October Bad Faith Case Roundup

discovery

Discovery

Claims Files / Reserve History

Parisi vs. State Farm, 2017 US Dist. LEX, 162161 (Western District of PA, Oct. 2, 2017) (Gibson, J.)Court ordered in camera inspection of State Farm’s claims file including portion of the file designated “free-form attorney” to make determination of whether or not information contained is protected by the attorney-client privilege or attorney work-product doctrine.   Court also held reserve history of claim is discoverable.

Pleadings

Adequately Pleading Bad Faith/Handling UIM Claim

Thomas vs. Protective Insurance Company, 2017 US Dist. LEX 166955 (M.D. Pa. Oct. 10, 2017) (Caputo, J.) – The Court denied Protective’s Motion to Dismiss Plaintiff’s Amended Complaint pursuant to F.R.Civ. P. 12(b)(6) finding that Plaintiff sufficiently stated bad faith cause of action when making specific averments concerning insurer’s conduct of handling UIM claim.  Plaintiff specifically alleged Protective’s failure to investigate, failure to communicate, failure to evaluate, and misrepresentation to the insured as well as violation of Pennsylvania Insurance Department regulations.

Irving vs. State Farm, 2017 US Dist. LEXIS 164390 (E.D. Pa. Oct. 4, 2017) (Slomsky, J.) – Court granted State Farm’s Motion to Dismiss Plaintiff’s bad faith claims pursuant to F.R.Civ.P 12(b)(6).   Disagreement over the value of the UIM claim, without more, does not constitute bad faith.   Plaintiff granted leave to attempt to amend Complaint to state bad faith cause of action.

 

Summary Judgment

Defense and Indemnity Provided To Insured

State Auto Property vs. Stucky, 2017 W.V. LEXIS 759 (Oct. 10, 2017) (Ketchum, J.) West Virginia Supreme Court held that Plaintiff failed to state a bad faith claim as a matter of law where it was provided defense and indemnity in an underlying trespass suit.   Court observed that State Auto provided the insured, CMD, with a defense and settled the underlying tort suit for $325,000, well within the insured’s $1 million dollar policy limit.
Delays Processing UIM Claim,  Collection of Records,  Investigation

Radolfi vs. State Farm, 2017 U.S. Dist. LEXIS, 165013 (M.D. Pa., Oct. 5, 2017) (Carlson, J.) – Court grants summary judgment in favor of State Farm in UIM claim,  holding no inference from which a finding of bad faith could be made.   The Court observed that while there were delays in processing the claim, including the collection and review of medical records, the delays were not attributable to State Farm.  The Court found that State Farm’s request to the Plaintiff’s attorney for medical records were not complied with, including requests for updated medical records.  The Court held that Plaintiff also failed to provide employment records despite making a claim for wage loss.  The Court also held that a new contractual bad faith cause of action was barred by the law of the case, in that it had previously dismissed a statutory bad faith claim, and that State Farm’s initial error in stating coverage limits to the insured did not constitute bad faith.

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Attorney Client Privilege Waived In Bad Faith Case Despite No Advice of Counsel Defense, Federal Magistrate Rules

acp

HATTIESBURG, Aug. 15 — A federal magistrate judge in Mississippi has ruled Nationwide Insurance must produce documents and that the insurer’s former counsel must produce billing records in a bad faith case related to the handling of an uninsured/underinsured motorist’s claim, finding the insurer waived protections under the attorney-client privilege and the attorney work product doctrine, even though it did not formally assert the advice of counsel defense.

In Craig Flanagan, et al. v Nationwide Property and Casualty Insurance Company,  U.S. Magistrate Judge Michael T. Parker  found that while Nationwide did not formally assert the advice of counsel defense opening the door to prior counsel’s work product and communications, it did pick and choose certain potentially privileged documents to produce in  aid of  its defense in the case, thereby waiving attorney – client and work product protections.

Nationwide’s insured, Craig Flanagan was severely injured in a motor vehicle accident on  May 31, 2014 while driving a vehicle owned by owned by Flanagan Construction Co. and insured by Nationwide Property and Casualty Insurance Co.  The Nationwide Policy provided UM/UIM Coverage, out of which Nationwide paid  $1 million statutory limits for noneconomic damages and $1.5 million for the medical expenses.  After Nationwide failed to pay the remaining $4.15 million in remaining UM/UIM limits, Flanagan, his wife,  and Flanagan Construction sued Nationwide in the U.S. District Court for the Southern District of Mississippi. In the suit, the  Plaintiffs sought the remaining UM/UIM limits ,  and also alleged fad faith, for which they sought punitive damages.

During the course of the case the Plaintiff’s filed a motion to compel production of a number of Nationwide claims documents, including investigative documents, and the files of outside counsel, Bill McDonough of Copeland Cook Taylor and Bush, relating to the claims. The Plaintiffs also sought the billing records of McDonough and the Copeland firm,  which was retained initially by Nationwide  to investigate the claim, but was later retained to represent Nationwide in the UM/UIM claim as well.

In granting the motion to compel, Judge Parker wrote:

“Plaintiffs argue that Nationwide is relying upon the advice and actions of McDonough as a defense despite Nationwide’s insistence that it is not asserting an ‘advice of counsel’ defense.  According to Plaintiffs, ‘Nationwide has produced a number of communications between Nationwide and Copeland Cook in support of its defense to the bad faith allegations, but has chosen to cherry-pick which communications to produce in discovery and which communications to withhold on a claim of privilege.’ . . .  Plaintiffs also point to the fact Nationwide identified McDonough as a witness in its initial disclosures and point to Nationwide’s interrogatory response.”

Nationwide opposed the motion to compel,  and argued that did not plead advice of counsel.  It also argued that the documents it did produce showing communication between Nationwide and McDonough contained only “objective facts,” and neither legal advice nor attorney work product.

Judge Parker disagreed, however, writing:

“review of the documents produced by Nationwide . . . reveals that Nationwide did not simply disclose ‘objective facts’ as it alleges, but also disclosed McDonough’s opinions regarding Flanagan’s evidence supporting his loss of income claim, Flanagan’s ability to prove cognitive impairment, the need to hire experts, the benefits and risks involved in scheduling a medical examination, and the timeliness of Nationwide’s investigation and payment to Flanagan…

An insured cannot force an insurer to waive the protections of the attorney-client privilege merely by bringing a bad faith claim.  Nationwide’s prior production, however, has put at issue Nationwide’s confidential communications with McDonough.  Nationwide has voluntarily injected its counsel’s advice into this case by purposely disclosing, inter alia, its counsel’s opinion that Nationwide has not ‘unnecessarily delayed payment of [Flanagan’s] claim.  . . .

To allow Nationwide to use the attorney-client privilege to withhold additional information related to counsel’s advice ‘would be manifestly unfair’ to Plaintiffs.”

Judge Parker also  found that Nationwide’s disclosure of certain documents containing McDonough’s opinions and impressions constituted waiver of the work product doctrine as well, and ordered the documents to be produced.

Editor’s Note: The price of asserting the Advice of Counsel Defense in a bad faith case is always waiver of attorney – client privilege and the attorney work product doctrine.  The calculus of the costs and benefits of asserting the defense must therefore always  be done thoroughly and carefully.   Insurers and their lawyers must be mindful that there are many ways to assert Advice of Counsel, and few, if any, to try to put it back in to the bottle once it has been let out.  Formal assertion of the defense is but one way to waive the protections of   attorney – client privilege and the attorney work product doctrine.  The defense can be asserted by conduct as well, leading to inadvertent waivers of privilege and work product protection. 

Craig Flanagan, et al. v Nationwide Property and Casualty Insurance Company, No. 2:17-cv-33-KS-MTP, S.D. Miss., Eastern Div., 2017 U.S. Dist. LEXIS 123204

Pa. Judge: Bad Faith Case Severed, Jury To Hear Common Law Bad Faith Claims

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Pennsylvania’s  Westmoreland County Court of Common Pleas has denied a motion to stay of discovery in a  bad faith case pending completion of a UIM case, but has also ordered severance of trial of the bad faith claims under which common law bad faith claims will be tried by a jury, and statutory bad faith claims will be tried by the judge.

In Madeja v. State Farm Mutual Automobile Ins. Co., No. 5493 of 2016 (C.P. Westmoreland Co. April 11, 2017 Scherer, J.), the plaintiffs advanced both common law bad faith claims and statutory bad faith claims,  The trial court ordered those claims severed from the underlying UIM claim.  In a bit of a quirk, however, the court ruled that depending on the verdict returned on the UIM claim,  the common law bad faith claims would be heard with the same jury that determined the UIM claim while the court would hear the statutory bad faith claim on a non-jury basis.

A copy of the trial court order can be found here.

Editor’s note:  The trial court order in this case points out the somewhat unique nature of bad faith law in Pennsylvania — it is a two-headed creature with both a common law component and a statutory law component.  In this writer’s experience, trials of both statutory and common law bad faith claims is not the norm — statutory bad faith claims are usually singly tried to the bench in state court.  The court order in question sets up for a potentially unruly and cumbersome bad faith trail, given the likelihood of overlapping evidence presented on the common law and statutory bad faith claims.   The Court might streamline the process by simply taking evidence in a single bad faith proceeding, and then letting the jury render a verdict on the common law claims, with the Court issuing a decision on the statutory bad faith claims. 

The ruling could serve as an incentive to the plaintiffs’ bar to not only plead common law bad faith claims, but seek trial of those claims in an effort to work around what has traditionally been the province of the trial judge in bad faith cases. 

 

 

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Post-Litigation Claims Documents Not Discoverable, Court Rules

discovery

OAKLAND, May 31 – A California federal district magistrate has shielded from discovery  information in its insurer’s file generated after  the filing of coverage litigation.

Magma, a technology company,  sought coverage for underlying securities litigation from Genesis, which had written Magma’s excess  directors and officers insurers coverage.  Magma requested discovery of its excess insurer’s “claims handling information.” After Genesis provided information up to but not following the date of the coverage suit against it, Magma requested  the excess insurer’s file for the period following the beginning of the coverage litigation, including information about the excess insurer’s reinsurance and reserves.

Magma argued that Genesis’ duty of good faith and fair dealing continued even after coverage litigation commences, and on that basis argued the post litigation claims documents were discoverable .

White and the cases that followed it concerned whether an insured’s bad faith claim could be based on evidence of an insurer’s conduct during coverage litigation — but in all of those cases, the conduct at issue was already known to the insured. In Magma, by contrast, the insured technology company was seeking discovery of information unknown to it, contained within the excess insurer’s own internal files.

District Magistrate Howard R. Lloyd wrote that the possibility of post litigation bad faith conduct was not sufficient grounds to make the post-litigation information discoverable.  Lloyd called the company’s discovery request on that basis speculative, and without more, a “fishing expedition into the heart of the insurer’s litigation strategy. . . the insurer has an absolute right to defend against the insured’s claims, and opening up its litigation file to its insured would undermine its fair day in court.”

Judge Lloyd ruled, that the work product privilege of  Federal Rule of Civil Procedure 26(b)(3)(A) protected the information.

Genesis Insurance Company v. Magma Design Automation, Inc. No. 5:06-cv-05526, (N.D. Cal. May 31, 2016)

3rd Circuit Rules Discovery Conduct Not Basis for Bad Faith Claim, Distinguishes Hollock

discovery

PHILADELPHIA, May 10 – The U.S. Court of Appeals for the Third Circuit has affirmed the dismissal of a disability insurance breach of contract and bad faith case, ruling in part that the insurer’s discovery practices in the case could not serve as the basis for a valid claim under the Pennsylvania Bad Faith Statute.

Dr.  John Duda  sued Standard Insurance, his disability insurer, claiming a wrist injury prevented him from performing the functions of his job as an orthopedic surgeon.  Duda conceded that he could still perform many functions, such as minor surgeries, office consults, and serving as an independent medical examiner.  He also failed to produce sufficient medical documentation, claiming that he was either self-treating for the injury, or treated by partners in his medical practice as a professional courtesy.

The Third Circuit affirmed the District Court’s dismissal of Duda’s breach of contract and bad faith claims.  Regarding the latter claim the Court held:

Duda attempts to prop up his insurance-based bad faith claim under 42 Pa. Cons. Stat. § 8371 by claiming that Lincoln engaged in bad faith during the discovery stage of the instant litigation.  However, Pennsylvania courts have held that § 8371 “clearly does not contemplate actions for bad faith based upon allegation of discovery violations.”  O’Donnell ex rel. Mitro v. Allstate Ins. Co., 734 A.2d 901, 908 (Pa. Super. Ct. 1999).  Although the Hollock v. Erie Insurance Exchange case, upon which Duda relies, allowed for the possibility that an insurer’s actions during litigation, at least in some circumstances, may be admissible evidence in support of the underlying bad faith claim, 842 A.2d 409, 414-15 (Pa. Super. Ct. 2004), it also emphasized that a bad faith claim is still established upon a showing that the insurer “refused to pay the proceeds of [the] policy” because of “a frivolous or unfounded reason,” id. at 416.

The three judge panel concluded that Standard had a reasonable basis to deny Duda’s claims for coverage.

Duda v. Standard Ins. Co. et. al., (3rd. Cir., May 10, 2016)

Streamlining Insurance Litigation Discovery With Predictive Coding

Predictive-Coding-21

 

It has been a year since Southern District of New York Magistrate Judge Andrew J. Peck issued the latest in a line of significant e-discovery opinions approving the use of predictive coding in generating document productions in Rio Tinto v. Vale, — F.R.D. —-, 2015 WL 872294 (S.D.N.Y.) .  Predictive coding, also known as “Technology Assisted Review” (TAR) is the use of keyword search, filtering and sampling to automate portions of an e-discovery document review.   Most importantly, insurers can use TAR to reduce both the internal and external financial burdens of the discovery process in insurance coverage and bad faith litigation.

Here is a one paragraph primer on TAR:  A small “seed sample” of documents undergoes manual review by inside or outside counsel and/or a discovery management unit, and is assigned coding in terms of responsiveness to a given discovery request. That seed sample is then converted to an algorithm which is then used to run an automated search on a large set of potentially responsive documents, and the process yields a subset of responsive documents which are then reviewed and  provided in discovery.  Parties generally cooperate in the TAR process, and agree on a TAR protocol.   This process does NOT relieve litigation counsel of the obligation to review the documents which are going to be produced, but it is an efficient means of culling responsive documents, and it has become a recognized, acceptable method of electronic discovery under the Federal Rules of Civil Procedure.

Peck wrote in Rio Tinto that “it is now black letter law that where the producing party wants to utilize TAR for document review, courts will permit it.” (citing to cases from the federal tax and district courts in Arkansas, California, Nebraska, New York, and Tennessee, as well as Virginia and Delaware state courts).  He noted that  the courts have split where the requesting party has sought that the producing party use TAR and the producing party has resisted, but also cited to Dynamo Holdings Ltd. P’Ship v. Comm’r of Internal Revenue, 143 T.C. 9, 2014 WL 4636526, at *5 (U.S.T.C. Sept. 17, 2014), where the U.S. Tax court declined to follow an argument by the IRS that TAR was an “unproved technology,” and further holding that “the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.”

Judge Peck stressed the need for cooperation and transparency between adverse parties when developing a TAR protocol, and pointed out that TAR was at least as valid as keyword or manual searches of documents.

The line of thinking seen in Rio Tinto can be of great value to insurers in defending insurance and bad faith litigation.  Automated searching is now an approved method of culling through a large volume of potentially responsive discovery documents, and insurers can and should take advantage of both the technology, and the emerging body of case law approving of its use.  Predictive coding can save time, money, and manpower when it comes to answering discovery.

For more information on using predictive coding to reduce your discovery burdens in bad faith, insurance coverage, and any other litigation, reach me at chaddick@dmclaw.com or 717-731-4800.

Use Privilege Logs To Win Bad Faith Discovery Battles

Privilege-log

There is no more critical or touchy stage of discovery in a bad faith case than the request for the claims file.  It will color the rest of the discovery course, including, most notably, depositions of claims personnel.  Inevitably the request for the file comes, seeking every bit of data, electronic and hard copy, which ever existed in the claims file.  The request contains no restrictions, and no reasonable bounds – the bane of insurance company counsel’s existence.  How to respond, yet again, without having to fight World War III?

A well-prepared privilege log provides insurance company counsel with an opportunity to frame and present argument on discovery motions before they are ever filed.  And yet this opportunity is overlooked — passed over for  rote, form privilege log entries like “Not Discoverable:  Attorney Client Privilege” and the like.  These bland entries will neither  satisfy plaintiff’s counsel, nor a judge.  So take a step back and look differently at the privilege log which accompanies your initial  claims file production.  Look at the opportunity as a chance to file a free discovery brief, and treat it as such.  Get the jump on making valid arguments to protect those portions of the claims file which need not be disclosed under the applicable jurisdiction’s discovery law.

First, a quick look at an example regarding the discovery of claims reserve information, and then a review of the basic elements of privilege log entries which will persuade judges and protect portions of the insurer’s claims file:

Bad Privilege Log Entry Example:  “Objection.  Claims Reserves Are Not Discoverable”

Much Better Privilege Log Entry Example:  “Reserve information is non-discoverable work product and/or is irrelevant and disclosure of information will not lead to admissible information. See, Safeguard Lighting Sys. , Inc. v. N.Am. Specialty Ins., 2004 WL 3037947 (E.D.Pa. 2004); Union Carbide Corp. v. The Travelers Indemnity Co., 61 F.R.D. 411 (W.D.Pa. 1973); Fidelity & Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516 (E.D.Pa. 1996); and Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881 (Pa.Super. 2000). Reserving is an insurance accounting instrument largely designed for purpose of regulatory compliance, and not evidence of an insurer’s opinion as to either the actual value or settlement value of the claim.  See, id.”

The differences in the two privilege log entries is apparent, but it is not simply the size — don’t confuse length with persuasive substance.  The better privilege log entry contains the following elements:

  • specific reference to the discovery sought, identifying it with as much particularity as possible;
  • Comprehensive statement of case law and rule of procedure which supports insurance company counsel’s position that the discovery sought is protected from discovery.
  • Where possible, additional identification of important public policy principles which weigh in favor of protecting the discovery sought.  Common sense and logical arguments can also appear here.

In addition to providing a jump on the opposition should the dispute make its way to a judge, it demonstrates to the reviewing judge that the objections were not “knee-jerk” or form objections not worthy of the judge’s consideration.  It sets up the insurer’s counsel as credible and thoughtful in the mind of the Court , which will not hurt the insurer, of course.

Good insurance company counsel do not look at privilege logs as merely something to be thrown together as part of preparing discovery answers.  They look at logs instead  as an opportunity to advocate for the protection of discovery at a key point in the bad faith or coverage case.

CJH