Why it matters: Rebuking Travelers Property Casualty Co. for engaging in a “pattern of gamesmanship designed to prevent and unduly delay” the discovery process, a federal court judge in Maryland ordered Travelers to produce three additional months of claims materials the court previously held were privileged. In the initial discovery dispute, Travelers relied upon a tactic all too commonly employed by insurers, asserting that the materials sought were protected by the attorney-client privilege (because attorneys were involved in the claims process) and the attorney work product doctrine (because the attorneys’ work was performed in anticipation of litigation). While the court acknowledged that it initially gave the benefit of the doubt to Travelers’ representations in that regard, it took a decidedly different view in light of new evidence unearthed by the insured indicating that the attorneys were involved in ordinary claims handling functions and the insurer did not anticipate litigation until months later than it initially indicated to the court. Because attorneys’ acting in an ordinary claims handling role does not confer privilege, the claims materials generated in that capacity were not privileged.

Detailed Discussion

In this case, American Capital faced litigation over a tainted heparin product. American Capital sought coverage from Travelers, which filed suit in response seeking a declaration that it was not obligated to provide a defense or indemnity.

In discovery, American Capital moved to compel production of Travelers’ claims handling materials. Travelers objected, arguing that the requested materials were protected by attorney-client privilege because in-house and outside counsel were involved in the claims process. Travelers further asserted that the work product doctrine applied as of September 2008 because that is when it anticipated litigation.

Based on prior deposition testimony of a Travelers employee and the insurer’s representations (for which the court indicated it had afforded Travelers the benefit of the doubt), the court initially limited discovery to claims materials generated prior to September 18, 2008. However, after two additional depositions of a Travelers claims handler and another employee, American Capital moved for reconsideration. Testimony from these depositions indicated that both in-house and outside counsel were engaged in ordinary claims handling matters.

The “new deposition testimony cannot be reconciled with … [the] previous deposition testimony” that formed the basis for Travelers’ opposition to American Capital’s motion to compel, U.S. Magistrate Judge Jillyn K. Schulze wrote. Based on the new evidence, the court pushed the cut off date forward three months, ordering Travelers to produce claims materials generated through December 8, 2008.

The decision, which was filed under seal in July 2013, was only recently released and remains heavily redacted. But the court’s unhappiness with the insurer’s defense tactics is clear. Travelers’ “opposition to the renewed motion to compel does not address the fact that they presented evidence and arguments to the court which are, in hindsight, misleading,” the court opined.

Moreover, the court held, Travelers “badly misconstrue[s] the relevant legal principles as well.” Travelers relied upon the irrelevant proposition that the attorney-client privilege and work product protection are not per se unavailable prior to the decision to deny coverage. “But of course the evidence the insurer produces must be sufficient to sustain its burden to show that the disputed material was not prepared primarily for the ordinary business purpose of adjusting insurance claims,” Judge Schulze said. “It goes without saying that if the evidence is later shown to have been misleading or inaccurate it is no longer sufficient to sustain that burden.”

The court then reviewed the new testimony to determine the date on which Travelers could legitimately claim protection for the claims handling materials. Noting that a “claims handler’s request that counsel review coverage does not automatically convert the analysis from an ordinary business activity to a litigation-geared activity,” the court opined that several of the activities that Travelers asserted conferred privilege must be performed when handling any claim. “A decision to examine coverage,” the court noted, “is not the same as anticipating litigation.”

“[T]he evidence on which [Travelers now] relies is woefully insufficient to overcome the explicit testimony of the only two employees whose statements of their intentions regarding litigation are available,” the court concluded. “The court previously gave [Travelers] the benefit of the doubt in finding that [it] anticipated litigation on September 18, 2008. Once again, giving [Travelers] the benefit of the doubt, the court finds that [Travelers has] demonstrated that [it] anticipated litigation as of December 8, 2008.”

An in camera review of documents after December 8, 2008, was deferred for American Capital to review the additional information. When discussing how to handle any remaining in camera review, the court reiterated its displeasure with Travelers. “In making this determination the court will consider the fact that [Travelers has] unduly delayed discovery,” the court opined. “After the misleading nature of their evidentiary basis for claims of attorney-client privilege and work product protection was exposed, first in depositions and then in [American Capital’s] motion, [Travelers] chose not to alter or modify their position.”

In addition, the court held, Travelers “inappropriately responded” to an order to produce documents for in camera review by “dropping off two large boxes, each containing approximately 6 inches of paper, without any attempt to organize or meaningfully identify any document, much less match any document with an entry on a privilege log.”

This document dump alone could have justified a ruling that Travelers was not entitled to withhold those documents, the court added. “In retrospect, that ruling should have been made, because the submission was part of what has now emerged as a pattern of gamesmanship designed to prevent and unduly delay the production of documents to which [American Capital is] entitled.”

To read the opinion in The Charter Oak Fire Insurance Co. v. American Capital Ltd., click here.