Insurance Company Claim Files: Are They Discoverable?

BACKGROUND

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During the litigation process of a first-party property insurance coverage case, the insurer's claims file is usually considered to be the "crown jewel" of discovery by plaintiff's counsel, particularly, in those cases where bad faith is alleged against the insurer. Over the objections of defense counsel, who may claim simply that much of the claim file documents are irrelevant, or that the request is overly broad and not likely to lead to admissible evidence, courts will frequently require the insurer to produce various portions of the claims file, i.e., those non-privileged documents which describe facts uncovered and activity undertaken during the insurer's claims investigation, as well as, the production of non-privileged documents which may outline the basis and reasoning for the insurer's coverage defense.

It is axiomatic that the concept of "relevance" during the discovery stage of a law suit is broader than when the term is used for purposes of admission of evidence at trial. Thus, discovery presupposes a range of relevance and material which includes, not only what is admissible at trial, but also that which leads to material admissible at trial. Krupp v. Chicago Transit Auth., 8 Ill.2d 37, 132 N.E.2d 532 (1956). Moreover, relevancy is determined by reference to the issues, for generally, something is relevant if it tends to prove or disprove something at issue.

An overview of the relevant Illinois Supreme Court Rules is necessary in order to properly examine the extent to which the insurer's claim file may be discoverable in a first-party property insurance law suit:

Supreme Court Rule 201(b)(2)(Privilege and Work Product) provides in pertinent part:

Supreme Court Discovery Rule 214 (Discovery of Documents, Objects, and Tangible Things-Inspection of Real Estate) provides in pertinent part:

The amended Supreme Court Rule 214, effective January 1, 1996, further provides in part:

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It is important to note that courts will, where appropriate, reject an insured's request for production when the request is considered overly broad. One of the leading cases on the degree of specificity required in a Motion to Produce is Monier v. Chamberlain, 35 Ill.2d 351, 221 N.E.2d 410 (1966). In Monier, the court rejected any requirement of minute particularization in the production request and held that categorical designations achieve the specificity requirement of Supreme Court Rule 214. The court also indicated that, what would suffice as a reasonable description, would depend upon the circumstances of each case.

Importantly, however, is that at least one Illinois court has interpreted the Monier opinion to conclude that a blanket request for the production of an insurer's claims file is not a categorical designation which complies with the specificity requirement of Supreme Court Rule 214. Bauter v. Reding, 68 Ill.App.3d 171, 385 N.E. 2d 886 (1979). THE WORK-PRODUCT PRIVILEGE

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Often, insurer's counsel's objection to the production of the claims file is based upon an assertion of the work-product privilege. As a general rule, the work-product privilege protects investigative materials and other documents prepared "in anticipation of litigation", and provides a broader protection than the attorney-client privilege.

Thus, the attorney's work product is viewed as the shaping process by which the attorney has arranged the available evidence for use in trial as dictated by his or her training and experience. Monier v. Chamberlain, 35 Ill.2d 351, 221 N.E.2d 410 (1966). However, while the work-product exemption protects notes and memoranda prepared by counsel for use at trial, it is not intended to protect material and relevant evidentiary facts from the truth-seeking processes of discovery. Id. at 431.

For example, in a first-party property insurance suit, it is often argued by plaintiff's counsel that the date of denial reflects the date when the insurer's anticipation of litigation began, and that all claims file documents generated prior to that date should be discoverable. And, it is correct that many courts consider the initial phase of the insurer's claims investigation, i.e., the period prior to denial, as routine, or in the ordinary course of the insurer's business; and, place on the insurer the burden of showing a contrary time as to when litigation was first anticipated.

In Hawkins v. District Court, 638 P.2d 1372, 1379 (Colo. 1982), the court addressed the issue of when an insurer begins to anticipate litigation in a first-party property insurance coverage dispute:

It should be also be noted that hiring a lawyer may be one factor to consider in determining when the insurer's anticipation of litigation begins, but it is not conclusive. Burr v. United Farm Bureau Mutual Ins. Co., 560 N.E.2d 1250, (Ind. App. 4 Dist. 1990).

The North Carolina Federal Court in Rosa Lee Ring v. Commercial Union Insurance Co., et al, No. 2:94CV0014, M.D. N.C., Rockingham Div., recently concluded that an insurer anticipated litigation within days of the insured's fire loss and, thereby, denied the insured-plaintiff's discovery of the insurer's claim file during the subsequent litigation.

In Rosa Lee Ring, the insurer's defense attorneys, in resistance to a motion by plaintiff to compel the production of the claims file, stated that they were willing to provide documents only up to, and including, October 17, 1991, the date at which the insurer first suspected arson and anticipated litigation, and only five days after the loss occurred. On that date, a meeting was held between the insured and her attorney, the insurer, and an investigator.

It was learned at the meeting on October 17, 1991, that the insured had financial problems, that she left the insured premises moments before the fire, and that the insured had retained legal counsel only several days after the loss and at an early stage of the insurer's investigation. Furthermore, prior to the meeting, cause and origin investigators had concluded that the fire was deliberately set.

The Judge in the subsequent litigation found that the insured refused to discuss the fire with the insurer, and that the insured had already retained counsel approximately five days after the date of loss. The Judge stated that "[f]rom this, one may conclude that October 17, 1991, even in the plaintiff's mind, litigation of some sort might be likely as a result of the fire. "For example, if plaintiff was fearful of criminal charges being filed against her, this clearly demonstrates that a reasonable person in defendant's shoes would anticipate litigation with plaintiff as well. APlaintiff has not rebutted these natural inferences". BAD FAITH ALLEGATIONS: INSUFFICIENT!

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The Magistrate Judge in Rosa Lee Ring also rejected the plaintiff's assertion that the claims file documents were necessary in order to prove her bad faith allegations against the insurer. Noting that some state courts have supported the plaintiffs' positions in those cases involving allegations of bad faith by the insurer, the Judge, nevertheless, found more persuasive the reasoning of the Montana and Florida Supreme Courts, which held that the creation of a bad faith cause of action did not evidence a legislative intent to abolish the attorney-client or work-product privileges. State ex rel. U.S. Fidelity and Guar. Co. v. Montana Second Judicial Dist. Court., 240 Mont. 5, 783 P.2d 911 (Mont. 2nd Dist 1989); Kujawa v. Manhattan Nat. Life Ins. Co., 522 So.2d 1078 (C.App. 4th 1988) 541 So.2d 1168 [Fla. 1989].

The Judge in Rosa Lee Ring further concluded that, while it may be more difficult for an insured-plaintiff to prove a bad faith claim without the examination of an insurer's claims file, it is not impossible. THE ATTORNEY-CLIENT PRIVILEGE

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An additional objection to the production of the claims file is often based upon an assertion of the attorney-client privilege. With regard to a test for determining whether an attorney-client privilege exists in a corporate setting, the threshold requirements include a showing that the communication originated in a confidence that it would not be disclosed; that it was made to an attorney acting in his or her legal capacity for purposes of securing legal advice or services; and that it remained confidential; the burden of showing such facts is on the party claiming the exemption. Archer Daniels Midland Co. v Koppers Co., Inc., 138 Ill.App.3d 276, 485 N.E.2d 1301 (Ill.App. 1st Dist. 1985)

In light of the proper application of the attorney-client privilege, it is interesting to examine the defense attorney's role during the pre-suit - pre-denial stage of an insurance claims investigation, an area which is often the subject of controversy. Thus, during this period of a claims investigation, the question often becomes whether the attorney's role is to act as legal counsel to the insurer, or to act as merely an investigator who, coincidentally, happens to have a law license.

In (State of West Virginia Ex Rel. Relator v. Honorable Herman G. Canady Jr., et al., Respondents [Real Parties in Interest: United States Fidelity and Guaranty Co., et al. V. Robert M. Lovell], No. 22867 W. Va. Sup. Ct., the insured, Robert M. Lovell, submitted a claim to his insurer, USF&G, following a fire to his home in 1992. The claim was viewed as suspicious and was assigned to the insurer's Special Investigative Unit. An attorney, Craig McKay, was hired on behalf of the insurer to assist in the investigation. The insured filed suit after the claim remained unresolved for seven months. Attorney McKay submitted a final Alitigation Report@ to the insurer, and another attorney, James D. McQueen, Jr., was hired to defend the suit.

The insured's attorney then sought discovery of attorney McKay's report, and demanded the production of several other documents: a letter from attorney McQueen to USF&G's in-house counsel, an electronic message sent from a claims examiner to in-house counsel, and a letter from attorney McQueen to in-house counsel and others.

The trial court examined, in-camera, the disputed documents, concluded that they were relevant and discoverable, and USF&G petitioned the West Virginia Supreme Court for a Writ of Prohibition. The West Virginia Supreme Court found the trial court's Findings of Fact inadequate and outlined certain guidelines for the court to follow in making a determination of whether such documents are protected by the attorney-client and work-product privileges.

The West Virginia Supreme Court further held that the trial court must determine whether Attorney McKay was acting as an attorney. If so, his report should be considered privileged and non-discoverable. The Supreme Court continued by stating that if the trial court finds the attorney-client privilege inapplicable, it should consider whether the report falls within the Awork product@ doctrine. PRIMARY-EXCESS INSURANCE - THE COMMON INTEREST DOCTRINE

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Claims file documents generated in connection with primary and excess insurance company communications are also the subject of controversy. Thus, it is common for a primary insurer to communicate with an excess carrier regarding the status of a suit or regarding the investigation of a claim filed by their mutual insured. However, when a first-party suit is filed by their insured against the primary insurer because of a coverage dispute concerning a property insurance claim, the insurers will likely have a strong desire for their communications to be considered privileged and non-discoverable, particularly, those communications that take place after suit is filed.

Under the Acommon interest doctrine@, when an attorney acts for two different parties who each have a common interest, communications by either party to the attorney are usually considered to be privileged. Waste Management, Inc. et al., v. International Surplus Lines Insurance Co. et al., 144 Ill.2d 178, 579 N.E.2d 322 (Ill. 1991).

In light of the common interest doctrine, it is interesting to examine the court's holding in Allendale Mutual Insurance Co. v. Bull Data Systems, 152 F.R.D. 132 (N.D. Ill. 1993). In Allendale, the court held that documents provided by the primary insurer to its reinsurer regarding the status of the insured's claim and its investigation into a fire were not protected by a "work product" privilege because the documents were created in the ordinary course of the insurer's business. The court further held that, even if there was a privilege involving the documents, it is waived when the primary insurer discloses the material to its reinsurer because an insurer and a reinsurer do not have a common interest in a litigation case involving coverage.

Although Allendale argued that an attorney-client privilege should attach to the documents because all of the information contained in the documents came from their attorney, the court held that information does not become privileged just because it came from an attorney. The key test is whether the communications reflect legal advice given by an attorney acting in that capacity. Also, the court went on to state that while communications with the attorney may itself be privileged, documents created before the communication but later discussed with the attorney cannot be. WAIVER OF THE WORK-PRODUCT OR ATTORNEY-CLIENT PRIVILEGE

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It is important to examine the impact of the Federal Rules of Evidence on the issue of whether an insurer is required to produce the contents of its claims file during the course of litigation in a first-party property insurance law suit and whether it may have waived its right to assert the work-product or attorney-client privileges:

Fed.R.Ev. 612 provides that:

Accordingly, the privileged status of certain documents contained within the claims file may be considered waived if the insurer-deponent, in preparation for testimony, uses the privileged documents to refresh his or her memory for the purpose of testifying.

As stated previously, the attorney-client privilege exists to protect and maintain confidential communications between the lawyer and the client and, thus, to protect the attorney-client relationship itself. Accordingly, any disclosure by the client is inherently inconsistent with the policy of facilitating a confidential attorney-client relationship and, therefore, must result in a waiver of the privilege. Fidelity & Casualty Co. V. Mobay Chemical, 252 Ill.App.3d 992, 625 N.E.2d 151 (Ill.App. 1st Dist. 1992), cert. denied 624 N.E.2d 806 (1993).

It should be noted, however, that the attorney-client and work-product privileges are separate and distinct protections, and waiver of one does not necessarily serve as waiver of the other. Waste Management, Inc. et al., v. International Surplus Lines Insurance Co. et al., 144 Ill.2d 178, 579 N.E.2d 322 (Ill. 1991).