December 30, 2019 Practice Points

Wasting Away Again in Insuranceville

Counselors should be aware of the differing interpretations of Rule 26 unless and until further court decisions or amendments to the FRCP provide clarity.

By Ethan Price-Livingston

This Practice Point examines a split between district courts as to whether the remaining limits of a “wasting” or “vanishing” policy (where defense costs erode the overall limits) is discoverable as a supplemental “initial disclosure” throughout the course of litigation. There are two sides to the debate, the first, that the plain meaning/text of Federal Rules of Civil Procedure (FRCP) Rule 26 does not require insurance policies to be produced more than once (even where the remaining limits has substantially decreased throughout the course of litigation). (Note: This article only addresses “initial disclosures” of insurance policies under Rule 26 and does not address scenarios where the remaining limits are discoverable on other grounds such as when the remaining limits are at issue or otherwise relevant in the proceeding.) The second and opposing view is that the purpose of Rule 26 is to allow parties to accurately appraise the worth of the lawsuit and a central factor in that calculous is the remaining amount of insurance coverage. Therefore, there should be a supplemental disclosure if there has been a material change in the remaining limits.

In federal actions, FRCP Rule 26 governs the discoverability of insurance policies. As to initial disclosures, Rule 26(a) provides that “a party must, without awaiting a discovery request, provide to the other parties: . . . for inspection and copying as under Rule 34, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” FRCP Rule 26(a)(1)(A)(iv). Further, pursuant to Rule 26(e)(1)(A) a party must supplement its initial disclosures “in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing.”

In a wasting policy, defenses costs erode the limits and prolonged and expensive litigation can eat up much of the potential coverage. The number of limits remaining under a policy is often a key factor in negotiating settlement, such as when a limits settlement demand is made. The question, then: Does a party have an obligation (or can it be compelled) under Rule 26 to provide an updated total of its remaining insurance coverage as a lawsuit progresses or is the initial production of the policy/declarations sufficient?

District courts have taken differing positions on this question. For example, the District Court for the Eastern District of New York compelled supplemental production of the remaining limits of a wasting policy based on the underlying purpose of Rule 26. See In re Delmarine, Inc., 535 F. Supp. 2d 318 (E.D.N.Y. 2007).

Delmarine is an admiralty case regarding personal injuries suffered by a passenger when two recreational motor boats collided. The case featured protracted litigation as a limitation of liability action was consolidated with the personal injury action. Regarding the personal injury claims, a non-jury trial took place in which liability was allocated 85 percent to Driver A and 15 percent to Driver B. The passenger was awarded $750,000 for injuries and pain and suffering to date, $500,000 for future pain and suffering, and $23,422.10 for past medical expenses. Remaining before the court were damages related issues including whether—after trial—Driver A and the owner of Vessel A could be compelled to provide updated information about the remaining limits of their wasting insurance policies.

The court compelled production of the remaining limits of the wasting policies based on the underlying purpose of Rule 26. The court noted that the primary purpose of mandatory disclosure of insurance policies “is to enable counsel to ‘realistically appraise the case by determining whether an insurer will be able to satisfy an expected judgment or settlement agreement.’” Delmarine, 535 F. Supp. 2d at 322 (citing Fireman’s Fund Ins. Co. v. Cunningham Lindsey Claims Mgmt., Inc., 2005 WL 1522783, at *3 (E.D.N.Y. June 28, 2005)). The court found that the parties had complied with their initial disclosure requirements by producing their insurance policies earlier in the litigation but that “because the claimant likely needs the requested information to decide whether to proceed against Delmarine [Owner of Vessel A],” the court ordered disclosure of the remaining limits. Id. at 322; see also Suffolk Fed. Credit Union v. Cumis Ins. Soc., Inc., 270 F.R.D. 141, 142-43 (E.D.N.Y. 2010) (finding partially based upon the advisory committee’s notes that reinsurance information is discoverable to enable counsel for both sides to make the same realistic appraisal of the case). An important factor to the court’s decision was that the limitation of liability action still had to be tried, which would further deplete the insurance policies.

However, district courts in other circuits have taken a different approach and found that a party complies with its initial disclosure obligation by providing a copy of its policy, and the party is not required to produce supplemental information or documents in connection with the remaining limits as the matter progresses.

In Excelsior College v. Frye, Magistrate Judge Pappas of the United States District Court, Southern District of California, denied a motion to compel that in part sought production before trial of remaining limits of an insurance policy. 233 F.R.D. 583, 586 (S.D. Cal. 2006). The plaintiff argued that production of remaining limits was justified under Rule 26(a)(1)(D), which calls for the mandatory production of insurance agreements. (In the version of the FRCP in effect in 2006, Rule 26(a)(1)(D) provided for the mandatory production for inspection and copying of insurance agreements, it has been renumbered to Rule 26(a)(1)(A)(iv) in the current version without any material changes to the text.) The court found that the plain meaning of Rule 26(a)(1)(D) merely requires the disclosure of an insurance policy that gives rise to a duty to defend or hold harmless and does not require subsequent production of the remaining limits. Id. at 586 (stating that the plaintiff sought disclosure of “information regarding the remaining policy limits—information that is also clearly not called for by the rule”). The court noted that the defendant had already produced the applicable policy in compliance with Rule 26 and noted that “[c]ase law does not support an extension of the requirements of Rule 26(a)(1)(D) beyond its plain meaning.” Id. at 587.

Similarly, in Silver v. Bad Boy Enterprises, LLC, a denied motion sought to compel production by defendants before trial of the remaining limits of a wasting policy. 2013 WL 1187962, at *1 (M.D. Ga. Mar. 21, 2013). The plaintiffs contended that the defendants had to regularly supplement the initial disclosure of their insurance policy limits under a Georgia statute and under FRCP Rule 26(a)(1)(A)(iv). The court specifically held that the defendants had complied with the requirements of Rule 26(a)(1)(A)(iv) by producing a copy of the applicable policy, including a declarations page showing the policy limits as of the date that the policy was issued. Id. The court also noted that the initial production of the policy also satisfied the requirements of the Georgia discovery statute.

As demonstrated by the cases above, trial courts have wide discretion over such discovery rulings. Further, the dichotomy is between courts that interpret Rule 26 based on its plain meaning and those that do so based on its purported underlying purpose to realistically appraise parties of the value of the action. In any event, counselors should be aware of these differing interpretations unless and until further court decisions and/or amendments to the FRCP provide additional clarity on the issue.

Ethan Price-Livingston is an associate with Cozen O'Connor in New York City, New York.

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