Tackett v. State Farm Fire and Cas. Ins. Co.

• Decision Date: 15 November 1994
• Docket Number: No. 58,1994,58
• Citation: 653 A.2d 254
• Parties: Billie TACKETT and Truman Tackett, her husband, Plaintiffs Below, Appellants, Cross-Appellees, v. STATE FARM FIRE AND CASUALTY INSURANCE COMPANY, Defendant Below, Appellee, Cross-Appellant. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 254

653 A.2d 254

Billie TACKETT and Truman Tackett, her husband, Plaintiffs Below, Appellants, Cross-Appellees, v. STATE FARM FIRE AND CASUALTY INSURANCE COMPANY, Defendant

Below, Appellee, Cross-Appellant.

No. 58, 1994.

Supreme Court of Delaware.

Submitted: Nov. 15, 1994.

Decided: Feb. 10, 1995.

Appeal from Superior Court. Affirmed.

Edmund Daniel Lyons, Aerenson, Ferrara & Lyons, Wilmington, for appellants, cross-appellees.

F. Alton Tybout, Tybout, Redfearn, & Pell, Wilmington, for appellee, cross-appellant.

Before VEASEY, C.J., WALSH and HOLLAND, JJ.

WALSH, Justice:

This is an appeal from the Superior Court following a jury verdict in favor of the plaintiffs-below, appellants, Billie Tackett ("Mrs. Tackett") and Truman Tackett, her husband (the "Tacketts"). The Tacketts based their claim on allegations of bad faith in the delayed payment of underinsured motorist coverage under a policy issued by the appellee, State Farm Mutual Fire and Casualty Insurance Company ("State Farm"). The Tacketts claim error in the Superior Court's directed verdict on their claim for intentional infliction of emotional distress and in its refusal to submit to the jury their claim for punitive damages. State Farm has cross-appealed from a pretrial ruling which required State Farm to disclose certain documents in the face of State Farm's assertion of attorney-client privilege and work product.

We conclude that a cause of action for the bad faith delay, or the nonpayment, of an insured's claim in a first-party insured-insurer relationship is cognizable under Delaware law as a breach of contractual obligations. In the absence of accompanying physical injury, however, there can be no recovery for emotional distress. While punitive damages may be recoverable for an intentional or malicious breach of a contract of insurance, the Superior Court correctly determined, as a matter of law, that such recovery was not warranted in this case.

With respect to State Farm's cross-appeal, we affirm the Superior Court's order requiring production of materials allegedly protected by the attorney-client privilege on the basis of waiver. We do not endorse the Superior Court's analysis in rejecting State Farm's work product assertion, but conclude that this material is equally subject to production under the circumstances of this case. Accordingly, we deny the cross-appeal as well.

I

In May, 1984, Billie Tackett was injured in an automobile accident caused by another driver's negligence. In settlement of her claim against the driver, Mrs. Tackett accepted $25,000, the policy limits, from the tortfeasor's liability insurer. Because she believed that the amount received did not fully compensate her for her injuries, she initiated a claim against State Farm for recovery under an uninsured/underinsured motorist coverage provision of her own policy. Initially, there was some dispute as to the amount of such coverage. After the Tacketts commenced litigation, however, State Farm agreed to reform its underinsured coverage to provide limits of $50,000 per person/$100,000 per accident on the policy.

On November 7, 1986, the Tacketts' counsel presented a demand to State Farm for the full $50,000 of underinsured coverage to settle Mrs. Tackett's claim for her injuries, as well as her husband's loss of consortium claim. The demand from the Tacketts' counsel presented proof that, disregarding future medical expenses or pain and suffering, Mrs Tackett would be unable to pursue her previous employment and would suffer a wage loss of more than $110,000 by the time she reached retirement age.

In an internal evaluation report dated November 17, 1986, Linda Walters, a State Farm Claims Representative, evaluated the Tacketts' demand and the supporting documentation. She concluded that, with additional supporting documentation, the claim had a value of $45,000 to $50,000. The claim superintendent, Rick Walls ("Walls"), therefore, placed a $50,000 reserve on the claim, but ordered an independent medical examination because of a suspicion that a prior accident contributed to Mrs. Tackett's condition. This examination was ordered despite the earlier advice of State Farm's outside counsel, F. Alton Tybout ("Tybout"), who reported "that there is not much more that can be done in the taking of additional discovery. The possible benefit of an independent medical examination is questionable." On November 18, Tybout had advised Walters that "the arbitrator would probably find the [Tackett's] claim had a value of $50,000 or more even though it has some obvious disabilities."

The independent medical examination sought by State Farm was performed by Dr. Dewey Nelson on January 9, 1987. Dr. Nelson reported to State Farm that Mrs. Tackett "does not have any impressive neurological signs," but that the 1984 accident did activate a prior back condition. State Farm then asked Dr. Nelson to elaborate on his findings. On February 27, 1987, Dr. Nelson advised State Farm that Mrs. Tackett could do some type of gainful employment without heavy lifting, twisting, turning or climbing and could perform "sedentary duties such as receptionist or secretarial activities."

In early March, 1987, State Farm's claim superintendent, Walls, authorized payment of $30,000, with an initial offer of $20,000. The Tacketts' counsel promptly rejected this offer and repeated his demand for the policy limits. In May, 1987, State Farm transferred Walls in the ordinary course of business and a new claim superintendent, W. Travers Rinehardt ("Rinehardt") assumed responsibility for the Tackett claim. After review of supporting documentation, Rinehardt concluded that State Farm had undervalued the claim and made a written offer of policy limits on June 12, 1987 to the Tacketts' attorney. The Tacketts eventually agreed to accept this amount, but without prejudice to their filing of a claim for bad faith delay. To that end, the Tacketts filed an amended complaint on August 12, 1987 seeking compensatory and punitive damages.

During the course of pretrial discovery, the Tacketts propounded interrogatories concerning State Farm's claims handling procedures and eventually sought production of the Tacketts' entire claim file. State Farm produced the file, but deleted nine items on the ground that such material was protected by the attorney-client privilege and/or the work product doctrine. The trial court ordered the documents produced for an in camera examination and, thereafter, ordered their production. Tackett v. State Farm Fire and Casualty, Del.Super., 558 A.2d 1098 (1988). It is this ruling which is the subject of State Farm's cross-appeal.

The Tacketts' bad faith claim proceeded to trial. The Tacketts argued at trial that State Farm's actions were taken in pursuit of a "Get Tough" policy which the company had established to limit what it viewed as an increase in bodily injury claims, including uninsured and underinsured motorist claims. State Farm contended that any delay in the payment of the Tacketts' claim was attributable to a failure by the Tacketts to furnish timely, supporting information and its belief that Mrs. Tackett's pre-accident physical condition contributed to her injuries. During the course of trial, the Superior Court ruled that Mrs. Tackett could not present evidence of, or recover damages for, emotional distress in the absence of proof of accompanying physical injury. Upon State Farm's motion, the trial court also barred recovery for punitive damages. The court ruled, as a matter of law, that punitive damages were not recoverable in a breach of contract action in which there was no showing of intentional or malicious conduct.

The jury was instructed that, if it were persuaded that State Farm had delayed payment of the Tacketts' claim in bad faith, it could award compensatory damages in the form of legal interest on the policy limits eventually tendered by State Farm. The jury returned a verdict for the Tacketts in the sum of $3,062.50. The Tacketts have appealed from the trial court's rulings which restricted the scope of recoverable damages.

II

Although the Superior Court's ruling on State Farm's attorney-client and work product claim is the subject of a cross-appeal, we will examine that ruling at the outset because, sequentially, it preceded the rulings at trial. Moreover, in the event the trial court erred in not upholding the assertions of privilege and immunity, documents subsequently produced should not have been available for the plaintiffs' use at trial, possibly invalidating that result.

This Court exercises de novo review on the question of whether a trial court correctly applied the attorney-client privilege, Citadel Holding Corp. v. Roven, Del.Supr., 603 A.2d 818, 825 (1992), and the work product doctrine. There is no factual dispute concerning the authenticity of the disputed documents and both parties agree that, prima facie, the documents were protected by the attorney-client privilege. The dispute centers on whether, as the Superior Court ruled, State Farm waived both its attorney-client privilege and its work product defense.

As previously noted, the question of protected documents arose in pretrial discovery. In paragraph 43 of their amended complaint, the Tacketts alleged:

The failure or refusal of State Farm to pay Plaintiffs' claim for the full $50,000.00 in benefits on the Underinsured Motorist provision of the above referenced policy was willful and deliberate on the part of the Defendant and without any reasonable justification. [emphasis added]

State Farm denied this allegation in its answer to the amended complaint, but did not provide any explanation for its denial. The plaintiffs propounded further interrogatories upon State Farm on August 21, 1987. One of these interrogatories read as follows:

Set forth all facts in support of any claim by State Farm that it had any "reasonable justification" in support of State Farm's decision to not pay...