Archive for the 'PA – Reserves' Category

SEPTEMBER 2017 BAD FAITH CASES: COURT ADDRESS DISCOVERY OF RESERVES, SETTLEMENT AUTHORITY, CLAIMS MANUALS, AND THE RULES FOR ORGANIZING DOCUMENT PRODUCTION (Philadelphia Federal)

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This case involved the adjustment of a fire loss claim. The insurer made over $1 Million in payments during a two-year period. The insured brought a bad faith action over claims handling and payment during that two-year period. This opinion addresses the insured’s motion to compel discovery.

Once the party seeking discovery meets its initial burden by showing relevance, “the burden then shifts to the party opposing discovery to articulate why discovery should be withheld.” “The party resisting production must demonstrate to the court ‘that the requested documents either do not come within the broad scope of relevance defined pursuant to Fed. R. Civ. P. 26(b)(1) or else are of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure.’”

  1. Organization of Document Production

3,200 pages of documents were provided on an unsearchable pdf. The plaintiff objected that the documents were not as kept in the usual course of business or referenced to particular document requests. The insurer responded they were provided as kept in the ordinary course of business. The Court stated that “the producing party has the choice to either produce documents as they are kept in the ordinary course of business or to label them to correspond with the request categories.” Thus, “labeling is not required where the party otherwise complies with the rule by producing the documents as they are kept in the normal course of business.”

The Court accepted the insurer’s “representation that the documents were produced as kept in the usual course of business.” The insurer offered “some narrative explanation of what was produced, and how it was produced.” The Court would not require the insurer “to label the documents to correspond to [the] requests,” where it had “sufficiently described its document production as containing emails, claims notes,  and correspondence—all of which are pieces of the entire file that Plaintiff requested.” In asserting that the documents were “not produced … as kept in the usual course of business,” the insured’s argument was “devoid of any particularized factual basis for this claim.” Thus, this aspect of the motion to compel was denied.

  1. Discovery of Reserves and Settlement Authority

The Court first observed the split in authority on discovery of reserves. It “ordered in camera inspection of the loss reserves ‘to the extent that those documents contain information other than specific amounts set for loss reserves.’”

The Court stated that “the reserve information may be relevant to Plaintiffs bad faith claim based on the timeline of this case. For instance, Plaintiff alleges that Defendant insisted on a release before issuing payments because Defendant knew it was offering less than what it owed; that Defendant knowingly delayed the payment of claims to save money and to injure Plaintiff; and that the release is invalid.” The Court cited authority for the proposition that “reserve information relevant to whether insurer acted in bad faith in not settling case within policy limits before trial” could be discovered. “Accordingly, to the extent employees or agents of the company discussed the value of Plaintiffs claim or other factual information regarding the claim in connection with setting the reserves, such information may be relevant.” Still the Court did not order direct production of previously redacted material, but ordered the insurer to “produce unredacted copies of the reserve and settlement authority information to the Court for in camera inspection.”

  1. Discovery of Claims Manuals

“Courts within this district have found that limited portions of claims manuals are relevant in bad faith insurance cases.” The Court observed thatEastern District Judges “have typically found that information contained in claims manuals is discoverable to the extent that it concerns employee procedures for processing claims.”The insured sought “[t]he portion of the claims manual regarding any portion of the Policy relied upon by you in making a coverage decision on plaintiff’s claim.” The specific bad faith claim involved the manner and timing of payment.   The Court found the document request overly broad, and that it went further than the bad faith claim as asserted. The Court did disagree with the insurer’s argument that discovery can only be permitted for a total denial of coverage. The Court limited the document request “to include only portions of the claims manuals that discuss policies relating to valuation of claims, and the timing of claims payments.”

Date of Decision: August 9, 2017

Bala City Line, LLC v. Ohio Sec. Ins. Co., CIVIL ACTION No.: 16-cv-4249, 2017 U.S. Dist. LEXIS 126579 (E.D. Pa. Aug. 9, 2017) (Sitarski, M.J.)

MARCH 2017 BAD FAITH CASES: FINEMAN, KREKSTEIN & HARRIS OBTAINS SIGNIFICANT VICTORY FOR INSURER IN DEFEATING UIM BAD FAITH CLAIM AT TRIAL IN PHILADELPHIA’S COMMERCE COURT (Philadelphia Commerce Program)

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In a bad faith case that actually went to trial, in Philadelphia’s Commerce Court, Fineman, Krekstein & Harris won a finding in favor of the insurer in a hard fought case, involving a myriad of bad faith issues. The court issued a 37 page Findings of Fact and Conclusions of Law, vindicating the positions argued and case presented for the insurer.

The insureds argued, among other things, that there were undue delays in claims handling, adjusters did not keep claims files in accordance with policy manuals, and reserves were improperly set. Among other things, the insurer focused its arguments on the timing of the insureds first making a demand for payment; reliance upon competent counsel in reaching decisions; and that the insureds’ original demand for the $1,000,000 policy limits was never lowered through the course of the UIM case.

In its conclusions, among other things, the court observed there is no heightened duty to insureds in the UIM context, and that even negligence or bad judgments do not equate to bad faith. The court made clear that delay is not bad faith per se, and that evaluating delay includes an analysis of the reasonableness of denying a claim. Moreover, even if unreasonable, to constitute bad faith the delay must be knowing or reckless. Bad faith is measured from the time demand is made.

The court also stated that undervaluing a claim is not bad faith if there is a reasonable basis for the valuation. Thus, a low but reasonable valuation is not bad faith. A settlement offer in the insurer’s low range of estimated value also is not bad faith. On the facts of this case, the court observed that the insurer never took the position that it would pay nothing on the claim, and as described below, made a number of offers.

The court found it was reasonable under the circumstances for the insurer to decline mediation two weeks before the arbitration was to take place. The insurer’s counsel testified that it was too late to mediate, and that there was no indication the insureds would lower their demand. The court observed that in evaluating bad faith, courts weigh the insureds’ decision not to negotiate down from a policy limit demand, even though the insured is not required to negotiate. The court found that settlement almost always requires a mutual give and take, which did not occur in this case.

The insurer was required to pay $600,000 under the UIM arbitration award. The court found, however, there was no evidence the insureds would have accepted $600,000 to settle the case prior to arbitration.

The court also took into consideration the actual difference between the ultimate UIM arbitration award, the insurer’s final offer, and the insured’s demand. In this case, the insured’s final offer was approximately $182,000 below the ultimate award, but the insureds’ policy limit demand was $400,000 greater than the award. The court found the insurer’s final settlement offer was reasonable, and that earlier offers for lesser sums were permissible interim offers. The court explained the reasonableness of each offer in its context.

Among other facts addressed in the court’s conclusion of law, the court gave weight to the fact that the insurer’s UIM defense counsel received a report from his own expert that counsel had not requested. Furthermore, defense counsel disagreed with the report’s conclusions. However, instead of withholding the report, counsel and the insurer’s representatives produced it to the insureds.

Moreover, the insurer used a high-end number from this same report in coming up with the basis for its final offer. The arbitration panel also used that number, rather than the insureds’ expert’s even higher number, in coming up with its arbitration award. The court stated that the insurer did not have to base its decision upon the insured’s expert rather than the insurer’s own expert.

The court found the insurer’s investigation was lengthier than it should have been, but did not constitute bad faith. The court found the insurer’s request for an independent medical examination was not evidence of bad faith. Nor was this a case of setting a reserve and never moving from that number during the course of the claim. The court found no discrepancy in the manner of setting reserves and the nature of the investigation that showed intent or recklessness in undervaluing the claim. As to the claims handling, even if unduly lengthy or negligent, this did not constitute bad faith.

The court further found that the carrier’s representatives sought UIM defense counsel’s advice in good faith, and that counsel was competent to give advice on defense and valuation of the claim. Although this was not a strict advice of counsel defense, since the insurer’s representatives ultimately made their own decisions, the thorough nature of counsel’s advice, when considered as a component of their decision making, supported the reasonableness of their claims handling decisions.

Date of Decision: March 21, 2017

Richman v. Liberty Insurance Underwriters, Sept. Term 2014, No. 1552, Court of Common Pleas of Philadelphia (C.C.P. Phila. Mar. 21, 2017) (McInerney, J.) (Commerce Program)

S. David Fineman and Christina L. Capobianco of Fineman, Krekstein & Harris were defense counsel.

NOVEMBER 2015 BAD FAITH CASES: COURT ORDERS INSURER TO PRODUCE (1) RESERVE INFORMATION (2) CLAIMS FILES FOR IN CAMERA REVIEW AND (3) PROPRIETARY INFORMATION SUBJECT TO CONFIDENTIALITY ORDER (Western District)

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In Smith v. Progressive Specialty Insurance Company, the court granted in part the insured’s motion to compel discovery after finding that redacted information provided by the insurer was discoverable and relevant to the determination of whether the insurer acted in bad faith.

The insured originally filed a complaint against her automobile insurer, alleging state law claims for breach of contract and bad faith relative to an underinsured motorist (“UIM”) claim. The insured served discovery requests on the insurer, and the insurer provided the insured with non-privileged portions of UIM claim notes along with a privilege log.

Upon receipt of the requested documents, the insured filed a motion to compel in which she argued that the redactions related to the insurer’s valuation of her UIM claim and reserves are “relevant to [her] bad faith claim, as it has been alleged that [the insurer] failed to properly investigate and evaluate her case in accordance with the duty of good faith and fair dealing.” The insurer opposed the motion and argued that its UIM claim notes and reserve information were protected from discovery as opinion work product. Alternatively, the insurer urged the court to conduct an in camera review of the documents before ordering the production of same.

The court acknowledged that there is “competing treatment of whether reserve information is discoverable in a bad faith lawsuit,” but ultimately determined that the amount set aside for reserves is germane to any analysis that the insurer made of the claim’s value and relevant to the determination of whether the insurer acted in bad faith in processing the claim. Accordingly, the court ordered the insurer to produce any previously redacted reserve information in the claim file.

The court next pointed to Pennsylvania case law for the proposition that an insurer’s “claims file is discoverable in a bad-faith case like this one, as information in that file on [the insurer’s] decision to deny the claim is relevant or could lead to potentially relevant information.” Thus, the insurer was ordered to produce to the court all entries it had previously redacted in the UIM claim notes based upon the work product doctrine in order for the court to conduct an in camera review.

Finally, the court ordered the insurer to produce to the insured any information it had previously redacted pursuant to its so-called “confidential and proprietary” privilege, finding that disclosure of this information appeared adequately protected by the parties’ confidentiality agreement.

Date of Decision:  November 4, 2015

Smith v. Progressive Specialty Ins. Co., CIVIL ACTION NO. 2:15-cv-528, 2015 U.S. Dist. LEXIS 149835 (W.D. Pa. November 4, 2015) (McVerry, J.)

The court denied a subsequent motion for reconsideration on the reserve issue.

OCTOBER 2015 BAD FAITH CASES: INSURER DID NOT ACT IN BAD FAITH BY EXHAUSTING POLICY LIMITS IN SETTLING SOME, BUT NOT ALL CLAIMS, WHERE SETTLEMENT AVOIDED MILLIONS OF DOLLARS IN EXPOSURE TO INSURED, AND INSURED WAS FULLY APPRISED THAT REMAINING CLAIM WOULD NOT BE COVERED (New Jersey Appellate Division)

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In Doitch v. Khatri, a third-party action for insurance coverage, the insureds filed a breach of contract and fiduciary duty complaint against an insurer refusing to settle a claim on behalf of the insureds. Summary judgment was granted to the insurer, and the insureds appealed.

The underlying claims arose from a fire damaging the insured’s home, a multi-family dwelling, as well as surrounding properties.  There were also serious bodily injuries to an upstairs tenant and a firefighter responding to the fire. The insured had a homeowners’ policy with the insurer with a $300,000 coverage limit per incident.

Multiple claims and lawsuits were filed against the insureds after the fire. The insurer ended up paying one claim in full as part of an arbitrated property damage decision. Three other claims, which exceeded $7.5 million, were consolidated and scheduled to proceed to trial. Meanwhile, a tenant of the insureds notified the insurer through a letter from her attorney that, “we are in the process of conducting an investigation to obtain the cause and origin of the fire.” The letter requested, “photos of the area where the fire began,” but made no mention of a claim for damages. The tenant’s insurer asserted a property damage subrogation on behalf of the tenant, alleging that many of her belongings were destroyed by the fire. The homeowner’s insurer denied the claim, and stated that after an investigation, the insured was not legally responsible for the tenant’s damages.

One month before the three other claims were set for trial, the insurer notified the insured that the three other claimants were willing to settle their claims “for the amount of money remaining available under [the insured’s] $300,000.00 liability policy.” The insurer advised that it would be best to settle the three claims currently in suit, as the insurer believed there were valid defenses to all the claims, but that a possible recovery would likely exceed the amount of money available under the policy. The insurer acknowledged that the remaining claim would not be resolved by this settlement. The insureds agreed to settle the three claims in suit at that time, exhausting the remainder of the policy.

Nearly three months later, the insureds received notice of a complaint filed by the remaining claimant. In response, the insured filed a third-party complaint against the insurer demanding that the insurer indemnify and defend against the claim, and argued that the insurer’s failure to do so was a breach of contract and fiduciary duty.

The Law Division granted the insurer summary judgment on the bad faith claim.  Further, the court found that the insurer had no duty to initiate and engage in settlement negotiations with the remaining claimant.  Rather, the insurer “negotiated and obtained very favorable settlements… in the face of claims seeking in excess of $7.5 million.” Moreover, the settlements were executed with the insured’s consent “and only after explan[ing to the insured that] the settlement would not resolve the ongoing property damage claim.”

On appeal, the Appellate Division observed that “absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlements may exhaust the policy limits.” There was no evidence that the insurer acted in bad faith or breached its fiduciary duty, and the appellate court agreed with the reasoning of the Law Division.

Date of Decision: September 3, 2015

Doitch v. Khatri, Docket No. A-3513-13T1, 2015 N.J. Super. Unpub. LEXIS 2134 (App. Div. September 3, 2015) (Kennedy, J. and Hoffman, J.)

SEPTEMBER 2015 BAD FAITH CASES: IN ADDRESSING MOTION TO COMPEL COURT: (1) FINDS COMMUNICATIONS WITH ATTORNEYS PRIVILEGED; (2) WORK PRODUCT DOCTRINE DID NOT APPLY PRIOR TO DATE LITIGATION THREATENED; AND (3) RESERVES DISCOVERABLE IN BAD FAITH CASES (Middle District)

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In Cicon v. State Farm Mutual Automobile Insurance Company, the insured brought an uninsured motorist bad faith claim against an insurer refusing to pay policy limits.  In discovery, the insurer had produced a privilege log claiming attorney client privilege and work product protection; and further asserting reserves are not discoverable.

The court first observed the breadth of the attorney client privilege under Pennsylvania law. The insured argued that it could obtain attorney client communications that occurred before the insured filed the bad faith action.  The court appeared to accept the notion that somehow attorney client communications could be discoverable if not related to the defense of the case, but were only related to mere business purposes; but concluded that there was no evidence to show the communications concerned anything other than defending against the insured’s claims.

As to the work product doctrine, which went to the internal communications of the insurer’s representatives other than attorneys, the court readily protected such communications after the date the insured’s counsel threatened litigation, presuming that “all inter-office communications in this file after that date were prepared in anticipation of litigation and are, thus, properly excluded from discovery except in the redacted form [the insurer] has proposed.” In doing so, the court was not necessarily ruling that an express threat of litigation was required to create “anticipation of litigation”; but the parties here had offered no details about prior events that would have revealed an earlier date to anticipate litigation.

However, as to the communications described in the privilege log predating the express threat of litigation, where the insurer court not “reasonably be seen as having anticipated litigation”, the court found these communications were “prepared in the ordinary course of business, and, consequently, are not subject to work product protection.”  The court did refuse to allow discovery of these materials “to the extent that any of these documents contain explicit discussion of an attorney’s advice or direction,” recognizing these discussions would be redacted.  This would imply that the attorney client privilege is broader that what the court appeared to earlier suggest, i.e., that even a communication with an attorney during a time period when this was in the ordinary course of business is still protected.

Finally, while recognizing a split in the district courts, the court ruled that discovery of reserve information in bad faith cases in permissible.

Date of Decision: August 21, 2015

Cicon v. State Farm Mut. Auto. Ins. Co., Case No. 3:14-CV-2187, 2015 U.S. Dist. LEXIS 111104 (M.D. Pa. August 21, 2015) (Conaboy, J.)

AUGUST 2015 BAD FAITH CASES: ON DISCOVERY MOTIONS, COURT: (1) QUASHES DEPOSITION OF FORMER CEO; (2) QUASHES DISCOVERY OF OTHER CASES; (3) ALLOWS DISCOVERY OF SI UNIT/LOW IMPACT UNIT RELATING TO SPECIFIC CASE AT HAND; (4) ALLOWS DISCOVERY OF RESERVES (Middle District)

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Morris v. USAA Casualty Insurance Company involved discovery disputes in a UIM breach of contract and bad faith case.  The court denied a motion to quash the deposition of the insurer’s designated representative on the basis that the deposition notice was vague and overbroad; but did quash the deposition of the insurer’s former president and CEO.

The court (1) granted a motion to limit discovery of information from other cases; (2) denied a motion to quash “with respect to information regarding the SI Unit or Low Impact Unit as it relates to this case”; and (3) denied a motion for protective order on reserve information. The court noted the split in authority on discovery of reserves, but agreed with the line of cases, including cases from the Middle District, ruling in favor of discovery.

Date of Decision:  August 18, 2015

Morris v. USAA Cas. Ins. Co., CIVIL ACTION NO. 3:12-CV-1664, 2015 U.S. Dist. LEXIS 108966 (M.D. Pa. August 18, 2015) (Kosik, J.)

JUNE 2015 BAD FAITH CASES: COURT (1) FINDS RESERVES CAN BE ADMITTED INTO EVIDENCE; (2) SETS THE TIME PERIOD TO CONSIDER EVIDENCE OF BAD FAITH FROM ACTUAL NOTICE OF THE CLAIM UNTIL THE CLAIM WAS RESOLVED; (3) FINDS EVIDENCE OF OTHER CASES NOT ADMISSIBLE; AND (4) FINDS EXPERT TESTIMONY ON CLAIMS HANDLING ADMISSIBLE ON BAD FAITH (Middle District)

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In Clemens v. New York Central Mutual Fire Insurance Company, the court addressed numerous motions in limine, in a supplemental underinsured motorist action.  The motions directly addressing the bad faith claim are summarized below.

Reserves

The court rejected the insurer’s argument that evidence of reserves be barred from evidence.  The court cited case law going both ways on the subject: (1) “that the relationship between the amount an insurance company reserves for a claim and the amount it ultimately offers to resolve that claim is so tenuous as to make the size of the reserve irrelevant for purposes of determining a bad faith claim” vs. (2) “that the amount set aside in reserve necessarily reflects a company’s assessment of the potential worth of the claim and, to the extent the reserve is dissimilar from the amount offered in settlement, is germane to an analysis of whether the company acted in bad faith in pretrial settlement negotiations”.  The court adopted the second position accepting the evidence, but expressly made clear that the insurer would not be precluded “from producing testimony explaining the difference between its reserve and its settlement offer in this case.”

Time Period of Bad Faith Claim

The insurer took the position that the time period in which to consider the bad faith claim began when the insured’s attorney advised the carrier that the tortfeasor’s carrier had agreed to pay its policy limits; and ended the date suit was filed. The insured took the position that the relevant time frame should begin on the date that their counsel advised the insurer of a potential underinsured motorist claim, and never ended because the misconduct of an insurer, even after suit is filed, may constitute bad faith.

The court found that bad faith may not be predicated on the insurers “actions or lack of action before being notified of a claim”, and in this case counsel’s allusion to a potential claim did not trigger any duty.  Further, while case law does allow “for the introduction of evidence of an insurer’s bad faith even during the pendency of a lawsuit …. such evidence of bad faith cannot be provided simply by an insurer’s action of mounting an aggressive legal defense.”  The court ruled that resolution of the underinsured motorist claim ended any bad faith cause of action after that date, and no evidence of the insurer’s alleged bad faith occurring after that date would be permitted.

The cutoff date, i.e., the date the underinsured motorist claim was resolved, was June 20, 2014.  The insured’s suit was removed to federal court in September of 2013. Thus, the time period in which bad faith conduct could be considered encompassed part of the time period during the pendency of the bad faith litigation itself.

Other Cases

The court granted the motion in limine barring evidence of other insureds’ claims against the carrier.  The court found in particular that the U.S. Supreme Court had ruled that evidence of what happened to other insureds, not parties to the case at hand, could not be used to enhance punitive damages for the party actually in the case.

Expert Testimony on Bad Faith Claim Regarding Industry Standards & Claims Handling

The court observed its own broad discretion on evidentiary matters, and the Federal Rules favoring the admission of evidence to assist the trier of fact. It concluded that the insured’s expert testimony could be helpful to the jurors in their inquiry as to whether the insurer acted in bad faith. Thus, the court allowed the insured’s expert to testify regarding industry standards and claims handling practices.

Date of Decision:  June 15, 2015

Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2015 U.S. Dist. LEXIS 77180 (M.D. Pa. June 15, 2015) (Conaboy, J.)

This is the fourth opinion in this matter.  Here are links to the first three (1, 2, and 3).

 

JUNE 2015 BAD FAITH CASES: ALTHOUGH NO BAD FAITH ASSERTED, JUDGE NEALON PROVIDES EXCELLENT OVERVIEW OF BAD FAITH DISCOVERY LAW AS BASELINE FOR HIS RULINGS (Lackawanna Common Pleas)

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In Sharp v. Travelers Personal Security Insurance Co., although no bad faith claim was filed, the court used comparisons to discovery in insurance bad faith cases repeatedly throughout this detailed opinion.

On the issue of reserves, the court cited numerous opinions, pro and con, on the proposition 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.”  However, “[n]o Pennsylvania court has permitted discovery of insurance reserves in litigation not involving a bad faith liability claim against an insurer.”

On claims manuals, policy manuals, and training materials, the insurer argued that training and policy manuals have only been deemed discoverable in bad faith actions. The court stated: “It is beyond cavil that an insurer’s claims practice manual setting forth its procedures and guidelines for handling claims is relevant evidence in a bad faith action against an insurer.”

On the issue of claim representative personnel files, in general, there is a heightened standard of review for relevance. Further, “[p]roduction of personnel files has only been deemed appropriate in bad faith litigation where earlier discovery conducted by the parties has established a sufficient nexus between the personnel file and the bad faith claim.” And even in bad faith cases, the requests are often denied. “Those courts have rejected such discovery on the ground that the insureds may obtain the information sought through less invasive and burdensome means by deposing the claims representatives in question and their supervisors.”

On the issue of other litigation or administrative complaints involving medical expense benefit claims, “[s]everal federal district courts have denied discovery requests for ‘similar claims evidence,’ even in bad faith litigation, and have reasoned that evidence of other lawsuits or claims is irrelevant since they presumably involve different facts and circumstances.” “Some of those courts have also concluded that production of information concerning other bad faith suits or complaints would be unduly burdensome and cost prohibitive.” “The only state appellate authority addressing the discoverability of ‘similar claims evidence’ allowed such discovery, provided that it was restricted to the same type of claims at issue in the pending litigation.”  “More recent federal rulings have likewise determined that ‘other litigation’ evidence could lead to the discovery of admissible evidence and may uncover relevant ‘pattern and practice’ proof, so long as the discovery is confined ‘to those practices employed in handling plaintiff’s claim….’” “Such discovery may also unearth earlier depositions or statements by … claims personnel that may be pertinent to the issues in this case.”

Date of Decision: March 7, 2014

Sharp v. Travelers Personal Security Insurance Co., NO. 12 CV 6483, COMMON PLEAS COURT OF LACKAWANNA COUNTY, PENNSYLVANIA, 2014 Pa. Dist. & Cnty. Dec. LEXIS 282 (C.C.P. Lackawanna March 7, 2014) (Nealon, J.)

 

A copy of Judge Nealon’s exhaustive opinion, including voluminous authority on these discovery issues, can be found at the link of this page of the excellent Tort Talk blog.

JUNE 2015 BAD FAITH CASES: (1) ATTORNEY CLIENT PRIVILEGE AND WORK PRODUCT DOCTRINE PROTECT AGAINST PRODUCTION OF CLAIMS FILES; (2) COURT WILL NOT PRESUME COUNSEL IS MISREPRESENTING NATURE OF REDACTED MATERIALS AS BASIS TO CONDUCT IN CAMERA INSPECTION; (3) COURT RELIES ON PRIVILEGE LOG IN MAKING RULINGS; (4) RESERVES NOT DISCOVERABLE AS INSURED FAILED TO SHOW GOOD CAUSE FOR PRODUCTION; (5) PRESENCE OF BAD FAITH CLAIM ALONE CANNOT AUTOMATICALLY REQUIRE PRODUCTION OF ATTORNEY MATERIALS (Middle District)

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In Lane v. State Farm Mutual Automobile Insurance Company, the court provided a detailed discussion of the work product doctrine, in the context of a UM-bad faith claim against the insurer.  The court addressed three sets of materials on the insured’s motion to compel:

(1) whether the mental impressions of insurers employees recorded after the filing of the Complaint constitute protected work product;

(2) whether the reserve history for plaintiff’s claim and the procedures for setting reserves are irrelevant, confidential and privileged; and

(3) whether portions of the insurer’s “Auto Injury Evaluation” containing the mental impressions of defense counsel are protected by attorney-client privilege and attorney work product doctrine.

WORK PRODUCT AND ATTORNEY CLIENT PRIVILEGE

The court first addressed the work product issues, under Federal Rule of Civil Procedure 26(b)(3), and questions of attorney client privilege.

Redactions and Attorney Client Privilege

The court rejected plaintiff’s efforts to have the judge review redacted documents in camera.  Contrary to plaintiff’s assertions, the insurer’s privilege log adequately described the nature of the information being redacted, so that it could be addressed on the discovery motion.

Moreover, the vast majority of redactions were on billing invoices for legal services or correspondence between the insurer and privately-retained or in-house counsel, which the court concluded “very clearly involve classic cases of attorney-client privilege.”

The court was vehement in its response to plaintiff’s arguments that the insurer’s counsel may not have been forthcoming in claiming the redacted materials were what was purported: “But the hypothetical possibility that representations made by a duly licensed attorney and officer of this court could be found to be utter fabrications is insufficient to carry Plaintiff’s burden in overcoming the privilege. Nor does this Court believe it is appropriate to order the Defendant to submit these redacted materials for in camera inspection simply because the Plaintiff does not trust counsel’s representations. In the absence of any evidence that the statements made before this Court are fraudulent, we shall accept them as true.”

Claims File and Privilege Logs

As to the claims file, the insured sought production of items recorded after the complaint was filed, which the insurer redacted as containing protected mental impressions of its employees,  mental impressions of defense counsel or other attorney client privileged information or attorney work product. The insurer’s privilege log also included items created before suit was filed against the insurer, on the same bases.

A party claiming that documents were created in anticipation of litigation and are thus protected, may carry its initial burden by submitting a properly documented privilege log.  Such a privilege log “should identify each document and the individuals who were parties to the communications, providing sufficient detail to permit a judgment as to whether the document is at least potentially protected from disclosure.” (internal quotations omitted).  In this case, the privilege log was “just barely sufficient to meet Defendant’s initial burden that a privilege potentially applies[, because] [t]he Log identifies the documents, states that they were created by [the insurer’s] employees (albeit without naming those employees), and states that these documents were created as to Plaintiff’s claim file after the date on which a civil Complaint on this very matter was filed. While these representations do not contain detailed factual support, they are enough to carry the burden of proof that the documents were work product created in anticipation of (then-ongoing) litigation.”

Bad Faith Claims Alone Do Not Pierce Privilege

The insured argued it was still entitled to the discovery because post complaint mental impressions are necessarily relevant to the bad faith case. This argument was based on the theory that the “insurer had a continuing duty to investigate the insured’s [UM] claim even after suit was filed.”  The court rejected this argument for a number of reasons: (1) the insured did not provide any plausible justifications as to how the post-Complaint mental impressions could actually be relevant to the facts of his specific bad faith claim, as opposed to asserted an abstract proposition; (2) “the mere fact that Plaintiff has asserted a bad faith claim does not by itself overturn the work-product privilege” (no advice of counsel defense had been asserted); and (3) independently, the insured never addressed how he could not obtain the substantial equivalent by other means without undue hardship, as required under Rule 26(b)(3). Moreover, this plaintiff did have the opportunity to take bad faith discovery, which would include deposing claims adjusters.

Pre-Complaint Materials

This involved attorney client communications and attorney work product, and the court was not going to pierce these privileges under the circumstances.  The insured argued that the attorney materials can be discovered when they are placed at issue, but the court found they were not placed in issue, i.e., no advice of counsel defense was being asserted.  Further, “the mere fact that attorney-client communications may relate to the lawsuit does not expose them to discovery. Quite the contrary: it is in exactly these situations where attorney-client privilege is most properly invoked.”

Reserves

The insurer redacted reserve amounts, and refused to produce manuals and procedures for setting reserves. The court observed that: “Pennsylvania law requires casualty insurance companies to ‘maintain a claim reserve for incurred but unpaid claims and an active life reserve which shall place a sound value on its liabilities and be not less than the reserve according to appropriate standards set forth in regulations issued by the Insurance Commissioner.’”

The insured argued reserve information was relevant regarding the value of the claim and how it was being processed. However, the court found that “[t]he mere fact that Plaintiff’s Complaint alleges a bad faith refusal to pay his policy proceeds does not by itself indicate relevance, because the reserve history and procedures do not ipso facto have any necessary connection to the alleged bad faith.”  The court did not reject the notion that reserve information could be discoverable upon a showing of good cause, but this was a case specific matter; and here, the plaintiff provided “no explanation for how the reserve history is relevant or reasonably calculated to lead to the discovery of admissible evidence in connection with the issues presently before” the court.

Date of Decision:  May 18, 2015

Lane v. State Farm Mut. Auto. Ins. Co., 3:14-CV-O1045, 2015 U.S. Dist. LEXIS 64679 (M.D. Pa. May 18, 2015) (Mariani, J.)

SEPTEMBER 2014 BAD FAITH CASES: AFTER JURY VERDICT FOR DISABILITY INSURER IN BAD FAITH CASE, COURT FOUND THAT (1) LIMITED DISCLOSURE OF EVIDENCE ON REGULATORY HISTORY WAS WITHIN THE COURT’S DISCRETION; (2) ALLOWING WIDE LATITUDE ON CROSS OF EXPERT MET DAUBERT; AND (3) JURY HAD SUFFICIENT EVIDENCE, TAKEN IN LIGHT MOST FAVORABLE TO THE VERDICT WINNER, TO RULE AS IT DID (Philadelphia Federal)

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In Leporace v. New York Life and Annuity Corp., involving a disability policy, the jury found for the insurer on the contractual and statutory bad faith claims.  In summarizing the law on both causes of action, Judge Baylson looked to Judge McLaughlin’s Dewalt opinion in addressing the different standards of proof, and the type of knowledge required to make out these claims.

The court issued prior opinions on the statute of limitations, expert testimony and the admissibility of evidence.  The court found no reason to reconsider the statute of limitations argument, and then addressed plaintiff’s claims of trial errors, chiefly concerning new evidentiary issues.

The insured focused on the court’s precluding evidence, but failed to show prejudice.  Moreover, wide latitude was given in permitting plaintiff’s evidence, and the court’s rulings on the evidence were within a trial judge’s discretion.  The insured alleged that he was barred from introducing evidence on Market Conduct Examinations and the Regulatory Settlement Agreements and amendments thereto, but this was not the case. The court had allowed “testimony about these adverse regulatory actions regarding defendant, when they pertained to issues directly affecting the plaintiff, and/or were not already subsumed within [the insurer’s] own standards for reviewing disability claims.” But the court “ruled that admitting evidence as to the origin of these regulatory materials was not relevant to plaintiff’s claim and would have been unduly prejudicial to the defendants….”  It did not exclude, however, “reference to these regulatory standards in total….” Further, the insured “was given significant and wide latitude in introducing both factual testimony and expert testimony supporting his claims, with adequate reference to the regulatory proceedings….”

The court found that the “jury had a full picture of the plaintiff’s claims and the reasons for [the insurer]’s conduct.” There was evidence that both sides causing delays in claims handling; and that the insured received benefits due for a significant period of time. The jury had these facts, and resolved in favor of the defendant; the court observing that the facts are taken in the light most favorable to the verdict winner when moving to set aside the verdict.

Finally, the insured attempted to argue trial error in connection with allowing the defense’s expert testimony.  The court observed that “plaintiff was given wide latitude to cross examine [the expert] about his qualifications before he was allowed to testify as an expert,” meeting Daubert’s requirements.

Date of Decision:  August 7, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 108804 (E.D. Pa. August 7, 2014) (Baylson, J.)