FEBRUARY 2012 BAD FAITH CASES: FEDERAL COURT DENIES NON-PARTY (INSURER) OBJECTIONS TO REINSURER’S RULE 45 SUBPOENA ISSUED IN CONNECTION WITH OUT OF STATE BAD FAITH CASE (Middle District)

In Allied World Assurance Company v. Lincoln General Insurance Company, the court addressed a subpoena requesting documents relating to a bad faith case proceeding in the Middle District of Florida. The underlying bad faith action was brought by the guardian of an accident victim, who was hit by a driver during the scope of the driver’s employment. For the purposes of litigation, the insured-employer also assigned its rights to the victim’s guardian. Following the accident, the victim filed a personal injury claim against the driver and employer. The employer’s primary insurer investigated the claim and defended the insured-employer. The primary insurer also hired an adjuster to investigate the facts and an attorney to represent the insured driver and employer.
In May, 2008, the insurers offered a combined $2 million of coverage to the accident victim. The victim rejected the offer and on March, 20, 2009, a jury returned a $65 million verdict against the negligent driver and employer. After the judgment was returned, a series of mediations took place that involved all of the parties to the litigation. As a result, the judgment was satisfied as to the driver and partially satisfied as to the employer, whose primary insurer paid more than its $1 million policy limit. Thereafter, the guardian-assignee commenced the underlying bad faith action, seeking to recover the balance of the judgment from the excess insurer.
The insured-employer’s excess insurer issued the subpoena in question out of the Middle District of Pennsylvania, serving the employer’s primary carrier — a non-party in the bad faith action. The subpoena requested twenty-one documents relating to the bad faith lawsuit, including settlement reserve authority requests, the underwriting file held by the primary insurer, and the personnel file of the insurance adjuster hired by the primary insurer. The primary insurer objected and the court issued an opinion, grouping the objections into several categories.
First, the court addressed technical objections to the subpoena. The primary insurer argued that Federal Rule of Civil Procedure 45(a)(3) required the excess carrier’s attorney to be admitted to the district court where the subpoena was to be served. The court rejected this argument because the attorney that issued the subpoena was admitted in Florida, where the bad faith litigation was pending. The court also rejected an argument that the service of process itself was flawed because the person upon whom service was made is an agent of the primary insurer. Moreover, Rule 4(h) allows a corporation to be served in the same manner as a person.
Second, the primary insurer objected on the grounds of work-product, arguing that the excess insurer did not make a showing of “substantial need” or “undue hardship” as required by Rule 26(b)(3). The court ruled that, under Florida law, “work product material generated in the adjustment of an underlying claim . . . is discoverable in a third-party bad faith case.” Moreover, in the previous litigation, the primary insurer owed a fiduciary duty to the insured parties and the excess insurer seeking the documents. Accordingly, the court found that the work-product doctrine was inapplicable.
Third, the primary insurer argued that the attorney-client privilege rendered documents undiscoverable because the interests of the two parties are not aligned. However, the court reasoned that, during the previous personal injury suit, their interests were aligned in defense of the insured driver and employer. Because the parties’ interests were essentially the same in the prior dispute, the court held that “any correspondence between the insurer and the insurer’s retained counsel concerning the insured’s cases was not privileged and must be produced by the insurance company.” The parties shared a common interest in defending against the personal injury claim in the underlying litigation, rendering the privilege inapplicable.
Fourth, the primary insurer objected under Florida’s Mediation and Privilege Act, which states that “[a] mediation participant shall not disclose a mediation communication to a person other than another mediation participant or participant’s counsel.” The court reasoned that the privilege is inapplicable in this case because both insurers “were mediation participants and there has been no effort to disclose the communications to persons other than mediation participants.” The court also rejected the primary insurer’s objection to disclosing communications that occurred outside the mediation process.
Fifth, the excess insurer sought the employment file of the primary insurer’s adjuster who handled the personal injury claim. The court disagreed with the excess insurer that this request was overly broad. The court repeated its rationale that the primary insurer “was a party to, and assumed the responsibility of defending against claims made in the underlying litigation which led to the bad faith claim,” rendering the privilege inapplicable.
Sixth, the excess insurer observed that some of the documents produced by the primary insurer were redacted, seeking a privilege log from its opposition. The primary insurer defended that that no privilege log was necessary because of a prior comment by the excess insurer that it would not seek privileged information. The court again found for the excess insurer. It reasoned that Rule 45(d)(2)(A) allows a party to assess a claim of privilege through examining a general description of the sought after documents.
Lastly, the court held that, under Rule 45(c)(1), the excess insurer has “a duty to take reasonable steps to avoid imposing an undue burden or expense” upon the primary insurer.
Date of Decision: February 2, 2012
Allied World Assur. Co. v. Lincoln Gen. Ins. Co., NO. 1:11-mc-00342, 280 F.R.D. 197, 2012 U.S. Dist. LEXIS 12883 (M.D. Pa. Feb. 2, 2012) (Rambo, J.)