Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Harper is a first party bad faith claim arising out of an arson that destroyed Harry Harper’s auto-body shop. Auto-Owners Insurance Company (“Auto-Owners”) was the insurer and denied the claim. Harper filed suit, alleging that Auto-Owners’ denial of coverage constituted a breach of contract in bad faith because it had insufficient evidence that Harper was responsible for the arson. During litigation, Harper sought all of Auto-Owners’ claims files. Auto-Owners argued that because it routinely anticipates litigation with an insured when a fire is reported as incendiary, all documents that were produced after it received notice -- the day of the fire -- that the cause was arson are immune from discovery under the attorney/party work product rule, the expert work product rule, and the attorney-client privilege. The Court noted the classic issue of work product protections and the insurer's obligation to investigate claims in good faith:

Because insurance companies investigate claims as part of their regular business, but with an eye to litigation at the same time, the court saw the work product rule as creating a dilemma for the courts: protect all insurance company investigatory reports, thus unduly increasing the costs of litigation, or open all claims files for inspection, thus inhibiting the candor and reliability of investigatory/adjuster evaluations and allowing plaintiffs to acquire the litigation strategy of the insurance company.

The court began with the general principle that the party asserting the privilege has the burden of proving that it applies. The analysis started with the concept that work product protection is not absolute and is more accurately described as a “limited immunity” rather than a privilege. There are two components that must be met: reasonable anticipation and causation. For reasonable anticipation, the Court looked to whether the documents at issue were prepared in “anticipation of litigation.” But what does that mean? Does that mean that just because an insurer might get sued then the work product privilege applies? Does that mean that because the insurer and insured cannot agree upon the amount of the loss, litigation is anticipated? No, it does not. There is a higher threshold that must be met in order for a document to be considered to have been prepared in “anticipation of litigation.”

…[A] party must demonstrate that ‘at the very least some articulable claim, likely to lead to litigation’ has arisen [citation omitted], that the probability of litigation is ‘substantial and imminent’ [citation omitted], objective facts establishing an identifiable resolve to litigate [citation omitted], or ‘ an identifiable specific claim or impending litigation when the materials were prepared’ [citation omitted]…that a party has consulted or retained an attorney [citation omitted]…

Assuming that the party asserting the privilege satisfies the first component, the next step is that the material sought to be protected must have been produced because of that prospect of litigation and for no other purpose. As discussed a few weeks ago in Plaintiffs are Entitled to the Claims File in a Bad Faith Lawsuit, the mere preparation of a document in connection with the investigation of the claim does not entitle that document to protection by the work product privilege.

If documents and materials are produced in the ordinary and regular course of a party’s business, and not to prepare for litigation, they are outside the scope of work product.

The Court continued its analysis, stating that while a court’s identification of a point in time after which litigation is reasonably anticipated is a legitimate and useful exercise, the protection afforded by the work product rule does not depend solely on the fact that a document was produced after that point in time, but depends primarily on the reason or purpose for the documents’ production.

Even after litigation is justifiably anticipated, routine or ordinary investigations or reports are not work product and may be obtained as normal discovery without a special showing of need.

Furthermore, it is important to consider that insurers have an inherent duty to investigate and evaluate a claim and make a decision with respect to claims submitted by its insureds. As such, it does not make sense that an insurer’s entire file is protected by the work product privilege because it was prepared in “anticipation of litigation.” For those of you who have been following this blog, you’ve heard this before:

It is presumed that a document or thing prepared before a final decision was reached on an insured’s claim, and which constitutes part of the factual inquiry into or evaluation of that claim, was prepared in the ordinary and routine course of the insurer’s business of claim determination and is not work product. Likewise, anticipation of litigation is presumed unreasonable under [Federal Rule of Civil Procedure 26(b)(3)] before a final decision is reached on the claim. The converse, of course, is presumed for documents produced after claims denial.

So there you have it – there are Courts that find that unless and until the insurer denies coverage, the work product privilege does not apply. A carrier that wants to overcome these presumptions must demonstrate, by specific evidentiary proof or objective facts, that a reasonable anticipation of litigation existed when the document was produced, and that the document was prepared and used solely to prepare for that litigation, and not to arrive at a claim decision.

Based on the application of the foregoing analyses, the Harper court ordered the production of a number of documents for which Auto-Owners had asserted the work production, attorney-client and or expert immunities, including: invoices and statements from outside experts for investigations performed; reports of investigation results provided to attorneys; memorandum documenting Auto-Owners’ decision to deny the claim; and correspondence between the carrier and an attorney wherein the attorney was merely serving as a claims process supervisor.

When insurers assert the work product privilege, policyholder counsel should not simply accept the objection. Motions to compel should be the standard procedure after a close analysis of what it is and why it is the carrier is asserting certain information is work product. In this claims practice arena of litigation, the work product privilege is often asserted broadly and undeservedly. Motions to compel that are properly prepared often pleasantly lead to surprising evidence that usually shows that the damage of truth was what the opposition was attempting to protect. The general rule is that when in doubt, use the rules and law to your advantage - ask for an in camera inspection of the documents so that the court can see for itself that the privileges do not apply.

Happy Friday!

We all know that an insurer’s claims file will typically contain the following:

• Correspondence between the insurer and the insured or any representative of the insured
• A copy of the policy at issue
• A list of any payments made on the claim to date
• The adjuster’s log or a listing of entries for the adjuster’s notes
• For those claims where the insured retained a public adjuster, the estimate prepared by the public adjuster on behalf of the insured
• Receipts, canceled checks, invoices, credit card statements or any other documentation provided by the insured to support expenses incurred in connection with the loss
• Any estimate of damages prepared by the insurer’s adjuster regarding the loss
•  Reports by engineers, roofers or other tradesmen who inspected the insured property and prepared a report for the insurer regarding the loss
• Claims summary
• Whether the file was reported to the Special Investigation Unit

A claims file can also contain other information that can be helpful to you in developing your bad faith case against a carrier. Claims files usually identify all personnel who were involved in the claim. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I. You should be able to identify the adjuster(s), supervisor(s), or any other type or level of employee that was involved in the file and the level of each person’s participation. Once you obtain this information, you can decide whether it is necessary to depose one or more individuals regarding their involvement in the handling of the claim. If you decide that it is necessary to depose particular employees, you may want to serve additional discovery seeking the personnel files for each employee that you want to depose. Why would you want to do that? Wouldn’t you want to know how much experience the adjuster had and what training he/she received? It could be important to find out whether any employee was financially rewarded for reducing payments on claims. When handling your client’s claim, was the employee in compliance with industry standards? Was the employee following the insurer’s standards? These are all questions that you should ask yourself when you get the claims file. Based on the facts of your case, it may be crucial for you to delve into these additional areas in order to properly develop your case.

The carrier’s claims file will likely also identify the claims programs, procedures and/or software that were used in the handling of the claim. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I. The policies and procedures in place at the time your insured sustained the loss will help you understand what measures were implemented by the carrier to decrease payments in claims. The experts in the field provide examples of programs that have been used by insurers such as the following: “CCPR” (Claim Core Processing Re-Design) for Allstate; Quantum Leap for Safeco and State Farm; and “ACE” (Advancing Claims Excellence or Accelerating Claims Excellence - depending on who you ask) for Nationwide. Based on the carrier’s specifics, your expert can help you understand how the program the insurer implemented affected the handling of your client’s claim.

An insurer’s claim file might also include reserve information. Last week’s blog titled Reserves Are Important in Insurance Coverage and Bad Faith Claim Disputes discussed what reserves are and why they are important to a bad faith claim.

So why are we talking about what’s in a claims file? Because in many jurisdictions you are entitled to the claims file in a bad faith lawsuit. Of course, you can expect the usual work product and attorney client objections. That’s when you bring in your expert, do your homework and file a motion to compel, because the case law in many jurisdictions is on your side.

Courts must distinguish between reports prepared in response to an unfortunate event that might well lead to litigation, and materials prepared as an aid to litigation. The work product doctrine is not an umbrella that shades all materials prepared by the lawyer, the doctrine focuses on material assembled and brought into being in anticipation of litigation.

Clover Staffing, LLC and Johnson Controls World Services, Inc., et al., 238 F.R.D. 576, 579 (S.D. Tex. 2006); Citing U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982); See also, Electronic Data Systems Corp. v. Steingraber, No. 4-02-CV-225, 2003 WL 21653414 (E.D. Tex. July 9, 2003). Additionally, the work product privilege does not extend to the underlying facts relevant to the litigation. Furthermore, if the insurer assembled the materials in the ordinary course of business or pursuant to public or insurance requirements unrelated to the litigation with its insured, then the documents are typically not shielded by the work product privilege. Navigant Consulting, Inc. v. Wilkinson, 220 F.R.D. 467, 473 (N.D. Tex. 2004). In the insurance context, courts have routinely recognized that the investigation and evaluation of claims is part of the regular, ordinary and principal business of insurance companies. Lanelogic Inc. v. Great American Spirit Ins. Co., No. 3-08-CV-1164, 2010 WL 1839294 (N.D. Tex. May 6, 2010); Douga v. D & B Boat Rentals, Inc., No. 04-1642, 2007 WL 1428678 (W.D. La. May 10, 2007).

Even though litigation is pending or may eventually ensue does not cloak such routinely generated documents with work product protection.

Piatkowski v. Abdon Callais Offshore, L.L.C., No. 99-3759, 2000 WL 1145825 (E.D. La. August 11, 2000).

If the document would have been created without regard to whether litigation was expected to ensue, it was made in the ordinary course of business and not in anticipation of litigation.

Additionally, courts have explained that insurers cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when the insurer already has an inherent duty to investigate, evaluate and make a decision regarding claims made by its insureds. Harper v. Auto-Owners, Inc. Co., 138 F.R.D. 655, 662 (S.D. Ind.1991); Pete Rinaldi’s Fast Foods v. Great American Ins. Co., 123 F.R.D. 198, 202 (M.D. N.C. 1988).

It is presumed that a document or thing prepared before a final decision was reached on an insured’s claim, and which constitutes part of the factual inquiry into or evaluation of that claim, was prepared in the ordinary and routine course of the insurer’s business of claim determination and is not work product. Likewise, anticipation of litigation is presumed unreasonable under [Federal Rule of Civil Procedure 26(b)(3)] before a final decision is reached on the claim. The converse, of course, is presumed for documents produced after claims denial.

Simply put, the work product privilege usually does not apply unless and until the carrier has denied coverage. In most jurisdictions the way to overcome the foregoing presumptions is for the insurer to demonstrate, by specific evidentiary proof or objective facts, that a reasonable anticipation of litigation existed when the document was produced, and that the document was prepared and used solely to prepare for that litigation, and not to arrive at a claim decision.

I hope you tune in next week for more bad faith discussions.

Happy Friday!

Unfortunately for the policyholder, no such privilege exists for their documents. Unlike an insurer, a condominium association cannot make broad claims that everything created as a result of a claim is protected. As I mentioned last week in The Cooperation Clause and Document Production: A Condominium Association's Difficult Task, document production is a very intensive process, especially for an association with hundreds of thousands of pages of information to sort through. Even a small and innocent mistake could lead to an insurer screaming from the rooftops and attempting to void an otherwise valid claim.

For condominium associations in particular, many times attorneys become involved in an insurance claim from the very beginning. In many instances, the independent or insurance adjuster is moved to the side early in the process and replaced by the insurer’s attorney, who ends up directing the adjustment and making the final determination of coverage.

For many years, insurers have claimed that all of the work that these attorneys performed in the adjustment of the claim was privileged because of the work product and attorney-client privilege. When insurers acted in bad faith by denying valid claims, the insurer could refuse to produce relevant documents which reflected this improper behavior during the bad faith litigation.

Fortunately, Florida courts caught on to this tactic and have stopped the insurer’s attempts to improperly hide its bad faith conduct by invoking attorney-client and work product privilege on materials in the claim file.

The Florida Supreme Court’s ruling in Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005) set the precedent in preventing insurer’s from concealing bad faith activities with claims of privilege. Specifically, Ruiz overruled previous case law and found that work product documents created in the breach of contract action were part of the claim file and must be turned over in subsequent bad faith litigation.

There has been some debate over whether the Court’s ruling in Ruiz prevented insurers from relying on attorney-client privilege to keep from producing documents related to the underlying breach of contract action or adjustment process.

This was the exact question which Sandalwood Estates Homeowner’s Association recently faced in the Southern District Court of Florida. After Hurricanes Frances and Wilma, Sandalwood suffered significant damages. When the insurer did not promptly pay the full amounts due under the policy, the parties proceeded to appraisal. The result of the appraisal was an award of around $5,000,000 more than was originally offered by the insurer.

Sandalwood filed suit alleging that the insurer had acted in bad faith in handling the insurance claims. During the discovery phase of the lawsuit, the insurer claimed that many of the documents requested did not have to be produced because they were protected by the attorney-client privilege.

The District Court disagreed, holding that while the documents may have privileges attached to them in a breach of contract action, documents dealing with the handling of the claim were part of the claim file and discoverable in a bad faith action. As the court stated, “…courts in Florida have consistently held that the Florida Supreme Court intended Ruiz to extend to claim file materials that would otherwise be protected by attorney-client privilege.” Sandalwood Estates Homeowner’s Assn’s Inc. v. Empire Indemnity Insurance Company, No. 09-80787, 2010 WL 411088 (S.D. Fla. January 28, 2010)

With the complexity and amount of money involved in condominium claims, there is a growing trend of insurers bringing in attorneys very early in the process. When acting in this capacity, the materials in the claims file should not be privileged simply because the attorney is involved. While this is obviously not the first time a court has found that these documents should be produced, the Sandalwood case is an important victory for condominium associations and other policyholders who are at the mercy of the insurer after a devastating loss.