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In Wagner v. Allstate Insurance Company, an underinsured motorist case, the court (1) refused the insurer’s effort to stay the bad faith claim, but (2) rejected most of the insured’s discovery requests.  The issues were made less dramatic because the parties appeared to agree that the breach of contract and bad faith claims would not be tried simultaneously to the jury; rather the issues would be bifurcated for trial if necessary.

However, the insurer continued to press the issue that bad faith discovery should still be stayed, pending the outcome of the breach of contract trial, which would have prevented consecutive trials before the same jury – an argument the court rejected.

Stay of Bad Faith Claim

The insurer’s primary argument was that it would be prejudiced in allowing discovery on the bad faith claim, because it would putatively “have to forfeit protection for work product that it prepared in anticipation of litigating Plaintiffs’ breach of contract claim because that information may be relevant to the bad faith claim (and therefore discoverable).”

However, the court observed that a “mere claim of bad faith is not enough to shatter the work-product privilege.” The only issue was then really whether the materials were work product or not, and the court did not believe there was a need to avoid its deciding those issues that merited a stay.

Rather, the only prejudice at issue was to the insured, because either (a) discovery on all issues would proceed and the insurer might put up a fight on discovery as to material it would otherwise turn over without objection, or (b) a stay of the bad faith claim would subject the insureds “to the time and expense of having to participate in two separate rounds of discovery (and inevitable motion practice) accompanied by two separate jury trials.”

“For Plaintiffs, neither alternative is free from hardship. By opposing [the insurer’s] request to stay the bad faith claim, the [insureds] have taken the position that the former represents the lesser of these two evils, and [the insurer], which bears the burden of demonstrating that separating the claims is proper, … has not shown otherwise.” The court also rejected the notion that the insurer’s victory on the breach of contract claim would moot the bad faith claim.

The court stated that even if that were to occur, the bad faith claim could proceed on the basis of alleged delays in evaluating or investigating the claim.

In sum, the stay was not needed to eliminate prejudice or promote economy. The court observed the different trends in granting/denying stays in Pennsylvania’s federal and state courts, but attributed this to the fact that bad faith is tried by a judge in state court, but a jury in federal courts.

Discovery Issues

The court then went on to address the work product issue, citing the Borgia case as summarizing the matter: “[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.  … This does not mean, however, that the work product doctrine is wholly inapplicable to insurers’ claims files. … Rather, [a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.”

Thus, the insureds’ assertion that all of the insurer’s claims and investigations files were created in the ordinary course of business was untenable. Rather, “[w]hether Plaintiffs may be entitled to a subset of that information would hinge upon a fact-specific inquiry into the nature of the information that they seek, when [the insurer] reasonably anticipated litigation, Plaintiffs’ need for the particular information, and whether they can obtain the information through other means.”

The court observed this requires very specific arguments and typically the need for in camera review by the court of the documents at issue.  The insureds made no such arguments on this motion; nor did it address other non-work product arguments.  Their sole position appeared to be that there was no work product privilege in the first instance, and so this detail was not required.  Thus, the motion was denied, but without prejudice.

However, the court did go on to determine the date when the insurer reasonably anticipated litigation, thus providing resolution for the production of documents prior to that date.  This date occurred after the insureds first demand for policy limits, because the insurer had asked for certain additional information to be able to evaluate the claim and the demand.  It was only after receiving that information that litigation could have been reasonably anticipated.

Lastly, the court observed that even materials prepared after litigation was reasonably anticipated might be discoverable if the exceptions to work product protection could be established. Thus, if the insureds “are able to show that they have a substantial need for particular materials and cannot, without undue hardship, obtain their substantial equivalent by other means, Plaintiffs may be permitted to obtain the discovery they seek, provided Plaintiffs are not seeking mental impressions, conclusions, opinions, or legal theories of [the insurer’s]  attorneys or other representatives.”

The court observed that deposition testimony from the insurer’s employees may be an alternative source of this information.

Date of Decision:  January 19, 2016

Wagner v. Allstate Ins. Co., No. 5:14-cv-07326, 2016 U.S. Dist. LEXIS 6364 (E.D. Pa. January 19, 2016) (Leeson, J.)