Koken v. One Beacon Ins. Co.

• Decision Date: 31 October 2006
• Citation: 911 A.2d 1021
• Parties: M. Diane KOKEN, Insurance Commissioner of the Commonwealth of Pennsylvania, in her official capacity of Liquidator of Legion Insurance Company, Plaintiff v. ONE BEACON INSURANCE COMPANY, CGU Insurance Company, General Accident Insurance Company of America, White Mountain Insurance Group, LTD and Commercial Union Insurance Company, Defendants.
• Court: Pennsylvania Commonwealth Court

Page 1021

911 A.2d 1021

M. Diane KOKEN, Insurance Commissioner of the Commonwealth of Pennsylvania, in her official capacity of Liquidator of Legion Insurance Company, Plaintiff v. ONE BEACON INSURANCE COMPANY, CGU Insurance Company, General Accident Insurance Company of America, White Mountain Insurance Group, LTD and Commercial Union Insurance Company, Defendants.

Commonwealth Court of Pennsylvania.

Argued August 31, 2006.

Decided October 31, 2006.

Ordered Published November 28, 2006.

COPYRIGHT MATERIAL OMITTED

Charlotte E. Thomas, Philadelphia, for plaintiff.

P. Kevin Brobson, Harrisburg, for defendant.

OPINION BY Judge COHNJUBELIRER.

M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania (Liquidator),¹ in her official capacity as Liquidator of Legion Insurance Company (Legion), filed a Complaint² to recover alleged preferential payments totaling $6,400,000 received by One Beacon Insurance Company (OneBeacon) and/or their agents,³ from Legion, on or about March 8, 2002. (Complaint, pp. 1-2.) OneBeacon has now filed an Application to Compel Answers to Interrogatories and Production of Documents seeking to compel the Liquidator to respond to and/or expound on its discovery requests.

I. FACTUAL BACKGROUND

Legion reinsured OneBeacon on three separate Certificates of Facultative Insurance (collectively, the Reinsurance Certificates) with: (1) Associated Restaurant Management (ARM); (2) Sentinel Real Estate Corporation; and (3) New Plan Excel Realty Trust. Disputes arose among the parties over Legion's performance as the reinsurer under these programs and, in 2001 and 2002, the parties entered into arbitration proceedings. The arbitration panels, in separate proceedings, ordered Legion to (1) establish an escrow fund in the amount of $2.5 million with Legion's law firm, and (2) create a letter of credit in the amount of $4.9 million, both as security for payment of an award to OneBeacon. (Complaint ¶ 25.) However, on or about March 6, 2002, OneBeacon and Legion entered into a Confidential Settlement Agreement and Release (Settlement Agreement) to resolve the three pending arbitrations by commuting Legion's assumed reinsurance obligations to OneBeacon under the programs. (Complaint ¶ 26.) Legion was released from all past, current and future obligations to OneBeacon for an amount certain—$6.4 million— "to satisfy the antecedent debts under the Reinsurance Certificates." (Complaint ¶ 26.) On or about March 8, 2002, Legion paid the debts by transferring, to OneBeacon, $3.9 million of funds deposited to support the letter of credit and the $2.5 million cash escrow account. (Complaint ¶ 27.)

On March 28, 2002, this Court entered an order placing Legion into rehabilitation. This rehabilitation was prompted by Legion's cash flow problems, caused by reinsurers that failed to make timely payments.⁴ Koken v. Legion Ins. Co., 831 A.2d 1196, 1205 (Pa.Cmwlth.2003) (Legion), affirmed, 583 Pa. 400, 878 A.2d 51 (2005). On August 29, 2002, and amended on October 18, 2002, the Rehabilitator filed a petition to place Legion into liquidation, alleging that: (1) it consented to its liquidation; (2) it was insolvent; and (3) "further rehabilitation of Legion . . . [wa]s futile and [could have] substantially increase[d] the risk of loss to creditors, policyholders and the public." Legion, 831 A.2d at 1201. About one year later, on July 28, 2003, this Court granted the Rehabilitator's petition and Legion was placed into liquidation. (Complaint ¶¶ 5, 6.)

On July 22, 2005, the Liquidator filed a Complaint against OneBeacon,⁵ claiming that funds paid as a result of the Settlement Agreement constitute preference payments, which are recoverable by the Legion estate. OneBeacon filed an Answer and New Matter on August 31, 2005. Thereafter, OneBeacon filed two sets of interrogatories: Discovery Set I on October 7, 2005,⁶ and Discovery Set II on April 25, 2006.⁷ To date, the Liquidator has produced 7,516 pages of documents, including the entire record on the liquidation petition.

On May 26, 2006, OneBeacon filed an Application to Compel Answers to Interrogatories and Production of Documents alleging the Liquidator failed and/or refused to respond to OneBeacon's requests in 3 specific areas: (1) the Insurance Department's dealings with Legion; (2) the Liquidator's decision to commence a preference action against OneBeacon; and (3) Legion's retrocessionaires.

The Liquidator served her answers and objections to OneBeacon's discovery requests, including the following reasons: (a) the requests are irrelevant, not reasonably calculated to lead to the discovery of admissible evidence, vague, ambiguous, overly broad and unduly burdensome; (b) the definition of "you" encompasses so many individuals and entities to make a specific answer impossible; (c) the "relevant time period" is from March 28, 2001, until the present (five years); (d) the Insurance Department, in its regulatory capacity, is not a party to this litigation and examination materials obtained by the Department are protected from disclosure by the regulatory privilege; and, (e) there has been a lack of responsive communications (specifically addressed to Discovery Request # 2).

The Court reviewed all materials and then heard argument regarding OneBeacon's Application to Compel on August 31, 2006.

II. LEGAL BACKGROUND

A. Discovery Rules

Pennsylvania Rule of Civil Procedure 4003.1 permits discovery "regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action." Pa. R.C.P. 4003.1. Discovery requests often require courts to consider whether the information sought is relevant, reasonable, and not privileged.

Relevancy depends upon the nature and the facts of the individual case, and any doubts are to be resolved in favor of relevancy. 6 Stnd. Pa. Prac. § 34:23. The party seeking discovery need not justify complete relevance in advance. 6 Stnd. Pa. Prac. § 34:24. Furthermore, the objector to a discovery request must demonstrate non-discoverability; in this case, the Liquidator has the burden of "establishing the right to refuse discovery." Id. However, if there is nothing in the record from which relevancy can be ascertained, this Court may place the burden of establishing relevancy upon the requesting party. Id.

Discovery requests must also be reasonable, which is "to be adjudged on the facts and circumstances of each case." 6 Stnd. Pa. Prac. § 34:32. Discovery is liberally allowed, and all doubts should be resolved in favor of permitting discovery. 6 Stnd. Pa. Prac. § 34:23. However, a court can prohibit the discovery of matters which have been stated too broadly or without proper specification, and would amount to a "fishing expedition." 6 Stnd. Pa. Prac. § 34:28.

Further, discovery requests are permitted for non-privileged information only. 6 Stnd. Pa. Prac. § 34:35. Privilege must be claimed, and the burden of demonstrating a privilege is on the party seeking to limit disclosure. 6 Stnd. Pa. Prac. § 34:36. All professional communications are considered privileged, however, and the burden of showing otherwise is with the party alleging the privilege is inapplicable. Id.

B. Pertinent Insurance Law

The Liquidator filed her Complaint "to recover preferential payments . . . received by [OneBeacon] from Legion on or about March 8, 2002." (Complaint pp. 1-2.) Section 530 of the Act defines a "preference" as:

[A] transfer of any of the property of an insurer to or for the benefit of a creditor, for or on account of an antecedent debt, made or suffered by the insurer within one year before the filing of a successful petition for liquidation under this article the effect of which transfer may be to enable the creditor to obtain a greater percentage of this debt than another creditor of the same class would receive.

40 P.S. § 221.30(a). As is pertinent here, Section 530 explains that, where a liquidation order is entered while an insurer is subject to rehabilitation, "transfers otherwise qualifying shall be deemed preferences if made . . . within one year before the filing of the successful petition for rehabilitation or within two years before the filing of the successful petition for liquidation, whichever time is shorter." Id. In such situations, the Act authorizes the Liquidator to avoid a preference under the following specific conditions:

Any preference may be avoided by the liquidator, if (i) the insurer was insolvent at the time of the transfer; (ii) the transfer was made within four months before the filing of the petition; [or] (iii) the creditor receiving it or to be benefited thereby or his agent acting with reference thereto had, at the time when the transfer was made, reasonable cause to believe that the insurer was insolvent or was about to become insolvent. . . . Where the preference is voidable, the liquidator may recover the property. . . .

40 P.S. 221.30(a).

C. "Insurance Regulatory Privilege"⁸

In the Liquidator's Answer to Defendants' Supplement to Compel Answers to Interrogatories and Production of Documents (Liquidator Answer, Discovery Set II), the Liquidator argues that various sections of the Act protect submissions to the Insurance Department as "confidential, not deemed a public record, and not subject to the Right to Know Act." (Liquidator Answer, Discovery Set II, ¶ 12B, p. 7.) The Liquidator cites, as examples, the following sections in support of her argument:

• Section 1710, "Prevention of insolvencies" —added by Section 19 of the Act of December 18, 1992, P.L. 1519, 40 P.S. § 991.1710;

• Section 337.8, "Disposition of unassigned funds"—added by Section 4 of the Act of February 17, 1994, P.L. 92, 40 P.S. § 459.8;

• Section 320, "Annual and other reports; penalties"—40 P.S. § 443;

• Section 905, "Examination reports"— added by Section 12 of the Act of December 18, 1992, P.L. 1469, 40 P.S. § 323.5;

• Section 679-A, "Confidentiality"—added by Section 2 of the Act of ...