MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART I: STATUTORY MEDIATION PRIVILEGE APPLIES TO MEDIATIONS IN UNDERLYING TORT ACTION WHERE DISCOVERY IS SOUGHT FOR SUBSEQUENT BAD FAITH CASE; MEDIATION PRIVILEGE APPLIES TO NON-LAWYER INSURER REPRESENTATIVES; AND COURT INSTRUCTS INSURER TO PROVIDE A MORE DETAILED PRIVILEGE LOG FOR DOCUMENTS OUTSIDE THE MEDIATION PRIVILEGE WHERE THE INSURER SEEKS TO ASSERT THE ATTORNEY CLIENT PRIVILEGE OR WORK PRODUCT DOCTRINE (Philadelphia Federal)
In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation. The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine. Further, the insurer had objected to producing one of its attorneys for deposition in connection with producing its litigation and claims files and sought to depose the insured’s attorneys relating to the defense of the Underlying Action (which are discussed in a separate blog entry).
The basic factual background involved a third party personal injury claim against the insured. The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action. In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.
During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.
The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement. The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.
The Mediation Privilege
The parties agreed that Pennsylvania statutory law on the mediation privilege governed, 42 Pa.C.S. § 5949. The party asserting the privilege has the burden of establishing its application. In this matter, there had been 5 mediation sessions, with 5 different mediators. All but one session was covered by the privilege because those sessions “involved ‘[t]he deliberate and knowing use of a third person by disputing parties to help them reach a resolution of their dispute.’”
It did not apply to the other mediation because the insurer did not participate in that session, which only involved the injured third party’s claim against the insured’s co-defendant.
The court rejected the proposition “that the mediation privilege does not apply in a bad faith action alleging an insurer’s failure to engage in good faith settlement negotiations,” and would not allow discovery of the insurer’s “correspondence and claim notes reflecting communications made” during the mediation.
The court stated that the “mediation privilege extends not only to mediation communications of parties, but also to communications ‘by, between or among’ representatives of insurance companies present at the mediation.” The court observed applying the privilege “to participating insurance companies’ representatives is essential to the success of the mediation sessions [because,] [f]requently, adjustors or representatives of insurance companies attend mediation sessions. Indeed, many mediators require their presence, either in person or by telephone.”
Thus, “[f]or mediation sessions to be fruitful, insurance adjustors and representatives must be free to discuss candidly any offers and proposals without fear that such communications may be used against them in future litigation.”
The court specifically rejected the notion that the language of the mediation statute should not apply to mediation over the underlying claim when those communications are being used to support a later bad faith case. The court rejected this argument as both outside the statute’s plain language, and contrary to the public policy behind the mediation privilege.
Lastly, the court noted that the privilege “is limited to communications ‘by, between or among’ the mediator, parties and participants made during the mediation session, or communications made to the mediator or from the mediator outside a session,” and that “’discussions among parties outside the presence of the mediator and not occurring at a mediation proceeding are not privileged.”
Thus, “[w]here the mediator has no direct involvement in the discussions and where the discussions were not designated by the parties to be a part of an ongoing mediation process, the rationale underlying the mediation privilege (i.e., that confidentiality will make the mediation more effective) is not implicated.’”
Attorney-Client Privilege/Work Product
First, under Pennsylvania law, appointed defense counsel is the insured’s attorney, and may be, but is not always, the insurer’s attorney. Thus, when appointed counsel communicated with the insurer on the insured’s defense, the insurer could not assert the attorney-client privilege as against the insured.
However, the insurer in this case was seeking to protect communications from in-house counsel to the insurer’s employees regarding issues of coverage, issuing a reservation of rights letter, and bad faith, in connection with the underlying action. The court appeared to recognize this distinction in its evaluation.
The court then re-stated the federal work product doctrine in this context: (i) ordinarily a party “’may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).’”; (ii) “[a] document is prepared in anticipation of litigation when ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’”; (iii) “It has generally been held that the work product doctrine applies to insurance companies confronted with a bad faith claim brought by an insured.”; (iv) “A ‘mere claim of bad faith is not enough to shatter the work-product privilege.’”; and (v) “Courts recognize that ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”
The court then applied the potential application of these two privileges to documents that were outside the mediation privilege. The insurer was instructed to “review its privilege log .… and [i]f necessary, [the insurer] shall make a further production and/or amend its privilege log.”
Further, “[t]o the extent, [the insurer] asserts the attorney-client privilege, or the work product doctrine to exclude production of documents created prior to the settlement of the Underlying Action … [the insurer] shall produce those documents to this court for in camera review ….”