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Oklahoma District Court Holds That Bad Faith Claim Survives Motion to Dismiss Where the Uninsured/Underinsured Motorist’s Insurer Wrongfully Pursued Subrogation From the Tortfeasor’s Insurer
Abraham Sandoval, Associate in the Chicago Office
In Brambl v. GEICO Gen. Ins. Co., 2011 U.S. Dist. LEXIS 127941 (N.D. Okla. Nov. 4, 2011), the United States District Court for the Northern District of Oklahoma allowed an insured to pursue his claims for breach of contract and bad faith against his uninsured/underinsured motorist ("UM") insurer because the insurer, after tendering the policy limits, wrongfully pursued subrogation from the tortfeasor’s insurer despite allegations that the insured’s injuries exceeded both policies’ combined value.
John Brambl sued his UM insurer, GEICO General Insurance Company ("GEICO"), for injuries he sustained in a motor vehicle accident due to the negligence of a third party. After requesting, and receiving, the limits of the UM policy, Mr. Brambl alleged that GEICO reduced the amount of insurance available to him to compensate for his injuries. Indeed, after GEICO tendered its UM limits to Mr. Brambl, it subrogated against and recovered the amount paid to Mr. Brambl from the tortfeasor’s liability insurer.
Mr. Brambl filed suit against GEICO contending that such conduct reduced the total amount of insurance available to compensate him for his injuries. In his Second Amended Complaint, in which he alleged that his damages exceeded the combined value of both policies, Mr. Brambl included counts for bad faith and breach of contract based on GEICO’s subrogation activity and recovery.
GEICO moved to dismiss the bad faith and breach of contract claims pursuant to Fed. R. Civ. P. 12(b)(6). In support, GEICO argued that Oklahoma law mandates that, when a UM carrier’s insured sustains injury by a negligently operated underinsured motor vehicle, the UM coverage is the primary policy and not the tortfeasor’s liability policy. Therefore, GEICO asserted that it immediately possessed vested subrogation rights to the proceeds of the tortfeasor’s insurer upon its payment to Mr. Brambl. GEICO reasoned that, under Okla. State. Tit. 36 § 3636 (F)(2), if the UM carrier substitutes its own payment for the liability insurer’s settlement offer, the UM carrier is entitled to the insured’s right of recovery to the extent of such settlement payment and any settlement under the UM coverage. Mr. Brambl countered by claiming that GEICO engaged in unreasonable and bad faith conduct by investigating and evaluating his claim in a manner that led GEICO to wrongfully pursue subrogation from the tortfeasor’s insurer and then retain the subrogated funds.
The District Court determined that Mr. Brambl stated a plausible bad faith claim and denied the insurer’s motion to dismiss. Citing to Barnes v. Oklahoma Farm Bureau Mutual Insurance Company, 2000 OK 55, 11 P.3d 162, 169 (Okla. 2001), which appears to reject a construction of Oklahoma’s UM subrogation scheme that would allow a UM carrier to reduce an insured’s total amount of proceeds from both policies where the insured’s damages are equal to or greater than the combined value of the policies, the District Court held that GEICO was accused of doing what Barnes prohibits – namely, reducing the total amount of insurance available to the insured where a reasonable evaluation of plaintiff’s claim would have revealed it to be in excess of both combined policies. The District Court also held that GEICO did not receive immediate subrogation rights upon tendering its limits since that construction was "out of context" and "ignored the remaining statutory framework, all of which clearly prohibited [the UM carrier] from recouping any amounts from the tortfeasor that were needed to cover the insured’s total damages." Thus, the District Court concluded, the bad faith claim was sufficiently pled.
Furthermore, despite GEICO’s argument that it promptly paid its UM policy limits and that Mr. Brambl accepted them, the District Court found Mr. Brambl’s breach of contract claim worthy of surviving GEICO’s motion to dismiss. That claim appeared to be based on GEICO’s retention of subrogated funds from the tortfeasor’s insured where a reasonable investigation of Mr. Brambl’s claim would have revealed that Mr. Brambl had not received the full value of his damages. Accordingly, the allegations were sufficient to state a plausible claim since GEICO’s "payment" to its insured, which resulted in a net loss of zero to GEICO following its retention of subrogate funds, did not comply with certain subrogation duties owed to an insured whose damages exceed the combined value of both policies.
Tressler Comments: The Brambl case highlights the notion that a bad faith claim can arise from either the express terms of a policy, by statute or by other means. Thus, an insurer may not only be obligated to comply with the contractual provisions of its policy, but it may also need to satisfy certain statutory obligations imposed onto it by the insurance contract. At least in Oklahoma, a claim for bad faith may be based upon: (1) failure to perform express contractual duties, (2) failure to perform statutory duties imposed upon the contract, (3) failure to perform certain acts that are "derivative" or "secondary" and that arise from the insurer-insured relationship, or (4) failure to follow Oklahoma case law interpreting insurance contracts or Oklahoma insurance statutes. Brambl is a reminder that insurers should be cognizant of the multiple sources from which obligations may be imposed upon them.
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Decision Worth Noting...
In Canales v. Am. Sec. Ins. Co., 2011 U.S. Dist. LEXIS 128631 (M.D. Fla. Nov. 7, 2011), the United States District Court for the Middle District of Florida recently held that the Florida Department of Financial Services’ ("DFS") acceptance of a Civil Remedy Notice ("CRN") filed in support of a statutory bad-faith claim was sufficient to survive an insurer’s motion to dismiss for lack of specificity.
In Canales, American Security Insurance Company ("ASIC") argued that Jose Canales’ Amended Complaint was devoid of facts identifying the basis of the bad faith claim and failed to meet the pleading requirements of Federal Rule of Civil Procedure 8. Mr. Canales responded that, taken together, the Amended Complaint and the attached CRN contained sufficient factual allegations to support a statutory bad faith claim as to ASIC’s settlement of Mr. Canales first-party claim. The District Court agreed with Mr. Canales, holding that the DFS’ acceptance of the CRN (which requires a claimant to specify the claim against an insurer) served as evidence that the CRN had sufficient specificity to provide the insurer with notice of the violation and a factual basis for the claims against ASIC.
Thus, even though Mr. Canales’ Amended Complaint itself may have lacked the necessary specificity, the District Court denied ASIC’s motion to dismiss based on the claims in the attached CRN.
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United States District Court for the Southern District of California Holds That Insurer and Coverage Counsel Attorney-Client Communications are Protected But Work Product is Discoverable in Bad Faith Action
Heather Sullivan, Associate in the Chicago Office
In Ivy Hotel San Diego, LLC, et al. v. Houston Cas. Co., 2011 U.S. Dist. LEXIS 119746 (S.D. Cal. Oct. 17, 2011), a discovery dispute arose over whether documents generated by an insurer’s outside law firm during coverage evaluation and monitoring, including subsequent communications with the insured’s counsel to facilitate payment of defense costs, were protected by the attorney-client privilege and work product doctrine.
Ivy Hotel San Diego, LLC ("Ivy Hotel") filed an insurance coverage action against Houston Casualty Co. ("HCC"), alleging breach of contract and breach of the covenant of good faith and fair dealing. Ivy Hotel had incurred legal fees and expenses while defending a cross-complaint filed in 630 F Street, LLC, et al. v. Krump Construction, Inc., et al. Case No. 37-2007-00072559-CU-BC-CTL. Ivy Hotel defended itself against a number of allegations, including breach of an implied agreement and breach of an implied warranty. The Krump case settled in 2010.
On December 1, 2007, Ivy Hotel tendered the cross-complaint to HCC. Approximately one month later, HCC informed Ivy Hotel that it had retained Ross, Dixon & Bell, LLP (which later merged into Troutman Sanders LLP and will hereinafter be referred to as "Troutman Sanders") to "evaluate and monitor" the coverage matter. At that time, HCC had not made a determination as to coverage under the policy. On January 22, 2008, Troutman Sanders submitted a preliminary coverage opinion to HCC, and thereafter a letter was issued to Ivy Hotel indicating that coverage was not "presently available," but that HCC would review its position if Ivy Hotel submitted additional information.
On May 20, 2009 Ivy Hotel’s insurance coverage counsel sent Troutman Sanders a letter requesting that HCC reconsider its position. Troutman Sanders responded on July 10, 2009 and reiterated that HCC did not believe coverage was available. However, "as a showing of good faith," HCC agreed to revisit its coverage denial and agreed to reimburse Ivy Hotel for its costs and expenses incurred in defending the Krump action, subject to a reservation of rights. Throughout 2009 Ivy Hotel’s insurance coverage counsel forwarded invoices reflecting defense costs and expenses directly to Troutman Sanders.
On December 18, 2009, Ivy Hotel sent Troutman Sanders a letter regarding its concern that HCC had yet to provide reimbursement for defense costs. On January 14, 2010, Troutman Sanders informed Ivy Hotel that HCC completed its evaluation of the invoices and that HCC agreed to reimburse Ivy Hotel 25 percent of fees. On February 11, 2010, a check for reimbursement was mailed to Ivy Hotel.
After a suit was filed by Ivy Hotel against HCC, Ivy Hotel formally requested documents concerning HCC’s "handling of the claim for legal fees and expenses incurred in connection with the Krump Cross-Complaint." HCC withheld a number of documents on the basis that they were protected by either the attorney-client privilege or work product doctrine. HCC insisted that it was not obligated to produce documents relating to the work of Troutman Sanders as its coverage counsel because such documents were privileged.
Ivy Hotel contended that the Troutman Sanders documents were discoverable as Troutman Sanders’ role was to handle claims rather than act as outside coverage counsel. Ivy Hotel asserted further that the documents were not prepared in anticipation of litigation and therefore not protected by the work product doctrine. Ivy Hotel pointed out that HCC terminated Troutman Sanders as counsel and hired DLA Piper as coverage counsel when litigation began. Lastly, Ivy Hotel argued that even if HCC could establish that the documents qualified as work product, they were discoverable because: (1) Ivy Hotel had a substantial need for the materials and could not, without undue hardship, obtain their substantial equivalent by other means; and (2) mental impressions were at issue due to the bad faith and breach of contract allegations, and Ivy Hotel had a compelling need for information revealing those mental impressions.
Regarding whether the documents were subject to the attorney-client privilege, the District Court determined that the ultimate question was whether HCC’s dominant purpose in retaining Troutman Sanders was to receive legal advice or act as a claims adjuster. The District Court noted that under California law, courts look to the "dominant purpose of the relationship" between the client and the attorney to determine whether the attorney-client privilege attaches to attorney-client communication. (Quoting Costco Wholesale Corp. v. Superior Court, 47 Cal.4th 725, 739, 101 Cal. Rptr.3d 758, 219 P.3d 736 (2009)).
In support of its opposition to the motion to compel, HCC submitted declarations from the lead attorney at Troutman Sanders and the claims adjuster at HCC. The Troutman Sanders attorney asserted that she provided legal analysis and advice to HCC, while HCC’s claim adjuster indicated that she was the claims adjuster on the Krump action. The claim adjuster further stated that she made clear to Ivy Hotel that she was the claims adjuster handling the matter. In contrast, Ivy Hotel asserted that all of its communications were directly with Troutman Sanders and that Troutman Sanders was engaged primarily in claims handling.
The District Court noted that since Troutman Sanders was the point of contact for Ivy Hotel and directly sent the coverage opinion to Ivy Hotel’s counsel, Troutman Sanders’ role extended "beyond that of outside claims counsel and into that of claims adjuster." (Citing Umpqua Bank v. First Am. Title Ins. Co., 2011 U.S. Dist. LEXIS 34088 at *9 (E.D. Cal. 2011)). However, based on the declarations submitted by Troutman Sanders and the HCC claims adjuster, the District Court found that the dominant purpose of the Troutman Sanders-HCC relationship was one of attorney-client and not claims adjuster.
The District Court explained that the record indicated that HCC hired Troutman Sanders to analyze and evaluate legal issues relating to coverage and not merely to serve as outside claims adjusters. Therefore, the District Court held that confidential information transmitted between Troutman Sanders and HCC was protected from production.
With respect to the documents withheld on the basis of the work product doctrine, the District Court sided with Ivy Hotel. The District Court noted that HCC failed to provide any facts or argument to indicate that the documents were prepared in reasonable anticipation of litigation. Based on the evidence before the District Court, it found that Troutman Sanders’ work product was created regardless of the threat of litigation. Specifically, the District Court pointed to the positions expressed by HCC and Troutman Sanders that a final coverage determination had not been made. The District Court reasoned that these position letters indicated that HCC and Troutman Sanders were not creating documents for litigation purposes.
Furthermore, the District Court was influenced by the fact that bad faith was at issue, and therefore the strategy, mental impressions and opinions of the insurer’s agents concerning claims handling were relevant. (Citing Holmgren v. State Farm Mut. Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992); Umpqua, 2011 U.S. Dist. LEXIS 34088 at *16-17). The District Court determined that Troutman Sanders, at the very least, were agents of HCC and involved in evaluating the claim. The District Court noted further that Ivy Hotel’s need for this information was compelling, as Ivy Hotel had no other way to probe the reasons HCC denied Ivy Hotel’s claim. For those work product documents that may have also qualified as attorney-client privileged documents, the District Court ordered their production for in camera review. However, all other work product documents previously withheld were ordered produced.
HCC also argued that the Troutman Sanders files were not within its possession, custody or control because Troutman Sanders was not in possession of the documents and that HCC was not legally entitled to the former attorneys’ work product. The District Court disagreed and held that the documents located in Troutman Sanders’ files were within the control of HCC because HCC maintained the right and ability to influence the former law firm to allow inspection and copying of the materials. The District Court further stated that HCC, as the law firm’s former client, paid for the creation of the work product and was entitled to inspect and copy the materials.
Thus, the District Court held that all documents which were in the physical custody or possession of Troutman Sanders and were not protected by the attorney-client privilege had to be produced. Those documents overlapping under the protections of the attorney-client privilege and work product doctrine were to be produced for the District Court’s in camera review.
Tressler Comments: Insurers and coverage counsel should do their best to delineate their roles, with coverage counsel responsible for coverage issues and the claims adjuster handling the facts and logistics of the underlying claim. Since these duties can often commingle, insurers should be aware that – should a bad faith claim arise – coverage counsel’s work product and/or communications with the insurer may be discoverable.
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Decision Worth Noting...
The United States District Court for the Southern District of Mississippi recently applied Alabama law and dismissed a worker’s compensation bad faith claim where the employee sustained injuries in Mississippi but the policy was purchased for an Alabama insured.
In Williams v. Liberty Mut. Ins. Co., 2011 U.S. Dist. LEXIS 126148 (S.D. Miss. Oct. 31, 2011), Steven Tanner purchased a worker’s compensation policy from Liberty Mutual Ins. Co. ("Liberty Mutual") for his business in Alabama. While the worker’s compensation policy primarily applied to incidents in Alabama, it also provided coverage for injuries to Mr. Tanner’s Alabama employees who worked in other states on temporary assignments. When one of Mr. Tanner’s employees, Clinton Williams, was injured in Mississippi, Liberty Mutual opened up claims in both Alabama and Mississippi. After receiving benefits, Mr. Williams sued Liberty Mutual for bad faith in Mississippi. Liberty Mutual moved to dismiss based on Alabama law applying and Alabama’s exclusivity rules, which do not allow bad faith claims against workers compensation carriers.
The District Court applied Mississippi’s choice of law rules and rejected Mr. Williams’ argument that Mississippi should apply based on Liberty Mutual’s alleged bad faith handling and adjustment of his Mississippi workers’ compensation claim and him residing in Mississippi. Using Mississippi’s "center of gravity"/"most significant relationship" test set forth in the Restatement (Second) of Conflicts of Law, the District Court held that Alabama law applied.
In this matter, Mr. Tanner obtained his policy in Alabama, which applied to temporary work in other states; Mr. Williams’ employment relationship was centered in Alabama; and workers compensation carriers in Alabama reinsured the policy. Thus, although Mr. Williams was injured in Mississippi, the District Court held that Alabama had "the most significant relationship to the occurrence and the parties." On this basis, the District Court granted Liberty Mutual’s motion to dismiss, since Alabama’s worker’s compensation exclusivity statutes bar bad faith claims against worker’s compensation insurance carriers.
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