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In Borgia v. State Farm Mutual Automobile Insurance Co., the court addressed discovery disputes in the context of UIM breach of contract and bad faith claims, based on refusal to pay the $750,000 policy limits and alleged unreasonable delays in claim processing.  The insured had sustained serious physical and cognitive injuries, and was unable to care for his wife who suffered from multiple sclerosis.

The insurer had produced a redacted claims file, and withheld other documents based upon the attorney-client privilege and the work product doctrine. Some material was also redacted or withheld on the basis of relevance.  The insured sought to compel the carrier to produce a subset of the material referenced in its privilege log.

Prior to making its ruling, the court reviewed the disputed documents in camera. The insured ultimately did not challenge the assertion of the attorney-client privilege over communications between outside counsel and claims personnel, including redactions of such material; nor the redaction or withholding of information on unrelated matters on the basis of relevance.

Well prior to suit, the parties exchanged communications and demands after the accident, and the point came where the insureds demanded policy limits, and stated that in the absence of an expeditious resolution they would proceed to litigation.  The carrier responded that it needed more time to evaluate medical records.  Two months later, the carrier retained a law firm.

That counsel began to play the lead role in discussing settlement with the insured’s counsel in short order.  The same firm eventually represented the insurer after suit was filed five months later.

Prior to suit, the insurer requested statements under oath (“SUOs”), which were taken 2-3 months after the carrier retained counsel.  Shortly before taking the SUOs, the insurer offered $300,000 to settle, and then $350,000 after the SUOs. The insureds rejected the offers, and the insurer thereafter requested an independent medical examination of the injured insured.

A complaint was eventually filed for breach of contract, bad faith, and loss of consortium. After removal, a motion to dismiss the bad faith claim was denied.

The documents sought included: (1) entries in electronic claims logs regarding the  assessment of liability for the accident and available coverage, valuation of the claim, settlement authority, reserve amounts, and updates made to various categories of information; (2) evaluations of the claim prepared by claims personnel in two different months prior to suit; (3) emails among claims personnel regarding settlement authority; and (4) an asset report for the driver of the other car involved in the accident.

The insurer invoked the work product doctrine as to all of these documents, most of which reflected the mental impressions of the company’s claims personnel regarding the claim.

The work product doctrine protects certain material prepared in anticipation of litigation, but not those prepared in the ordinary course of business.  The court observed that: “As numerous courts have recognized, ‘[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.’”

On the other hand, this did not mean “that the work product doctrine is wholly inapplicable to insurers’ claims files,” or that the “’mere claim of bad faith is enough to shatter the work-produce privilege.’” “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 first step is to determine when the insurer reasonably anticipated litigation, which includes both an objective and subjective component.  Courts initially focus on the state of mind of the party preparing, or ordering preparation, of the document, and that person’s anticipation of litigation must be objectively reasonable for the work product protection to apply. “A party’s anticipation of litigation is objectively reasonable if ‘there existed an identifiable specific claim or impending litigation when the materials were prepared.’”

The court concluded that the insurer reasonably anticipated litigation by the time it hired counsel to handle the claim, in light of the policy limit demand, the threat of litigation, and its own knowledge that it was not prepared to pay policy limits.  The fact that the insureds had hired their own counsel earlier, who made demands, were not facts, standing alone, that objectively created anticipation of litigation.  The fact that the insurer did not hire counsel for months after the initial demands supported that conclusion.

Thus, all document prepared prior to the date of counsel’s retention had to be produced, unredacted. This included reserve information.  The court recognized that district courts in the Third Circuit are divided over whether reserve information is discoverable.

However, it followed the district courts which conclude that “the establishment of reserves would serve little, if any, purpose unless the reserves ‘have some relationship to the insurer’s estimation of the insured’s potential liability, and the amount set aside for reserves is therefore germane to any analysis [the defendant-insurer] made of the claim’s value and is relevant to the determination of whether the defendant-insurer acted in bad faith in processing the claim.”

The court looked to Judge Rambo’s recent Shaffer opinion on this point; though in finding reserve information relevant, the court expressed “no opinion regarding the admissibility of such information as that issue is not before the Court at this time.”

The court next addressed whether documents created after hiring counsel still lacked work product protection because they would have been created in the ordinary course of business in any event. The court stated, again citing Shaffer: “This argument has some force since … an insurance company ‘has a duty to investigate, evaluate[,] and make a decision with respect to claims made on it by its insureds.’”

Again, however, the court also recognized that at some point there is a shift from claims evaluation to defending against objectively anticipated prospective litigation, citing Judge Rambo’s recent Keefer decision. After an in camera review, and for the reasons given as to when the insurer first reasonably anticipated litigation, the court found that activity “shifted from mere claims evaluation to defending against the prospect of litigation on an objectively reasonable basis” when it retained outside counsel.

Lastly, the court addressed plaintiff’s substantial need argument under Rule 26(b), for overcoming the work product doctrine, even if applicable, i.e., where a party “shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.”

The court then reiterated that “a mere allegation of bad faith is insufficient to overcome the work product privilege,” and then stated the insureds failed to make the showing necessary to obtain disclosure of work-product-protected materials, particularly where they could depose the claims personnel as a viable means of obtaining at least some of the information they wanted. The insureds motion was, however, denied without prejudice.

The court noted that there had been no true address of whether any of this included opinion work product, which would be entitle to the highest level of protection.

Date of Decision: September 3, 2014

Borgia v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION No. 14-3149, 2014 U.S. Dist. LEXIS 123180, (E.D. Pa. September 3, 2014) (Sanchez, J.)