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)
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.”
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.”
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].”
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.