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SEPTEMBER 2014 BAD FAITH CASES: COURT DETERMINES TIME WHEN INSURER REASONABLY ANTICIPATED IN LITIGATION IN DECIDING DISCOVERY DISPUTES OVER WORK PRODUCT PROTECTION VS. DISCOVERABLE ORDINARY BUSINESS RECORDS; SIDES WITH THOSE DISTRICT COURTS IN THE THIRD CIRCUIT ALLOWING FOR DISCOVERY OF RESERVES; AND REFUSES TO ALLOW MERE ALLEGATION OF BAD FAITH TO BLOW UP WORK PRODUCT PROTECTIONS (Philadelphia Federal)

Published on September 23, 2014 in PA - Discovery and Evidence and PA - Reserves. Closed
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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.)

AUGUST 2014 BAD FAITH CASES: FAILURE TO FOLLOW INVESTIGATIVE AND CLAIMS HANDLING STANDARDS IN INSURER’S OWN MANUAL, ADJUSTER’S FAILURE TO CONSULT WITH OTHERS AND GO BEYOND HER OWN CONCLUSIONS, AND FAILURE TO CONDUCT IME DEFEAT MOTION TO DENY BAD FAITH CLAIM (Western District)

Published on August 20, 2014 in PA - Claims Handling Procedures, PA - Reserves and PA-Manuals. Closed
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Mineo v. Geico involved a UIM claim. The insured was a Vietnam War Veteran who had suffered significant combat injuries during the War. Years later he was in a motor vehicle accident and suffered a shoulder injury. After the accident, there was some record that he suffered a further shoulder injury. The insurer offered a settlement sum that the insured rejected. The insured contended that the adjuster incorrectly placed too much emphasis on the post-accident injury in devaluing the extent of his injury from the accident.

In addressing the insurer’s motion for summary judgment on the bad faith claim, the court stated that in evaluating the insured’s bad faith claim it could consider insurer’s because bad faith can include a lack of good faith investigation into facts, and failure to communicate with the claimant. The court stated that an “insurance company … is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.” However, it “must conduct a meaningful investigation, which may include an in-person interview, examination under oath, medical authorizations, and/or independent medical examinations.”

The adjuster relied on only one physical therapy record to justify her position that the injury was caused or aggravated by the post-accident fall. This was based on her review of the medical records, and her conclusion that no IME was needed. The court observed she was not a doctor, knew that the insured disputed the record, and the insured’s physical therapist had explained that there was a significant left shoulder dysfunction prior to the post-accident fall.

The court cited to the insurer’s claims manual which “admonishes its adjusters to avoid drawing conclusions based on assumption or speculation,” and which “underscores the importance of completeness….” The manual warned: “If the denial is unsound, the result may be a complaint or a lawsuit, either of which could have been avoided. Because some cases turn on very fine points, reports must be complete and accurate.”

The manual also included “a Sequence of Investigation, which ‘applies to the majority of cases,’ and sets forth that adjusters should: ‘Determine whether independent medical examinations are necessary, and if so, see your supervisor and then arrange for them. Determine whether medical peer review should be secured. If so, see your supervisor.’” The adjuster did neither, and the carrier only had an IME pursued post-litigation.

The court next addressed the issue of whether the insurer failed to meet its own standards of using a “90-Day Control” which is used to calculated and set reserves and to revisit these matters at 6, 12, and 18 months. Under the insured’s manual “Supervisors and managers review each summary and give direction, comments and instructions…. Each Summary and supervisor/manager review must be completed by the end of the month in which the 90th day falls.” The court questioned whether this was created or produced to the insured.In addressing stalled negotiations and the languishing nature of the process, the court stated that the insurer could have conducted an in-person interview, done an examination under oath, sought medical authorizations and/or an IME. The IME eventually conducted appeared to favor the insured’s version of events; and the court cited case law for the proposition that a failure to conduct an IME could be the basis for a bad faith claim. In this regard, the court was “mindful” of the Unfair Insurance Practices Act.

The summary judgment motion was denied.

Date of Decision: July 15, 2014

Mineo v. Geico, Civil Action No. 12-1547, 2014 U.S. Dist. LEXIS 95686 (W.D. Pa. July 15, 2014) (Fischer, J.)

MAY 2014 BAD FAITH CASES: ON MOTION IN LIMINE, COURT DECIDES: (1) PLAINTIFF’S INSURANCE CLAIM HANDLING EXPERT CANNOT TESTIFY ON MEDICAL ISSUES OR RESERVES; (2) EVIDENCE OF RESERVES NOT PROPER IN DISABILITY INSURANCE CLAIM; (3) PAST GENERAL CLAIMS HANDLING PRACTICES NOT ADMISSIBLE, BUT PRE-CLAIM EVIDENCE CONCERNING ACTUAL INSURED ADMISSIBLE; (4) PLAINTIFF CAN RECOVER FOR EMOTIONAL DISTRESS UNDER COMMON LAW CONTRACT BREACH OF DUTY OF GOOD FAITH; BUT (5) PLAINTIFF CANNOT RECOVER FOR “LITIGATION STRESS” EXPERIENCED IN THE BAD FAITH LITIGATION ITSELF (PHILADELPHIA FEDERAL)

Published on May 20, 2014 in PA - Claims Handling Procedures, PA - Discovery and Evidence, PA - Experts, PA - Reserves and PA-Manuals. Closed
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In Leporace v. New York Life & Annuity Corp. the court addressed various motions in limine on a bad faith claim against a disability insurer.

On the first issue, both parties attempted to disqualify the other’s experts. Plaintiff’s expert was qualified on most issues, but was not permitted to testify on the strengths of medical opinions or medical care. Furthers, she was not permitted to testify on reserves. The Court concluded that introducing evidence on reserves would be contrary to the concepts behind competitive and confidential reserve practices of insurance companies, and should not be permitted in a bad faith case on a disability insurance claim.

As to the insurer’s expert, the court allowed expert testimony on the basis of the expert’s conclusions regarding the carrier’s claims manual that the insurer met its obligations; however, it found this expert’s reliance on Pennsylvania statutory and regulatory positions, the NAIC Market Regulation Handbook and various on-line websites “doubtfully relevant, if at all….”

The court would not allow a volume of evidence on the carrier’s practices, prior to the date that the court found the claim at issue started; however, the court did allow limited evidence under Federal Rule of Evidence 404(b) on the specific issue of the carrier identifying the insured as a “malingerer” during a five year period prior to the current claim.

Next, citing Birth Center and the recent Peruggia decision, the court did permit plaintiff to see damages for emotional distress under a common law contract claim for breach of the duty of good faith.

Finally, the court would not allow expert testimony, or recovery, on the insured’s claims for “litigation stress”. The court analyzed this issue closely, and gave two reasons that the insured could not seek recovery for the stress of the bad faith lawsuit itself. First, it cited a body of cases from various jurisdictions rejecting “litigation stress” because there is no question that filing a lawsuit is the plaintiff’s decision, and imposing additional damages on the defendant for defending against the plaintiff’s claims would impair the defendant’s right to defend itself. Second, once a lawsuit is instituted, the party becomes subject to the contentions of an opposing party and the rulings of a court, and the stress may be from the insurer’s counsel conduct of the case or even the court’s ruling, and not the insurer itself.

Date of Decision: May 7, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 62911 (E.D.Pa. May 7, 2014) (Baylson, J.)

 

MAY 2014 BAD FAITH CASES: THIRD CIRCUIT (1) UPHOLDS DISCOVERY RULINGS THAT RESERVES AND COMMUNICATIONS WITH REINSURER WERE NOT DISCOVERABLE; (2) REITERATES THAT INSURER IS NOT OBLIGATED TO MAKE PARTIAL PAYMENTS ON A DISPUTED CLAIM; AND (3) FINDS NO BAD FAITH IN INSURER NOT ALTERING ITS ORIGINAL POSITION BASED ON ITS FIRST EXPERT’S VALUATION – DESPITE A SUBSEQUENT HIGHER VALUATION BY ITS SECOND EXPERT– PENDING THE OUTCOME OF THE APPRAISAL PROCESS (Third Circuit)

Published on May 15, 2014 in PA - Claims Handling Procedures, PA - Discovery and Evidence and PA - Reserves. Closed
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In Mirarchi v. Seneca Specialty Insurance Company, the Third Circuit affirmed the District Court’s judgment in the carrier’s favor on a fire loss claim.

The policy at issue had a $600,000 limit, directing that valuation on claims be done according to the property’s actual cash value (ACV). The policy defined ACV as the amount it would cost to repair or replace the property at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Further, per the policy, the carrier would not pay on any claim until it received a formal proof of loss from the insured. If a disagreement arose as to the value the property value or amount of loss, either party could seek an appraisal. A fire occurred, prompt notice was given, and each party retained experts.

The insurer estimated the ACV at approximately $332,000 and the insured’s expert came in at approximately $692,000. The insurer still paid the first $100,000 on the claim after the insured submitted a partial proof of loss. After receiving a proof of loss based on the $692,000 figure, the insurer paid the balance of the undisputed part of the claim, i.e., the difference between $100,000 and its experts ACV number ($332,000). The experts continued amicable discussions thereafter on the difference until the insured told his expert that he would not accept anything less than $500,000. The parties mutually agreed to enter the appraisal process, and each side hired an independent appraiser. The insurer’s appraiser estimated the ACV at $449,550, more than $100,000 higher than the insurer’s original estimate. The dispute was submitted to an umpire, who concluded that the ACV was $618,338.07. The insurer then paid the balance remaining on the $600,000 policy limit.

The insured brought a bad faith claim on the basis of delayed payment. As stated, the District Court granted the insurer summary judgment. The first issues on appeal were challenges to the trial court’s discovery rulings. First, the trial court found reserves not discoverable because they were irrelevant to the claims. This was a significant issue to the insured, because the carrier had set it reserves at the policy limit, $600,000, well above the initial valuation. The trial court explained that a loss reserve is the insurer’s own estimate of the amount which the insurer could be required to pay on a given claim. The lower court did recognize that reserve information is sometimes relevant in bad faith cases, but it concluded that the loss reserve figures in this particular case did not represent an evaluation of coverage based upon a thorough factual and legal consideration.

The Appellate Court found that the insured failed on appeal to show that the loss reserve figures were related to the carrier’s considered estimate of the ACV such that they would be relevant to his bad faith claim. Thus, the lower court did not err in its legal analysis of the relevance of loss reserve estimates generally in bad faith cases, and did not abuse its discretion in excluding the evidence in this case based on its lack of relevance to the bad faith claim.

In a footnote, the Third Circuit likewise upheld the lower court’s decision not to permit discovery of communications between the insurer and its reinsurer for the same reasons that it affirmed on the loss reserve issue, i.e., these communication were not evidence of the insurer’s considered evaluation of the value of the insured’s claim. The Third Circuit also found no abuse of discretion in the trial court’s refusal to extend discovery, compel additional discovery responses or reconsider earlier rulings after the insured retained new counsel.

Turning to the merits, because the insurer ultimately paid the full policy limit, the bad faith claim was based on delay, which required the insured to show that (1) the delay was attributable to the insurer, (2) the insurer had no reasonable basis for causing the delay, and (3) the insurer knew or recklessly disregarded the lack of a reasonable basis for the delay. The cornerstone of the insured’s argument was the insurer’s second appraiser came in at a significantly higher number than the first expert; and that the insurer acted in bad faith by standing by its adjuster’s initial estimate of ACV pending resolution by the umpire, failing to make an additional partial payment, and failing to make a higher settlement offer.

As to the partial payment issued, an insurer has no duty to advance partial payments, particularly where the claim is disputed. Further, the undisputed evidence showed that the insurer relied on a genuine and considered estimate of ACV by its first expert. That subsequent estimates assigned a higher value to the claim did not constitute clear and convincing evidence that the insurer acted in bad faith either in arriving at its initial estimate or by standing by that estimate until the appraisal process concluded. The Third Circuit stated: “That is, after all, what the appraisal process is for—settling disputes about the value of a claim.”

The insured failed to show by clear and convincing evidence that the insurer acted unreasonably in the manner it paid the claim, and that no reasonable juror could conclude otherwise. The insured’s breach-of-contract claim, based on a breach of the duty of good faith, failed for the same reasons as his statutory bad faith claim.

Lastly, the court noted that the insured’s used of mathematical calculations regarding the first estimate, the property’s purchase price, and the balance of the insured’s mortgage lacked sufficient explanation to make a persuasive argument for a conspiracy between the insurer and its experts.

Date of Decision: April 29, 2014

Mirarchi v. Seneca Specialty Ins. Co., No. 13-2129 , UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2014 U.S. App. LEXIS 8015 (3d Cir. April 29, 2014) (Ambro, J.)

 

APRIL 2014 BAD FAITH CASES: COURT ORDERS PRODUCTION OF RESERVE INFORMATION IN BAD FAITH CASE; DENIES PRODUCTION OF WORK PRODUCT PREPARED IN ANTICIPATION OF LITIGATION (Middle District)

Published on April 29, 2014 in PA - Claims Handling Procedures, PA - Discovery and Evidence and PA - Reserves. Closed
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In Shaffer v. State Farm Mut. Auto. Ins. Co., Judge Rambo issued her second discovery opinion in the insurance bad faith context within three days. The Judge had ordered the insurer to submit unredacted versions of all redacted and partially redacted pages of the claims log to the court for an in camera review. The files provided to the insured by the carrier remained significantly redacted.

The dispute involved a UIM claim, where the insureds (with the carrier’s consent), settled their claims with the other driver and sought additional coverage on their own policy. $200,000 was available in coverage, and the insureds demanded $150,000, and had provided the carrier with medical records and other information regarding the claim. The carrier made no settlement offer. The insureds brought claims for breach of contract and bad faith, but the court denied a motion to dismiss the bad faith claim.

The court evaluated the redactions under the work product privilege. The court stated that an insurer’s claims file may be discoverable in a bad faith case like this one, as information in that file on the defendant’s actions related to the claim is relevant or could lead to potentially relevant information; however, it cited precedent applying the work product doctrine limiting that discovery as the work product privilege protects “the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” The court observed that the work product doctrine is not applicable merely because the material was prepared by or for the agents of an insurer, and that an insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation….” However, Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Thus, “[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.”

The court was unable to determine the basis for much of the redaction, but noted that several portions were likely redacted because the pages contained information pertaining to reserves or the insurance adjusters’ impressions or conclusions.

As to reserves, the carrier had redacted all reserve information. The court observed that there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit. Some courts have determined that information related to reserve values is not discoverable and that the procedure for setting reserves . . . is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary. However, other courts have found that “reserves, of course, must have some relationship to the insurer’s estimation of the insured’s potential liability. Otherwise, the setting aside of reserves would serve little, if any purpose.” Thus, the amount set aside for reserves “is certainly 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 concluded that because the insureds alleged that the carrier acted in bad faith during its investigation of their UIM claim, the amount set aside for reserves is relevant to the determination of whether it acted in bad faith in processing the claim, and therefore, the court ordered the disclosure of such information.

As to the insurance adjuster’s impressions, conclusions and opinions, the court first stated that mental impressions and opinions of a party and its agents are not generally protected by the work product doctrine unless they are prepared in anticipation of litigation. Thus, “work product prepared in the ordinary course of business is not immune from discovery.” As stated by Judge Rambo three days earlier in Keefer v. Erie Ins. Exchange, the gravamen of a claim of work product protection necessarily requires an assessment of when litigation was anticipated, which is a determination not subject to a bright-line rule. As recognized by the Third Circuit, “[p]rudent parties anticipate litigation and begin preparation prior to the time suit is formally commenced.” Thus, whether litigation was reasonably anticipated is a fact-dependent inquiry. Although the court lacked the necessary evidence to determine when the insurer reasonably anticipated litigation, the court had reviewed the claims file with this standard in mind, and concluded that certain portions of the record were prepared in anticipation of litigation and should be protected. The accompanying order reflects the court’s findings in this regard. Date of Decision: March 10, 2014

Shaffer v. State Farm Mut. Auto. Ins. Co., Civil Action No. 1:13-cv-01837, 2014 U.S. Dist. LEXIS 30436 (M.D. Pa. March 10, 2014) (Rambo, J.)

APRIL 2014 BAD FAITH CASES: FEDERAL DISTRICT JUDGE PROVIDES DETAILED ANALYSIS ON PROPER SCOPE OF DISCOVERY IN UIM BAD FAITH CASE AS TO RESERVES, CLAIMS HANDLING DOCUMENTS AND PRACTICES, EVALUATING VALUE OF CLAIMS, RATIONALE FOR NON-PAYMENT, ADJUSTER’S MENTAL IMPRESSIONS, FILE REDACTION, AND DISCOVERABILITY OF OTHER BAD FAITH CLAIMS AGAINST THE SAME INSURER (Middle District)

Published on April 26, 2014 in PA - Discovery and Evidence, PA - Experts, PA - Reserves and PA-Manuals. Closed
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In Keefer v. Erie Insurance Exchange, the court addressed the scope of discovery in a bad faith UIM context. The insurer had objected to producing discovery on the following:

 

1) The initial reserve value for Plaintiff’s claim and the amount in which it has changed, if at all; 2) Claims manuals and any documents used to process and/or investigate Plaintiff’s claims; 3) Any evaluations conducted regarding Plaintiff’s demands or Defendant’s offers; 4) Rationale as to why the claim had not been paid; 5) Impressions/conclusions and opinions of the adjuster(s) regarding the value and/or merit of the claim and/or defenses; 6) Complete un-redacted copy of the Claims file; 7) Names/Captions and location of all bad faith claims against the Defendant in the last five years; 8) Procedures followed or pursued to determine if a claim is to be paid; and 9) In what way Defendant deviated from its normal procedure in the investigation of Plaintiff’s claims.

 

In addition to these categories, the insured requested that the insurer’s neuropsychologist produce raw test data from his examination of injured sured. The court has reviewed the raw test data in camera.

 

1. Reserves

The insurer argued that reserves are not discoverable in a bad faith claim. The court observed that “there is competing treatment of whether reserve information is discoverable in a bad faith lawsuit.” Some courts find it not discoverable on the bases that it is confidential information which a court should not order to be disclosed unless the relevance of the information is clear and disclosure is necessary; while other courts have found that “reserves, of course, must have some relationship to the insurer’s estimation of the insured’s potential liability. Otherwise, the setting aside of reserves would serve little, if any purpose.” In the latter court’s opinions, the amount set aside for reserves “is certainly 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 present court agreed that the amount of reserve, if any, assigned to the insured’s UIM claim should be produced. The insured asserted claims that that the insurer acted in bad faith during its claim investigation, and thus a comparison between the reserve value of the claim and the insurer’s actions in processing the claim could shed light on the insurer’s liability under the bad faith statute. Thus, the reserve amount was deemed relevant or that it could potentially lead to relevant information.

The court also rejected the argument that the reserve information is protected from discovery by the work product doctrine. It could not agree that the reserve values were prepared outside the ordinary course of business. Under the work product doctrine, mental impressions and opinions of attorneys and their agents are protected from discovery when they are prepared in anticipation of litigation, as distinguished from materials prepared in the ordinary course of business.

2. Claims Manuals, Procedures Generally Followed, and Procedures Followed in Evaluating and Investigating Plaintiff’s UIM Claim

The insured sought information from the insurance adjuster or supervisor regarding the claims manuals used to process and/or investigate the insured’s claims, the procedures followed or pursued to determine whether a claim is to be paid, and whether the insurer exercised a normal procedure in investigating and evaluating the UIM claim. The insured argued this was relevant to the reasoning upon which the insured denied satisfying the UIM claim, and therefore relevant to the bad faith claim. The insurer argued that the posture of this case, which includes both bad faith and UIM causes of action, militates against disclosure as unduly prejudicial, even if the manuals would be relevant to the bad faith lawsuit. The court permitted the insured to inquire into the processes that the insurer used to investigate her claims. As to the relevance of Defendant’s policies for handling claims, inquiry into this area is reasonably calculated to lead to information relevant to the bad faith cause of action. Such material would allow the insured to compare the insurer’s standards for evaluating claims with the conduct of the insurer’s agents in the case at hand. Although the fact that the insurer’s agents departed from established standards or policies in handling this UIM claim may not alone establish bad faith, such information “is probative evidence” and could make it more likely that the insurer acted in bad faith in investigating the UIM claim. Given the liberal scope of federal discovery and the fact that such information may lead to the discovery of admissible evidence, the court overruled the insurer’s objections to this discovery.

 

3. Evaluations, Impressions, Conclusions, and Opinions Regarding the Value and Merit of Plaintiff’s Claims and Demands and Defendant’s OffersThe insurer opposed inquiries regarding its adjusters’ impressions, conclusions, and opinions regarding the value and merit of the claim and their evaluations of the insured’s demands and the insurer’s offers. The court observed that mental impressions and opinions of a party and its agents are not generally protected by the work product doctrine unless they are prepared in anticipation of litigation. Thus, “work product prepared in the ordinary course of business is not immune from discovery.” The gravamen of a claim of work product protection necessarily requires an assessment of when litigation was anticipated, which is a determination not subject to a bright-line rule, observing that: “Prudent parties anticipate litigation and begin preparation prior to the time suit is formally commenced.” Thus, whether litigation was reasonably anticipated is a fact-dependent inquiry, and the facts were not developed on this issue by the present parties. To determine the issue, it needed specific evidence demonstrating when litigation was reasonably anticipated. The court stated generally that the insured would be permitted to inquire into the adjuster’s opinions, mental impressions, and conclusions that he or she formed while investigating the UIM claim in the ordinary course of business and not formed with litigation reasonably anticipated. However, as there were insufficient facts to determine anticipation of litigation vs. ordinary course, the court did not rule on the objection at that point.

 

4. Rationale Underlying the Reason for Non-PaymentThe insurer objected to the inquiry regarding the adjuster’s or supervisor’s rationale of the reason Plaintiff’s UIM claim had not been paid. Given the liberal scope of federal discovery and the fact that the reason for non-payment may be probative of whether insurer acted in bad faith in the investigation of the UIM claim, the objection was overruled.

 

5. Un-redacted Claims FileThe parties disputed whether the insured was entitled to access of the insurer’s entire claims file created for the underlying UIM case. The insurer argued that certain documents within the claims file are subject to the attorney-client privilege or work product protection and need not be produced. The insurer did not dispute that at least some portion of the file may be discoverable in this action. The court stated that an insurer-defendant’s claims file may be discoverable in a bad faith case like this one, as information in that file on the defendant’s actions related to the claim is relevant or could lead to potentially relevant information; but also observing that prior case law held that while a plaintiff could discover claims file in bad faith case, it would apply the work product doctrine to limit the plaintiff’s attempt to discover the un-redacted UIM claim file and all documents associated with the file. The court denied discovery to the extent that the insured wanted the entire file without any redactions for attorney-client privilege. The insurer was required to produce the claims file, and the insured would be entitled to question the insurer’s agents on its contents. The insurer could assert privilege over portions of the case file and set forth the redacted portions in a privilege log, and the insured could challenge those assertions through an appropriate motion with the court. At present, the court could not make a decision on whether particular documents in the file were subject to privilege, as such an assessment would require a motion that describes the particular documents at issue and an in camera inspection. The insurer was ordered to produce the claims file subject to its assertions of privilege. The court also denied the insured’s request to the extent that she seeks the entire claims file without any redactions for documents falling under the work-product doctrine, noting that the work product privilege protects “the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” The work product doctrine, however, is not applicable merely because the material was prepared by or for the agents of an insurer. An insurer’s attorney “may invoke work product protection in favor of documents prepared by it in anticipation of litigation, but Rule 26(b)(3) was “not intended to protect all insurance claim files from discovery.” Citing prior case law: “An 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.”

6. Unrelated Bad Faith Actions The insurer objected to the insured’s solicitation of information regarding unrelated bad faith claims against the insurer in the last five years. The court found that: “Past claims by other insureds are not relevant to the present bad faith action before the court.”

7. Raw Test Data The insurer objected to producing raw test data collected from the insured during a neuropsychological examination. The court reviewed the raw test data in camera. The insurer wanted a protective order, citing the need for confidentiality of the raw data gathered from the neuropsychological evaluation; based on the examining doctor’s statement regarding the need to protect the integrity of the examination methods and results. The court found the concerns legitimate; however, they did not warrant a protective order to prevent disclosure. The court observed that the party wishing to obtain a protective order has the burden of demonstrating that “good cause” exists for the order. Citing Third Circuit precedent, good cause is established on a showing that disclosure will work a clearly defined and serious injury to the party seeking closure. Such an injury must be shown with specificity, as broad allegations of harm, unsubstantiated by specific examples or articulated reasoning, do not support a good cause showing. Courts must use a balancing test, weighing the requesting party’s need for information against the injury that might result if uncontrolled disclosure is compelled. When the risk of harm to the owner of a trade secret or confidential information outweighs the need for discovery, disclosure through discovery cannot be compelled, but this is an infrequent result. If the materials should be disclosed, the issue is whether some limitation should be placed on the disclosure, which again depends on a judicial balancing of the harm to the party seeking protection (or third persons) and the importance of disclosure to the public. Courts have a great deal of flexibility in crafting the contents of protective orders to minimize the negative consequences of disclosure and serve the public interest simultaneously.

Most commonly, courts condition discovery of confidential documents by preventing the party obtaining the documents from sharing that document with others and by using that document for any purpose other than the present litigation. Courts are given the necessary flexibility to “justly and properly consider the factors of each case.” Applying these standards, the extent of the insured’s injuries was a central issue. The data sought form the insurer’s doctor pertained to the tests and results therefrom that were conducted to assess the extent of those injuries. Thus, liberal discovery policies dictated that the material was discoverable. However, the court ordered that the raw test data be produced following the execution of a confidentiality agreement designed to protect the confidential nature and trade secrets of the tests conducted by examining doctor.

Date of Decision: March 7, 2014

Keefer v. Erie Ins. Exch., Civil No. 1:13-CV-1938 , 2014 U.S. Dist. LEXIS 29282 (M.D. Pa. March 7, 2014 (Rambo, J.)

APRIL 2014 BAD FATIH CASES: COURT FINDS: (1) PLEADING OF CLAIMS HANDLING ADEQUATE TO SURVIVE TWOMBLY CHALLENGE; (2) NO SUFFICIENTLY CLEAR CLAIM DENIAL TO TRIGGER STATUTE OF LIMITATIONS; (3) CLAIMS OF FALSE ADVERTISING PRIOR TO INCEPTION OF POLICY NOT ACTIONABLE UNDER BAD FAITH STATUTE; (4) CLAIM OF BREACH OF FIDUCIARY OBLIGATION NOT MATERIAL ELEMENT OF SECTION 8371 CLAIM; (5) CLAIM OF “INDIFFERENCE” TO POLICY HOLDERS GENERALLY STRICKEN WHERE CASE WAS NOT A CLASS ACTION; (6) ALLEGATIONS CONCERNING RESERVES COULD BE MATERIAL; AND (7) CLAIMS OF UIPA VIOLATIONS WERE TO BE STRICKEN, THOUGH BASIS MAY HAVE BEEN LACK OF OPPOSITION BY INSUREDS (Middle District)

Published on April 7, 2014 in PA - Claims Handling Procedures, PA - Discovery and Evidence, PA - General Bad Faith and Litigation Issues, PA - Procedural Issues and PA - Reserves. Closed
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In Clemens v. New York Cent. Mut. Fire Ins. Co., the Court addressed a UIM case, where the accident arose in August 2009, plaintiff gave notice of a possible UIM claim in April 2010, and the carrier gave plaintiff consent to settle against the third party’s carrier in July 2011. Plaintiff alleges numerous conversations between April of 2010 and July 15, 2013, and items of correspondence were exchanged with the insurer’s agents concerning Plaintiff’s efforts (1) to obtain a status report from the Defendant regarding its claim investigation; (2) to schedule an arbitration of the UIM claim, and (3) to schedule Plaintiff’s “Statement Under Oath”. On May 25, 2011, during the time the aforementioned matters were being discussed by the parties, Plaintiffs submitted a demand letter to Defendant detailing their injuries and supporting documentation including medical records, photographs and authorizations requested by Defendant. On August 26, 2013, Plaintiffs brought suit.

The carrier moved to dismiss the bad faith claim, and strike certain other allegations. It argued plaintiffs did not plead their bad faith claim with “the requisite level of facts to properly state a claim upon which relief may be granted.” The Court disagreed, finding that the various factual allegations at could be plausibly read to indicate a possibility that there was a duplicitous delay by an insurer in the claims handling process.
The court also rejected a statute of limitations argument. The carrier argued that because the Plaintiffs’ brief indicates that the medical records it submitted should have been sufficient to convince the insurer to pay the claim, and because the docket indicates that those records were provided more than two years before the Complaint was filed, the case should be dismissed. The court found that this did not constitute the kind of clear notice existing in prior precedent triggering the statute. In this case, the parties were still attempting to resolve this matter well into the year 2013 or, at least, that Defendant was sending signals that it was actively considering the claim. Thus, the insurer had not provided the type of clear notice that the claim was being denied within the two years immediately preceding the filing of the Complaint as required by the Third Circuit.

The court did agree to strike Plaintiffs allegation that the carrier’s failure to act to help their insureds was inimical to the advertising through which the Defendant solicited policyholders. Section 8371 does not provide relief for false advertising in the procurement of an insurance policy. The carrier also sought to strike allegations of a fiduciary obligation from the Complaint; however, the court essentially found that the phrase had no functional effect on the bad faith, and denied the motion to strike as the term was basically irrelevant to the case. The court did agree to strike the allegation that the carrier was indifferent toward its policyholders generally, as it was not a class action.
The insurer also moved to strike an allegation that it set a grossly inadequate reserve for Plaintiffs’ claim, as a source of bad faith. The Court recognized that a great discrepancy between the size of a reserve and the amount offered in settlement of a claim is not, without other evidence, proof positive of bad faith on an insurer’s part, it believed that the presentation of such evidence is potentially germane to the determination of the bad faith issue. It thus denied the motion to strike.
The insurer also moved to strike allegations relating to alleged violations of the Unfair Insurance Practices Act. The carrier cited numerous cases holding that, unless and until the Pennsylvania Supreme Court holds otherwise, evidence of violations of portions of UIPA are irrelevant to the maintenance of a bad faith claim. The insureds did not respond to Defendant’s argument in this regard, and those allegations were stricken and the Court stated that it would not admit evidence directed to establishing violations of UIPA. Interestingly, this same court followed Pennsylvania Superior Court precedent in a case decided 10 days earlier, permitting consideration of UIPA violations, which as observed in that case summary, is different that the position taken by many federal courts in the absence of a Pennsylvania Supreme Court ruling.

Dated: February 24, 2014
Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2014 U.S. Dist. LEXIS 22534 (M.D. Pa. February 24, 2014) (Conaboy, J.)

AUGUST 2011 BAD FAITH CASES
JUDGE ORDERS IN CAMERA REVIEW OF INSURER’S LOSS RESERVES DOCUMENTATION AS POTENTIALLY RELEVANT TO INSURED’S BAD FAITH CLAIM (Philadelphia Federal)

Published on August 3, 2011 in PA - Discovery and Evidence and PA - Reserves. Closed
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In Mirarchi v. Seneca Specialty Insurance Company, the insured filed a claim with the defendant insurer after a fire damaged his pizzeria.
After Seneca denied coverage, plaintiff sought to compel the insurer to produce un-redacted documentation of its claim investigation. Specifically, the information sought by the plaintiff concerned the defendant’s setting of loss reserves, a process which the insurer argued is protected from disclosure by the work product doctrine. The insurer also contended that such information need not be disclosed because it is irrelevant to the resolution of plaintiff’s bad faith claim.
The court first struck down Seneca’s work product defense, as it found that the requested documentation was neither prepared by attorneys (or their agents) nor prepared in anticipation of litigation but was instead created within the ordinary course of the insurance business.
The court then addressed whether Seneca’s loss reserves were sufficiently relevant to the action’s subject matter to be discoverable, including a lengthy discussion of the nature of setting reserves.
Typically, the court noted, loss reserve information is irrelevant and thus undiscoverable. However, such information is more likely to be discoverable in bad faith cases because it can illustrate discrepancies, if any, between what the insurer believed the claim to be worth and what it actually ended up paying out to the insured. Still, the court took care to note that even in bad faith cases, the relevance of loss reserve information is not a foregone conclusion.
The court concluded: “However, the facts considered in setting the reserve amount may potentially be relevant to [the insured]’s bad faith claim. For instance, to the extent that employees or agents of Seneca discussed the value of [the insured]’s claim or other factual information regarding the claim in connection with setting the reserves, such information may potentially be relevant to [the insured]’s claim of bad faith. Thus, the Court will order Seneca to produce unredacted copies of the non-privileged documents provided to the Court for in camera inspection to the extent that those documents contain information other than specific amounts set for loss reserves. The Court cautions that this ruling in no way implies that such information will be admissible at trial.”
Date of Decision: July 22, 2011
Mirarchi v. Seneca Specialty Ins. Co., Civil Action No. 10-3617, United States District Court for the Eastern District of Pennsylvania, 2011 U.S. Dist. LEXIS 80871 (July 22, 2011) (Pratter, J.)

JUNE 2011 BAD FAITH CASES
JUDGE MUNLEY ORDERS A WIDE RANGE OF DOCUMENTS PRODUCED, AND WILL LATER CONSIDER SPECIFIC ITEMS FROM PRIVILEGE LOG, IN UIM BAD FAITH CLAIM (Middle District)

Published on June 27, 2011 in PA - Discovery and Evidence, PA - Reserves and PA-Manuals. Closed
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In Consugar v. Nationwide Insurance Company of America, plaintiff Diana Consugar was involved in an April, 2009 car accident from which she sustained severe injuries. Her auto insurance policy with Nationwide provided for underinsured motorist (UIM) coverage—meaning that the policy would provide coverage for injuries sustained in an accident where the other driver’s insurance policy did not provide sufficient reimbursement.
The insurance policy carried by the other driver had a limit of $25,000, and while the plaintiff received this amount from the third party’s insurer, she sought additional coverage from Nationwide under her policy’s UIM provisions, which provided for coverage up to $300,000. Though plaintiff provided Nationwide with her medical records to assist in their evaluation of the claim, Nationwide never proposed a settlement offer. The insurer notified plaintiff that they would not arbitrate her UIM claim and that if she wished to recover anything under the policy, she would have to take Nationwide to court.
So she filed an action in state court, alleging that Nationwide was obligated to provide UIM coverage under the policy and that their failure to do so constituted bad faith. Nationwide removed the case to the Middle District on diversity grounds whereupon plaintiff propounded several discovery requests, most of which Nationwide objected to, citing attorney-client privilege and the work product doctrine.
While Nationwide did provide the insured with some limited records from its claims file, it redacted most of the information that could have illustrated the thought process behind the UIM claim’s denial.
On one hand, the court noted that the withheld information could be of particular relevance in a bad faith claim, pointing to another District court decision involving Nationwide in which the Eastern District found that the claims file or claims log should be disclosed in a bad faith action against the insurance carrier. Marshall v. Nationwide Mut. Ins. Co., 1994 U.S. Dist. LEXIS 7834 (E.D. Pa. 1994). On the other hand, the Middle District here was not prepared to engage in a wholesale denial of privilege for every document in Nationwide’s file. Thus, to the extent that plaintiff sought Nationwide’s entire claims file without any redactions for privilege, the court denied the insured’s motion for production. However, it did so without prejudice, noting that the plaintiff could, by motion, bring particular documents it sought disclosed before the court for “in camera” inspection in which the court would determine whether discovery of the document would be appropriate.
Nationwide sought more absolute protection from disclosure under the work product doctrine, arguing that any document added to the file after June 14, 2010 should be considered as created in anticipation of litigation and therefore protected work product. Nationwide pointed to June 14th because it was on this date that Nationwide discovered that the insured had a pre-existing medical condition which she was now attempting to attribute to the accident. After learning of the insured’s medical history, it became clear that Nationwide would deny the claim and that litigation would be imminent. Thus, argued Nationwide, any contributions to the file from that point forward should be considered protected work created in anticipation of litigation.
However, the Middle District was not prepared to take an exception to discovery’s liberal disclosure rules as far as Nationwide would have liked, noting that ultimately litigation should not be a competition to see which party can manipulate legal doctrines to gain advantage.
Nationwide also sought to prevent the disclosure of its procedures for establishing “insurance reserves”—the pools of funds allocated to satisfy obligations that may arise under a claim. It argued that reserve information was not discoverable in a bad faith claim. The court disagreed, finding that reserve information—inasmuch as it is an estimation by the insurer of its potential liability on a claim—is of particular relevance in a potential bad faith situation. Thus, the court ordered that the amount of any reserve allocated to the insured’s claim be produced. The court observed that if in fact there was a discrepancy between the reserve value assigned to the claim and Nationwide’s actions in actually processing the claim, that could shed light onto whether or not there was bad faith.
Similarly the court ordered Nationwide to produce its employee training manuals and the files of other claims similar in nature to plaintiff’s. Its reasoning was that such information could be instructive in a bad faith inquiry by revealing whether denying claims like plaintiff’s was a part of company policy as a matter of course, or whether denying the plaintiff’s claim indicated a failure to follow established policy.
Ultimately, the court ordered Nationwide to provide that which plaintiff specifically requested, with the caveat that if Nationwide wanted to designate certain information as privileged it could do so by creating a log which would inform the plaintiff what is believed to be privileged and why. Plaintiff would then be able to challenge this designation by requesting an in camera review of the specific information for which privilege was claimed.
Date of Decision: June 9, 2011
Consugar v. Nationwide Ins. Co. of America, No. 3:10cv2084, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist LEXIS 61756 (June 9, 2011) (Munley, J.)

JANUARY 2008 BAD FAITH CASES
PENNSYLVANIA SUPREME COURT VACATES ORDER GRANTING ATTORNEY’S FEES FOR REVERSE BAD FAITH (Pennsylvania Supreme Court)

Published on January 23, 2008 in PA - Reserves and PA - Reverse Bad Faith. Closed
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In Old Forge School District, et al. v. Highmark, Inc., et al. the Pennsylvania Supreme Court was asked to decide whether the Commonwealth Court abused its discretion in awarding fees to Highmark for the alleged “vexatious” conduct of the Plaintiffs/Appellants, instituting litigation challenging Highmark’s insurance rates and reserves. Appellants, policyholders, filed petitions with the Commonwealth Court seeking review of the Insurance Commissioner’s refusal to provide retroactive insurance rate relief. Appellees Highmark and Hospital Service Association of Northeastern Pennsylvania (“NEPA”) each filed preliminary objections on the basis that the Court lacked subject matter jurisdiction and the Appellants failed to exhaust their statutory remedies. In addition, NEPA filed a Motion for attorneys fees against all Appellants, except Old Forge School District, on the basis that the litigation constituted “vexatious” conduct (the “Motion”). The Commonwealth Court granted NEPA’s Motion. NEPA ultimately agreed to withdraw the Motion as part of a settlement agreement. Soon thereafter, however, Highmark moved for attorneys’ fees. The Commonwealth Court granted Hallmark’s motion for the same reasons it had granted NEPA’s Motion. The Court stated that the awarding of fees was appropriate because Appellants had been told, repeatedly, that insurance rates and the amount of reserves are a part of the regulatory process under the Insurance Commissioner’s discretion and are not the proper subject of adversary litigation. On appeal, Appellants argued that pursuant to the “Thunberg” test, a lawsuit is filed for vexatious reasons if: “(1) the suit was filed without sufficient ground in either law or in fact; and (2) the suit served the sole purpose of causing annoyance.” Also, Appellant policy holders argued that the suit was not vexatious as they had asserted legitimate legal theories. The Supreme Court held that the Commonwealth Court’s decision to impose attorneys’ fees was untenable because the Court did not articulate its reasoning according to the Thunberg test. Further, the Supreme Court remanded case and directed the Commonwealth Court to reevaluate the issues based upon one of its recent decisions whereby the Supreme Court held that the courts, and not the Insurance Department, were empowered to adjudicate claims challenging insurers’ excess reserves.
Old Forge School District v. Highmark, 592 Pa. 307, 924 A.2d 1205 (2007) (Saylor, J.)
J.T.L.