Insurer Bad Faith Setup Defense and Reverse Bad Faith Claims: Insurer vs. Policyholder Perspectives 2023

An insurer that has acted in bad faith may be liable for significant extra-contractual and punitive damages. Thus, unscrupulous plaintiffs have manufactured, manipulated, and proffered settlements under conditions which the insurer must, for legitimate reasons, refuse and thereby make itself vulnerable to damages for "bad faith."

When defending bad faith claims, insurers are increasingly deploying strategies, counterclaims, and affirmative defenses to expose the plaintiff's wrongful conduct related to the claim, such as the plaintiff's failure to cooperate and give proper notice of a claim or fraud and misrepresentation.

Some courts permit insurers to assert a "bad faith setup" defense, whereby they are allowed to demonstrate that claimants employed their own bad faith setup tactics solely to obtain punitive damages. There is also a question as to whether an insurer can assert a counterclaim for "reverse bad faith," whereby an insurer can recover for a plaintiff's breach of the covenant of good faith and fair dealing, although this approach has had limited success. Only one state expressly authorizes this defense by statute. Nonetheless, several reported cases recognize the claim, at least in dicta, and insurers continue to deploy it.

Listen as our authoritative panel of policyholder and insurer counsel discusses the latest litigation trends in defenses raised by insurers in bad faith litigation that focus on the alleged wrongful conduct of the claimant. The panel will cover the claimant's bad faith setup, fraud or misrepresentation, and the affirmative defense of reverse bad faith.