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A Bad Faith Claim Need Not Pry Open the Door to An Insurer’s Files

When a bad faith claim and coverage claim are filed simultaneously, an insurer must consider what impact this pairing has on the discoverability of it’s internal coverage analyses and what steps should be taken to narrow the scope of discovery. A recent federal decision sheds light on how an insurer can prevent bad faith claims from being used as a tool to transparently invade privileged claim file materials in order to unfairly influence the determination of coverage.

In The Scotts Company LLC v. Liberty Mutual Insurance Company, No. 06-00899, (S.D. Ohio June 26, 2007), the plaintiff alleged that it was afforded coverage under general liability policies for claims arising from pollution cleanup on properties it owned. The insurer refused coverage and instead negotiated a settlement agreement with its insured. In a subsequent declaratory action, the insured sought the insurer’s internal coverage and strategy documents, premised upon the insured’s claim that the insurer had acted in bad faith in pressuring its insured into a settlement agreement rather than honoring its coverage obligations. The insurer moved to bifurcate and stay discovery of the bad faith claim, arguing: (1) that proceeding with discovery and adjudication of both coverage and bad faith actions would be prejudicial; and (2) such simultaneous proceeding is contrary to the principle of judicial economy if the plaintiff does not win on preliminary coverage issues which must be decided before the bad faith claim can be justiciable.

In granting the insurer’s motion for bifurcation and stay of discovery, the court acknowledged that, although the coverage issues and bad faith issues may be interrelated, such connection does not overcome the unfairness and prejudicial effect that the production of privileged documents would have on the insurer’s ability to defend against these actions.

The majority of courts have followed similar reasoning to that set forth in The Scotts Co. LLC opinion. See Vanguard Fire & Cas. Co. v. Golmon, 955 So.2d 591, 594 (Fla. 1st D CA 2006) (insurer would suffer irreparable harm if forced to defend against both breach of contract and bad faith claims simultaneously); Enoka v. AIG Hawai’i Ins. Co., 128 P.3d 850, 864 (Hawai’i 2006); Allstate Indem. Co. v. Ruiz, 899 So.2d 1121, 1130 (Fla. 2005) (courts should use tools of abatement of actions and in-camera inspection to ensure full and fair discovery when coverage and bad faith actions are litigated together); In re Trinity Universal Ins. Co., 64 S.W.3d 463, 467-68 (Tex.Ct.App. 2001); Imperial Cas. & Indemn. Co. v. Bellini, 746 A.2d 130, 134 (R.I. 2000) (insured’s actions for reformation of policy and bad faith should be severed and discovery narrowly tailored so as to prevent simultaneous litigation of the two causes).

While the prospect of an insurer producing its privileged claim materials in the face of coverage and bad faith actions is daunting, there are procedural alternatives that the court may employ in order to level the playing field. Therefore, it is essential that an insurer defending against coverage and bad faith actions protect its privileged materials by filing the proper procedural motions in order to narrow potentially prejudicial and damaging discovery of its privileged claim materials. For additional information on the cases cited herein, please feel free to contact Kelly Stoltz at Bates & Carey LLP.