Court of Appeals Affirms Evidentiary Privilege Protection of Insured-Insurer in Bad Faith Litigation

Michael R. Giordano

Zurich American Ins. Co. v. Circle Centre Mall, LLC
2018 WL 5813048 (Ind. Ct. App. 2018)

In Indiana, there have not been many cases addressing the discoverability of insurance claim materials. In the case of Zurich American Ins. Co. v. Circle Centre Mall, LLC, the Court of Appeals addressed a number of evidentiary privileges in addressing the discoverability of insured-insurer communications.

The origins of this case arose from a tragic accident involving a student that fell from an escalator at the Circle Centre Mall in Indianapolis. The student filed suit against the mall’s owner and two maintenance companies that serviced the escalator. As part of the maintenance contract, the maintenance companies were to name Simon, the Mall owner, as an additional insured. A dispute arose relating to whether a maintenance company insurer, Zurich, would provide a defense and indemnity to Simon. Eventually, Simon filed a lawsuit against Zurich contending that the insurer breached the insurance policy in failing to provide coverage to Simon, and that it also breached its duty of good faith and fair dealing (“bad faith”) owed to Simon as an additional insured under the policy. Simon eventually settled the student’s lawsuit against the company and sought to recover from Zurich its defense costs and indemnity payments made to the student.

During the litigation, a discovery dispute arose concerning various documents that Zurich had exchanged between it and its insured, the maintenance company. Simon filed a motion to compel production of the documents, which Zurich and the maintenance company opposed, claiming that the documents were protected by various privileges. The trial court granted Simon’s motion to compel.

Later, Simon filed a motion for sanctions against Zurich, by contending that Zurich violated the court’s order compelling production of documents. Simon also contended that additional documents were discoverable. The trial court granted Simon’s motion for sanctions and ordered Zurich to produce the additional documents and pay Simon’s attorney fees. Zurich filed a notice of appeal of the court’s ruling imposing a monetary sanction against it.

Simon filed a second motion for sanctions requesting that the court enter default judgment against Zurich for failing to produce the ordered documents. The trial court granted that motion and entered an order of default against Simon, which prompted an interlocutory appeal.

The first issue addressed by the court was whether to apply a new Delaware case, Tackett v. State Farm Fire & Cas., 558 A.2d 1098 (Del. Super. Ct. 1988), where the court established a “the trial is the file” approach, essentially allowing discovery of an insurance claims file in bad faith actions by overriding any evidentiary privileges. The Delaware Court concluded that because a plaintiff cannot realistically prove a bad faith claim without being able to discover the claims file, the evidentiary privileges do not apply. The Indiana Court of Appeals rejected the application of the Delaware approach by relying upon a previous Indiana appellate decision, Hartford Fin. Services Group, Inc. v. Lake County Park & Recreation Board, 717 N.E.2d 1232 (Ind. Ct. App. 1999), that recognized evidentiary privileges which preclude discoverability of certain documents in a bad faith claim.

The second issue addressed by the court was whether the work product privilege, outlined in Indiana Trial Rule 26(B)(3), applied to preclude discovery of the documents. In reviewing the disputed documents, the Court of Appeals noted that the letters involved the insured’s evaluation of its defenses and included other mental impressions or conclusions of its legal counsel. The court observed that it was difficult to imagine any other documents that more squarely fit within the definition of work product.

After finding that the documents clearly fit the definition of work product, the only remaining analysis was whether those documents were prepared in anticipation of the litigation. The court observed that the documents were not prepared in anticipation of the Simon bad faith action, but were prepared in anticipation of the student’s lawsuit. The court concluded that there was no requirement that the documents must have been prepared in anticipation of the litigation where the party is seeking the documents. Instead, if they were prepared in anticipation of any litigation, they were entitled to the protection.

Some of the other documents were also asserted as subject to the attorney-client privilege. Specifically, Zurich contended the documents were prepared by the maintenance company’s attorney for the benefit of the maintenance company and also shared with the insurance company that was providing the defense. While the attorney-client privilege can be waived when privileged information is disclosed to a third-party, in this case, the court found that the insurance company was not a third-party, but shared a “common interest” with the maintenance company such that a “common-interest” privilege applied to prevent the documents’ disclosure.

Finally, the court was also asked to address whether the insurer-insured privilege adopted in the case of Richey v. Chappell, 594 N.E.2d 443 (Ind. 1992) applied. Specifically, that case established that communications by an insured to the insurance company regarding an incident are protected from disclosure to a third party. However, the court found that this privilege did not apply in the present case because Simon was not a “third-party claimant,” but rather an additional insured of Zurich asserting a first-party claim.

As a result, the court affirmed the trial court on the discoverability of one document, but reversed the trial court on the discoverability of all remaining documents at issue. The court also vacated the sanctions award against Zurich, but withheld issuing an order as to whether the trial court would have still awarded a sanction for Zurich’s refusal to produce the one document determined to be discoverable by the Court of Appeals.

This case provides further support to permit insurance companies to properly protect documents that may be prepared in anticipation of litigation (work product) or communications with the insured (common-interest privilege) within a bad faith case. This case is a must-read for insurance practitioners who handle bad faith litigation cases.