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  • July 17, 2017

    Is Everything Discoverable When Bad Faith Is Alleged Against Insurance Companies?

    Bad faith litigation against insurance companies often involves discovery beyond what is permitted for typical breach of contract claims. Barbara O’Brien explores discovery issues that both plaintiff’s and defense counsel face when a bad faith claim is alleged against an insurance company.

    Barbara A. O'Brien

    When bad faith is alleged against an insurance company, the scope of discovery that plaintiffs often seek is much broader than the discovery sought or permitted for breach of contract claims.1

    But how much broader will a court permit? Is there some burden that must be satisfied to obtain that additional discovery? What are the discovery issues when a bad faith claim is included in a complaint?

    Unfortunately, few reported decisions exist in Wisconsin on the scope and limits of discovery in bad faith claims. Courts of other jurisdictions, however, provide some guidance.

    Bad Faith Claim Requirements

    In Wisconsin, to proceed with discovery on the bad faith claim, an insured must satisfy the court that the insurer has breached the contract or that the insured will be able to prove a breach in the future.2 Once established, plaintiffs litigating a claim of bad faith may be entitled to discover the insurer’s work product and attorney-client privileged material containing information relevant to the claim handling.3

    Barbara O’Brien Barbara A. O’Brien, Marquette 1987, is an attorney with Powell, Peterson & Frauen, S.C. in Milwaukee, where her practice includes bad faith counseling and litigation.

    The Seventh Circuit concluded that the insured must show a likelihood that the documents sought may contain evidence of bad faith.4 “The insurer [then] bears the burden of proving with specificity why the discovery sought is improper or would put an undue burden on the insurer.”5

    Discovery in a Bad Faith Claim

    Bad faith discovery may include the insurer’s internal determination to deny benefits, the insurer’s evaluation as to how a jury may value the claim, and the insurer’s approach to settlement.6

    For example, the insurer’s training materials to evaluate claims, reserves prior to the dispute, written evaluations of the insured’s damages, claim procedure guides, and the computer software estimators that evaluate claims may all be relevant and discoverable.7

    Is There a Pattern?

    Plaintiff’s counsel may also seek discovery beyond the claim file to show that the insurer is involved in an alleged pattern of denying certain claims through claim handling practices.8 In so doing, counsel can ask the claim handler whether he or she handled the claim at issue in the same manner they would handle other claims involving similar circumstances. If the claim handler answers “yes,” the plaintiff has established a pattern of wrongful conduct. If the answer is “no,” an inference may exist that the claim handler singled out the insured for improper treatment.

    Discovery of records from other insureds may be denied on the grounds that it will not lead to the discovery of relevant evidence or that it is prejudicial. If discovery of any other claim files is permitted, the discovery tends to be very limited.9 Yet evidence of the pattern can be established by other means such as training manuals, consumer complaints, and claim payment goals or incentive programs.

    Attorney-client Communication: Discoverable?

    While discovery is more expansive for bad faith claims, some documents may still be protected by the attorney-client privilege or the work product doctrine. Wis. Stat. section 905.03 provides:

    A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client:

    • between the client or the client’s representative and the client’s lawyer or the lawyer’s representative;
    • between the client’s lawyer and the lawyer’s representative;
    • by the client or the client lawyer to a lawyer representing another in a matter of common interest;
    • between representatives of the client or between the client and a representative of the client; or
    • between lawyers representing the client.

    This privilege should remain intact in certain insurance claims and insurers should assert the privilege. For instance, in first party claims where the insured makes a claim under their own policy for bodily injury or property damage, the attorney representing the insurance company is not representing the insured.

    Since a bad faith claim is not an enumerated exception in the statute,10 the documents between the attorney and client, even if in the claim file, should be listed on a privilege log and kept confidential.

    In contrast, in third party claims, the insurer and defense counsel have an obligation to defend the insured. The attorney, first and foremost, is the attorney for the insured. Further, the attorney is representing both the insurer and the insured. Thus, the privilege is waived and the communications are not protected.11

    Some courts in other jurisdictions have held that attorney-client privileged communications are discoverable in bad faith litigation.12 The Ohio General Assembly has taken a different approach and enacted a statute to address the privilege for discovery in bad faith cases.13 The assembly declared that the attorney-client privilege is a substantial right and public policy tended to guard the right. The statute provides a new procedure in which the insured is required to (1) make a prima facie showing that the privilege should be waived and then (2) the court should conduct an in camera inspection of the disputed communications, and then -- and only then -- may the material be discoverable.14

    Wisconsin courts, other than making generalized statements about the privilege, have not specifically addressed it in the context of bad faith claims. However, section 905.03 should protect the communications since the statute specifically enumerates the only exceptions to the privilege. Bad faith claims against an insurer is not an enumerated exception.

    Work Product Privilege

    In addition to the attorney-client privilege, the work product privilege may be at issue in bad faith claims.

    Under the doctrine, documents and tangible things prepared by or on behalf of a party in anticipation of litigation are generally not discoverable absent a showing of need.15 Some courts have held that in bad faith cases, the requirement of substantial need is automatically met and the work product is discoverable.16 Other courts hold that a mere allegation of bad faith without more will not satisfy the substantial need requirement. The insured instead must demonstrate actual need for the materials requested.17

    Wisconsin courts will most likely permit discovery of the insurer’s work product once the insured meets the required burden of proof prior to obtaining any bad faith discovery. The insured has to be able to establish bad faith or prove that bad faith can be established in the future and the insurer has the right to challenge the claim not just by pleading but by motion prior to discovery.18

    A more challenging issue might be if the work product contains the attorney’s mental impressions or opinions. Generally, the protection afforded in those situations is elevated.19

    Few Litigated Cases

    In general, few litigated cases on issues involving discovery in bad faith claims exist in Wisconsin.

    Wisconsin courts have held that discovery in cases involving bad faith claims is broad, once plaintiff meets an initial threshold of coming forth with some evidence of bad faith. Presumably, plaintiff’s counsel is entitled to discovery of the claim file.

    However, the attorney-client privilege should still protect certain documents and communications unless a statutory exception exists. That privilege may also apply to claim file materials that include the mental impressions and opinions of counsel.


    1 See Dahmen v. American Family Mut. Ins. Co., 2001 WI App 198, ¶ 13, 247 Wis. 2d 541, 635 N.W.2d 1.

    2 Brethorst v. Allstate Prop. & Cas. Ins. Co., 41, ¶ 76, 334 Wis. 2d 23, 798 NW2d 467.

    3 Dahmen, 2001 WI App 198, ¶ 13.

    4 Logan v. Commercial Union Ins. Co., 96 F.3d 971, 977 (7th Cir. 1996).

    5 Baires Blue Cross Blue Shield of Minn. v. State Farm Mut. Auto Ins. Co., 2016 WL 4591905, *5(E.D. Wis. Sept. 2, 2016).

    6 Dahmen 2001 WI App. 198, ¶ 13.

    7 Baires Blue Cross, 2016 WL 4591905,*6.

    8 Ron A. Yarbrough and Cheri Turnage Gatlin, Discovery of Information from an Insurer, 3 FIDELITY L. ASS’N J. 71, 72 (1997).

    9 North River Ins. Co. v. Mayor and City Council of Baltimore, 680 A.2d 480 (Ct. App. Md. 1996).

    10Wis. Stat. section 905.03(4) enumerates the following exceptions to the attorney-client privilege: (a) Furtherance of crime or fraud, (b) Claimants through same deceased client, (c) Breach of duty by lawyer or client, (d) Document attested by lawyer, or (e) Joint clients.

    11 Hoffman v. Labutzke, 233 Wis. 365, 289 N.W. 652 (1940).

    12 Allstate New Jersey Ins. Co. v Humphrey, 2008 WL 382666 (N.J. Super. App. Div. 2008) (The insured can “pierce” the attorney-client privilege by showing a legitimate need for the evidence, showing the relevance of the evidence, and showing that the information could not be obtained in any other way.); Nowak v. Lexington., 464 F. Supp. 2d 1241 (S.D. Fla. 2006) (Insurer cannot assert attorney-client privilege to withhold documents relevant to a bad-faith issue.)

    13 Ohio Rev. Code § 2317.02(A)(2).

    14 Id.

    15 State ex rel. Dudek v. Circuit Court for Milwaukee County, 34 Wis. 2d 559, 591, 150 N.W.2d 387 (1967).

    16 Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005); Brown v. Superior Court 137 Ariz. 327, 670 P.2d 725 (1983) (The very nature of a bad faith complaint satisfies the substantial need requirement.)

    17 Bozeman v. State Farm Fire and Cas. Co., 420 So. 2d 89 (Ala. 1982); Travelers Indem. Co. v. Allied-Signal, Inc., 124 F.R.D. 101 (D. Md. 1989) (Persuasive evidence that the insured acted in bath faith is necessary to overcome the privilege.)

    18 Brethorst, 2011 WI 41¶ 77.

    19 Palmer v. Farmers Ins. Exch., 261 Mont. 91, 861 P.2d 895 (1993) (Opinion work product is discoverable only if the opinions regarding the insurer’s handling of the claim are “directly at issue in the case and the need for the material is compelling.”); Underwriters Ins. Co. v. Atlanta Gas Light Co., 248 F.R.D. 663 (D. Ga. 2008) (Rule 26(b) (3) creates and absolute bar to discovery of the attorney’s mental impressions).

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