When a carrier denies coverage, does it matter how the company has handled similar claims for other policyholders?  Can a policyholder look at the claim files the carrier has created and maintained in connection with other claims?

For the lawyers on both sides of a coverage lawsuit, questions about what the carrier must disclose in discovery can be outcome determinative.  Policyholders and carriers have spent vast amounts of energy, money, and printer ink over the years fighting about whether, for example, the insured is entitled to discover how much the carrier has reserved on the claim, or what the carrier might have told its reinsurer about the claim.  As policyholder counsel, I have never thought that it should be a particularly close question whether information of this kind is at least discoverable. 

In every state, there are rules and court decisions that say, in sum and substance, that a party can obtain anything in discovery that is relevant and that might lead to the disclosure of admissible evidence.  Courts view discovery as an “open season on the facts.”  The amount of money a carrier reserves on a claim reflects the adjuster’s view about how much the company might have to pay to resolve it.  Surely that information says something relevant about the carrier’s position on the claim. 

Likewise, insurance companies nearly always have their own insurance coverage, called reinsurance, to cover some or all of the amounts that it pays its policyholder on a particular claim (or class of claims).  If the carrier is telling its policyholder that the claim is clearly excluded while, at the same time, it is telling its reinsurer that there is a high probability that the claim will be covered, an interest in the search for the truth would seem to compel that those admissions should come to light.  As Justice Benjamin Cardozo once said, “Sunshine is the best disinfectant.”   Remarkably, though, policyholders have lost the quest for disclosure of this kind of information frequently enough to make it an issue that has to be fought on a case-by-case basis.

It isn’t a heavy lift for a court to order production of other claim files when the issue is the carrier’s pattern or practice of claim handling. But aren’t those same files also relevant to other claim handling issues?

In Florida, as in some other states, there is a statute that provides a civil remedy to a policyholder for an insurer’s bad-faith handling of a claim.  The Florida law also provides that the policyholder may be entitled to punitive damages if it can show that the acts of bad-faith claim handling “occur with such frequency as to indicate a general business practice.”  One sensible place to look for evidence of a general business practice would be the claim files that the carrier kept in connection with other, similar, claims for coverage.  That is precisely what the policyholder sought in First Coast Energy LLP v. Mid-Continent Casualty Co. (download a pdf of the decision here).

The case involved a claim under a pollution liability policy that the carrier had denied.  A trial court rejected the denial and entered judgment in favor of the policyholder, First Coast Energy, which then brought another lawsuit in the U.S. District Court for the Middle District of Florida, claiming that the denial had violated the Florida bad-faith statute.  The carrier rejected the policyholder’s request for production of claim files relating to other policyholders’ claims for coverage under similar pollution liability policies. 

The district court came down firmly on the side of the policyholder and required the carrier to produce the files.  (Although this unpublished decision was issued in May 2013, it is just now receiving wide attention among people who care about these kinds of things.)  Interestingly, under Florida law the insurer cannot protect work product — that is, materials prepared in anticipation of litigation, which is usually subject to a privilege from disclosure — that it chooses to place in a policyholder’s claim file.  Consistent with this rule, the First Coast Energy court held that the carrier would have to produce all of the materials in the other-policyholders’ files, including work product and excluding only any material subject to the attorney-client privilege.

It isn’t, perhaps, a particularly heavy lift for a court to grant discovery of other claims files where the issue is whether the carrier engaged in a pattern and practice of bad-faith claim handling.  Where else would a policyholder find information relevant to that issue?  A more interesting question is: Why wouldn’t this information also be relevant to the initial claim denial, irrespective of bad faith or pattern and practice?  Evidence of a carrier’s disparate treatment of similar policyholders under the same policy language and under similar circumstances is relevant to (that is, it has a tendency in reason to prove) any number of questions that often arise in coverage litigation.  The one that comes readily to mind is whether policy language is ambiguous.

An insurance policy is ambiguous when it is reasonably susceptible to inconsistent interpretations or meanings.  The question can be important because of the rules of contract construction that courts almost universally apply to insurance policy interpretation.  Because insurance policies are drafted by the insurance industry and sold to all policyholders on a take-it-or-leave-it basis, courts construe ambiguities in policy language against the drafter and in favor of coverage.  If different insurance company adjusters come to different coverage conclusions when making decisions about the same policy language under the same circumstances, there can be no legitimate question that this is relevant to whether the policy language in question is ambiguous.

If, as the First Coast Energy decision makes clear, other policyholders’ claim files are discoverable because they are relevant to the question whether a carrier engaged in a pattern and practice of bad-faith claim denial, why wouldn’t those same kinds of claim files be discoverable when they are relevant to other questions that arise in coverage cases?  The honest answer is: They should be.