Settling the Settlement Negotiation Privilege


[author: James Mirro]

Most litigation is settled before it reaches trial.  When negotiating a settlement, parties should consider whether statements made in the course of those negotiations (which may take either written or oral form) are subject to discovery.  This issue arises with some frequency and in a variety of settings.  In insurance coverage disputes, for instance, the liability insurer may wish to have more information about the basis for the insured’s settlement of the underlying action, particularly if the insurer was not invited to participate in those negotiations.  When parties (or non-parties) are asked for discovery related to such prior settlement communications, they often argue that a “settlement negotiation privilege” bars that discovery.  Two recent opinions that permit such discovery can be cited by insurers who seek settlement communications: a District of Maryland opinion involving liability coverage (in favor of National Union Fire Insurance Company) and a California District Court of Appeal opinion in favor of Volkswagen in an asbestos product liability action.
In National Union Fire Insurance Company of Pittsburgh, PA, et al. v. Porter Hayden Company, 2012 WL 628493 (D. Md. 2012) (Blake, J.), insured Porter Hayden Bodily Injury Trust sought insurance coverage for amounts that it had paid asbestos claimants in personal injury settlements.  National Union was aware that those same asbestos claimants may have asserted parallel claims against certain non-party bankruptcy trusts and claim processing facilities.  National Union thus issued subpoenas seeking information from those non-party trusts and facilities, for the purpose of comparing any statements made by the asbestos plaintiffs in those proceedings to statements made by them to Porter Hayden.  The subpoenas called for each non-party trust or claims processing facility to produce the information that claimants supplied on their claim forms as well as other information. 
Counsel for the non-party asbestos plaintiffs moved to quash the subpoenas on the grounds that the information sought is “confidential” and constitutes “privileged settlement-related material.”   As to the confidentiality argument, National Union argued that there is no recognized legal principle holding that parties can create immunity from discovery for themselves by entering into a private agreement.  As to the privilege argument, National Union argued both that the Fourth Circuit had not recognized such a privilege and that the insured had put the information “at issue” in the case by seeking indemnification:  “the insurers maintained that because they are expected to indemnify Porter Hayden for payments made to the claimants, issues about whether those individuals filed claims with other asbestos settlement trusts and whether that information is consistent are relevant to the [litigation].” 
The Court agreed with National Union and denied the motion to quash.  On the question of confidentiality, the Court held that “[t]here is no privilege for documents merely because they are subject to a confidentiality agreement, and confidentiality agreements do not necessarily bar discovery that is otherwise permissible and relevant.”  In addition, the Court held that “the material sought by the subpoenas should not be automatically barred from discovery by virtue of being related to settlement.”  The Court noted that the Fourth Circuit has not imposed a settlement privilege with respect to discovery.  The Court found that the information requested was relevant in that it would allow the insurers to confirm the factual basis of the claims and the Court quoted several earlier decisions to the effect that “information about the validity of claims made [is] relevant and discoverable.”  To the extent that the information sought was “sensitive,” the Court noted that it would be protected by the protective order already in place. 
In the course of its decision, the District of Maryland cited to the California case of Volkswagen of America, Inc. v. Superior Court, 43 Cal. Rptr. 3d 723 (1st Dist. 2006) (granting petition for writ of mandate and holding that the lower court erred by failing to permit certain discovery into settlement issues).  In this case, Volkswagen was sued for personal injuries suffered by plaintiff as a result of his alleged exposure to asbestos.  Volkswagen sought broad settlement-related discovery from the plaintiff including settlement proposals and statements that may have been made in connection with settlement negotiations with non-party settlement trusts.  Plaintiff objected and Volkswagen moved to compel.  After the trial court permitted only limited discovery into these matters, Volkswagen filed a petition for writ of mandate.
On appeal, the Court of Appeal agreed with Volkswagen that the lower court’s order was too restrictive with respect to the settlement discovery sought.  In particular, the Court rejected plaintiff’s argument that Evidence Code §§ 1152-54 (California’s analog to Federal Rule of Evidence 408) barred settlement discovery.  The Court held that the admissibility of a document bears on its discoverability in the sense that if the document is admissible, it necessarily is discoverable.  But the court held that “the inverse is not necessarily true: the fact that evidence is not admissible does not mean that it is also not discoverable.”  Thus, the court rejected as “untenable” the argument that discovery is not permissible if the evidence disclosed would not itself be admissible.  Further, the court expressly rejected plaintiff’s argument that Evidence Code § 1152 precludes the discovery of settlement offers.  Rather, the Court agreed with Volkswagen that “the statutory protection afforded to offers of settlement [] does not elevate them to the status of privileged material.” 
Thus, both of these recent opinions can be cited by insurers who seek settlement-related discovery from a related action.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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