Archive for the 'PA – Attorney Client Privilege' Category

BAD FAITH CLAIM BIFURCATED AND STAYED; REQUEST TO DEPOSE INSURER’S COUNSEL QUASHED AS COVERAGE COUNSEL COMMUNICATING WITH INSURED IS COMMONPLACE AND DOES NOT MAKE COUNSEL A FACT WITNESS (Middle District)

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In this first-party property damage case, Judge Conner addressed a motion to sever and stay a bad faith claim, as well as a motion for a protective order to quash the deposition of the carrier’s coverage counsel, who was also defending the breach of contract and bad faith action.

Motion to Sever and Stay Results in Bifurcation and Stay

Judge Conner first noted the difference between a Rule 21 motion to sever and stay, and a Rule 42 motion to bifurcate, observing that severance results in two separate and distinct actions, resulting in separate judgments. In this case, the insurer had moved to sever, but also included in its motion bifurcation as a form of relief.

“Severance is appropriate when the claims are ‘discrete and separate,’ each capable of resolution without dependence or effect on the other.” Factors include whether the two claims will require different evidentiary proof, judicial economy, and party prejudice. Judge Conner observed the wealth of case law addressing severance and bifurcation in insurance bad faith cases, but noting that the cases go both ways.

As in other cases, the insurer here argued, “irreparable prejudice from premature and potentially unnecessary disclosure of otherwise privileged information, inefficiency in litigating a secondary claim of bad faith that may be mooted by resolution of the coverage claim, and jury confusion and the potential loss of [the insurer’s] chosen counsel if the claims proceed together.”

  1. The court agreed that the breach of contract claim and bad faith claim are separate and distinct, with only minor overlap. For example, “[i]nformation concerning how [the insurer] investigated and evaluated the coverage claim, its claims-handling policies, and its attorney and personnel communications regarding denial of coverage … are simply immaterial to the issue of whether coverage is required under the policy.”

  2. The court also found the prejudice element favored the insurer’s position. The insurer focused on revealing its attorneys’ advice, opinions and strategy as providing an undue advantage in the insured’s contract case, where such information would not otherwise be discoverable. The insured focused on increased litigation expenses.

Judge Conner found “that although both parties have proffered potential prejudice, [the insurer’s] likely injury from denying separation of these claims outweighs the possible increased costs identified by [the insured]. As [the insurer] correctly notes, attorney-client privilege and the work product doctrine are long-held, venerated components of our legal system. …. Such protections are not absolute, but they should not be disregarded lightly. We do not dismiss [the insured’s] legitimate concern regarding litigation costs, but ultimately conclude that this factor also favors [the insurer].”

  1. On the judicial economy element, the court rejected the notion that a ruling denying coverage would moot the bad faith claim; instead observing that a bad faith claim can exist independently of a coverage denial. [Note: As recently reiterated on this Blog, there is a longstanding issue as to whether statutory bad faith can be pursued in Pennsylvania simply for poor claims handling, if there is no benefit due under the policy.] The court also rejected the notion that the likelihood of more complex discovery disputes if both actions are litigated together requires severance.

After weighing all factors, Judge Conner chose to bifurcate, rather than sever; and to stay discovery on the bad faith claim. He recognized other courts had ruled differently in insurance bad faith cases, but highlighted the fact that each case is unique, that judges have broad discretion, and that in “this” case bifurcation and stay were warranted.

Court denies insured’s request to depose the insurer’s counsel

The insured sought to depose the insurer’s defense counsel in the case, who was also involved in the underlying coverage dispute. The insurer moved to quash the deposition. As the only pending case was now the breach of contract claim, Judge Conner viewed the issue through that prism.

The insured argued that counsel acted as a claim investigator, and was thus a fact witness. However, it offered no support for that position. It sought to depose counsel to obtain his: “’thoughts and reasoning as to why certain information was or was not included in the denial letters,’ knowledge of the cause and extent of the loss, and reasons why ‘certain information was disregarded” and the claim ultimately denied.’” The court found this “either irrelevant to the breach of contract claim, privileged, discoverable through other means, or a combination thereof.”

“Furthermore, that [the insurer’s counsel] authored letters denying coverage and setting forth [the insurer’s] reasons for its denial has no bearing on whether his deposition is necessary on the breach of contract claim. The practice of insurers consulting with their attorney regarding coverage and having their attorney communicate with the insured is quite commonplace and does not transform [coverage counsel] into a fact witness.”

The court further recognized the potential issue that the deposition could result in counsel’s disqualification. This was another reason to quash the deposition in connection with the contract claim. Judge Conner did leave the door open for the insured to reassert its request to depose counsel in the bad faith case.

Dated: July 25, 2019

McFarland, LP v. Harford Mutual Insurance Cos., U. S. District Court Middle District of Pennsylvania CIVIL ACTION NO. 1:18-CV-1664, 2019 U.S. Dist. LEXIS 124038 (M.D. Pa. July 25, 2019) (Conner, J.)

Our thanks to Dan Cummins of the excellent Tort Talk Blog for bringing this case to our attention.

EMAILS BETWEEN CLAIMS ADJUSTER AND PLAINTIFF’S COUNSEL AFTER INSURER’S DEFENSE COUNSEL’S INVOLVEMENT IS MADE KNOWN: IT’S BEST NOT TO DO THAT, EVEN IF ADJUSTER INITIATES THE CONTACT (Middle District)

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This UIM breach of contract and bad faith case involved an alleged ex parte contact with the carrier’s claims adjuster, after defense counsel had communicated a letter of representation to the insured’s counsel. Three months later after that representation letter, there were direct communications, via email exchanges, between plaintiff’s counsel and the claims adjuster. They discussed the plaintiff’s demands and claims handling events. The carrier brought a motion for a protective order to preclude use of these emails in the case, because of the allegedly impermissible ex parte contacts with a represented person.

The email initiating the communications came from the adjuster to plaintiff’s counsel. The carrier took the position this was inadvertent, asserting the adjuster actually intended the email for her own defense counsel. The court observed it was unclear whether the communication was inadvertent. In any event, the court found whether intended or inadvertent, the result is the same.

The court generally observed that the prudent course would have been for plaintiff’s counsel to communicate with defense counsel regarding the adjuster’s very first email, rather than responding to the adjuster. This clearly would have avoided the ensuing issues.

The court analyzed the contact under Rule of Professional Conduct 4.2, governing direct contacts with represented persons. It concluded the rule was not violated. There was no intent to create an unfair advantage or indicia of dishonest intent. Further, the court observed defense counsel did not make an issue of the email exchange for a year, in demanding that it not be disseminated by plaintiff’s counsel, e.g., to plaintiff’s expert.

However, though there was no rule violation, some remedial measures were warranted. Thus, the court precluded any information obtained from the adjuster via these emails, that could bind the carrier.

The court did deny a request for attorney’s fees on the motion. The communications were limited, and the conduct did not rise to the level of egregiousness that would call for an attorney’s fee award.

Date of Decision: July 17, 2019

Golden v. Brethren Mutual Insurance Co., U. S. District Court Middle District of Pennsylvania Civil No. 3:18-CV-02425, 2019 U.S. Dist. LEXIS 118519, 2019 WL 3216629 (M.D. Pa. July 17, 2019) (Saporito, M.J.)

 

TWO THINGS WITH THE SAME NAME DO NOT MAKE THEM THE SAME: PENNSYLVANIA STATE CASE LAW ON THE WORK PRODUCT DOCTRINE NOT APPLICABLE IN FEDERAL COURT (Philadelphia Federal)

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Magistrate Judge Wells addressed the difference between the federal and Pennsylvania work product doctrines in this federal UIM bad faith case.

Under the Federal Rules of Civil Procedure, a party must be anticipating litigation when documents are created to get work product protection. Courts must find the “temporal trigger” to determine when federal work product protection starts, i.e., “the point in the insurance company’s investigation when its activity shifted from ordinary claims evaluation to work performed in anticipation of litigation.” There are two components: (1) when did the insurer subjectively anticipate litigation and (2) when did it become objectively reasonable to expect a lawsuit. Documents created before this time are deemed prepared in the ordinary course of business.

The insurer argued that UIM cases are inherently adversarial, and therefore litigation is anticipated in all UIM cases from inception. It relied only on Pennsylvania state case law for this argument. The court found state case law interpreting Pennsylvania’s work product doctrine did not provide guidance on applying the federal work product doctrine because the doctrine’s application differed in federal and state court.

Absent any effort to “prove the moment when [the insurer] shifted from ordinary evaluation of Plaintiff’s UM claim to subjectively anticipating litigation” or demonstrating “that it was objectively reasonable for it to have anticipated litigation at any precise point in time” the court found the insurer “failed to properly invoke the starting point for application of the work product doctrine … [and] cannot avail itself of that doctrine’s protection.”

Date of Decision: January 24, 2019

Brown-Comfort v. Progressive Insurance, U. S. District Court Eastern District of Pennsylvania CIVIL ACTION NO. 18-2929, 2019 U.S. Dist. LEXIS 11884 (E.D. Pa. Jan. 24, 2019) (Wells, M.J.)

 

 

OCTOBER 2017 BAD FAITH CASES: COURT ADDRESSES A WIDE RANGE OF BAD FAITH DISCOVERY ISSUES AS TO PRIVILEGE, WORK PRODUCT, AND RESERVES (Western District)

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This is a discovery opinion addressing a wide range of issues including the attorney client privilege, work product doctrine and discovery of reserves. A number of rulings were held in abeyance pending in camera review, which are not addressed below

1.        The attorney client privilege is not limited to claims handler communications with outside counsel.

“This Court is not aware of any authority that limits the attorney-client privilege to communications with outside counsel, as opposed to in-house counsel, and Plaintiff has cited none. Therefore, this Court rejects Plaintiffs’ claim that the attorney-client privilege could not have attached before Attorney McDonnell was retained as outside counsel to handle Plaintiffs’ claim.”

2.         The privilege is not abrogated simply because a document is relevant to a bad faith claim.

“Plaintiffs next assert that the documents listed in the privilege log titled ‘Communications with counsel regarding the value and merits of claim’ are not privileged because they “go to the heart of this bad faith action[.]” (ECF No. 20 at 8.) However, as Defendant notes, the Third Circuit has unequivocally held that ‘[r]elevance is not the standard for determining whether or not evidence should be protected from disclosure as privileged, and that remains the case even if one might conclude the facts to be disclosed are vital, highly probative, directly relevant or even go to the heart of an issue.’ Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 864 (3d Cir. 1994). Moreover, ‘[a] party does not lose the privilege to protect attorney client communications from disclosure in discovery when his or her state of mind is put in issue in the action.’ Id. Thus, while Plaintiffs are correct that these communications ‘go to the heart’ of Plaintiffs’ bad faith claim, this fact does not change the analysis of whether these communications are protected by the attorney-client privilege.

3.     Documents prepared by claims adjusters and sent to attorneys are privileged.

“Plaintiffs also claim that ‘communications made by the claims representatives are not immune from discovery.’ This argument is easily dismissed. ‘[T]he attorney-client privilege operates in a two-way fashion to protect confidential client-to-attorney or attorney-to-client communications made for the purpose of obtaining or providing professional legal advice.’ The fact that the documents were prepared by the claims adjusters, rather than the attorney to whom the documents were sent, is immaterial to the analysis of whether those documents are protected under the attorney-client privilege.”

4.         Reserves discoverable in bad faith action.

The court found reserve information discoverable in bad faith cases. It wrote the following in explaining its position:

“There is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Shaffer v. State Farm Mut. Auto. Ins. Co., No. 1:13-CV-01837, 2014 U.S. Dist. LEXIS 30436, 2014 WL 931101, at *2 (M.D. Pa. 2014). “Some courts have noted a ‘tenuous link between reserves and actual liability given that numerous considerations factor into complying with this statutory directive.'” Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8, quoting Fidelity & Deposit Co., 168 F.R.D. at 525 (citing Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co., 139 F.R.D. 609, 613 (E.D. Pa. 1991)). However, as a court of common pleas recently stated:

Several trial courts, including this court, have reasoned that insurance reserves are discoverable in bad faith litigation against insurers, where liability for the underlying claim has already been established, since such information may be relevant to the issue of whether the insurer acted in bad faith in failing to settle or pay the original claim. See Consugar v. Nationwide Insurance Co. of America, 2011 U.S. Dist. LEXIS 61756, 2011 WL 2360208, at * 5 (M.D. Pa. 2011) (‘Since plaintiff here claims that defendant acted [*19]  in bad faith, a comparison between the reserve value of the claim and defendant’s actions in processing plaintiff’s claim could shed light on defendant’s potential liability.’); North River Ins. Co. [v. Greater New York Mut. Ins. Co.], 872 F. Supp. [1411] at 1412 [(E.D. Pa. 1995)] (finding reserve information “relevant to the question of whether or not [the insurer] acted in bad faith during the pre-trial settlement negotiations.”); McAndrew v. Donegal Mutual Ins. Co., 56 Pa. D. & C. 4th 1, 18 (Lacka. Co. 2002); Fretz v. Mutual Benefit Ins. Co., 37 Pa. D. & C. 4th 173, 180 (Alleg. Co. 1998). Sharp, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282, 2014 WL 8863084 at *8.”

5.     Reserves concerning insured’s claim are discoverable, but reserves concerning other claims are not, and court will not indulge fishing expedition on setting reserves for other claims.

“Defendant’s boilerplate responses also contend that Plaintiffs’ requests are overly broad. … This Court disagrees with Defendant’s contention in regards to Interrogatory No. 5, in which Plaintiffs’ seek information regarding the reserve history for [the insured’s] own claim. Because the gist of Plaintiffs’ complaint is that Defendant acted in bad faith in handling [the insured’s] underinsured motorists claim, Plaintiffs’ request for the reserve history for [her] claim is not overly broad.”

“However, this Court agrees with Defendant that RPD No. 4 is overly broad. While Plaintiffs have demonstrated the relevancy of the reserve amounts for [the insured’s] own claim, Plaintiffs have not shown — nor even argued in their Motion to Compel — that reserve information for other insureds is relevant to Plaintiffs’ claim. Therefore, Defendant will only be required to produce any relevant documentation of the reserve history for [the insured’s] claim.”

“RPD No. 4 asks for “all documents relating to or involving the process used from 2011 to the present in setting or otherwise establishing or determining reserves for underinsured motorists claims.” (ECF No. 20-2 at 4.) However, neither Plaintiffs’ Motion to Compel nor Defendant’s Brief in Opposition contain any argument concerning whether or not discovery of Defendant’s reserve process for other insureds is appropriate. In other words, neither party addresses the issue of whether RPD No. 4 seeks documents that are outside of the context of Plaintiffs’ specific claim. To the extent that Plaintiffs’ ask for discovery of reserve information for other claims, this Court declines the invitation to allow Plaintiffs to embark on a fishing expedition.”

6.       Work product doctrine not applicable to reserve information in this case.

“The only other objection that Defendant has put forth is its boilerplate response that the information requested by RPD No. 4 and Interrogatory No. 5 ‘is protected from discovery by the work-product doctrine.’ … However, Defendant’s threadbare and conclusory invocations of the work product doctrine fail to establish that Defendant is entitled to the privilege it asserts. Moreover, Defendant does not even argue in its Brief in Opposition that this information is protected by the work-product doctrine. Further, according to the reserve history for [the insured’s] claim, the reserve values were set by non-attorneys. … In fact, Defendant has not asserted that the reserve amounts were set or altered at the direction of, or with the cooperation of, counsel. Therefore, Defendant has failed to establish that the information Plaintiffs seek is protected by the work-product doctrine.”

Date of Decision: October 2, 2017

Parisi v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 3:16-179, 2017 U.S. Dist. LEXIS 162131 (W.D. Pa. Oct. 2, 2017) (Gibson, J.)

 

OCTOBER 2017 BAD FAITH CASES: BIFURCATION AND STAY OF BAD FAITH CLAIM DENIED ON ALL FOUR CRITERIA, INCLUDING SIMILARITY OF ISSUES, COMMON EVIDENCE, UNDUE EXPENSE TO THE INSURED, AND ABSENCE OF PREJUDICE (Middle District of Pennsylvania)

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An underinsured motorist injured the insureds. The tortfeasor’s insurer ultimately tendered $15,000 to the insureds. The insureds’ own UIM policy contained maximum benefits of $100,000, or $200,000 with stacking. The insureds demanded full benefits under the policy.

After investigation, the insurer offered $10,000 to settle the UIM claim. The insureds filed suit in the Court of Common Pleas. The insurer removed the action to federal district court and filed a motion to dismiss. The Court denied the insurer’s motion to dismiss. The insurer then filed a motion to bifurcate the bad faith claim pursuant to Federal Rule of Civil Procedure 42.

In considering a party’s bifurcation motion, courts are careful to consider whether a stay would damage a party. Specifically, courts consider four factors in deciding a Rule 42 motion: “(1) whether the issues are significantly different from each other; (2) whether they require separate witnesses and documents; (3) whether the nonmoving party would be prejudiced by bifurcation; and (4) whether the moving party would be prejudiced if bifurcation is not granted.” The movant bears the burden to show that bifurcation is appropriate.

  1. First, the Court found that the claims are not “so profoundly different” as to justify bifurcation.

  2. The Court ruled that “both claims would utilize similar documents, such as the [insurer’s] claim file, relevant medical evidence . . ., and the [insurer’s] settlement attempts.” In addressing the insurer’s concerns on privileged materials pursuant to the attorney work-product doctrine, the Court ruled that the insurer failed to identify specific documents that enjoy such privilege. Furthermore, the Court reasoned that the insurer is free to file such motions going forward in order to assert its privilege at any time.

  3. The Court held that the insured would suffer economically if the bad faith claim was stayed, because the insured would have to pay its attorney to do twice the work. “Bifurcation would require two discovery periods, double the dispositive motions, and double pre-trial motions.”

  4. Lastly, the Court held that the insurer would not be prejudiced were its motion to bifurcate be denied, because the insurer could simply defeat the bad faith claim by showing a reasonable basis for its settlement offer and investigatory conduct.

In conclusion, none of the four factors weighed in favor of bifurcation and the Court denied the motion to sever and stay the bad faith claim.

Date of Decision: September 18, 2017

Newhouse v. GEICO Cas. Co., No. 4:17-CV-00477, 2017 U.S. Dist. LEXIS 150793 (M.D. Pa. Sept. 18, 2017) (Brann, J.)

FEBRUARY 2017 BAD FAITH CASES: INSURER BAD FAITH AT ISSUE IN EVALUATING SETTLEMENT PAYMENT; ADVICE OF COUNSEL NOT AT ISSUE UNLESS ASSERTED (Middle District)

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An insurer sued its appointed defense counsel in connection with counsel’s defense of a UIM claim. The insurer claimed that counsel failed to assure that the UIM arbitration panel was instructed on the limits of insurance ($2 million), and that the carrier was subjected to the risk of having to pay an excess arbitration award of nearly $4 million above policy limits.

The UIM plaintiff settled the claim with the carrier, which included receiving the full amount of the arbitration award above policy limits. Defense counsel asserted a defense of contributory negligence based on the insurer’s alleged bad faith handling of the UIM claim; and further argued that the settlement was not entirely for the $ 6 million arbitration award (to which sum it was identical), but included monetary consideration for the UIM plaintiff’s threatened bad faith claim as well.

The court granted partial summary judgment to strike the affirmative defense of contributory negligence, but only to the extent that this defense was based on the insurer’s conduct that was not causally related to the arbitration award. The court accepted counsel’s argument that part of the settlement payment was to get a release for the bad faith claim, and thus was part of the damages at issue.

Therefore, it would permit some discovery on the argument that the insurer acted in bad faith in handling the underlying UIM claim, and paid some portion of the settlement to address that issue.

Thus, the Court found that “the fact and extent of [the insurer’s] bad faith handling of the [UIM] claim and concomitant exposure to bad faith liability are directly relevant to the question of the amount of damages it sustained due to [defense counsel’s] conduct. If [the insurer] is successful on its malpractice claim, it will have to prove actual losses that it suffered as a result of Defendants’ negligence. Because [the insurer] did not pay the arbitration award directly, it cannot claim that the excess award is the damages it now seeks. However, if [the insurer] attempts to prove that the settlement payment constitutes actual losses proximately caused by Defendants’ negligence, it must also prove with reasonable certainty what portion of the settlement payment in excess of its policy limits was paid to satisfy the arbitration award. Discovery on [the insurer’s] exposure to bad faith liability is therefore relevant to the scope of damages [the insurer] alleges to have sustained. And because [the insurer’s] bad faith conduct affects the amount of damages sought, the Court will not preclude Defendants from pursuing discovery on … bad faith.”

Next, the court addressed discovery issues.

The carrier had argued that certain documents in its own files were subject to the attorney-client privilege or work product doctrine. In addition, defense counsel sought discovery of the files of the attorney that replaced him in the UIM case.

As to the second category, the court could not rule because the privilege log was inadequate. The privilege log “entries do not contain specific sender and recipient information, and the Attorney Work Product entries do not state the specific party who created the work product. Additionally, the descriptions are too vague to permit the Court to find that each element of the privilege claimed is satisfied. [The insurer] therefore must supplement its privilege log with this information in order for the Court to determine whether the documents are in fact privileged.”

As to the insurer’s own documents, the court found that the work product doctrine applied to claim notes containing the mental impressions and strategies of the insurer’s attorneys and representatives. These notes were authored by an attorney or claim handler of the insurer.

The insurer also sought to withhold documents that were sent by the defendant defense counsel to the insurer regarding post-arbitration strategy. The court found the attorney-client privilege waived once the insurer sued its attorney, and that the attorney himself held the work product privilege, not the insurer.

The court found the carrier did not waive the privilege concerning communications with in-house counsel, and with the outside counsel subsequently retained. The carrier had disclosed a limited privileged document, but the court found this did not constitute waiver of the privilege as to every communication with counsel.

The court further found that the insurer was not asserting an advice of counsel defense, which could waive the privilege. The court observed that “an attorney’s ‘[a]dvice is not in issue merely because it is relevant, and does not necessarily become in issue merely because the attorney’s advice might affect the client’s state of mind in a relevant manner.’”

“Rather, ‘[t]he advice of counsel is placed in issue where the client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney client communication.’” Those circumstances were not present.

Date of Decision: January 20, 2017

N.J. Mfrs. Ins. Co. v. Brady, No. 15-2236, 2017 U.S. Dist. LEXIS 8268 (M.D. Pa. Jan. 20, 2017) (Caputo, J.)

DECEMBER 2016 BAD FAITH CASES: COURT REFUSES TO BIFURCATE UIM CONTRACT AND BAD FAITH CLAIMS, OR STAY BAD FAITH DISCOVERY WHERE INSURED RESISTED THE STAY AND WAS WILLING TO RISK POTENTIAL PREJUDICE TO THE INSURED HIMSELF DURING CONSOLIDATED DISCOVERY (Philadelphia Federal)

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The insurer sought to bifurcate the breach of contract and bad faith claims in this UIM case, and a stay of discovery on the bad faith claim. In its second bad faith opinion of the day, the court denied the motion as the factors concerning convenience to the parties, avoidance of prejudice, or efficiency did not warrant separation of the two claims or a stay on discovery. The details of the court’s decision are quoted, in part, below: “In commercial or property damage cases, there may be complexities that warrant bifurcation; however, this is a personal injury case arising out of a motor vehicle accident. The key issue in the breach of contract claim is damages and the principal basis of the bad faith claim is delay: neither is a complex issue.”

“[B]ifurcation is not warranted … because [the insurer] has not shown that the level of prejudice it will face from proceeding to one trial on both claims outweighs the detrimental effects of severance. First, we note that although … the issues in the two claims are distinct, they are not as dissimilar as [the insurer] contends.” In arguing that the contract claim focuses on determining damages and the bad faith claim on the insurer’s case evaluation, the insurer “fails to recognize that an evaluation of the reasonableness of an insurer’s investigation necessarily includes analysis of the documentation the insurer relied on in coming to its conclusion. Indeed, ‘[the insurer’s] investigation did not occur in a vacuum,’ and the facts regarding the underlying accident and its consequent damages are relevant to it.”

“There is considerable overlap in the evidentiary proof relevant to each claim. Analysis of both claims is likely to require testimony from [the insured], [his] treating physicians, and [the insurer’s] medical expert as well as documentation regarding the accident, [the insured’s] injuries and the damages he suffered. Although foreseeable additional witnesses for the bad faith claim are the [insured’s] personnel responsible for handling [the] claim, and counsel for either or both parties, it is likely that many witnesses, and much of their testimony, will be the same for both claims. It would be inconvenient and wasteful of judicial resources to require them to appear in two separate trials to testify on overlapping issues.”

The court distinguished two other cases because of the difference in the progress of discovery on the contract and bad faith claims; and because it was unclear in the present case if counsel would have to testify, because counsel’s role was not pivotal to the bad faith claims at issue.

Finally, the insurer contended “without citation to any authority, that separate trials and a stay on discovery in the bad faith claim is necessary in order to assuage the potential for prejudice to both parties in the discovery process.” It argued “that work product it generated in preparation for litigation of the contractual claim would be relevant and discoverable in the bad faith claim, forcing [it] to either forfeit its privilege or claim it and thereby hamper Plaintiff’s litigation of the bad faith claim.”

The court found this did not warrant staying the bad faith claim. “[T]he insurer’s privilege would ‘not disappear merely because work product prepared in anticipation of litigation over one claim may also be relevant to a second claim.’” “Rather, the insurer would simply have to ‘prove its entitlement to work product protection, . . . [a fact] that does not justify the necessary expenditure of judicial resources and time’ that severance would occasion.”

Moreover, “the party most at risk of prejudice under the instant circumstances is [the insured], and he opposes [the insurer’s] motion. By opposing severance, [he] takes the risk that he may be vulnerable to not obtaining documents [the insurer] would otherwise be willing to produce. [He] has chosen this course rather than go through ‘the time and expense of having to participate in two separate rounds of discovery (and inevitable motion practice) accompanied by two separate jury trials.’” The insured’s stance therefore weakened the carrier’s position that severance was necessary to prevent prejudice in the course of discovery.

Date of Decision: November 21, 2016

Zinno v. Geico Gen. Ins. Co., No. 16-792, 2016 U.S. Dist. LEXIS 161250 (E.D. Pa. Nov. 21, 2016) (Baylson, J.)

JUNE 2016 BAD FAITH CASES: COMMUNICATIONS BETWEEN IN-HOUSE COUNSEL OF (1) TPA AND (2) AUHTORIZED CLAIM REPRESENTATIVE WITH INSURER USING THEIR SERVICES IS PRIVILEGED (Middle District)

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In Heller’s Gas v. International Insurance Company of Hannover, a breach of contract and bad faith case, the insured claimed that documents withheld or redacted did not fall within the attorney-client privilege, the work product doctrine, or reserve information. The insured argued that all but one document was either sent to or from employees of the insurer’s third party administrator (TPA) or its authorized claim representative, and as neither of these entities were subsidiaries of or owned by the insurer, the communications were not privileged.

In the Answer, the insurer did not assert an agency relationship with either the TPA or the authorized claims representative. It took the opposite position in the motion papers, arguing that communications between the TPA’s in-house counsel and/or the claim representative’s in-house counsel with the insurer fell within the scope of attorney-client privilege.

The court reviewed the unredacted documents in camera. The court stated: “After thoroughly examining the documents, this Court finds that the information redacted appropriately falls within the attorney-client privilege and work product doctrine and is consequently information directly related to or referencing legal strategy regarding the instant litigation. The correspondence further supports [the insurer’s] latterly-advanced argument that [the TPA and authorized claims representative] are essentially agents of [the insurer].”

Date of Decision: June 1, 2016

Heller’s Gas, Inc. v. Int’l Ins. Co. of Hannover Ltd., 4:15-CV-01350, 2016 U.S. Dist. LEXIS 71069 (M.D. Pa. June 1, 2016) (Brann, J.)

JANUARY 2016 BAD FAITH CASES: COURT ORDERS INSURER TO PRODUCE ALL RELEVANT DOCUMENTS PREPARED BEFORE LITIGATION WAS REASONABLY ANTICIPATED, REJECTED THE WORK PRODUCT ARGUMENT (Western District)

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In Smith v. Progressive Specialty Insurance Company, the court wrote at length on the work-product doctrine, as applied to a claim handler’s file in a bad faith case. It ultimately ordered the insurer to produce all relevant documents from its claim file prepared before it could be reasonably anticipated that the claim would be litigated, finding that the work-product doctrine did not apply.  It did, however, protect claims of attorney-client privilege and attorney work product.

An insurer’s claims file can be discoverable in a bad faith case, as information in that file on the insurer’s decision to deny the claim is “relevant or could lead to potentially relevant information.” At the same time, however, the court noted that “institution of a bad faith claim does not automatically waive attorney-client privilege or the work product doctrine.”

The court acknowledged that not everything “prepared by or for the agents of an insurer” is protected by the work product doctrine, and that the doctrine only protects documents prepared in anticipation of litigation. Here, the insurer argued that litigation was anticipated as soon as the insured asserted an underinsured motorist (“UIM”) claim.

The court disagreed, and found that the insurer could not have reasonably anticipated litigation until the insurer’s position and the insured’s position as to the extent of the insured’s damages and lost wages came to “loggerheads.” Accordingly, documents prepared before that time fell outside the scope of the work product doctrine, and the court ordered these documents to be produced.

Date of Decision: December 15, 2015

Smith v. Progressive Specialty Ins. Co., 2:15-cv-528, 2015 U.S. Dist. LEXIS 167618 (W.D. Pa. December 15, 2015) (McVerry, J.)

NOVEMBER 2015 BAD FAITH CASES: INSUREDS’ COUNSEL COULD BE DEPOSED ON COMMUNICATIONS WITH INSURER’S ADJUSTER DURING PRE-SUIT CLAIMS HANDLING NEGOTIATIONS (Philadelphia Federal)

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The insureds brought an action against their insurer, alleging breach of contract as well as bad faith on the part of the insurer in negotiating regarding a claim for underinsured motorist benefits. The insurer moved to compel the deposition of counsel for the insureds, while the insureds countered with a motion for a protective order.

The insurer sought to depose counsel for the insureds regarding “discussions that she had with [the insurer’s] claims adjuster concerning the [insureds’] insurance claims before filing this lawsuit.” The insurer argued that these conversations concerned central factual issues that were relevant in determining whether the insurer acted in bad faith in negotiating settlement of the insurance claim.

The insurer noted that in support of their bad faith claim, the insureds alleged that the insurer failed to request a statement under oath or a medical examination of one of the insureds. The insurer argued that it acted reasonably pursuant to an oral agreement with the insureds’ counsel, however, that counsel would provide the insurer with information that would render a statement under oath and medical examination unnecessary.

The court stated that the existence of this oral agreement was central to both the bad faith claim and defense of the claim, and acknowledged that a deposition of counsel is appropriate where “the attorney’s conduct itself is the basis of a claim or defense, [and] there is little doubt that the attorney may be examined as any other witness.”

Because counsel for the insureds had factual information regarding the agreement that was only available from her, the court found that the insureds could not meet their burden of showing that “the information is so readily available from other sources that an order compelling [counsel’s] deposition would be oppressive.”

Further, the court found that harm to the insureds’ representational rights would be minimal, as the communications at issue were not protected by the attorney-client privilege. Accordingly, the court granted the insurer’s motion and held that the insurer may depose the insureds’ counsel “limited to her communications with [the insurer] regarding the [insureds’] pre-litigation insurance claim.” The insureds’ motion for a protective order was denied.

Date of Decision: October 21, 2015

Adeniyi-Jones v. State Farm Mut. Auto. Co., CIVIL ACTION NO. 14-7101, 2015 U.S. Dist. LEXIS 142822 (E.D. Pa. October 21, 2015) (Bartle III, J.)