Last week’s post, The Big Picture in Discovery of Insurer Claims Practices, discussed a case from the Supreme Court of Kentucky that provided an overview of how Courts tie together various principles of discovery that are generally raised in the discovery of bad faith cases. General rules of bad faith discovery vary between states and the types controversies at issue. An Indiana federal court decision, Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991), is a classic example.

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!