The Permissible Use of Evidence of Insurance Coverage

The grounds for admission specified in Rule 411 are not exclusive, which means that the “number of possible alternative uses of the existence or non-existence of liability insurance is, of course, unlimited.” Leonard, supra, at § 6.9. Moreover, despite objections under Federal Rule of Evidence 403, courts have also admitted arrangements, such as indemnity agreements, which are similar to insurance but may not qualify as “liability insurance” under Rule 411.

Given the underlying role of liability insurance in personal-injury law, Rule 411 is of obvious importance to practitioners in that field. However, the business-torts lawyer also needs to be familiar with it. Numerous scenarios could arise in cases involving misrepresentation, trade secrets, and tortious interference in which a party might seek to admit evidence of insurance or a similar arrangement. The resolution of objections will depend on the proponent’s purpose for admitting the evidence and the balancing under Rule 403 of the relevance versus unfair prejudice caused by its admission.

Contrary to the knee-jerk reaction of most litigators, insurance and insurance-like evidence can reach a jury under the right circumstances. For instance, a court may admit evidence of insurance to establish the meaning and effect of a contractual provision and trade usage. See Posttape Assoc. v. Eastman Kodak Co., 537 F.2d 751, 758 (3d Cir. 1976). Or a court might admit evidence of insurance if it demonstrates that an underlying contract was viewed as binding by the parties. See Morton v. Zidell Explorations, Inc., 695 F.2d 347, 351 (9th Cir. 1982), cert. denied, 460 U.S. 1039 (1983). Or a court might admit evidence of an indemnity agreement as proof that defendants in a trade-secret-misappropriation action knew they did not own the trade secrets, and as evidence of the proper measure of the plaintiff’s damages. See DSC Commc’ns Corp. v. Next Level Commc’ns, 929 F. Supp. 239, 242-45 (E.D. Tex. 1996).

Rule 411 and Its Rationale and Origins
Federal Rule of Evidence 411, entitled, “Liability Insurance” and included within Article IV of the Rules (“Relevance and its Limits”) took effect in 1975. Amendments in 1987 and 2011 were “technical” and “stylistic” and not intended to be substantive or “to change any result in any ruling on evidence admissibility.” See Fed. R. Evid. 411 (Advisory Committee Notes, 1987 and 2011 Amendments). Rule 411 reads as follows:

The reason for the rule is “concern[] over unfair prejudice—that if a jury were to learn of the party’s coverage or lack of coverage by liability insurance, it would relax its standards in determining both fault and damages.” Leonard, supra, at § 6.1.

In describing four permissible uses of liability insurance evidence (a witness’s bias or prejudice, agency, ownership, or control) the rule uses the phrase “such as” to indicate that these examples are not the only permissible ones. Id., at § 6.9. But even if admission is sought for a permissible use, evidence of insurance must still pass muster under more generally applicable rules of evidence, most importantly Rule 403. See Fed. R. Evid. 411, Advisory Committee Notes, 2011 Amendments. Rule 403 allows a court to “exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice . . . .”

Witness bias or prejudice is a self-explanatory use and not as likely to arise in the context of business torts. “The paradigm case for use of evidence of insurance to show bias is cross-examination of a claims adjuster or insurance company doctor,” but any “economic tie . . . likely to influence the witness to favor the insurance company” can be shown through evidence of liability insurance. Wright and Graham, Federal Practice and Procedure, Vol. 23, § 5367 (1980). Thus, this article will focus on cases related to “agency, ownership or control,” and other unspecified uses that fall within the “such as” language.

Is It Liability Insurance or Something Else?
Rule 411 applies only to “liability insurance.” What exactly that means, and whether Rule 411 applies to arrangements such as indemnity agreements, will affect a decision to admit or exclude such evidence. Commentators have defined liability insurance as “any contract whereby the insurer assumes the risk of liability for damages to the person or property of others, which liability has been allocated to the insured either by a rule of common law or by statute.” Leonard, supra, at § 6.7.1, quoting, William R. Vance, Handbook on the Law of Insurance, § 196, at 999 (3d ed. Buist M. Anderson rev. 1951).

In DSC Commc’ns Corp. v. Next Level Commc’ns, two former DSC employees started Next Level and allegedly stole DSC’s trade secrets. After DSC filed litigation, the former employees sold Next Level, complete with the alleged stolen trade secrets, to a company called General Instruments Corporation (GI). Part of what the former employees received in return was GI’s agreement to indemnify them against the DSC litigation. The district court held that an indemnity agreement was not liability insurance and not covered by Rule 411. Id. at 244. Other courts, however, particularly in the Eighth Circuit, have treated indemnity agreements and similar arrangements as inadmissible under Rule 411. See, e.g., Garnac Grain Co. v. Blackley, 932 F.2d 1563, 1570 (8th Cir. 1991) (the trial court should have excluded evidence of a fidelity bond, even though the bond was “not technically ‘insurance against liability,’” because the exclusion fulfilled the intent of Rule 411); see also Leonard, supra, at § 6.7.1 & n. 37.

The DSC Commc’ns court identified six characteristics of liability insurance. It found that the indemnity agreement only met three, and the missing three characteristics were dispositive. The court noted that GI, just like a liability insurer, had been paid to assume the risk at issue, was able to pay for the judgment, and had agreed to indemnify the two former employees for losses they had sustained to a third party, their former employer, as opposed to paying them for a loss they directly suffered.

But this was not enough to make the agreement liability insurance. Unlike an insurer under a liability insurance policy, GI could not spread the loss among its policy holders because it had none (this was an isolated agreement rather than an insurance policy written as part of an insurance business), could not incentivize the former employees to avoid liability with the threat of higher future premiums because this was a one-time contract, and was not insuring against future risk. The last factor was most critical to the court, and it was supported by its finding that when the former employees and GI entered into the indemnity agreement, the employees “had already committed the acts that gave rise to this lawsuit.” DSC Commc’ns, 929 F. Supp. at 244.

It is worth noting, however, that the DSC Commc’ns court held that the indemnity agreement was admissible whether it was liability insurance or not. Id. at 242. Nonetheless, the proponent and opponent of “insurance” evidence need to consider whether the contract in question will be treated as “liability insurance” under Rule 411 or something else in shaping admissibility arguments.

Ways to Introduce Evidence of “Insurance”
Evidence of insurance may be admitted to establish an agency relationship. See Hunziker v. Scheidemantle, 543 F.2d 489, 495 n.10 (3d Cir. 1976). In Hunziker, the Third Circuit held that the district court, in a wrongful death case arising from a plane crash, could admit evidence that one defendant insured another to establish a disputed agency relationship between them. As commentators have explained, the rationale for this use of insurance evidence is that a party does not usually insure someone for whose conduct it will not be liable. Conversely, “the failure to obtain liability insurance that covers a particular person would evidence lack of responsibility for that person’s conduct.” Leonard, supra, at § 6.10.2. But see Wright and Graham, supra, at § 5365 (suggesting that the absence of insurance coverage is clearer proof of the lack of an agency or employment relationship than the existence of such insurance indicates the existence of such a relationship, because a cautious principal might insure someone who is not an agent or employee, given the possibility that the principal could nevertheless be held liable for that person’s conduct).

Evidence of insurance coverage also may be admitted in a business-tort case as evidence of a meaning or existence of a binding contract. In Morton v. Zidell Explorations, Inc., 695 F.2d 347, 351 (9th Cir. 1982), cert. denied, 460 U.S. 1039 (1983), the court of appeals ruled that the trial court had properly admitted evidence that the plaintiffs had purchased builder’s risk insurance. The evidence of insurance was important because the plaintiffs denied that there was a valid written contract between them and the defendant. However, the disputed contract required the plaintiffs to purchase the risk insurance, which the plaintiffs did. Thus, the evidence of insurance was admitted to prove that the plaintiffs “deemed themselves bound by the contract” as they had partially performed it. Morton, 695 F.2d at 351.

In Posttape Assoc. v. Eastman Kodak Co., 537 F.2d 751, 757–58 (3d Cir. 1976), the court of appeals held that the trial court erred by excluding evidence that the plaintiffs had purchased insurance coverage that protected the plaintiffs from losses due to defective movie film. But see Wright & Graham, supra, at § 5364 n.11 (questioning whether the insurance in Posttapewas liability insurance or casualty insurance, but reaching no conclusion based on the ambiguous statement of facts). The defendant alleged that a contractual provision and trade custom in the industry limited the defendant’s liability for defective film. The defendant wanted to admit evidence of the plaintiffs’ insurance purchase to show that the plaintiffs were aware of the limitation of liability as both a contractual provision and trade usage, which the plaintiffs disputed.

The court of appeals found that “the existence of such [insurance] coverage might have been so unusual that the purchase itself would have significance in the circumstances.” Furthermore, in a point that might resonate in many business-tort cases, the court of appeals noted that this type of business claim was not one likely to result in unfair prejudice: “It is doubtful that there would be any prejudice because the parties were both commercial entities, [and] the injury was not likely to stir the emotions . . . .” Id. at 758.

Even if a proponent can demonstrate a plausible, permitted rationale to admit evidence of insurance under Rule 411, courts will nevertheless exclude it if the value of the proposed use of the evidence is substantially outweighed by the unfair prejudice it might create. SeePalmer v. Krueger, 897 F.2d 1529, 1537–38 (10th Cir. 1990). In Palmer, the plaintiff-daughter, representing her mother’s estate, sued her step-brother, representing her step-father’s estate, seeking damages for her mother’s death when her step-father crashed the parents’ small plane. The trial court excluded evidence about the role an insurance dispute played in stoking tensions between the step-siblings. The court of appeals agreed with the trial court “that the probative value, if there was any at all with regard to those matters, was so small,” that it “was dramatically outweighed by the undue prejudice that would have resulted if insurance had been brought into the case.”

Courts may be more inclined in business-tort cases to admit evidence of indemnification agreements than liability insurance, given the reference in Rule 411 to the latter but not the former. In DSC Commc’ns, for example, the court emphasized that the indemnity agreement was obtained after the former employees engaged in the alleged theft of the trade secrets.But cf. Matosantos Commercial Corp. v. SCA Tissue North America, LLC, 369 F. Supp. 2d 191,195–96 (D.P.R. 2005) (applying the rationale of Rule 411 to bar evidence of an indemnity agreement when, unlike in DSC Commc’ns, the agreement was entered into before the alleged wrongful conduct was not probative of the key issues in the case and was potentially prejudicial to the defendant).

Under the DSC Commc’ns facts, the court held that the evidence of the indemnity agreement, whether insurance or not, was admissible because “the fact that [the former employees] felt it was necessary to ‘insure’ against the contingency that they might be found to have stolen [DSC’s] trade secrets is evidence that they believed that they may not have owned the trade secrets. As such, this evidence is relevant to the issue of whether [the former employees] owned the alleged trade secrets.” DSC Commc’ns, 929 F. Supp. at 248.

The indemnity agreements were also relevant to the plaintiff’s damages because they were part of the consideration that the former employees received for selling their new company, “whose assets consist almost exclusively of the ideas that [DSC] claims were stolen.” Id.Thus, the court held that the value the former employees received for Next Level was a permissible way to measure DSC’s damages. The district court found little chance of unfair prejudice under Rule 403 by admitting the indemnity agreements, especially when, as in the Third Circuit’s Posttape decision, this was a commercial dispute.

The DSC Commc’ns court also held that defense counsel had opened the door to admission of the indemnity agreements in two ways. First, in voir dire, the former employees’ counsel had, despite the existence of the indemnity agreement, told the potential jurors that this case was “a question of life and death” for the two former employees. DSC Commc’ns, 929 F. Supp. at 249. In similar situations, defense counsel would be well-advised to proceed with caution before making dramatic appeals to the jurors regarding the potential financial consequences of a judgment.

Second, defense counsel also described for the jury the terms of the sale of the former employees’ new company to GI, with the exception of the indemnity agreement. The court held that under the completeness doctrine, to avoid giving the jurors a misimpression of the value of the new company, the evidence of the indemnity agreement was admissible. Id. See also Galaxy Computer Servs., Inc. v. Baker, 325 B.R 544, 551–52 (Bankr. E.D. Va. 2005) (in a case involving breach of fiduciary duty and tortious interference, the court admitted an indemnity agreement where the agreement was between two former officers of the plaintiff and a defendant company with which the officers allegedly conspired to harm the plaintiff, the officers’ former employer).

Conclusion
For the party with insurance or an indemnity agreement, and the party without it, relying on the generalization that evidence of insurance is not admissible without giving careful consideration to the implications of Rule 411 (and Rule 403) is done at that party’s own peril. Depending on the facts and issues in the case, the insurance policy or indemnity agreement, or at least some reference to it, can easily end up in front of the jurors. Litigators may have some ability to control whether such evidence gets admitted by shaping their case and arguments, particularly if they focus on the issue in advance.

Keywords: litigation, business torts, indemnity agreements, liability insurance, evidence, admissibility