St. Paul Reinsurance Company v. Commercial Financial Corp., No. C00-4080 (N.D. Iowa 12/19/2000), C00-4080.
| Decision Date | 19 December 2000 |
| Docket Number | No. C00-4080.,C00-4080. |
| Parties | ST. PAUL REINSURANCE COMPANY, LTD., CNA REINSURANCE COMPANY, LTD., and ZURICH REINSURANCE (LONDON) LIMITED, Plaintiffs, v. COMMERCIAL FINANCIAL CORP., Defendant, COMMERCIAL FINANCIAL CORP. and SECURITY STATE BANK, Counterclaim Plaintiffs, v. ST. PAUL REINSURANCE COMPANY, LTD., CNA REINSURANCE COMPANY, LTD., ZURICH REINSURANCE (LONDON) LIMITED, PROFESSIONAL CLAIMS MANAGERS, INC., and U.S. RISK UNDERWRITERS, INC., Counterclaim Defendants. |
| Court | U.S. District Court — Northern District of Iowa |
Despite the court's prior imposition of sanctions and warnings to the parties to make every effort to resolve their discovery disputes reasonably and informally, certain discovery issues have defied resolution without further judicial intervention. Those issues arise in the context of the defendant's counterclaim of "first-party bad faith" against the plaintiff insurers arising from their denial of the defendant's claim against an employment practices liability insurance policy. They concern the insurers' allegedly abusive assertions of attorney-client and work product privilege and their refusal to disclose any information about prior "bad faith" claims against them on the grounds of irrelevance and undue burdensomeness.
This lawsuit began on July 24, 2000, with the plaintiff insurers' filing of an action for declaratory judgment pursuant to 28 U.S.C. § 2201 for the purpose of construing the rights and legal relations of the parties arising from a contract of insurance entered into between St. Paul Reinsurance Company, Ltd., CNA Reinsurance Company, Ltd., and Zurich Reinsurance (London) Limited (hereinafter jointly referred to as the "London Insurers"), on the one hand, and Commercial Financial Corporation ("CFC"), on the other. In their declaratory judgment action, the London Insurers seek rescission of a contract for employment practices insurance between CFC and U.S. Risk Underwriters, Inc. ("U.S. Risk") based upon what the London Insurers allege were material misrepresentations by CFC in the process of applying for insurance coverage. Specifically, the London Insurers allege that CFC failed to disclose that, in October 1999, it had terminated three employees of third-party plaintiff Security State Bank, a bank CFC had recently acquired, as CFC should have done in connection with its February 9, 2000, request that Security State Bank be added to an existing employment practices liability insurance policy. The London Insurers contend that CFC failed to make the disclosure of the terminations, even though CFC knew that such information was material to the risk that the London Insurers assumed in issuing an employment practices liability insurance policy. The London Insurers therefore contend that CFC's actions constituted fraud. CFC responded on September 5, 2000, with its Answer, Counterclaim, and Third-Party Complaint, in which it asserts, inter alia, that the London Insurers acted in bad faith in denying CFC's claim against the employment practices liability insurance policy for coverage of the employment discrimination claims by the employees terminated from Security State Bank in October 1999.
Discovery in this case has been remarkably contentious. Indeed, in a published ruling, St. Paul Reins. Co., Ltd. v. Commercial Fin. Corp., ___ F. Supp.2d ___, 2000 WL 1737746 (N.D.Iowa Nov. 22, 2000), this court sua sponte imposed non-monetary sanctions for objections to discovery asserted by the London Insurers, which the court found were some of the most obstructionist and frivolous objections to discovery that the undersigned has ever seen, either in the practice of law, or on the bench, as a United States Magistrate Judge or United States District Court Judge. By a separate order, dated December 1, 2000, the court established a discovery plan and briefing schedule intended to provide for the resolution of all remaining discovery disputes.
At a telephonic conference on December 13, 2000, the parties advised the court that they have been unable to resolve amicably, reasonably, or informally two discovery disputes. Consequently, those matters are now before the court. The two remaining disputes concern the London Insurers' continued assertion of attorney-client and work product privilege as to various documents requested by CFC and the London Insurers' refusal to provide responses to CFC's discovery requests concerning prior bad faith claims against them on the grounds that the information concerning such bad faith claims is not relevant to CFC's own bad faith counterclaim or, if somehow relevant, that production of the requested information would be too burdensome. Because the parties contemplate a series of depositions beginning on or about December 20, 2000, to which the requested discovery responses would likely be relevant, the court has moved with speed, but not with haste, to provide as prompt a ruling on the present motions as due consideration of the merits would permit.
The court undertakes to resolve here the two persistent and vexing discovery issues remaining in this case. Although there is no necessary connection between the way the privilege issue is resolved, and the way the prior bad faith claims issue is resolved, there is a common thread between these discovery issues. That thread is that the resolution of both discovery issues may depend, at least in part, on the nature of CFC's bad faith counterclaim to which CFC contends that the materials at issue are relevant. Thus, the court will begin with a brief survey of the nature of CFC's bad faith counterclaim under Iowa law, then turn to separate consideration of the privilege and "other claims" issues.
The Iowa Supreme Court has recognized both "first-party" and "third-party" bad faith claims against insurers. See Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988). In Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 33-34 (Iowa 1982), the Iowa Supreme Court recognized the "third-party" variety of the tort — that is, a cause of action by a third party against an insurer asserting that the insurer acted in bad faith in its representation of its insured with regard to the third-party's claim against the insured's policy. Dolan, 431 N.W.2d at 790. Somewhat later, in Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988), the Iowa Supreme Court also recognized a "first-party" bad faith cause of action — that is, a cause of action by an insured against its insurer alleging that the insurer acted in bad faith in its treatment of the insured's insurance claim. See Stahl v. Preston Mut. Ins. Ass'n, 517 N.W.2d 201, 203 (Iowa 1994). A "first-party" variety of "bad faith" claim is at issue here.
As the Iowa Supreme Court has explained,
We adopted the first-party tort of bad faith in Dolan because "traditional damages for breach of contract will not always adequately compensate an insured for an insurer's bad faith conduct." 431 N.W.2d at 794; see, e.g., Nassen v. National States Ins. Co., 494 N.W.2d 231 (Iowa 1992). We explained that "the nature of the contractual relationship between the insurer and insured" justified this conclusion. Dolan, 431 N.W.2d at 794. Though we declined to recognize a fiduciary relationship in first-party situations, we determined that a bad faith tort would serve to redress the "inherently unequal bargaining power" between the insurer and insured. Id.
Stahl, 517 N.W.2d at 203. The Iowa Supreme Court has repeatedly stated the elements of proof for such a claim, as follows:
To be successful in a first-party bad faith claim, a plaintiff must prove by substantial evidence (1) the absence of a reasonable basis for denying the claim, and (2) that the defendant knew or had reason to know that its denial was without a reasonable basis. Sampson v. American Standard Ins. Co., 582 N.W.2d 146, 149 (Iowa 1998).
Seastrom v. Farm Bureau Life Ins. Co., 601 N.W.2d 339, 346 (Iowa 1999); Sampson v. American Standard Ins. Co., 582 N.W.2d 146, 149-150 (Iowa 1998); Morgan v. American Family Mut. Ins. Co., 534 N.W.2d 92, 96 (Iowa 1995); Brown v. Danish Mut. Ins. Ass'n, 550 N.W.2d 171, 175 (Iowa Ct. App. 1996); AMCO Mut. Ins. Co. v. Lamphere, 541 N.W.2d 910, 914 (Iowa Ct. App. 1995).
As to the first element of the tort,
An insurance company has the right to challenge claims that are "fairly debatable" without being subject to a bad faith tort claim. [Sampson, 582 N.W.2d] at 150. Thus, when an objectively reasonable basis for denying a claim exists, the insurer cannot be held liable for bad faith as a matter of law. Id. The debate may involve a dispute concerning an issue of fact or law. Id. The reasonable basis for denying the claim, however, must exist at the time the claim is denied. Id.
Seastrom, 601 N.W.2d at 346-47; Sampson, 582 N.W.2d at 150; Morgan, 534 N.W.2d at 96. "`The absence of a reasonable basis for denying the claim is an objective element.'" Sampson, 582 N.W.2d at 150 (quoting Morgan); Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d 250, 253 (Iowa 1991).
While the first element of the tort is an objective one, the second element — the "knew or reasonably should have known" element — is a "subjective" element. Brown, 550 N.W.2d at 175 (citing Reuter, 469 N.W.2d at 253). In Reuter, the Iowa Supreme Court considered the relevance of the insurer's investigation to the "knowledge" element:
Reuter argues State Farm must properly investigate and evaluate the medical expense claim before it can urge the claim is "fairly debatable." In response, State Farm cites Pirkl [v. Northwestern Mut. Ins. Ass'n, 348 N.W.2d 633 (Iowa 1984),] where in a first-party case, we said "the insurer has no clearly defined duty to investigate...
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