A Washington district court recently held that an insurer’s conduct and communications during a mediation were discoverable in a subsequent bad faith lawsuit brought against the insurer by another insurer in its status as the insured’s subrogee.  Mutual of Enumclaw v. Cornhusker Casualty Insurance Co., No. CV-07-3101 (FVS) (E.D. Wash. Sept. 16, 2008).

In the case, the insured had liability coverage under two separate business auto policies issued by Cornhusker and Enumclaw, respectively.  When the insured was sued by a claimant injured by the insured’s employee, both insurers accepted the insured’s defense without a reservation of rights and the case eventually proceeded to mediation.  After the initial acceptance of the defense of the underlying suit, Cornhusker notified the insured of a potential coverage defense but advised the insured that it would not raise the defense against the insured.  During the course of the mediation, however, Cornhusker notified Enumclaw of the purported coverage defense and represented that it would only contribute a limited sum towards any settlement.  The mediation ultimately proved unsuccessful and Enumclaw later agreed to settle with the claimants.  Subsequently, Enumclaw, as subrogee of the insured, commenced suit against Cornhusker for indemnification and contribution alleging, among other things, common law bad faith and violations of Washington’s Consumer Protection Act.

Enumclaw sought discovery from Cornhusker regarding statements and conduct at the mediation in the context of the bad-faith litigation.  Cornhusker moved for a protective order, relying on Washington’s Uniform Mediation Act (the “UMA”), under which mediation communications are privileged and protected from disclosure.  The district court held that the UMA only treats mediation communications related to the underlying dispute as privileged. The court held that since only damages for claimant’s injuries were addressed at the mediation and coverage issues were not, Cornhusker’s communications concerning coverage were unrelated to the mediated dispute and, therefore, were discoverable.  In dicta, the court noted that evidence of prior settlement negotiations are admissible to prove an insurer’s bad faith conduct under Rule 408 of the Federal Rules of Evidence.  

For a copy of the opinion, please click here.