Insurance Recovery Law -- Nov 27, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

Policyholders, Stand Your Ground

Insurers make a living by limiting their liability and costs, and understand all too well how to exploit the claims process to accomplish these ends. In this edition of the newsletter, we take a look at cases where policyholders refused to be gamed in the claims process and successfully stood their ground to keep their insurers honest.

In our first case, out of Maryland federal court, an insurer sought to insulate its claim materials from discovery by asserting that attorney participation in generating the materials rendered the files privileged. Although the insurer realized some success early on in this age-old tactic, the policyholder fought back, taking additional depositions that undermined the basis of the insurer’s privilege claims. Based on this new evidence, the court required the insurer to produce months of claims materials that it previously held were privileged. In its decision, the court openly criticized the insurer’s “pattern of gamesmanship” in the discovery process.

In our second case, out of New York state court, a policyholder believed that its insurer had numerous conflicts of interest in defending tort claims against the policyholder. The policyholder took a proactive stand and took the defense away from its insurer. The insurer then filed suit seeking to avoid its coverage obligations altogether based on being shut out of the defense of the cases. The policyholder fought back, filing counterclaims against its insurer for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of unfair trade practices statutes. The court agreed with the policyholder that, if its allegations were true, they stated valid causes of action, certain of which potentially supported a treble damages award against the insurer.

Insurer’s Discovery Tactics Harshly Criticized by Court

Why it matters: Rebuking Travelers Property Casualty Co. for engaging in a “pattern of gamesmanship designed to prevent and unduly delay” the discovery process, a federal court judge in Maryland ordered Travelers to produce three additional months of claims materials the court previously held were privileged. In the initial discovery dispute, Travelers relied upon a tactic all too commonly employed by insurers, asserting that the materials sought were protected by the attorney-client privilege (because attorneys were involved in the claims process) and the attorney work product doctrine (because the attorneys’ work was performed in anticipation of litigation). While the court acknowledged that it initially gave the benefit of the doubt to Travelers’ representations in that regard, it took a decidedly different view in light of new evidence unearthed by the insured indicating that the attorneys were involved in ordinary claims handling functions and the insurer did not anticipate litigation until months later than it initially indicated to the court. Because attorneys’ acting in an ordinary claims handling role does not confer privilege, the claims materials generated in that capacity were not privileged.

Detailed Discussion
In this case, American Capital faced litigation over a tainted heparin product. American Capital sought coverage from Travelers, which filed suit in response seeking a declaration that it was not obligated to provide a defense or indemnity.

In discovery, American Capital moved to compel production of Travelers’ claims handling materials. Travelers objected, arguing that the requested materials were protected by attorney-client privilege because in-house and outside counsel were involved in the claims process. Travelers further asserted that the work product doctrine applied as of September 2008 because that is when it anticipated litigation.

Based on prior deposition testimony of a Travelers employee and the insurer’s representations (for which the court indicated it had afforded Travelers the benefit of the doubt), the court initially limited discovery to claims materials generated prior to September 18, 2008. However, after two additional depositions of a Travelers claims handler and another employee, American Capital moved for reconsideration. Testimony from these depositions indicated that both in-house and outside counsel were engaged in ordinary claims handling matters.

The “new deposition testimony cannot be reconciled with … [the] previous deposition testimony” that formed the basis for Travelers’ opposition to American Capital’s motion to compel, U.S. Magistrate Judge Jillyn K. Schulze wrote. Based on the new evidence, the court pushed the cut off date forward three months, ordering Travelers to produce claims materials generated through December 8, 2008.

The decision, which was filed under seal in July 2013, was only recently released and remains heavily redacted. But the court’s unhappiness with the insurer’s defense tactics is clear. Travelers’ “opposition to the renewed motion to compel does not address the fact that they presented evidence and arguments to the court which are, in hindsight, misleading,” the court opined.

Moreover, the court held, Travelers “badly misconstrue[s] the relevant legal principles as well.” Travelers relied upon the irrelevant proposition that the attorney-client privilege and work product protection are not per se unavailable prior to the decision to deny coverage. “But of course the evidence the insurer produces must be sufficient to sustain its burden to show that the disputed material was not prepared primarily for the ordinary business purpose of adjusting insurance claims,” Judge Schulze said. “It goes without saying that if the evidence is later shown to have been misleading or inaccurate it is no longer sufficient to sustain that burden.”

The court then reviewed the new testimony to determine the date on which Travelers could legitimately claim protection for the claims handling materials. Noting that a “claims handler’s request that counsel review coverage does not automatically convert the analysis from an ordinary business activity to a litigation-geared activity,” the court opined that several of the activities that Travelers asserted conferred privilege must be performed when handling any claim. “A decision to examine coverage,” the court noted, “is not the same as anticipating litigation.”

“[T]he evidence on which [Travelers now] relies is woefully insufficient to overcome the explicit testimony of the only two employees whose statements of their intentions regarding litigation are available,” the court concluded. “The court previously gave [Travelers] the benefit of the doubt in finding that [it] anticipated litigation on September 18, 2008. Once again, giving [Travelers] the benefit of the doubt, the court finds that [Travelers has] demonstrated that [it] anticipated litigation as of December 8, 2008.”

An in camera review of documents after December 8, 2008, was deferred for American Capital to review the additional information. When discussing how to handle any remaining in camera review, the court reiterated its displeasure with Travelers. “In making this determination the court will consider the fact that [Travelers has] unduly delayed discovery,” the court opined. “After the misleading nature of their evidentiary basis for claims of attorney-client privilege and work product protection was exposed, first in depositions and then in [American Capital’s] motion, [Travelers] chose not to alter or modify their position.”

In addition, the court held, Travelers “inappropriately responded” to an order to produce documents for in camera review by “dropping off two large boxes, each containing approximately 6 inches of paper, without any attempt to organize or meaningfully identify any document, much less match any document with an entry on a privilege log.”

This document dump alone could have justified a ruling that Travelers was not entitled to withhold those documents, the court added. “In retrospect, that ruling should have been made, because the submission was part of what has now emerged as a pattern of gamesmanship designed to prevent and unduly delay the production of documents to which [American Capital is] entitled.”

To read the opinion in The Charter Oak Fire Insurance Co. v. American Capital Ltd., click here.

Policyholder’s Counterclaims Stand, New York Court Rules

Why it matters: In OneBeacon American Insurance Co. v. Colgate-Palmolive Co., a policyholder believed that its insurer’s objectives in defending tort litigation against the policyholder were inconsistent with the policyholder’s objectives. In addition, the policyholder believed that certain reinsurance and claims services agreements entered into by its insurer compromised the policyholder’s rights under the policy at issue. Making matters worse, the insurer was negotiating a deal to transfer its liabilities, including those related to the policyholder’s claims, to a third party, raising questions regarding whether there would be sufficient resources available to cover the policyholder’s claims. Recognizing the potential conflicts, the court held that the policyholder should be able to pursue breach of contract, breach of implied covenant of good faith and fair dealing, and statutory unfair trade practice claims against its insurer and its insurer’s reinsurer. Moreover, the court held, the policyholder was entitled to conduct discovery to learn more about the implications of the pending liability transfer.

Detailed Discussion
Colgate-Palmolive faced multiple lawsuits by tort claimants alleging exposure to asbestos contained in talc products manufactured by Colgate. Colgate’s insurer, OneBeacon, accepted tender of the claims and selected a defense firm. But when Colgate began to fear that a conflict existed, it hired its own counsel, which took over the defense.

OneBeacon filed a declaratory judgment action, asserting that Colgate violated the terms of its policy by preventing OneBeacon from being involved in the defense of the litigation. Thus, OneBeacon asserted, it had no obligation to pay defense or indemnity costs.

Colgate asserted multiple counterclaims alleging conflicts of interest, including OneBeacon’s reserved rights as to all present and future talc litigation involving Colgate. Colgate argued that these reservations created a conflict of interest between Colgate and any counsel appointed by OneBeacon. Moreover, Colgate argued, there was an inherent conflict in defense strategy between Colgate and OneBeacon. Colgate sought to defeat the talc cases in their entirety to prevent copycat suits, while OneBeacon was interested in defeating only those claims that implicated OneBeacon’s coverage and in controlling defense costs generally.

Colgate’s counterclaims also alleged conflicts of interest based on certain corporate relationships involving OneBeacon, including its relationships with National Indemnity Company (NICO) and Resolute Management. Pursuant to an agreement between NICO and OneBeacon, NICO retroactively reinsured $2.5 billion of OneBeacon’s existing liabilities. This arrangement also provided for NICO to adjust, handle, settle, pay, or repudiate any claims regarding the relevant OneBeacon policies. NICO then contracted with Resolute to administer claims handling duties on NICO’s behalf for OneBeacon’s policies.

Colgate argued that both of these arrangements resulted in Colgate’s being treated unfairly, including lack of incentive to provide Colgate with an adequate defense. As a result, Colgate asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of both New York and Massachusetts business laws. OneBeacon, NICO, and Resolute moved to dismiss all of the counterclaims.

Ruling largely in favor of Colgate, the court held that Colgate’s breach of implied covenant of good faith allegations regarding the impact of OneBeacon’s arrangements with NICO and Resolute were distinct from OneBeacon’s breach of contract claims and therefore would not be dismissed. Moreover, Colgate’s allegations regarding OneBeacon’s failure to inform Colgate of its right to independent counsel and subsequent failure to accept Colgate’s selected counsel stated a cause of action under the Massachusetts unfair and deceptive trade practices statute, the court held, and therefore survived the motion to dismiss. Importantly, this statute allowed for awards of triple damages if violated. However, the court held that Colgate did not state a cause of action under the New York unfair and deceptive trade practices statute because the transactions at issue were not sufficiently “consumer-oriented.”

Turning to Resolute and NICO, the court refused to dismiss Colgate’s tortious interference claim, but found that the language of the agreement between NICO and Resolute precluded a claim by Colgate based on third-party beneficiary status. In addition, NICO sought dismissal of breach of contract and breach of covenant of good faith and fair dealing claims, relying upon its status as a reinsurer. Based on the contract between OneBeacon and NICO, however, the court held that NICO could be liable. Case law has established that where the “original insured consistently deals directly with the reinsurer, bypassing the original insurer,” a direct cause of action against a reinsurer may stand. “The relevant Agreements submitted by NICO/Resolute fail to establish that the relationship between the insured (Colgate), insurer (OneBeacon), and the reinsurer (NICO) was that of a typical insured/insurer/reinsured relationship so as to preclude Colgate from asserting a direct breach of contract claim against NICO,” the court opined. The agreement required NICO “to perform all administrative services with respect to” the OneBeacon policies on behalf of OneBeacon, and NICO had failed to demonstrate that OneBeacon retained all contact with the insured.

Finally, Colgate’s counterclaims also raised issues regarding OneBeacon’s prospective transfer of its asbestos liability portfolio to a third party, which Colgate asserted would leave OneBeacon inadequately funded to pay its claims. Colgate sought discovery on the proposed transaction, and OneBeacon sought a protective order to preclude the discovery. The court sided with Colgate, holding that its concerns about the proposed transfer could be explored in discovery. “Colgate cites to the Proposed Acquisition as one of the bases of Colgate’s tort claims against OneBeacon, and discovery as to [the] impact the Proposed Acquisition has to the fulfillment of OneBeacon’s payment obligations under the OneBeacon Policies is relevant to the existing claims,” the court opined. That the agreement had yet to be approved was irrelevant, the court held, as the mere circumstances of the proposal could provide evidence tending to establish that OneBeacon breached its covenant of good faith and fair dealing.

To read the decision in OneBeacon American Insurance Co. v. Colgate-Palmolive Co., click here.

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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