rule of law that would mean that a plaintiff’s attorney under similar circumstances could “set up” an insurer for an excess judgment merely by offering to settle within the policy limits and by imposing an unreasonably short time within which the offer would remain open.

What Is The “Set-Up” Myth?

Using this language as a spring board, insurers typically defend claims of bad faith by arguing that they were “set up” by the claimant’s attorney. In order to “set up” the insurer, or so the argument goes, the claimant’s attorney has a subjective desire that the insurer not accept a time-limited demand so that a later bad-faith action will allow the claimant to recover more than policy limits. One court has rejected that interpretation of the Holt set up language, ruling that the language “simply indicates that the imposition of an unreasonably short time within which an offer to settle would remain open is a relevant factor in evaluating whether the insurance company acted unreasonably in failing to accept such an offer.”

Griffin arose in the context of a discovery dispute in a bad faith case in which the insurer sought communications between attorneys representing the claimant and the insured tortfeasor. The court quashed the subpoenas, ruling that any such communications shedding light on the parties’ motivation is irrelevant in a bad-faith case. Thus, although the length of the deadline in a time-limited demand is clearly relevant to bad faith, the claimant’s motivation for choosing a particular deadline is not. “Even if the attorneys for [the claimant and the insured] did have the subjective intent to ‘set up’ [the insurer] for a bad faith claim, their intent simply is not relevant to whether [the insurer’s] response was in bad faith.’