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A primary insurer brings an assigned bad faith claim against an excess insurer for not paying an excess verdict.  This opinion addresses discovery disputes over the attorney-client privilege and work product doctrine in that bad faith action.

The excess insurer sought discovery concerning defense counsel’s claim handling and opinions from the primary, and the primary moved to quash.

In the underlying action, plaintiff made an offer of judgment for $150,000.  The primary’s policy limit was $250,000.  The insured-tortfeasor wanted the primary to accept the offer of judgment, but it refused.  The underlying plaintiff’s counsel sent a Rova Farms letter to the primary, making clear that if there was an excess verdict, the primary could be liable for all sums in excess of the policy limit.  The case went to trial, and the jury verdict exceeded $2,000,000.

Only after the verdict did the insured’s family make counsel and the primary aware that they had an umbrella policy with a $2,000,000 limit. Thus, the excess carrier had never received notice of the claim or the trial, and only came to learn about the case after the verdict.  The primary likewise asserts it was not aware of the excess policy until after the verdict.  It demanded the excess carrier pay all sums due over its primary policy limits and any deductible.

The excess carrier began an investigation, making various requests to the insured and the primary for documents.  The primary and excess carriers also had settlement discussions, which did not resolve the matter.  The insureds assigned any claims against the excess carrier to the primary carrier.

The primary brought the instant suit against the excess carrier for denying coverage in bad faith.  The excess counterclaimed against the primary for acting in bad faith when it failed to settle the claim within policy limits.

In discovery, the primary requested documents from the excess supporting the counterclaim that the primary acted in bad faith.  The excess sought documents and communication from defense counsel (that the primary assigned to defend the insured) in the underlying action.  The primary withheld some documents on the basis of the attorney-client privilege and work product doctrine.

The excess carrier then issued a subpoena for these records directly to defense counsel.  Both the primary carrier and its appointed defense counsel objected.  Defense counsel issued a lengthy privilege log, while it withheld a considerable set of documents and communications.

The primary moved to quash the subpoena, with defense counsel’s permission.

Magistrate Judge Goodman’s thorough and detailed opinion sets out the parties’ positions at length, and provides a detailed exposition of the relevant case law. All of this boils down to whether the common interest doctrine applies to the relationship between the primary and excess carriers.  Resolution rested on the following principles:

  1. “In New Jersey, the primary insurer owes the excess insurer a duty to exercise good faith, ‘to take the initiative’ in handling the claims and to attempt to reach a settlement within the primary insurer’s policy limit.”
  2. “[A] primary insurer owes an excess insurer ‘the same positive duty to take the initiative and attempt to negotiate a settlement within its policy limit that it owes to its assured.’”
  3. “The excess insurer, therefore, generally has no duty to participate in the defense, and instead relies on the primary insurer’s good faith handling of the claims.”
  4. “Accordingly, an excess insurer relies on the primary insurer to reasonably (1) discharge its claims-handling obligations; (2) discharge its defense obligations; (3) properly disclose and apprise the excess insurer of events which will likely affect that insurer’s coverage; and (4) safeguard the rights and interests of the excess insurer by not placing the primary insurer’s own interests above that of the excess insurer.”
  5. “The imposition of such a duty of good faith and fair dealing on the primary insurer is based in fairness and policy…. Specifically, [t]he primary is in a knowledgeable position as it has current information of the status of an underlying claim, while the excess carrier relies on the primary carrier to keep it properly apprised of negotiation and litigation. It is a unique relationship between the parties, and it is reasonable for the excess carrier to rely on the primary carrier to act in good faith.”
  6. “[W]hen the primary insurer undertakes the representation of the insured, ‘it has the sole right to negotiate settlements’ and therefore ‘the interests of the excess carrier are very much affected by the actions of the primary….’”

Relying on these principles, the court rejected the notion that a primary’s disclosure of attorney-client communications to an excess carrier, in keeping the excess carrier apprised of the litigation, would result in a privilege waiver.  Magistrate Judge Goodman also rejected the argument that the primary’s fiduciary duty to the excess “is conditioned upon the excess insurer first contributing towards the final judgment or obtaining an assignment; [rather] the duty exists even before any judgment is even reached.”

She states: “This Court instead follows the broader approach, that the common interest doctrine protects otherwise privileged communications or work product shared with non-parties as long as the disclosure is made due to actual or anticipated litigation, to further a common interest, and is made in a manner sufficient to preserve the confidentiality of the documents and prevent disclosure to adverse parties.” The common interest between primary and excess carriers allows disclosure without waiver.  Disclosures are made to further a common purpose. Moreover, the excess insurer is “entitled to know the primary insurer’s position on the dispute, and [the primary insurer is] legally obligated to keep [the excess] apprised of the status of the claim and litigation.”

In the present case, if the primary knew of the excess insurer’s existence, it would have been required to provide the very same information the excess was seeking in discovery.  It would have been obligated to apprise the excess carrier of settlement negotiations and “strategic decisions”.  This duty only ends if the excess carrier denies coverage; and here, the excess carrier did not deny coverage, but never received notice until after a verdict was rendered.

In sum, the primary would have been able to provide the records at issue, without waiving any privileges, “because the disclosure would have been made to a non-adverse entity to further a common interest with respect to the handling of the [underlying] action. That [the excess carrier] did not actually receive notice of the [underlying] action should not prevent it from obtaining now what it otherwise would have received in the normal course.”

Date of Decision:  March 22, 2022

MERCURY INDEMNITY COMPANY OF AMERICA v. GREAT NORTHERN INSURANCE COMPANY, U.S. District Court District of New Jersey No. CV1914278MASLHG, 2022 WL 844561 (D.N.J. Mar. 22, 2022) (Goodman, M.J.)