An Ohio District Court recently denied an insurer’s motion to bifurcate its insured’s bad faith counterclaim from its declaratory judgment coverage action and to stay related bad faith discovery. Professionals Direct Insurance Co. v. Wiles Boyle Burkholder & Bringardner Co., LPA, No. 2:06-CV-240 (GCS) (S.D. Ohio, Oct. 27, 2008).

The insurer provided professional liability and malpractice insurance to an Ohio-based law firm under two separate professional responsibility insurance policies, each with consecutive one-year terms. The law firm was sued for malpractice by one of its clients after it missed a deadline for filing an appeal. The underlying lawsuit, for which the law firm had served as defense counsel, commenced before the policy effective date and concluded within the policy term.

The insured law firm sought coverage for the malpractice claim, and insurer filed a declaratory judgment that it had no duty to defend or indemnify because the insured firm had failed to disclose the “probable claim” when renewing its policy. After the insured counterclaimed for beach of contract and bad faith, the insurer moved to bifurcate the bad faith counterclaim and to stay the discovery required by a magistrate’s order until resolution of the coverage claims. The insurer argued that it would be prejudiced if the claims were tried together because production of certain required documents would essentially “open[] up [the insurer’s] coverage litigation playbook while the coverage aspect of the case [was] still pending.”

In denying the insurer’s motion, the district court first recognized that Federal Rule of Civil Procedure 42(b) authorizes a court to bifurcate in the furtherance of convenience or to avoid prejudice, or when conducive to expedition and economy. The court rejected the insurer’s attempt to cast disclosure of its “litigation strategy” as prejudice, and noted that the insurer had not presented any evidence or even argument that bifurcation would be more convenient or would expedite the claims. To the contrary, the court found that bifurcating the bad faith claim from the coverage action could result in two separate trials and significant hardship to the parties. The court concluded that judicial economy favored hearing all the claims together because they were all based on the same insurance policies and the parties’ respective duties thereunder.

In its order denying bifurcation, the district court also overruled the insurer’s objection that the magistrate’s discovery order was overly broad because it required the insurer to produce attorney-client communications regarding coverage that were created before the date of the coverage denial. The court held that if there is a finding that the release of certain information would be prejudicial, it can stay the bad faith claim and related production of documents.

A complete copy of the decision can be found here.