Monthly Archive for April, 2014
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.)
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.)
In Certain Underwriters at Lloyd’s London Subscribing to Policy No. SMP3791 v. Creagh, the District Court found that certain policy exclusions precluded coverage for property damage arising out of fluid release from a decomposing body, which is detailed in this earlier blog entry. The Third Circuit affirmed on the grounds explained by the District Court in finding no coverage, and readily upheld dismissal of the bad faith counterclaim in a footnote.
Date of Decision: April 14, 2014
Certain Underwriters at Lloyds v. Creagh, No. 13-3541, 2014 U.S. App. LEXIS 6853 (3d Cir. April 14, 2014) (Hardiman, J.)
In Wolfe v. Allstate Property Casualty Ins. Co., Judge Jones of the Middle District held that statutory bad faith claims could be assigned. This runs contrary to rulings in the Eastern District, holding that such claims cannot be assigned; one of which decisions, Feingold v. Liberty Mutual Group, was upheld in a non-precedential opinion from the Third Circuit three weeks ago, in which the Panel commended Judge Bartle’s detailed reasoning in concluding that Pennsylvania law does not permit such assignments.
However, in the Third Circuit appeal of Judge Jones’ decision in Wolfe, that Panel petitioned the Supreme Court of Pennsylvania for certification of the following question of law: “Under Pennsylvania law, can an insured tortfeasor assign his or her bad faith claim against an insurer, under 42 Pa.C.S. § 8371, to an injured third party?” Yesterday, the Supreme Court granted the Petition, and will hear the matter in Allstate Property and Casualty Insurance Company v. Jared Wolfe, No. 39 MAP 2014. Our thanks again to the Tort Talk blog for bringing this latest development to our attention.
Date of Decision: April 24, 2014
Allstate Prop. & Cas. Ins. Co. v. Wolfe, No. 23 MM 2014, 2014 Pa. LEXIS 1044 (Pa. April 24, 2014) (Per Curiam), transferred as Case No. 39 MAP 2014.
On December 15, 2014, the Supreme Court ruled section 8371 claims are assignable.
In Tripoldi v. Universal North American Ins. Co., the insureds had attempted to construct a water proofing system in their basement, the results of which ultimately damaged the structure of a basement wall in their home to the degree that it became uninhabitable. They made a claim and the insurer denied covered. The insured brought a breach of contract and bad faith suit.
As to the latter, they asserted that there was no debatable reason why the loss should not have been covered under the policy, and that the denial was arbitrary, capricious, and in direct contravention of the insurer’s own engineering report, and the stated cause of loss in that report.
The insureds also alleged that the carrier’s conduct was outrageous, and violated several provisions of the New Jersey Unfair Claims Settlement Practice Act and its accompanying regulations.
The coverage issue involved whether the structural damage to a wall that led to the home’s condemnation constituted a “collapse”. In the absence of any policy definition, under New Jersey law, the term collapse did not require an actual fall, but “any serious impairment of structural integrity that connotes imminent collapse threatening the preservation of the building as a structure or the health and safety of occupants and passers-by.”
However, the policy at issue did define “collapse”, and the issue was whether the damage sustained to the basement wall constituted an abrupt falling down or caving in of any part of a building, which would not require the falling down of the entire building. All parties further had the understanding that the basement wall at issue never collapsed completely in.
After a lengthy analysis, the court found that the circumstances met the policy definition of collapse, and summary judgment was granted to the insured on coverage.
Moving to the bad faith claim, the court stated that in the context of first-party insurance claims, the Supreme Court of New Jersey has held that “[t]o show a claim for bad faith, a plaintiff must show [1] the absence of a reasonable basis for denying benefits of the policy and [2] the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.”
Establishing a bad faith claim requires that a “plaintiff must show two elements: (1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.”
In addition, a “plaintiff may also demonstrate an insurer’s bad faith when the insurer unreasonably delays the processing of a valid claim, and the insurer knows or recklessly disregards the fact that the delay is unreasonable. However, neither negligence nor mistake may constitute bad faith on behalf of an insurer. “Rather, it must be demonstrated that the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable, or that it recklessly disregards the fact that the conduct is unreasonable.”
In other words, to show that an insurer has acted in bad faith, a plaintiff must demonstrate that no fairly debatable reason exists for denying or delaying the processing of a claim. “Under the ‘fairly debatable’ standard, a claimant must establish a right to summary judgment on the substantive claim in order to be entitled to assert a claim against the insurer for bad faith refusal to pay [or delay in processing].”
Both parties moved for summary judgment on the bad faith issue. The insureds asserted that the insurer conducted a grossly inadequate investigation into their loss, affirmatively misrepresented the findings of an expert report in its letter to the insureds denying coverage, added conditions to coverage that were not otherwise required under the policy, and affirmatively misrepresented that engineers were present at the site inspection.
However, the court found that the insureds failed to provide the Court with sufficient evidence that the insurer acted with reckless indifference to the proofs the insureds had submitted.
Still, the court did not rule for the insurer. It found that the record and the documents submitted in support of both parties’ motions did not present sufficient evidence for the Court to make a determination on whether the insurer acted with knowledge or reckless disregard of the lack of a reasonable basis for denying the insureds’ claim.
Procedurally, at that point in time, the insureds had not conducted any depositions of any of the insurer’s employees or any of the individuals involved in the investigation and evaluation of their claim. Thus, the summary judgment motion was premature.
Date of Decision: December 31, 2013
Tripoldi v. Universal North America Ins. Co ., U. S. Dist. Court, District of New Jersey, Civ. No. 12-1828 (D.N.J. Dec. 31, 2013) (Hillman, J.)
In Johnson v. Plasser American Corporation, an excess carrier paid in its $4,000,000 policy limits to settle a severe personal injury case involving the insured’s employee. There were issues concerning exclusions and whether the duty to defend was ever invoked based on exhaustion of the underlying policy’s limits. There was some alleged delay in response by the excess carrier to demands by the insured’s counsel.
The actual issues before the court involved whether the carrier had to reimburse attorney’s fees under Rule 4:42-9(a)(6), and whether there was bad faith in claims handling.
The court found that the duty to defend was never invoked, and that coverage was excluded. Thus, no attorney’s fees were due as the insured did not prevail on the indemnity claim. As to the bad faith claim, the Appellate Division upheld the trial court’s dismissal of the insured’s bad faith and breach of the covenant of good faith and fair dealing claims.
The insured did not assert bad faith in settlement. The carrier contributed $4 million — its umbrella policy limit — toward settlement of the underlying action, thus (1) shielding the insured from a potential judgment exceeding its coverage; and (2) shielding itself from a possible Rova Farms bad faith claim that it exercised bad faith in refusing to settle.
Rather, the insured focused on the carrier’s delay in providing its position regarding the insured’s request for a defense and indemnification under the umbrella policy. “In short, it alleges bad faith processing of its claim.” The insured also alleged the delay forced it to retain coverage counsel to ascertain its rights to coverage, which the carrier opposed, resulting in putative damages consisting of the insured’s legal fees.
The court found explanations for the delay in the record, though it did not condone a failure to respond; but ultimately it was clear to the insured that the insurer contested coverage.
The Court observed that: “An insurer owes a duty of good faith in processing an insured’s claim. … However, the standard applies to inattention to an uncontested claim.” The Court refused to follow the minority of jurisdictions supporting a cause of action for harm to the insured by the handling of an uncovered claim, but rather approved the majority view that “a covered claim is a sine qua non to maintaining a claim-handling claim”.
In this case, the coverage claim was contested, and contested successfully; thus, the insured’s coverage claim had no merit.
Further, the mere failure to issue a timely response to defense counsel’s letter is insufficient to establish bad faith, as simple negligence is not enough. Rather, “[w]hen a case involves a processing delay: [B]ad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay. In either case (denial or delay), liability may be imposed for consequential economic losses that are fairly within the contemplation of the insurance company.”
Date of Decision: February 26, 2014
Johnson v. Plasser Am. Corp., DOCKET NO. A-2116-12T1, 2014 N.J. Super. Unpub. LEXIS 372 (N.J. Super. App. Div. February 26, 2014) (Reisner and Ostrer, JJ.)