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A Young Lawyer’s Guide to Navigating Discovery in Coverage and Bad-Faith Disputes

Andrea Lee DeField and Adriana Perez

Summary

  • Discoverability of important documents is not only jurisdiction-dependent but fact-dependent.
  • Young lawyers should take ownership of pretrial discovery efforts and become the team’s go-to attorney on applicable law and procedure.
  • They can become the team’s point person on key discovery decisions in that jurisdiction, and the state or federal rules of procedure and any applicable local rules.
A Young Lawyer’s Guide to Navigating Discovery in Coverage and Bad-Faith Disputes
Nico De Pasquale Photography via Getty Images

In insurance coverage litigation, a young lawyer’s first opportunity to take ownership over part of the case is often in discovery. However, discovery in coverage and bad-faith actions can be contentious and the rules far from uniform across jurisdictions. Typically, insureds seek discovery of an insurer’s claim file, reserve information, reinsurance information, information regarding other insureds, the insurer’s manuals and guidelines, underwriting manuals, and a policy’s drafting history. However, whether an insurer must produce these documents depends on the jurisdiction in which the action is being litigated. Below are exemplar cases from various jurisdictions demonstrating how different courts have ruled on these discovery issues.

Insurer’s Claim File

In most instances, once discovery opens, the insured’s coverage counsel will seek the insurer’s claim file. The insurer often objects to this discovery and argues that the claim file is privileged, contains attorney work-product, or is otherwise precluded from discovery. However, courts disagree as to whether a claim file is actually privileged or otherwise protected.

For example, New York courts have held that the claim file may be discoverable. In Bombard v. Amica Mutual Insurance Co., the court held as follows:

The payment or rejection of claims is a part of the regular business of an insurance company. Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business. Reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are thus not privileged and are discoverable even when those reports are “mixed/multi-purpose” reports, motivated in part by the potential for litigation with the insured.

Further, even where an insurer retains outside counsel to render a coverage position, those documents, too, may be discoverable where counsel is engaged in “claims handling—an ordinary business activity for an insurance company.”

In Florida, whether a claim file is discoverable arguably depends on (1) whether the case is brought in federal or state court and (2) whether the case is a coverage case (declaratory action or breach of contract) or a case alleging bad faith. In Florida federal courts, there is no “claim file privilege.” Rather, the claim file is generally discoverable if relevant to the claims alleged. In addition, Florida federal courts recognize a presumption that documents in the claim file prepared before a final coverage position are not protected work product. Moreover, where the insured alleges bad faith, Florida federal courts are likely to permit discovery of the insurer’s claim file.

In contrast, in Florida state court, claim files are generally not discoverable until coverage has been resolved. Some Florida courts have determined that claim files are not relevant to the determination of coverage while others have focused on work-product considerations. Therefore, claim files are typically not discoverable in Florida state court until a bad-faith claim has been brought against the insurer.

Likewise, in California, courts have held that claim file discovery may not be relevant in coverage actions. Nonetheless, California courts have found claim file discovery relevant in bad-faith actions:

The importance of claims files as evidence in insurance bad faith actions has long been emphasized: “In bad faith cases, the jury is entitled to know exactly what information was in the insurer’s claims file (aside from privileged information): how else could they have properly determined whether [the insurer] acted fairly and in good faith in its handling of the claim?” . . . “The claims file is a unique, contemporaneously prepared history of the company’s handling of the claim; in an action [for bad faith] the need for the information in the file is not only substantial but overwhelming.”

However, attorney-client and attorney work-product privileges may shield some of the contents of a claim file from discovery.

Reserve Information

Reserves are funds insurers set aside to cover payment in the event of future liability. Insurers typically assert that reserve information is not relevant to insurance coverage actions. Nonetheless, whether reserve information will be subject to discovery depends not only on the jurisdiction in which the action is pending but on whether bad faith has been alleged.

Many New York federal courts have found reserve information to be discoverable. However, some New York state courts have held that reserve information is not material and necessary in coverage actions because bad faith has not been alleged.

Similarly, in Florida, some courts have held reserve information not to be discoverable where the insured has not alleged bad faith.

[R]eserve information is generally not discoverable in insurance coverage cases absent an allegation of bad faith by the insured. Florida courts have repeatedly held that reserve information is not subject to discovery in a first-party breach of contract action because it “is irrelevant to the determination of coverage. . . .” Thus, the undersigned recommends that Seacoast’s request for documents containing reserve information be denied.

California courts have found reserve information to be discoverable in bad-faith cases. For example, in a bad-faith action against a professional liability insurer, the insured was entitled to discovery of requested loss reserve information, regarding the insurer’s reserves in underlying actions against the attorney insured, unless the trial court could, as a matter of law, conclude, as to each separate item of information, that it was not relevant to the subject matter or was not calculated to lead to discovery of admissible evidence in a bad-faith action.

Reinsurance Information

Policyholders often seek discovery of reinsurance information because they believe that information provided by the insurer to reinsurers, or the reinsurance contracts themselves, may contain admissions or other concessions that may support their claims. As in the case of reserve information, whether this is discoverable depends not only on the jurisdiction but also on whether bad faith has been alleged.

Many federal district courts have held that Federal Rule of Civil Procedure Rule 26 requires initial disclosure of reinsurance agreements in insurance coverage litigation. In Missouri Pacific Railroad Co. v. Aetna Casualty & Surety Co., the Northern District of Texas considered whether Rule 26(a)(1)(D) requires initial disclosure of reinsurance agreements. The court held that it does, reasoning as follows:

When an insurer “cedes” a portion of its risk to a reinsurer, the reinsurer agrees to indemnify or reimburse the insurer according to the contractual terms. The court agrees with the magistrate judge’s holding that the Rule mandates disclosure of reinsurance policies because “by definition such policies would render a reinsurer liable for all or part of an adverse judgment entered against the primary insurer which obtained the reinsurance policy.”

Similarly, in New York, Civil Practice Law and Rule (CPLR) 3101(f) “entitles [policyholders] to copies of the applicable reinsurance policies themselves.” However, in Florida, some federal courts have determined that reinsurance information, including the reissuance policy, is discoverable only in a bad-faith action.

Reinsurance agreements, reinsurance communications, and related information may also be sought under Rule 34. In Klein v. Federal Insurance Co., the Northern District of Texas granted a motion to compel reinsurance agreements and reinsurance communications sought under Rule 34, finding the information to be relevant to the issue of notice. When a party seeks more than the agreement’s contents, however, some courts rely on the general relevance standard to determine if these materials should be produced. And insurers and their reinsurers may still claim attorney-client privilege or work-product protection where appropriate.

Moreover, the distinction as to whether the reinsurance agreement is treaty or facultative appears to go more to the relevance of reinsurance communications or other information under Rule 34 than the discoverability of the agreement itself under Rule 26. In Heights at Issaquah Ridge Owners Ass’n v. Steadfast Insurance Co., for example, the court reasoned as follows:

[Reinsurance] is a decision based on business decisions and not questions of policy interpretation. This is particularly so when the reinsurance is treaty insurance, as it is here. Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business from the insured. There is no connection between the claims asserted against defendant Steadfast, and Steadfast’s reinsurance of a block of its insurance policies, that would make that reinsurance relevant to the claims asserted here.

Information Regarding Other Insureds and Claims

Insureds also often seek information regarding other claims or insureds in order to establish a general business practice by the insurer, which can be necessary to establish bad faith in certain jurisdictions or necessary to establish entitlement to punitive damages. Insurers usually object, claiming the requests are overly broad and burdensome or that the documents sought are confidential. Nevertheless, some states allow policyholders to obtain this information during discovery in limited circumstances.

For instance, in New York and New Jersey, information concerning other claims or other insureds may be discoverable if such information is relevant to the claims asserted in the coverage litigation. However, federal courts in the Southern District of Florida have held information is discoverable only in bad-faith suits. California courts also limit when information regarding other claims and insureds is discoverable. In California, this information is discoverable only when the policyholder attempts to establish a general business practice of the insurer.

Insurers’ Manuals and Guidelines

Insureds typically also seek the insurer’s manuals and guidelines in order to establish a general business practice or a deviation from the insurer’s business practices in their cases in order to demonstrate bad faith. However, policyholders may also seek these materials in coverage actions, arguing that the materials are relevant to the insurer’s purported breach of the policy.

Some courts agree. For example, courts have held that an insurer’s manuals and guidelines are discoverable, even in a coverage action in which “bad faith” has not been alleged. However, Florida state courts, and others, often hold this information is discoverable only in bad-faith suits.

Underwriting Manuals and Drafting History

Another source of discovery disputes is the issue of whether an insurer’s underwriting manual is discoverable in a coverage action. Courts often permit this discovery, particularly where an underwriting issue is alleged. For example, in Firemen’s Insurance Co. of Newark, New Jersey v. Gray, the court held that in a coverage action, that

the underwriting file and claim file of each defendant are subject to disclosure in that they did not consist of material prepared for litigation of this action for a declaratory judgment. . . . “An investigation conducted to defend insured against a possible legal action is not material prepared for legal action as against the insurer himself.”

Policyholders also seek previous drafting history information in order to shed light on the meaning of the policy language. Courts will allow the discovery of this information when it is relevant to the case. Typically, a policy’s drafting history is relevant where ambiguity has been alleged. For instance, in Champion International Corp. v. Liberty Mutual Insurance Co., the Southern District of New York held that “inquiries concerning the drafting history of the provisions in question, how-to-sell instructions and claims manuals are clearly germane to the interpretation of such policies.”

Similarly, Florida courts have held that underwriting materials, including drafting histories, are discoverable where ambiguity has been alleged. The same is true in California.

Conclusion

As the cases demonstrate, discoverability of these documents is not only jurisdiction-dependent but fact-dependent as relevance is determined by the claims alleged in each coverage or bad-faith suit. Accordingly, even where the case law suggests that a category of discovery is or is not relevant, young insurance coverage lawyers should distinguish applicable law by demonstrating why the information sought is or is not relevant to the claims asserted in that action.

Moreover, young insurance coverage lawyers should make themselves invaluable members of the coverage or bad-faith litigation team by becoming the team’s point person on (1) key discovery decisions in that jurisdiction, (2) the state or federal rules of procedure and any applicable local rules, and (3) the court’s scheduling order and any orders on discovery practice and procedure. By taking ownership of pretrial discovery efforts and becoming the team’s go-to attorney on applicable law and procedure, young coverage lawyers can make themselves indispensable to the matter and convince partners, and clients, of why they deserve second or third chair at the coverage or bad-faith trial.

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