TORT REPORT: Discovery issues in bad faith claims

Listen to this article

Discovery disputes typically come to the forefront of most bad faith litigation.

But while the same issues typically arise, the results of these cases are rarely uniform across states.

One such issue involves whether to sever an underlying breach of contract claim from a bad faith claim, and whether or not the court should stay discovery in the bad faith action until the contract claim is concluded. The majority of state courts have resolved to try the claims separately, but still allow discovery to continue in the bad faith claim.

Wisconsin is among the minority of states that will sever the claims and stay discovery in the bad faith action. Our state recognizes that failing to stay discovery in the bad faith action can prejudice the insurer’s ability to defend the contract claim. Most prominently, bad-faith plaintiffs may be entitled to discover portions (or all) of the claim file, whereas in the typical contract action, defense counsel can legitimately argue that these materials are shielded from disclosure due to the attorney/client privilege and the work product doctrine.

As a tactical matter, the carrier typically seeks a stay of discovery until the underlying contract claim is settled, dismissed or otherwise resolved.  The recent case of Brethorst v. Allstate Property and Casualty Insurance Company, 2011 WI 41, seems to have reinforced Wisconsin’s rules on the insured’s discovery of claims materials. In Brethhorst, the Wisconsin Supreme Court confronted a novel issue: What if there is no contract claim? The court held that an insured can’t proceed with first-party bad faith discovery until it pleads a breach of contract and establishes that such a breach occurred or that it will be able to prove such a breach occurred.

“Institutional” discovery

In bad faith cases, the conduct of the carrier is on trial. The results of one case may impact subsequent cases.  Accordingly, plaintiffs want an expansive scope of permissible discovery.

Claims and training manuals, for example, typically outline the carrier’s investigation, evaluation and settlement practices. Savvy attorneys use these materials in an attempt to prove that the insurer either failed to adhere to its guidelines or, perhaps more damaging, that the guidelines themselves show “institutionalized” bad faith.

Jurisdictions are not uniform regarding whether these materials are discoverable. Some insurers have successfully argued their claims manuals are protected trade secrets.

Aggressive plaintiffs seek discovery of other claim files. Some courts have ordered the discovery of files handled by certain adjusters where the plaintiff argued the adjuster engaged in a pattern of improper claims handling.

Other courts have gone even farther and allowed discovery of reserves in order to learn the insurer’s opinion of a claim’s value. The plaintiff then gears discovery to see if the claim was handled in conformance with the reserve opinion.

For example, an insurer may set a reserve high and subsequently deny the claim, or offer a settlement much lower than the reserve amount. The plaintiff would argue this is evidence of bad faith.

Conversely, the plaintiff could argue bad faith where the reserve amount is low despite little evidence of contributory negligence on the part of the claimant and significant damages. While reserves should not be considered an admission of coverage or the value of a claim, this initial value could be used as evidence that all subsequent activity was geared with the reserve amount in mind.

Dos and don’ts

As a practical matter, the best course of action for the claims handler and attorneys advising insurers is to assume everything in the file may be discoverable in a later bad faith action.

An adjuster’s notes should avoid unnecessary opinions. Comments regarding a claimant’s appearance, gender and motive should be avoided. Adjusters should keep Joe Friday’s simple mandate in mind at all times: “Just the facts.”

Accordingly, it is good practice to avoid unnecessary adjectives such as “favorable” or “fortunate” when describing facts discovered during an investigation. Demonstrating fairness and even-handedness at all times is crucial. The adjuster should not choose sides or demonstrate subjectivity or prejudice toward a claimant.

Though bad faith claims involve a plethora of discovery issues, plaintiffs’ attorneys that are aware of the resources available to them can aggressively prosecute such claims. Defense counsel that can identify these issues at the outset of a claim and insurers that recognize the potential discoverability of their files and other materials make much more formidable opponents.

Nick Rudman is an associate at McCoy Law Group SC, Waukesha. The firm has a civil litigation practice that includes insurance defense, construction disputes and commercial/business litigation.