Developing a Discovery and Litigation Plan for Bad Faith Cases

Introduction
Discovery in a bad faith case, particularly in cases based on breach of a duty to settle or defend, is involved, intense and requires a great deal of planning at the onset of the litigation. Bad faith cases involve a number of potential witnesses on the insurance industry side who made decisions concerning the claim which form the basis of the allegations of bad faith made by claimant’s counsel. These individuals include the initial claims adjuster, litigation adjusters, claims and litigation supervisors and other senior personnel responsible for making decisions about coverage, settlement or the evaluation of the claim. In addition, numerous documents including, claims files, written and electronic communications, claims manuals, claims evaluation software and training materials are the subject of discovery and require early identification, careful management and precise legal objections when appropriate. Thus, it is incumbent upon counsel representing the insurance carrier to identify all the important players and documents that will be the subject of discovery.

This paper will focus on developing an initial discovery plan in bad faith cases, objections to production based upon attorney-client and work product privileges, preparing and defending depositions of insurance carriers’ representatives and, using targeted discovery to obtain admissions, exact specifications of bad faith and claimed damages and important documents from the policyholder. Although this paper is based upon my experiences defending bad faith cases based upon a breach of a duty to settle or defend and coverage disputes, these principles can apply when defending insurance carriers in both first and third party bad faith lawsuits.

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US 11th Circuit Court of Appeals refused to rehear its decision

On 1/13/15, the United States 11th Circuit Court of Appeals refused to rehear its decision affirming a federal district ruling that a major liability insurer was not responsible for a state court verdict in excess of 10 million dollars. Partner James Brieske of Gray, Rust, St. Amand, Moffett and Brieske successfully argued that tenants who were operating an unlicensed day care business at a residence were not insured real estate managers under the landowner’s dwelling policy. The tenants had brought a bad faith action based on a breach of a duty to defend and to settle a wrongful death action arising from the drowning of a child. The district court decision is Moon v. Cincinnati Ins. Co. 975 F. Supp. 2d 1326 and the Court of Appeals decision can be found at 2014 WL 5410298, C.A.11 (Ga.).

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Georgia Legislature Passes Bill to Regulate Pre Suit Time Demands

The Georgia Legislature recently passed House Bill 336 to regulate and establish procedures for pre suit policy limits time demands in motor vehicle accident claims. The bill was initially drafted by a group of yet to be identified plaintiff and insurance defense lawyers and quickly passed both the House and the Senate. The bill has been submitted to Governor Nathan Deal for his signature.  Once signed into a law a new code section , O.C.G.A 9-11-67.1, will be enacted that specifies certain requirements for a valid pre suit time demand.

HB 336 stems from a recent tide of policy limits time demands based upon the 1992 Supreme Court’s ruling in Southern General vs. Holt, 262 Ga.267, 416 S.E.2d 274 (1992), which established how a plaintiff, through his lawyer, could set up and bring a bad faith claim against his or her insurer if it did not agree to pay policy limits within an arbitrary deadline fixed by plaintiff’s counsel. If the demand was not paid within the deadline and the underlying verdict exceeded policy limits, the insured could then file an action or choose to assign the same to the underlying plaintiff against the insurer for the entire amount of the judgment plus interest, effectively removing policy limits from the case. Juries then consider whether the insurer acted in “bad faith” in failing to protect its insured by not paying the demand and exposing him or her to an excess judgment. The Georgia Supreme Court in Cotton States v. Brightman 276 Ga. 683,580 S.E. 2d. 519 (2003), then clarified the standard for examining whether an insurer was reasonable in not paying policy limits in response to a time limited demand to include negligence as well as bad faith.

In recent years, assignments have become less common. More often, the insured brings an action against the insurer seeking punitive damages, attorney’s fees and costs and any other compensatory damages that arise for the failure to pay the demand including damages to credit, mental anguish as well as for the amount of the judgment and interest. Plaintiff’s attorneys have the advantage of representing wronged insureds in front of juries who typically do not love insurance companies. In short, claims were transformed into potentially huge recoveries for both underlying plaintiffs and insureds where policy limits were as low as $25,000.

In this writer’s experience, Holt set up letters from lawyers seeking jackpot justice have exploded. Deadlines as low as 5 to 10 days craftily timed to include weekends and holidays and purposeful confusion over the exact date the deadline expires have become common. In addition, recent rulings by the Georgia Appellate Courts requiring strict compliance with the terms of the demand have led to Holt time demands specifying numerous and sometimes ambiguous conditions regarding the form and language of releases, lien satisfaction and delivery of payment. Often, these conditions are hidden in lengthy time demands in order to get the insurer to make an offer for policy limits that question liens or other matters that is deemed to be a counter offer and a rejection of the time demand. Last, seasoned trial lawyers have skillfully marketed themselves as insurance bad faith experts, encouraging attorneys to set up insurers with Holt demands so they can pursue lucrative bad faith actions when excess verdicts result.

HB 366 seeks to establish procedures for pre suit time demand in only motor vehicle accident cases. The new codes section only applies to “causes of action for personal injury, bodily injury or death arising from the use of a motor vehicle after 7-1-2103.” The demand must be in writing, sent either by certified mail or statutory overnight mail return receipt requested  and contain the following material terms:

1.      A 30 day time period from receipt of the offer in which the demand must be accepted;

2.      The amount of the payment;

3.      The party or parties to be released;

4.      The type of release to be accepted in exchange for payment;

5.      The claims to be released.

The code section also states that the insurer “shall have the right to seek clarification regarding terms, liens, subrogation claims, standing to release claims, medical bills, medical records and other relevant facts without this attempt to seek “reasonable clarification” being deemed to be a counter offer and an rejection of the demand. Last, the code section specifies forms of payment that are acceptable.

The passage of this bill is a welcome first step in providing structure to pre suit time demands and hopefully will curb the use of tricky and excessive tactics to remove policy limits in claims. However, it must be noted that the new code section does not apply to cases that do not involve car accidents and after suit is filed, anything goes. In addition, the code section has been characterized as flawed and a mere “Band-Aid on a sucking chest wound” since it does not provide any caps on penalties or attorney’s fees as in the case of most other forms of insurance bad faith in Georgia. Expect more lobbying from the insurance and business industries to expand the scope of the statute as well as strong and organized opposition from trial lawyers who view this as a “perceived problem.”

In the meantime, expect a wave of pre suit time demands for claims that arising for car accidents that occur before 7-1-13. This writer recommends that claims handlers as well as attorneys  continue to carefully read time demands and seek early verbal clarification form plaintiffs’ attorneys as to the terms of their demands and what releases they will accept. If more information is needed to respond to the demand, request the information and an extension of time to obtain and review demands well in advance of any deadlines. Most importantly,  ALWAYS inform the insured of the time demand, send then a copy and request their input.