In insurance coverage litigation, insurers frequently fight vigorously to prevent discovery by their insureds. Even though the insurer often pleads affirmative defenses numbering in the dozens, the insurer resists all efforts by the insured to obtain discovery of the factual basis for such alleged defenses. In addition, experience shows that discovery into the “drafting history” of policy forms—including the drafting of alternative wording not used in the policies at issue, can be very helpful, often showing that the policy wording was not intended to be applied in the manner the insurer now claims. For this reason, of course, insurers strenuously oppose such discovery.
Insureds have recently received a favorable ruling on these issues in a decision from a federal court in the Southern District of New York. A Magistrate Judge ordered Continental and CNA Insurance Companies (collectively “Continental”) to produce documents to its insured with respect to its 50 affirmative defenses, the pollution exclusion in its policies, and its underwriting practices. See Pentair Water Treatment (OH) Company v. Continental Insurance Company, 08-3604, S.D.N.Y., Nov. 16, 2009.
In response to the insurer’s answer, the insured sought discovery and depositions with respect to each of its 50 affirmative defenses. Continental objected to these requests, arguing that they sought information protected by attorney work product. In rejecting this argument, the Court relied on the text of Federal Rule of Civil Procedure 26(a)(1)(A)(ii) which provides that even without a discovery request, a party must produce “a copy…of all documents…that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses…” The Court held that Continental must produce all documents responsive to the insured’s requests, which had not been previously produced.
The insured also sought documents relating to any pollution exclusion clause that Continental utilized during the relevant time period as well as any specific clauses relating to exclusions for injury caused by viruses, bacteria, or fungi. Continental objected to the extent that the requests went beyond the specific pollution exclusion in the policy at issue. Again, the Court rejected this argument and held that documents relevant to construing the clause in the policy was not limited to those relating to the issue of the precise language. The Court found that information concerning other pollution exclusions employed by Continental including which one it chose to include and how that may have altered the pollution exclusion in the instant case was relevant.
Finally, the insured served deposition notices for witnesses to testify regarding Continental’s underwriting practices. Continental objected on the ground that the underwriting of any policies other than the policy specifically at issue in the instant case would be irrelevant. For the third time, the Court rejected Continental’s objection and held that Continental’s affirmative defenses – including its contention that the underlying facts did not constitute an “occurrence or an “accident” within the terms of the policy, that the lawsuit was not a “suit,” “action,” or “proceeding” under the Policy, and that the underlying action did not seek amounts that the insured was obligated to pay as damages – raised issues that implicated Continental’s underwriting practices. As a result, the insured was entitled to explore what risks Continental expected to cover when it used terms similar to those in the policy at issue.
This Pentair Water decision opens the door to extremely valuable discovery for insureds who face numerous affirmative defenses. The case also permits the insured to properly explore the insurers contentions regarding policy interpretation and intent, by pulling back the curtain and allowing the insured access to the internal deliberations and drafting efforts of the insurer to reveal what it intended the policy to mean before the insured asserted a claim.