Evans v. United Services Auto. Ass'n

• Citation: 142 NC App. 18,541 S.E.2d 782
• Decision Date: 06 February 2001
• Docket Number: No. COA99-1162.,COA99-1162.
• Parties: Terry EVANS, Plaintiff, v. UNITED SERVICES AUTOMOBILE ASSOCIATION and USAA Casualty Insurance Company, Defendants.
• Court: North Carolina Court of Appeals

541 S.E.2d 782

142 NC App. 18

Terry EVANS, Plaintiff, v. UNITED SERVICES AUTOMOBILE ASSOCIATION and USAA Casualty Insurance Company, Defendants.

No. COA99-1162.

Court of Appeals of North Carolina.

February 6, 2001.

Robinson & Lawing, L.L.P., by Robert J. Lawing and H. Brent Helms, Winston-Salem, for plaintiff appellant-appellee.

Kilpatrick Stockton L.L.P., by James H. Kelly, Jr., and Susan H. Boyles, Winston-Salem, for defendant appellants-appellees. HORTON, Judge.

Both plaintiff and defendants appeal from orders partially granting requests for the production of documents. Such interlocutory discovery orders are generally not appealable because they usually do not affect a substantial right that would be lost if the trial court's rulings are not reviewed before final judgment. Mack v. Moore, 91 N.C.App. 478, 480, 372 S.E.2d 314, 316 (1988), disc. review denied, 323 N.C. 704, 377 S.E.2d 225 (1989). Plaintiff moves to dismiss defendants' appeal as interlocutory, while defendants argue that, because the trial court's orders require that they produce material protected by the attorney-client privilege, their appeal involves a substantial right. We agree with defendants' contention.

We note first that the trial court attempted to certify the matter for appeal pursuant to Rule 54(b) of the Rules of Civil Procedure, finding that its rulings affected a substantial right of defendants. The trial court's order was not, however, "final" in nature, and the trial court may not make an interlocutory order immediately appealable by a Rule 54(b) certification. Lamb v. Wedgewood South Corp., 308 N.C. 419, 425, 302 S.E.2d 868, 871 (1983). After careful consideration, however, we find that the trial court's order affects a substantial right of defendants under the holding of our Supreme Court in Sharpe v. Worland, 351 N.C. 159, 522 S.E.2d 577 (1999).

In Sharpe, the trial court ordered the production of documents concerning the participation of the defendant physician in a Physician's Health Program. Defendants physician and hospital appealed, contending that the records were protected by a statutory privilege and therefore were not subject to disclosure. This Court dismissed defendants' appeal, holding that it was interlocutory and did not affect a substantial right of defendants. In reversing our decision, our Supreme Court held that where "a party asserts a statutory privilege which directly relates to the matter to be disclosed under an interlocutory discovery order, and the assertion of such privilege is not otherwise frivolous or insubstantial, the challenged order affects a substantial right under [N.C. Gen.Stat. § ] 1-277(a) and 7A-27(d)(1)." Sharpe, 351 N.C. at 166, 522 S.E.2d at 581. Here, defendants assert the common law attorney-client privilege, and we believe that the reasoning of Sharpe applies. We hold, therefore, that defendants' appeal affects a substantial right which would be lost if not reviewed before the entry of final judgment and deny plaintiff's motion to dismiss the appeal.

In this case both plaintiff and defendants bring forward numerous assignments of error, presenting two important questions of first impression for our consideration: first, whether the plaintiff in an action for breach of contract and "bad faith" against an insurer is entitled to discover internal documents relating to the bad faith issue prior to demonstrating that defendants' policy provides coverage for plaintiff; second, whether and to what extent either "work product" immunity or attorney-client privilege protect an insurer's claim file (including internal memoranda, correspondence, and legal opinions) from discovery in a "bad faith" claim against the insurer.

I. Bifurcation of Discovery

Defendants argue that the trial court erred in requiring them to produce internal documents because there has not yet been a determination that the homeowners' policy issued by defendants provides coverage for plaintiff's claim.

We are aware that the appellate courts in several of our sister states have held that a plaintiff is not entitled to discover internal documents generated by an insurer until the plaintiff proves that there is coverage under the policy. See, for example, Bartlett v. John Hancock Mut. L. Ins. Co., 538 A.2d 997, 1000-01 (R.I.1988)

; and Allstate Ins. Co. v. Swanson, 506 So.2d 497, 498 (Fla.Dist.Ct. App.1987). The Federal District Court of Montana has also held that the coverage question must be resolved in favor of the plaintiff before the defendant insurer may be required to produce its claims file. In re Bergeson, 112 F.R.D. 692, 697 (D.Mont.1986). In a similar factual setting, however, the Federal District Court for the Middle District of North Carolina denied the defendant's motion to bifurcate coverage and bad faith claims for discovery purposes, holding that it is "better to require that the discovery of the underlying contract claim and the bad faith claim proceed at the same time...." Ring v. Commercial Union Ins. Co., 159 F.R.D. 653, 658 (M.D.N.C.1995).

Plaintiff argues that this question is not properly before us on this appeal, because it was not raised in the trial court. Rule 10(b)(1) of our Rules of Appellate Procedure provides in pertinent part that "[i]n order to preserve a question for appellate review, a party must have presented the trial court with a timely request, objection or motion, stating the specific grounds for the ruling sought if the specific grounds are not apparent." State v. Eason, 328 N.C. 409, 420, 402 S.E.2d 809, 814 (1991). In Eason, defendant contended that the trial court erred in denying his motion to suppress evidence seized pursuant to a search warrant because the officer serving the warrant allegedly failed to comply with the provisions of N.C. Gen.Stat. § 15A-252. In declining to consider defendant's argument, our Supreme Court stated that "[n]othing in the record before us indicates that the trial court had anything before it referring to the officer's alleged violation of the statute when it denied the defendant's motion. This Court will not consider arguments based upon matters not presented to or adjudicated by the trial tribunal." Eason, 328 N.C. at 420, 402 S.E.2d at 814.

Here, there was no request that the trial court bifurcate discovery or enter an order pursuant to the provisions of Rule 26(d) to sequence or time discovery so that discovery related to the bad faith issues would follow the completion of discovery related to the coverage issues. Thus, we must agree with plaintiff that this important issue is not properly before us at this time.

As it seems likely, however, that this question will continue to arise in the trial courts, we point out that our Rules of Civil Procedure permit the parties to use discovery methods in any sequence, unless the trial court "upon motion, for the convenience of parties and witnesses and in the interests of justice, orders otherwise...." N.C. Gen.Stat. § 1A-1, Rule 26(d)(1999). Thus, it appears that a party may move that the trial court in its discretion schedule discovery so that discovery related to a coverage question precedes discovery related to a bad faith claim. Before making its decision on a motion to bifurcate the issues or to sequence discovery, the trial court should consider, among other things, the factual context in which the question arises, as well as the existence and nature of the coverage dispute. Further, since the determination of the existence of coverage under an insurance policy is a question of law for decision by the trial court, the trial court may choose to expedite a hearing to determine the coverage question.

Because the bifurcation issue is not properly before us at this time, we overrule this assignment of error.

II. Immunity and Privilege Issues

"The primary purpose of the discovery rules is to facilitate the disclosure prior to trial of any unprivileged information that is relevant and material to the lawsuit so as to permit the narrowing and sharpening of the basic issues and facts that will require trial." Bumgarner v. Reneau, 332 N.C. 624, 628, 422 S.E.2d 686, 688-89 (1992). Rule 26 provides for a broad scope of discovery:

Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party....

N.C. Gen.Stat. § 1A-1, Rule 26(b)(1)(1999). The test of relevancy set out in Rule 26(b)(1) is much less stringent than the standard of relevancy found in N.C. Gen.Stat. § 8C-1, Rule 401 (1999). For discovery purposes, information need only be "reasonably calculated to lead to the discovery of admissible evidence...." N.C. Gen.Stat. § 1A-1, Rule 26(b)(1).

Both parties in the instant case appeal orders by the trial judge compelling and denying discovery of certain documents. These orders contain neither findings of fact nor conclusions of law. Instead, the orders list each document as discoverable or "protected from disclosure by the attorney-client privilege and/or are matters prepared in anticipation of litigation." The purpose of requiring findings of fact and conclusions of law by trial courts is to allow meaningful review by the appellate courts. O'Neill v. Bank, 40 N.C.App. 227, 231, 252 S.E.2d 231, 234 (1979). Rule 52(a)(2) of the North Carolina Rules of Civil Procedure states, however, that "[f]indings of fact and conclusions of law are necessary on decisions of any motion ... only when requested by a party...." N.C. Gen.Stat. § 1A-1, Rule 52(a)(2)(1999).

Here, the record does not reveal that either party requested that the trial judge make findings of fact. It has been repeatedly held by our Supreme Court that, "[w]hen the trial court is not required to find facts and make conclusions of law and does not do so, it is presumed that the court on proper evidence found facts to support its...