JUNE 2014 BAD FAITH CASES: IN A WIDE RANGING DECISION ON IMPORTANT DISCOVERY ISSUES, THE COURT RULED THAT: (1) CLAIMS LOGS WITH FACTUAL INFORMATION PROVIDED BY ATTORNEYS TAKING EXAMINATIONS UNDER OATH, PRIOR TO A COVERAGE DECISION, ARE NOT SUBJECT TO THE ATTORNEY-CLIENT PRIVILEGE (INCLUDING THE IDENTITY OF LAWYER DECISION MAKERS IN THE EUO PROCESS), WHILE OTHER INFORMATION CONCERNING ADVICE OR POST-DECISION INFORMATION IS PRIVILEGED; (2) INFORMATION RELATING TO SUBROGATION POSSIBILITIES, AND OBTAINING A CAUSE AND ORIGIN REPORT, ARE NON-PRIVILEGED ORDINARY BUSINESS FUNCTIONS IN CLAIMS INVESTIGATION; AND (3) SPECIFIC CLAIMS AND PROCEDURE MANUALS ACTUALLY GIVEN TO AN INDIVIDUAL CLAIMS HANDLER ARE DISCOVERABLE, BUT MUST BE KEPT CONFIDENTIAL (Philadelphia Federal)
In Henriquez-Disla v. Allstate Property and Casualty Insurance Company, the carrier had provided redacted claim files, asserting the attorney-client privilege, and including a privilege log. The insured moved to compel production of the unredacted files on the basis that the attorney was acting in the role of claims adjuster or investigator. The insured also sought certain information regarding the retention of counsel and counsels’ activities in the “investigation of Plaintiffs’ claims.” Again, the insured provided the redacted claim logs and claimed attorney-client privilege.
The case actually involved two separate claims, one for theft and one for fire loss. The judge reviewed the unredacted document in camera prior to making her rulings. The underlying claims were for breach of contract and bad faith.
Counsel was retained early in the investigation of these claims, and this included an examination under oath (“EUO”). The carrier argued that counsel was retained for legal advice, which, the court observed, was “not unusual occurrence when an insurer is considering denying a claim.”
However, following New York case law, the court found that taking an examination under oath prior to a coverage decision is an ordinary business function, and is not subject to the attorney-client privilege. Reviewing the documents before her, it did “not appear from the claim logs that any coverage decision had been made at the time counsel was contacted to conduct the EUO’s.”
The unredacted logs indicated “that counsel was charged, at least in part, with the duty of collecting financial and ownership information in connection with the EUO.” Thus, the court concluded “that log entries and emails related to the scheduling and taking of the EUO’s, including the collection of information for the EUO’s, are part of the ordinary business function of claims investigation and therefore fall outside the attorney-client privilege.”
The court did state that “any communication seeking counsel’s advice remains privileged.” Further, “once the EUO was taken, counsel’s observations and opinions concerning the content of the statement are privileged, as it was legal advice regarding the propriety of the denial of the claim.”
The court, again following New York law, further held that “log entries and information relating to subrogation possibilities and obtaining a cause and origin report (C&O) are ordinary business functions in claims investigation.”
However, with respect to the log entries once suit was filed, the communications between counsel and the carrier were clearly in anticipation of litigation, reflected discussion of strategy, and were privileged communications. These redactions remained in-tact.
The insured also sought the identities of the individuals who determined that counsel needed to investigate Plaintiffs’ claims, the identities of all individuals at the law firm representing the carrier who participated in the investigation of the claims, and the individuals at the firm who determined that EUO’s were necessary. The insured also sought all documents concerning that firm’s consulting in its investigation and in determining that the EUO’s were necessary.
The court found those questions should be answered by the discovery already permitted. The court noted that that the unredacted log entries would reveal that counsel was retained to conduct the EUO’s and counsel’s investigation began in preparing to take the EUO’s. This adequately covered the identities of the specific lawyers making the decision to take the EUO’s.
Lastly, the insured sought certain documents, including policy and procedural manuals used to determine whether to deny a claim, whether to hire counsel to investigate claims, and whether to obtain EUO’s. The carrier argued that the information was confidential and proprietary, irrelevant, subject to the attorney-client and work product privileges, and that the requests were overbroad.
The court observed that in the carrier’s response to the bad faith claim, it specifically denied “taking the depositions of Plaintiffs for the pretext of trying to find a reason to deny the Claims” and “applying improper standards to substantiate its denial of Plaintiffs’ first-party benefit claims.” Because of this, the court found that the insured had a right to test the legitimacy of these defenses, and thus needed to know the policies which inform the carrier’s decisions on these matters.
The court followed Judge Buckwalter’s November 16, 2011 decision in Platt v. Fireman’s Fund Ins. Co., which did a study to date on the discoverability of an insurance company’s internal claims-handling procedures, and permitted discovery on the subject, within limits, in concluding that “materials used by Defendant in processing Plaintiff’s insurance claims may be relevant to her cause of action for bad faith.”
However, in light of the sensitive nature of the claims manuals and the overbroad request in Platt, he had limited discovery to “any material which pertains to instructions and procedures for adjusting claims and which was given to the adjusters who worked on [Plaintiff’s] claim,” and ordered that the material be kept confidential. The court then required the insurer to “produce copies of the claims procedures which inform its employees’ decisions to deny claims similar to Plaintiffs’, obtain EUO’s, and hire counsel to investigate claims (in the context of preparation for the EUO’s).”
The court further ordered the insureds and their counsel to “maintain the confidentiality of these disclosures.”