Fire Insurance Law II

Part Two

Discovery

Once the insurance company decides to deny the claim, litigation is the only alternative. The primary source of discovery is the insurance company's claim file. Typically, the claim file will include the adjuster's notes, statements from witnesses, the results of the company's investigation, and reports from the insurer's counsel who conducted the examination under oath (EUO).

A request for a claim file is usually answered with numerous objections based on work product privilege and attorney-client privilege. These objections must be vigorously challenged, for the only way to know for certain what information the company had available to it when it denied the claim is to obtain the claim file. The claim file often contains facts exculpatory of the insured which are relevant in determining whether the denial of the claim was made in good faith.

Insurance attorneys commonly respond to discovery requests for the claim file by making a broad objection to the request, and then providing the portions of the file that support the insurer's position or are innocuous. There is seldom a listing of the documents that are not being produced. The hope is that the insured's attorney will be satisfied to get some documents and will not pursue the matter further. Often this hope proves to be correct.

The law in this area, however, is quite clear. The party asserting an objection to discovery has the burden of establishing its claim of privilege.1 In order to preserve privilege claims, the party asserting them must prepare an index that itemizes each document and provides a factual summary of its contents and the justification for its being withheld.2 The insurer should be forced to produce such a "privilege log" which identifies each document being withheld, the name of the author, the name of the recipient, the subject of the document, and the basis of the privilege being asserted.3 Based on a review of the privilege log, counsel can often determine that non-privileged documents are being withheld. At the least, the log will force the insurer to carefully weigh whether to assert the privilege and will provide a summary of documents for the court to review if an in-camera inspection is ordered.

When a discovery dispute arises, the insurance company must establish that documents withheld on the basis of the work product privilege were "prepared in anticipation of litigation." However, the work product privilege does not extend to protect from discovery materials prepared in the ordinary course of business.4 Many cases have held that the materials in an insurance company's claim file are discoverable since all of these documents are prepared in the ordinary course of business. 5

In Rinald, supra, for example the court held as follows:

Because an insurance company has a duty in the ordinary course of business to investigate and evaluate claims made by its insureds, the claims files containing such documents usually cannot be entitled to work product protection. Normally, only after the insurance company makes a decision with respect to the claim will it be possible for there to arise a reasonable threat of litigation so that information gathered thereafter might be said to be acquired in anticipation of litigation.
When an insured is able to establish a prima-facie case of bad faith, discovery should be permitted of documents normally protected by the attorney-client privilege where such documents pertain to the bad faith dealing.6

Once full discovery is allowed of all relevant documents in the insurer's claim file, counsel can determine whether or not the information available to the insurer was sufficient to justify a denial of the claim. In this area, expert testimony is admissible to prove that an insurer acted in bad faith in denying a claim.7 A claim of bad faith allows the insured to ask for damages at the trial above and beyond those legally recoverable due to the breach of contract. Most courts allow insureds who are the victims of insurer bad faith to recover for emotional distress,8 economic loss,9 attorney fees, 10 interest,11 litigation expense,12 and, when malice, oppression, or insult is proven pursuant to R.C. 2315.21, punitive damages.13

Trial of the Lawsuit

The trial strategy employed in an arson case will depend on whether a bad faith claim is being presented to the jury along with the breach of contract claim. Although the insured will usually seek a joint trial on both issues, there are occasions when the reverse will be true. This usually occurs when there is evidence in the insurer's claim file that would not be admissible on the breach of contract claim, but might be admissible on the bad faith claim. An example of this type of evidence would be an incriminating statement made to the insurer's investigator by a person who can not be located at the time of trial. This statement would clearly be hearsay if introduced in the breach of contract claim, but might not be hearsay if offered on the bad faith claim. The insurer could argue that it was not offering the statement to prove its truth, but, rather, to prove that it had a good faith reason for denying the claim.

Arson is an affirmative defense which the insurer must establish by a preponderance of the evidence. Arson may be proven by circumstantial evidence, but in order to overcome a motion for a directed verdict, the circumstantial evidence must establish:

that the fire was of incendiary origin, that the insured had a motive to burn the property to obtain the insurance proceeds and that the insured had the opportunity to participate in the arson; however, almost all the cases indicate that mere proof of incendiary origin and motive is insufficient.14
In a typical arson case, the insurer attempts to paint an inculpatory picture of the insured by introducing evidence of various "suspicious" facts. The insured must be prepared to explain these facts clearly to show that the facts indicate guilt only in the biased mind of the insurance company.

For example, in Mize v. Hartford Insurance Company (W.D. Vs. 1982), 567 F.Supp. 550, the insurer relied on the following circumstantial evidence to justify its denial of the insured's claim for fire damage done to her house:

  1. the insured had previously lived with the admitted arsonist;
  2. the insured was on vacation at the time of the fire and had taken her jewelry with her;
  3. the insured had placed her pets in a kennel instead of leaving them at home;
  4. the insured was slightly behind in her mortgage payment;
  5. the insured had her important papers at her mother's house; and
  6. the insured had been trying to sell the house.
The trial court, in granting the insured's motion for a directed verdict, summarily dismissed the points which the insurer argued constituted circumstantial evidence of arson:
The insurance company's view of the circumstances, whether viewed singularly or as a whole, is not impressive. Every circumstance listed by the company was a perfectly normal, everyday act and was fully explained by the Plaintiff as such. When circumstances admit of two equally plausible interpretations, they are insufficient to carry the burden of proof.
In Southern Trust Insurance Co. v. Braner (1984), 169 Ga.App. 567, 314 S.E.2d 214, the insurer relied on the following circumstantial evidence to establish that the insured had burned his home:
  1. The insured had increased his coverage on the property two weeks before the fire;
  2. The insured's checking account was overdrawn for several months before the fire; and
  3. the house was locked when the fire occurred and the insured had the only key.
Despite these circumstances, the trial court granted the insured's motion for summary judgment on the arson defense:
Whether a fire loss resulted from arson caused or procured by the insured is normally a question for the jury. * * * However, the evidence in the instant case was insufficient to raise even an inference of arson caused or procured by [the insured] that would have authorized a jury to find favor of [the insurance company].
The more "suspicious facts" the insured is able to successfully explain, the better the insured's chances of defeating the arson defense. In addition, evidence should be introduced of any exculpatory facts such as:
  1. the insured's loss exceeded the policy limits;
  2. the insured has no criminal record;
  3. the insured has no history of submitting insurance claims;
  4. the property was never listed for sale;
  5. the insured lost personal items in the fire such as family photographs that cannot be replaced;
  6. the insured lost a pet in the fire;
  7. there have been other unexplained fires in the neighborhood;
  8. the insured has sources of cash available if needed from friends or family members;
  9. the insured has done extensive remodeling of the premises; or
  10. part of the insured's loss was uninsured, such as non-scheduled jewelry or a coin collection.
By introducing such evidence, the insured will force the insurer to confront the weakness in its circumstantial case. Hopefully, the jury will also focus on these facts and realize that there are at least as many circumstantial facts indicating innocence as there are indicating guilt. Since the insurer has the burden of proof, the insured can successfully argue that guilt has not been proven, but only has been used as a defense to give the insurer an excuse not to pay the claim.

  1. In Re Shopping Carts Anti-Trust Litigation (S.D. N.Y. 1982), 95 F.R.D. 299
  2. Pete Rinaldi's Fast Foods, Inc. v. Great American Insurance (M.D. N.C. 1988), 123 F.R.D. 198
  3. Wei v. Bodnar (D.N.J. 1989), 127 F.R.D. 91.
  4. Notes of Advisory Committee on Amendments of Discovery Rules, 49 F.R.D. 487, 501
  5. Harper v. Auto-Owners Insurance Company (S.D. Ind. 1991), 138 F.R.D. 655; Pete Rinaldi's Fast Foods, Inc. v. Great American (M.D. N.C. 1988), 123 F.R.D. 198; Langdon v. Champion (1988); 752 P.2d 999; Henry Enterprises v. Smith (1979), 225 Kan. 615, 592 P.2d 915; Hawkins v. District Court (1982), 638 P.2d 1372.
  6. United Services Automobile Association v. Werley (Alaska, 1974), 526 P.2d 28.
  7. American Concept Insurance Co. v. Lochhead (Utah 1988), 751 P2d 271; Neal v. Farmers Insurance Exchange (1978), 148 Cal. Rptr. 389, 582 P.2d 980.
  8. Bebault v. Hanover Insurance Co. (R.I. 1980), 417 A.2d 313.
  9. Delos v. Farmers Insurance Exchange (1979), 155 Cal. Reptr. 853.
  10. Brandt v. Superior Court (1985), 210 Cal. Rptr. 211, 693 P.2d 796, Sorin v. Board of Education (1976), 46 Ohio St. 2d 177.
  11. Delos v. Farmers Insurance Exhange, supra.
  12. White v. Western Title Insurance Co. (1985), 221 Cal. Rptr. 509, 710 P.2d 309; Spadafore v. Blue Shield (1985), 21 Ohio App.3d 201, 486 N.E.2d 1201.
  13. Hoskins v. Aetna Life Insurance Co. (1983), 6 Ohio St. 3d 272, 452 N.E. 2d 1315.
  14. Caserta v. Allstate Insurance Co. (1983), 14 Ohio App. 3d 167


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