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In Keefer v. Erie Insurance Exchange, the court addressed the scope of discovery in a bad faith UIM context. The insurer had objected to producing discovery on the following:

1)      The initial reserve value for Plaintiff’s claim and the amount in which it has changed, if at all; 2) Claims manuals and any documents used to process and/or investigate Plaintiff’s claims; 3) Any evaluations conducted regarding Plaintiff’s demands or Defendant’s offers; 4) Rationale as to why the claim had not been paid; 5) Impressions/conclusions and opinions of the adjuster(s) regarding the value and/or merit of the claim and/or defenses; 6) Complete un-redacted copy of the Claims file; 7) Names/Captions and location of all bad faith claims against the Defendant in the last five years; 8) Procedures followed or pursued to determine if a claim is to be paid; and 9) In what way Defendant deviated from its normal procedure in the investigation of Plaintiff’s claims.

In addition to these categories, the insured requested that the insurer’s neuropsychologist produce raw test data from his examination of injured sured. The court has reviewed the raw test data in camera.

1. Reserves

The insurer argued that reserves are not discoverable in a bad faith claim. The court observed that “there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Some courts find it not discoverable on the bases that it is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary; while 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.”

In the latter court’s opinions, 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 present court agreed that the amount of reserve, if any, assigned to the insured’s UIM claim should be produced.

The insured asserted claims that that the insurer acted in bad faith during its claim investigation, and thus a comparison between the reserve value of the claim and the insurer’s actions in processing the claim could shed light on the insurer’s liability under the bad faith statute. Thus, the reserve amount was deemed relevant or that it could potentially lead to relevant information.

The court also rejected the argument that the reserve information is protected from discovery by the work product doctrine. It could not agree that the reserve values were prepared outside the ordinary course of business. Under the work product doctrine, mental impressions and opinions of attorneys and their agents are protected from discovery when they are prepared in anticipation of litigation, as distinguished from materials prepared in the ordinary course of business.

2. Claims Manuals, Procedures Generally Followed, and Procedures Followed in Evaluating and Investigating Plaintiff’s UIM Claim

The insured sought information from the insurance adjuster or supervisor regarding the claims manuals used to process and/or investigate the insured’s claims, the procedures followed or pursued to determine whether a claim is to be paid, and whether the insurer exercised a normal procedure in investigating and evaluating the UIM claim.

The insured argued this was relevant to the reasoning upon which the insured denied satisfying the UIM claim, and therefore relevant to the bad faith claim. The insurer argued that the posture of this case, which includes both bad faith and UIM causes of action, militates against disclosure as unduly prejudicial, even if the manuals would be relevant to the bad faith lawsuit.

The court permitted the insured to inquire into the processes that the insurer used to investigate her claims. As to the relevance of Defendant’s policies for handling claims, inquiry into this area is reasonably calculated to lead to information relevant to the bad faith cause of action. Such material would allow the insured to compare the insurer’s standards for evaluating claims with the conduct of the insurer’s agents in the case at hand.

Although the fact that the insurer’s agents departed from established standards or policies in handling this UIM claim may not alone establish bad faith, such information “is probative evidence” and could make it more likely that the insurer acted in bad faith in investigating the UIM claim. Given the liberal scope of federal discovery and the fact that such information may lead to the discovery of admissible evidence, the court overruled the insurer’s objections to this discovery.

3. Evaluations, Impressions, Conclusions, and Opinions Regarding the Value and Merit of Plaintiff’s Claims and Demands and Defendant’s Offers

The insurer opposed inquiries regarding its adjusters’ impressions, conclusions, and opinions regarding the value and merit of the claim and their evaluations of the insured’s demands and the insurer’s offers. The court observed 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.”

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, observing that: “Prudent 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, and the facts were not developed on this issue by the present parties. To determine the issue, it needed specific evidence demonstrating when litigation was reasonably anticipated. The court stated generally that the insured would be permitted to inquire into the adjuster’s opinions, mental impressions, and conclusions that he or she formed while investigating the UIM claim in the ordinary course of business and not formed with litigation reasonably anticipated.

However, as there were insufficient facts to determine anticipation of litigation vs. ordinary course, the court did not rule on the objection at that point.

4. Rationale Underlying the Reason for Non-Payment

The insurer objected to the inquiry regarding the adjuster’s or supervisor’s rationale of the reason Plaintiff’s UIM claim had not been paid. Given the liberal scope of federal discovery and the fact that the reason for non-payment may be probative of whether insurer acted in bad faith in the investigation of the UIM claim, the objection was overruled.

5. Un-redacted Claims File

The parties disputed whether the insured was entitled to access of the insurer’s entire claims file created for the underlying UIM case. The insurer argued that certain documents within the claims file are subject to the attorney-client privilege or work product protection and need not be produced. The insurer did not dispute that at least some portion of the file may be discoverable in this action.

The court stated that an insurer-defendant’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; but also observing that prior case law held that while a plaintiff could discover claims file in bad faith case, it would apply the work product doctrine to limit the plaintiff’s attempt to discover the un-redacted UIM claim file and all documents associated with the file.

The court denied discovery to the extent that the insured wanted the entire file without any redactions for attorney-client privilege. The insurer was required to produce the claims file, and the insured would be entitled to question the insurer’s agents on its contents. The insurer could assert privilege over portions of the case file and set forth the redacted portions in a privilege log, and the insured could challenge those assertions through an appropriate motion with the court.

At present, the court could not make a decision on whether particular documents in the file were subject to privilege, as such an assessment would require a motion that describes the particular documents at issue and an in camera inspection. The insurer was ordered to produce the claims file subject to its assertions of privilege.

The court also denied the insured’s request to the extent that she seeks the entire claims file without any redactions for documents falling under the work-product doctrine, noting that 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 work product doctrine, however, is not applicable merely because the material was prepared by or for the agents of an insurer. An insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation, but Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Citing prior case law: “An 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.”

6. Unrelated Bad Faith Actions

The insurer objected to the insured’s solicitation of information regarding unrelated bad faith claims against the insurer in the last five years. The court found that: “Past claims by other insureds are not relevant to the present bad faith action before the court.”

7. Raw Test Data

The insurer objected to producing raw test data collected from the insured during a neuropsychological examination. The court reviewed the raw test data in camera. The insurer wanted a protective order, citing the need for confidentiality of the raw data gathered from the neuropsychological evaluation; based on the examining doctor’s statement regarding the need to protect the integrity of the examination methods and results.

The court found the concerns legitimate; however, they did not warrant a protective order to prevent disclosure. The court observed that the party wishing to obtain a protective order has the burden of demonstrating that “good cause” exists for the order. Citing Third Circuit precedent, good cause is established on a showing that disclosure will work a clearly defined and serious injury to the party seeking closure. Such an injury must be shown with specificity, as broad allegations of harm, unsubstantiated by specific examples or articulated reasoning, do not support a good cause showing.

Courts must use a balancing test, weighing the requesting party’s need for information against the injury that might result if uncontrolled disclosure is compelled. When the risk of harm to the owner of a trade secret or confidential information outweighs the need for discovery, disclosure through discovery cannot be compelled, but this is an infrequent result. If the materials should be disclosed, the issue is whether some limitation should be placed on the disclosure, which again depends on a judicial balancing of the harm to the party seeking protection (or third persons) and the importance of disclosure to the public.

Courts have a great deal of flexibility in crafting the contents of protective orders to minimize the negative consequences of disclosure and serve the public interest simultaneously.

Most commonly, courts condition discovery of confidential documents by preventing the party obtaining the documents from sharing that document with others and by using that document for any purpose other than the present litigation. Courts are given the necessary flexibility to “justly and properly consider the factors of each case.”

Applying these standards, the extent of the insured’s injuries was a central issue. The data sought form the insurer’s doctor pertained to the tests and results therefrom that were conducted to assess the extent of those injuries. Thus, liberal discovery policies dictated that the material was discoverable. However, the court ordered that the raw test data be produced following the execution of a confidentiality agreement designed to protect the confidential nature and trade secrets of the tests conducted by examining doctor.

Date of Decision: March 7, 2014

Keefer v. Erie Ins. Exch., Civil No. 1:13-CV-1938 , 2014 U.S. Dist. LEXIS 29282 (M.D. Pa. March 7, 2014 (Rambo, J.)