On April 15, 2013, the Supreme Court of the State of New York, County of New York, granted the insured’s request for the production of certain claims file material and previously sealed discovery in Estée Lauder Inc. v. OneBeacon Insurance Group LLC et al., index number 602379/2005, leaving insurers with yet another troubling instance of a broadened scope of discovery in bad faith cases.
This most recent decision and court order arises out of a discovery dispute in a longstanding breach of contract and declaratory judgment action filed by Estée Lauder against its insurer, OneBeacon and its predecessors (the insurer). Originally the lawsuit stemmed from the insurer’s decision not to pay defense costs and indemnity for underlying claims against Estée Lauder related to its alleged dumping of hazardous materials in various landfills spanning from 1999 to shortly before the time of filing the action. The insurer primarily denied coverage for untimely notice.
Estée Lauder filed suit asserting four counts. In essence, count one was for breach of contract for a previously settled lawsuit; count two was for breach of contract for an on-going claim; count three was for breach of contract for an on-going lawsuit; and count four was for a declaration that the insurer would have to indemnify Estée Lauder for any remaining claims stemming from the current claim and pending lawsuit (i.e., the subject of counts two and three, respectively).
Initially, the insurer prevailed on summary judgment. Estée Lauder filed a partial summary judgment motion on its third and fourth causes of action, which the lower court denied. New York’s Appellate Division reversed, however, denying the insurer’s summary judgment motion, rejecting the late notice argument; and granting Estée Lauder partial summary judgment on its third and fourth causes of action. Pursuant to the grant of summary judgment on the third cause of action (breach of the insurance contract in relation to the pending lawsuit against Estée Lauder), the Appellate Division held that Estée Lauder was entitled to post-tender reasonable defense fees and expenses plus prejudgment interest accruing from the date of the insurer’s denial.
It is this order of post-tender reasonable defense fees and expenses that is the crux of Estée Lauder’s bad faith claim against its insurer, as Estée Lauder claims that the insurer failed to pay the reasonable defense fees it owed in a timely fashion, instead trying to reach a global settlement of all claims. Estée Lauder claims that the failure to pay these fees promptly, while the insurer instead pursued a global resolution, was the insurer attaching “impermissible strings to payments it was clearly obligated to make under the Court order.”
Notably, Estée Lauder’s bad faith claim regarding the failure to pay the defense fees and costs was not asserted until well after it initiated its breach of contract and declaratory judgment action against the insurer and apparently did not arise until after the court’s order to pay. Thus, the documents most likely relevant to the bad faith claim were generated post-filing of the appeal, which was during the course of on-going litigation.
Motion to Compel
Estée Lauder sought documents related to the insurer’s alleged delay in paying the court ordered defense fees arguing that the insurer’s claim readjustment process to determine the amount of the defense fees and their reasonableness following the court’s order was a function of the insurer’s ordinary business, regardless of whether some of the individuals involved in the readjustment were licensed attorneys. Particularly, Estée Lauder categorized these documents as: 1) written recommendations as to the readjustment process; 2) large payment requests sent to the insurer; 3) documents referenced during the readjustment process; 4) notes taken at the insurer’s meetings regarding the claim; 5) adjustment period correspondence concerning justifications for the delay of payment (excluding correspondence with litigation counsel solely respecting strategy and tactics); 6) communications showing approval of counsel with respect to the readjustment; 7) the result of any review conducted by counsel of the defense expenses submitted; 8) documents of first investigations that the insurer claimed it needed to revisit as part of the readjustment; and 9) progress notes created during the readjustment period.
The insurer sought protection under the attorney-client privilege, and argued that Estée Lauder had no need for the documents as the reasons for the timing of the payment included that the insurer had to determine the actual “reasonable and necessary” costs and when interest actually applied; and that the insurer decided to focus on a global settlement rather than ascertain whether a very small percentage of the claimed defense costs could be considered undisputed. The court found that these positions supported Estée Lauder’s need for the documents – namely, in order to sustain its burden, Estée Lauder would have to show that the insurer’s focus on the global settlement dominated the cause for the alleged delay. Accordingly, the court found that Estée Lauder overcame the threshold question of whether, barring the applicability of a privilege, the documents sought were discoverable.
The insurer also sought to protect various sets of documents categorically, arguing that its deliberations after Estée Lauder filed an action against it were protected. Here, the bad faith claim allegedly arose out of the insurer’s failure to pay attorneys’ fees as ordered, after the insured already filed suit. As a result, the insurer argued Estée Lauder was not entitled to documents regarding the insurer’s deliberations about the payments, as suit was already filed – in essence, the insurer argued that post-filing deliberations were not discoverable. The court denied the request, finding that these documents were clearly relevant and the insurer was not entitled to a categorical protection merely because the documents were created after suit was filed.
The insurer also argued for categorical protection on the ground that its deliberations on the payment of attorney’s fees were deliberations about litigation that were protected by the attorney-client privilege and attorney work product doctrine. The court, again, denied categorical protection, as the insurer did not prove that all of the documents sought were, in fact, privileged, and could not be considered privileged merely because they were created “midstream of a litigation.” As to attorney-client privileged communications, the court held that the standard for protection was that they involved “predominantly a communication of a legal character,” which the insurer had not shown.
In its analysis, the court focused on the fact that the alleged bad faith claim arose from post-filing conduct – i.e., the insurer’s alleged untimely payment of attorney’s fees ordered by the court in the breach of contract and declaratory judgment action. Accordingly, the court ordered the insurer to turn over the nine categories of documents it had described that were related to the payment of Estée Lauder’s attorney’s fees for the relevant period between February 2009 and April 2012. To the extent any individual documents were privileged, the insurer was permitted to create a privilege log in compliance with New York law.
Estée Lauder’s Motion to Unseal
The court’s order also addressed Estée Lauder’s Motion to Unseal. Since February 21, 2006, there was a Sealing Order in place in the litigation that allowed the parties to designate as “Confidential,” documents containing commercially sensitive or trade secret information. As a result, Estée Lauder’s discovery motion and all related motion papers were filed under seal because the submitted exhibits were discovery materials that the insurer previously identified as “Confidential.”
Estée Lauder moved to unseal its discovery motion, arguing that the insurer’s confidential designation of deposition transcripts and other produced documents was for tactical reasons – namely, to create the impression of a lengthy readjustment of Estée Lauder’s claim, which needed to be protected from public view. Estée Lauder’s view was that the protected documents instead showed the insurer’s pressure on Estée Lauder to settle its remaining claims.
The insurer argued it had a legitimate interest in protecting the deposition transcripts because the witnesses testified regarding OneBeacon’s reinsurance. The court noted, however, that the cases cited by the insurer in support of this interest actually undermined its argument, as those cases held that the payment or rejection of claims is part of the regular business of an insurance company, rather than a legal operation.
The insurer next contended that it was contractually obligated to protect the information pursuant to its Administrative Services Agreement with its claims administrator. The Supreme Court found the insurer failed to specify how unsealing the documents would cause it to violate the Administrative Services Agreement and that such disclosures would not violate the agreement.
The insurer further argued that it relied on the sealing order in providing discovery. Rejecting this argument, the court held that the insurer had not been injured if, relying on the misapprehension that non-confidential material would be covered by the sealing order, it provided discovery that it was obligated to provide.
Here, the court denied categorical protection for documents created by the insurer during the course of litigation, even if licensed attorneys were involved in the creation of such post-filing documents. Instead, the court was clear – post-litigation documents that relate to the alleged post-filing bad faith conduct are discoverable, unless the insurer demonstrates that the specific document for which it is seeking protection is “predominantly a communication of a legal character.” The court’s decision and order potentially broadens the scope of discovery in bad faith cases, exposing an insurer’s communications with its legal team where those communications are in-house and a part of the insurer’s regular business as an insurance company as opposed to a part of its legal operations.
This case is distinctive, however, in that the crux of Estée Lauder’s bad faith claim is its allegation that the insurer failed to pay court ordered attorney’s fees in a timely manner. This is even though the court specifically held that only reasonable attorney’s fees were due, and, therefore, the insurer must adjust and consider/determine the reasonable amount of the fees. Because the case remains in active litigation, these bad faith allegations are still hotly contested. Notwithstanding this fact, insurers must remain aware of the importance of timely payments of undisputed amounts, including but not limited to court ordered attorney’s fees and costs. Accordingly, insurers should not attempt to strengthen their bargaining power as to remaining undisputed amounts through the strategic use of amounts owed and due.
Because the order was issued by a trial court, the discovery and bad faith questions here remain open. Nevertheless, this decision highlights the requirement that insurers that have on-going litigation with the same insured over the same series of claims should take precautions to protect their internal deliberations with counsel so as to preserve any privileges.