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In Shaffer v. State Farm Mut. Auto. Ins. Co., Judge Rambo issued her second discovery opinion in the insurance bad faith context within three days. The Judge had ordered the insurer to submit unredacted versions of all redacted and partially redacted pages of the claims log to the court for an in camera review. The files provided to the insured by the carrier remained significantly redacted.

The dispute involved a UIM claim, where the insureds (with the carrier’s consent), settled their claims with the other driver and sought additional coverage on their own policy. $200,000 was available in coverage, and the insureds demanded $150,000, and had provided the carrier with medical records and other information regarding the claim.   The carrier made no settlement offer. The insureds brought claims for breach of contract and bad faith, but the court denied a motion to dismiss the bad faith claim.

The court evaluated the redactions under the work product privilege. The court stated that an insurer’s claims file may be discoverable in a bad faith case like this one, as information in that file on the defendant’s actions related to the claim is relevant or could lead to potentially relevant information; however, it cited precedent applying the work product doctrine limiting that discovery as the work product privilege protects “the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.”

The court observed that the work product doctrine is not applicable merely because the material was prepared by or for the agents of an insurer, and that an insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation….”

However, Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Thus, “[a]n insurance company cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when it has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.”

The court was unable to determine the basis for much of the redaction, but noted that several portions were likely redacted because the pages contained information pertaining to reserves or the insurance adjusters’ impressions or conclusions.

As to reserves, the carrier had redacted all reserve information. The court observed that there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit. Some courts have determined that information related to reserve values is not discoverable and that the procedure for setting reserves . . . is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary. However, other courts have found that “reserves, of course, must have some relationship to the insurer’s estimation of the insured’s potential liability. Otherwise, the setting aside of reserves would serve little, if any purpose.”

Thus, the amount set aside for reserves “is certainly germane to any analysis [the defendant-insurer] made of” the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim. The court concluded that because the insureds alleged that the carrier acted in bad faith during its investigation of their UIM claim, the amount set aside for reserves is relevant to the determination of whether it acted in bad faith in processing the claim, and therefore, the court ordered the disclosure of such information.

As to the insurance adjuster’s impressions, conclusions and opinions, the court first stated that mental impressions and opinions of a party and its agents are not generally protected by the work product doctrine unless they are prepared in anticipation of litigation. Thus, “work product prepared in the ordinary course of business is not immune from discovery.”

As stated by Judge Rambo three days earlier in Keefer v. Erie Ins. Exchange, the gravamen of a claim of work product protection necessarily requires an assessment of when litigation was anticipated, which is a determination not subject to a bright-line rule.

As recognized by the Third Circuit, “[p]rudent parties anticipate litigation and begin preparation prior to the time suit is formally commenced.” Thus, whether litigation was reasonably anticipated is a fact-dependent inquiry.

Although the court lacked the necessary evidence to determine when the insurer reasonably anticipated litigation, the court had reviewed the claims file with this standard in mind, and concluded that certain portions of the record were prepared in anticipation of litigation and should be protected. The accompanying order reflects the court’s findings in this regard.

Date of Decision: March 10, 2014

Shaffer v. State Farm Mut. Auto. Ins. Co., Civil Action No. 1:13-cv-01837, 2014 U.S. Dist. LEXIS 30436 (M.D. Pa. March 10, 2014) (Rambo, J.)