discovery in bad faith insurance litigation: key to...

Discovery in Bad Faith Insurance Litigation:

Key to Successfully Proving or Defending Claims Navigating Scope of Discovery, Document Production,

and Joint Client Exception to and Implied Waivers of Privilege

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WEDNESDAY, JUNE 10, 2015

Presenting a live 90-minute webinar with interactive Q&A

Susan E. Dinneen, King Krebs & Jurgens, New Orleans

Marshall Gilinsky, Shareholder, Anderson Kill, Washington, D.C.

Alan P. Jacobus, Proprietor, Law Offices of Alan Palmer Jacobus, San Francisco

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Discovery in Bad Faith Insurance Litigation

The Policyholder’s Perspective

Marshall Gilinsky, Esq. Anderson Kill, LLP

1717 Pennsylvania Avenue

Washington, DC 20006 202.416.6554

[email protected]


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Disclaimer The views expressed by the participants in this program are not those of the participants’ employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session.


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DUTY OF GOOD FAITH Breach of Contract

− Benefit of Bargain

− Extra-contractual?

Tort

− Extra-Contractual

− Punitive Damages


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POSSIBLE BAD FAITH CONDUCT

Unreasonable Delay

Inadequate Investigation

Unreasonable Interpretation

Failure to Settle

Misrepresentation


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POSSIBLE BAD FAITH CONDUCT (2)

Refusal to Defend

Improper Conduct During Claims Process

Duty of Good Faith Continues

Deny Claim Advertised as Covered

Assert “Prejudice” Without Basis


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WHAT IS BAD FAITH CONDUCT?

Objectively Unreasonable

Reckless Disregard / Lack of Reasonable Grounds

Evil Mind


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Objectively Unreasonable The California standard.

The policyholder only needs to show that the insurance company’s conduct was objectively unreasonable.

Authority: Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032 (1973)


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Reckless Disregard

The Wisconsin standard.

Policyholder must show the insurance company’s awareness or reckless disregard that position was unreasonable, but this may be inferred from lack of reasonable grounds for delay or denial.

Authority: Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978).


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Evil Mind The policyholder must show a dishonest or

oppressive motivation.

Authority: Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W. 463 (1984).

Other Relevant Bad Faith /

Discovery Issues

• First party / third party differences

• Attorney-client privilege

• Work product

• Punitive damages

• Expert witnesses

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First Party / Third Party Concerns

• First Party (Fire / Theft / Etc.)

– Claim adjustment

• Third Party (Liability)

– Claim handling

– Duty to defend

– Duty to indemnify

– Duty to settle

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Attorney-Client Privilege and

Discovery

• Extends to communications and not to facts.

• The client cannot be compelled to answer the question, “What did you say or write to the attorney?”

• The client may not refuse to disclose any relevant fact within his knowledge merely because he incorporated a statement of such fact into his communication to his attorney.

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Public Policy Supporting the

Attorney-Client Privilege

• To encourage full and frank communication

between attorneys and their clients and thereby

promote broader public interests in the observance

of law.

• Sound advocacy depends upon the lawyer’s being

fully informed by the client.

• A lawyer’s assistance can only be safely and

readily availed of when free from the

consequences or the apprehension of disclosure.

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Work Product Protections and

Discovery

• More limited in scope than the attorney-

client privilege

• Note: Not attorney work product

• Policy: encourages lawyers to put their

work in writing

• Promotes efficiency

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The Work Product Rule

• “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). But, subject to Rule 26 (b) (4), those materials may be discovered if:

(i) they are otherwise discoverable under Rule 26 (b) (1); and

(ii) the 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.”

Fed. R. Civ. P. 26 (b) (3).

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• Applies to more than just attorneys

• General rule is that work product is not

discoverable

• High showing of substantial need and

inability to obtain the information elsewhere

required

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• Even if disclosure is ordered, it is limited.

• In ordering discovery of such materials

when the required showing has been made,

the court shall protect against disclosure of

the mental impressions, conclusions,

opinions, or legal theories of an attorney or

other representative of a party concerning

the litigation.

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Professional Responsibilities

Issues

• “It is the duty of an attorney . . . [t]o

maintain inviolate the confidence, and at

every peril to himself or herself to preserve

the secrets, of his or her client.”

• “A [lawyer] shall not intentionally,

recklessly, or repeatedly fail to perform

legal services with competence.”

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SOURCES OF EVIDENCE 1. Manuals (e.g., Claims, U/W, Loss Control)

2. Advertisements

3. Other Policyholders’ Claims Files

4. Briefs

5. Communications with Reinsurers

6. Claims File

7. Attorneys Acting as Claims Handlers


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SOURCES OF EVIDENCE (2) 8. Training Materials and Textbooks

9. Failure to Check Internal Information Prior to Denial (e.g., Loss control, U/W)

10. Automated Claims Adjusting Programs (e.g., Colossus, Xactimate)

11. Whistleblowers

Susan E. Dinneen, Esq. King, Krebs & Jurgens, P.L.L.C. 201 St. Charles Ave., 45th Floor New Orleans, Louisiana 70170

504.582.1274

[email protected]

Defense Perspective on Discovery in Bad Faith Suits

Discovery Typically Requested by Plaintiffs in Bad Faith Litigation

– Insured’s Claim File

– Information Regarding Similar Claims

• Other Insureds’ Claim Files

• Stats on Claims Handling

– Internal Policies, Procedures, Guides

Limiting the Scope of Plaintiff’s Discovery

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Resisting Institutional Allegations/Discovery

• Conduct Internal Investigation

• Object to Discovery on Grounds of Relevance, Breadth, Privacy, Privilege, Proprietary/Trade Secret

• Issue Discovery to Show No Basis for Allegations

• Motion to Strike Scandalous Allegations (e.g., discrimination)

• MSJ to Dismiss Bad Faith Allegations


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Resisting Institutional Allegations/Discovery

• Motion to Quash

• Protective Order (file documents under seal; return document after case resolved)

• Produce Redacted Version of Documents (following in camera inspection, if necessary)

• The Importance of Institutional Consistency in Responding To Discovery


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Production of the Insured’s Claims File

• Blanket requests for claim file generally not acceptable

• Redact all confidential/privileged portions of claim file

• Work product privilege – When does it attach?

– “…at the pivotal point ‘where the probability of litigating the claim is substantial and imminent’ or where ‘litigation was fairly foreseeable....’ ” Vinet v. Allstate Ins. Co., 1993 WL 515753 (E.D. La. 1993), citing State Farm Fire and Casualty Company v. Perrigan, 102 F.R.D. 235, 238 (W.D.Va.1984)


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• What if suit is first notice of the claim (e.g., UM claim)?

• A determining factor regarding the work-product doctrine is whether the document was prepared or obtained because of the prospect of litigation or in the normal course of business.

–Vinet v. Allstate Ins. Co., 1993 WL 515753 (E.D. La. 1993), citing Carver v. Allstate Insurance Co., 94 F.R.D. 131, 134 (S.D.Ga.1982)


Production of the Insured’s Claims File

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Discovery Regarding Similar Claims • Privacy concerns for other insureds • Stats are not credible evidence to prove insurer

handled this claim in a particular manner • Stats not relevant to reason for denial of claim at

issue – Other denials were made by different adjusters

• Evidence of other claims would essentially force insurer to defend multiple mini-trials

• Request is burdensome, or the requested materials are not in the insurer’s possession


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Production of Other Insured’s Claims Files

• Redact all confidential/privileged portions of claim file

– Fed. R. Civ. P. 5.2

• Request in camera review of documents at issue

• Limit to discovery of “similarly situated” insureds

– Weiss v. Allstate, 512 F. Supp.2d (E.D.La. 2007)

– Lambert v. State Farm, 2008 WL 2313134 (E.D.La. 2008)

– Chateau Argonne v. State Farm, 2008 WL 4411654 (E.D.La 2008)


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Discovery Regarding Claim Handling Stats

• Scandalous allegations are alleged to open the door to institutional discovery – Plaintiff’s Allegation: Insurer tends to treat young

African American females and males differently from their other customers.

– Plaintiff’s Discovery: Please provide statistical data regarding the number of claims that have been settled, by race and gender of the insured, in the Greater New Orleans area; please admit or deny that the plaintiff is an African American.


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• Tailor discovery to show no factual basis for the allegation – Please identify all facts and evidence supporting the allegations in ¶XII

of your Petition that “…the adjuster is refusing to pay the plaintiff’s claim because he believes that young African American females always make fraudulent insurance claims.”

• Conduct internal investigation to show no factual basis – Interview adjusters to determine if they knew the insured’s race

– “Where a decision is putatively race based, it naturally follows that a defendant accused of intentional racial discrimination would have to know the race of the plaintiff." Johnson v. Northwest Airlines, 839 F. Supp. 1253, 1259 (E.D. Mich. 1993);

• File Motion to Strike the Scandalous Allegations


Discovery Regarding Claim Handling Stats

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Production of Internal Operating Guides, Manuals and Protocols

• Tactic employed by plaintiffs to show bad faith -demonstrate an insurer violated its own internal policies while adjusting the claim at issue.

• Most insurers consider those guides to be protected trade secrets and proprietary data that is not discoverable.

• If it must be produced, redact and produce subject to Protective Order


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One of the goals of discovery in Bad Faith litigation is to obtain sufficient evidence to have the bad faith claim dismissed on MSJ.

Identifying Documents and Testimony to Refute Bad Faith Claims

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Plaintiff Must Show Satisfactory Proof of Loss Before Proving the Insurer Breached Its Duties • Plaintiff has the burden of proving satisfactory proof

of loss.

• “It logically follows from this burden that a plaintiff who possesses information that would suffice as satisfactory proof of loss, but does not relay that information to the insurer, is not entitled to a finding that the insurer was arbitrary or capricious” – Reed v. State Farm Mut. Auto. Ins. Co., 857 So.2d 1012,1020–21

(La 2003)


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Discovery to Dispute Satisfactory Proof of Loss • Affidavit/testimony from claim adjuster re: insured’s failure to

contact insurer or produce documentation after last tender

• Interrogatories seeking specific details regarding steps Plaintiff took to notify the insurer that he was unsatisfied with the adjustment of the claim

• Request for production of estimates, repair contracts, receipts, invoices to see when such documents were prepared

• Deposition/request for admission relative to satisfactory proof of loss

– e.g., admit you failed to contact the insurance company prior to the institution of the instant lawsuit


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Reasonable Basis to Deny Claim • Numerous courts have held insurers are not liable

for denying a claim in bad faith, even though coverage was ultimately resolved at trial in favor of the insured, so long as the insurer had a reasonable basis to deny the claim.

• While it is plaintiff’s burden to prove the insurer’s conduct was arbitrary, capricious or without probable cause, the insurer should collect evidence to prove a prima facie case that its denial of the claim was reasonable.


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Courts have found a reasonable basis to deny vehicle theft claims where there are inconsistencies discovered during the adjustment of the claim, making it “not a clear cut theft of loss”

– Duhon v. State Farm Mutual Automobile Insurance Co., 952 So.2d 908 (La.Ct.App.3d. Cir.2007)

– Johnson v. State Farm Mutual Automobile Insurance Company, 2012 WL 1745497 (E.D. La., May 16, 2012)

Reasonable Basis to Deny Claim – Suspicious Facts


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• Look to information already in the claims file – e.g. recorded statements, activity log note, EUOs, affidavit

of vehicle theft, police report

• Conduct discovery to show discrepancies in claim or other evidence of a possible fraud – Criminal background of the insured – Prior claims/suits made by the insured – Bank statements, credit reports, tax returns – Cell phone/tower records – Police department video or photographs – Social media – Medical/pharmacy records

Discovery to Show Reasonable Basis to Deny Claim – Suspicious Facts


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Reasonable Basis to Deny Claim – Coverage Questions

An adjuster may have reasonable basis to deny a claim or certain damage if the adjuster concluded:

– The damage/injury was preexisting

– The damage was caused by a peril not covered under the policy (e.g., flood, mold).


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• Affidavit/testimony of adjuster to explain why the claim decision was made

• Retain experts to opine on causation of damage • Request inspection of the property or an IME • Written discovery relative to condition of property

prior to the loss • Road Home / SBA / FEMA documents • Prior insurance claims (via claims search, SDT to

other insurers, underwriting documents)

Discovery to Show Reasonable Basis to Deny Claim – Coverage Questions


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• Estimates/records of current and prior repairs

• Photos of property prior to the loss

• History of property: year built/purchased, title transfers, repair/maintenance contracts

• Subpoena experts and public adjusters hired by plaintiff

• Depositions of Plaintiffs and their experts


Discovery to Show Reasonable Basis to Deny Claim – Coverage Questions

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Comparative Bad Faith as a Defense

• Insured’s own bad faith may preclude finding that insurer is in bad faith.


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Discovery to Show Insured’s Comparative Bad Faith as a Defense

• Issue discovery tailored to the insured’s actions:

– Breach of Duties After the Loss/Non-Cooperation (refusal to submit to EUO, IME, property inspection; refusal to produce records, receipts or other documents requested)

– Failure to dispute the claim decision prior to filing suit

– Material Misrepresentations/Fraud/Concealment

– Bad Faith Setup (e.g., time limited settlement demand, refusal to submit proof of loss)


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Advice of Counsel Defense in

Bad Faith Cases

• May be a complete defense to an insurer accused

of bad faith.

• Arguably puts the attorney’s advice at issue.

• May be discoverable.

• Limitations.

• State Farm Mut. Auto. Ins. Co. v. Superior Court

(Johnson Kinsey, Inc.), 228 Cal. App. 3d 721, 724,

279 Cal. Rptr. 116, 117-118 (1991).

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The Boone / Tackett / Lee Rules

• Policyholders will argue that the mere allegation of bad faith makes the insurer’s pre-denial file discoverable.

– Boone v. Vanliner Ins. Co., 91 Ohio St. 209, 744 N.E.2d 154 (2001)

– Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254 (Del. 1995)

– State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 13 P.3d 1169 (2000)

• Bad policy?

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The Boone / Tackett / Lee Rule:

Strategies

• Limits use of coverage counsel before denying a claim

• Removal to federal court (arguably more favorable work product rules)

• Limitation to the facts in Boone / Tackett / Lee

• Sever and stay of the bad faith claim.

• Two-way street?

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The O’Hara Rule (Illinois)

• W. States Ins. Co. v. O’Hara, 357 Ill. App.

3d 509, 828 N.E.2d 842, 293 Ill. Dec. 532

(2005)

• Odd application of common interest

doctrine

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Discovery in Punitive Damages

Claims

• Claims handling for claim at issue

• Discovery of handling of other insureds’

claims

– State Farm Mut. Auto. Ins. Co. v. Campbell,

538 U.S. 208, 123 S. Ct. 1513 (2003)

– Privacy Issues

– Relevance versus burden

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Expert Witnesses

• Policyholder will want to try to explain

failures in claim handling

• Insurer may or may not want to call an

expert

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Conclusion

• Know your jurisdiction

• Anticipate what your opponent’s discovery

will be

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Alan Jacobus Law Offices of Alan Palmer Jacobus

[email protected]

415.685.0820

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