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)

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

 

 

 

 

Hawaii: Defending Insured In Underlying Claim Not Necessarily Bad Faith Safe Harbor

HAWAII, Feb. 4 – The Supreme Court of Hawaii has ruled that a title insurer’s defense of its insured in underlying action to quiet title does not shield that insurer from bad faith exposure, and that questions of fact regarding the reasonableness of such action, as opposed to settling the underlying claim which appeared to be meritorious,  precluded summary judgment in favor of the title insurer.

In Anastasi v. Fidelity National Title Ins. Co., the Court affirmed an intermediate appeals court ruling that a summary judgment in favor of Fidelity National should be reversed, and the case remanded to trial for exploration of whether the title insurer should have paid to settle the underlying action to quiet title against its insured, Anastasi,  earlier, as opposed to continuing to litigate.  There was evidence that a warranty deed upon which Anastasi issued a mortgage to the borrower  was falsified, and the true owners of the property would prevail in the underlying suit against Anastasi and the mortgagee.

The Court found there were questions of fact regarding the reasonableness of Fidelity National’s continuing the defense of its insured in the underlying case after learning the deed upon which Anastatia issued the mortgage was forged.  Justice Paula Nakayama wrote for the court:

“If insurance companies were held to be acting reasonably as a matter of law any time they filed or defended lawsuits under a contractual right to pursue litigation, frivolous lawsuits could be used to unfairly delay payments to insureds for years…

The opinion also contains an excellent discussion of an ongoing discovery dispute regarding whether documents prepared by Fidelity’s in house legal department during the claims investigation were protected by attorney client privilege or the attorney work product doctrine.  The Court remanded that issue to the trial court as well, directing it to make a determination whether the documents in question were prepared “because of” litigation or the threat of litigation, or whether they would have been prepared regardless.

Anastasi v. Fidelity National Title Ins. Co. (HI 2016)(Nakayama, J.)

Federal Magistrate Judge Sanctions Insurer for Delayed Production of Draft Coverage Letter; Rules In-House Counsel E-mails Not Privileged

US D. New Jersey, Dec. 30, 2015 – U.S. Magistrate Judge Ann Marie Donio has granted in part and denied in part Plaintiff’s motion for sanctions against Bankers Standard Insurance Company in a bad faith and breach of contract case under a  homeowners’ insurance policy arising out of damage from Superstorm Sandy.   In Zawadsky v. Bankers Standard Insurance (link to full opinion below), the Court made several pronouncements which should be of concern to insurers, and their in house legal departments.

Draft Partial Coverage Letter: Admission of Coverage?

Although Bankers Standard issued a denial letter regarding the insured’s homeowners claim,  there was evidence that a junior adjuster had previously drafted a coverage letter extending partial coverage for the loss.  Judge Donio ruled that the intentional delay in turning the draft letter over was sanctionable under F.R.C.P. 37:

Most importantly, the Draft Partial Coverage Letter — despite Defendant’s assertion to the contrary — is an admission by one claims adjuster that there is coverage under the Policy. The fact that a more senior adjuster trumped that position and directed a flat denial of coverage be issued does not erase this conclusion. Additionally, the concealment of that conclusion — that admission — bespeaks of purposeful conduct that may, after the depositions are conducted, warrant additional sanctions. As noted by Plaintiffs, if it were not for the inadvertent production by Defendant on February 2, 2015 of the unredacted email, Plaintiffs would still not have the Draft Partial Coverage Letter.

(emphasis added).  The Court found the conduct of Bankers Standard Insurance sanctionable in this regard.

Emails Involving In House Counsel:  Lawyers or Claims Investigators?

Judge Donio ruled that Bankers Standard failed to adequately demonstrate that email strings involving in house legal department lawyers sufficiently came under protection for attorney client privilege.  She wrote:

…the timing of these communications supports Plaintiffs’ argument that Defendant’s in-house counsel was part of the investigation of Plaintiffs’ claim and not providing legal advice. The burden is on Defendant to appropriately support its application of the privilege at the time of the motion. Defendant has left it up to the Court to decipher these emails and determine whether in-house counsel is providing legal advice or acting as part of the claims investigation. Defendant has failed to demonstrate that the documents are protected by the attorney-client privilege.

As a result, the Court also ordered production of unredacted emails including communication with in house counsel.

Severity of the Sanction

Rather than granting the sanction requested by the Plaintiff — striking all of the insurer’s substantive defenses and moving directly to a damages trial — Judge Donio issued the lesser sanction of orders compelling production of the documents under dispute, and allowing the Plaintiff to re-open discovery on the issue of the draft partial coverage letter

Takeaways:

  • Bankers Standard was clearly concerned about the presence of a draft partial coverage letter in the same claims file in which a later full denial of coverage letter existed.   They elected to attempt to shield the letter from discovery.  Another option which may have proved the better route would have been to simply disclose the letter as part of the story of the on-going thought process of the claim, which later gave way to a reasonable conclusion, after consultation with senior claims staff and counsel, that there was ultimately no coverage for the loss.   Insurers are not prohibited from a change of mind on a coverage position if the claims investigation supports it.

 

  • This case is a signal example of why the  line of demarcation between claims staff and in-house legal counsel should never be blurred.  Here, Bankers Standard’s  failure to sufficiently articulate to the Court why the in house legal staff performed legal work, rather than claims investigation, sounded the death knell for attorney client privilege in the case.

 

  • The chances of Inadvertent production of privileged material can be reduced by the cross-checking of the production by a second or third pair of eyes in counsel’s office, and can be guarded against by inadvertent disclosure and claw-back discovery agreements, entered into at the outset of the case, along with such things as confidentiality agreements, and consent agreements to protective orders.

Zawadsky v. Bankers Standard Ins. Co., (D. N.J. 2015)