Second, in Bayley Construction v. Wausau Business Ins. Co., 2012 U.S. Dist. LEXIS 177559, the court rejected Wausau Business Insurance Company's objections to the insured's Rule 30(b)(6) notice requesting testimony from an insurer representative on the underwriting file for the policy at issue and the names and “dollar level authority” of the claims employees whose authority was necessary to deny a claim like the one at issue. Judge Martinez reasoned that the underwriting file information is discoverable not only because it is relevant to plaintiff's claims for denial of coverage but also because it appears reasonable that the information contained in the file may lead to the discovery of other admissible evidence.

In both cases, Judge Martinez indicated a willingness to award attorney's fees in favor of the insured. Below, Ferestien explains document retention and risk-management implications for claims managers.

Tell us more about Panattoni Construction, Inc. v. Travelers and the judge's application of attorney-client privilege to internal emails.
The Panattoni Construction case involved claims of bad faith, and Judge Martinez's decision focused upon Travelers' refusal to produce 180 pages of claims file documents based on the attorney-client privilege and work product doctrine. After reviewing the disputed documents in camera, Judge Martinez rejected Travelers' claim of privilege for all of the documents except for a single email communication between an in-house attorney and a claims unit manager.

Judge Martinez noted two significant limitations on the attorney-client privilege in the insurance coverage context. First, the privilege does not apply to communications with an attorney who is actually acting as an attorney rather than in some claims-handling capacity. Second, even where the privilege would otherwise apply, communications between an insurer and its attorney are discoverable with respect to the insured if the insured has sued for bad faith and the communication is relevant to that claim.

What must claims professionals understand about discovery and how their notes and records can play a role in litigation? Could an oversight on the part of the adjuster be detrimental to the insurer later on?
Many people believe that the attorney-client privilege protects your written communications with your attorney, regardless of what the correspondence says. But courts have grown increasingly hostile to the privilege because it prevents full disclosure of information. So claims professionals should understand that everything they write may later be provided to the insured and to a court. If an insured sues, especially for bad faith, then there is a good chance the insurer will produce most or all of its claims file.

It is important that claims files should document the adjuster's work with this understanding squarely in mind. In practical terms, this means claims professionals should strive for regular file note updates and plain-spoken and nonjudgmental language. Claims professionals should also limit their entries to what they actually know and avoid the temptation to jump to premature conclusions.

What types of claims-paying guidelines/internal policies have been deemed “discoverable” by courts? In the context of litigation, what should claims managers know about effective risk management and creating manuals for their employees?
The discovery rules in both state and federal courts are very broad. As Judge Martinez observed in Bayley Construction, insureds are afforded broad and liberal discovery such that an insurer may avoid productions of its internal policies only if it can make a particularized showing of prejudice or harm. So insurers should operate on the assumption that their internal policies will be given to the insured and a court if there is coverage litigation. Insurers, therefore, are typically well-served by taking a conservative approach to any manuals they adopt.

Guidelines are typically better than firm rules; for example, manuals should not use absolute language such as “always” or never” or set firm deadlines. Instead, insurers are often well served by employing “softer” language that allows for the exercise of discretion. For example, rather than use “must,” “always,” and “never,” manuals can approach relevant issues with phrases like “where appropriate, consider.”

What are some lessons from Bayley Construction v. Wausau Business Ins.?
Both cases convey two important lessons: First, as I've already noted, claims professionals need to approach their work with the understanding that everything they write might later be the subject of deposition questioning or a trial exhibit. Second, insurers should carefully pick their battles when they resist discovery in coverage litigation.

In deciding whether to refuse discovery, insurers should focus on only the most critical items and try to negotiate resolutions with insureds' attorneys. Most of the time courts will rule against an insurer resisting discovery unless the insurer can make a strong showing of privilege, extreme burden, and/or total irrelevance. And losing an early discovery motion can set the tone for the entire litigation either by emboldening the insured or angering the court.

What can you tell us about the evolution of guidelines for discovery of claims correspondence in recent years?
Federal judges are growing increasingly impatient with discovery disputes and expect there to be a free flow of potentially relevant information and documents. Unless an insurer can show that it has “bent over backwards” to avoid motion practice, many judges now award attorney's fees without hesitation. Insureds and their counsel now frequently try to wipe out any privilege that might normally apply to attorney communication documents and internal policy documents.

When a coverage dispute emerges, insurers should consider when and how they use inside and outside attorneys to investigate and/or manage a claim. If an attorney performs investigatory work, an insured and their counsel may later try to characterize them as a “super-adjuster” in order to defeat a claim of privilege. They also may allege bad faith, even where not justified, in order to force disclosure of privileged communications.