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"Open Sesame" – Do Bad Faith Allegations In A First Party Lawsuit Mandate That Insurers Must Produce Their Entire Claims File?

September 01, 2006 BY Def Admin

In the vast majority of first party lawsuits, the plaintiff brings allegations of bad faith on the part of the insurer, in addition to the foundation claim for breach of contract.  The obvious reasoning is that this allows the possibility of significantly increasing the potential amount of money which the plaintiff may bring home. However, a bad faith allegation may also be used by plaintiffs as a tool to maximize discovery and obtain documents which otherwise might not be available.

The plaintiff wants access to the defendant insurer’s entire claim file and all other possible information from which the plaintiff might be able to cobble together an argument that insurer not only breached the contract, but that it did so while acting deliberately or recklessly.  To that end, plaintiff will often attempt to couple far-reaching discovery requests with assertions that – because this is a bad faith claim – the information is necessary and plaintiff is entitled to it.  This article concerns whether the naked allegation of bad faith alone entitles plaintiff to vast amounts of material including the entire claim file, and if not then where Georgia courts draw the line.

In Georgia, the baseline case is North Georgia Lumber & Hardware v. Home Insurance Company, 82 F.R.D. 678 (N.D. Ga. 1979).  In this arson case, North Georgia Lumber sued their insurance company alleging bad faith failure to pay.  During discovery, North Georgia Lumber requested the insurer’s entire investigatory file, which Home Insurance Company refused to produce because the file included personal evaluations and mental impressions of employees and agents.  In response, the plaintiff argued that, simply because it was alleging bad faith, all material in the investigatory file was included in the subject matter of the lawsuit and was discoverable.

The Northern District disagreed with North Georgia Lumber and declined to order production of the entire claim file.  Notably, the court held that “[t]he issue of defendant’s ‘bad faith’ may only be determined by the weakness or strength of its defense as manifested at trial,” not by any mental impressions of its employees or agents while investigating the claim.  North Georgia Lumber & Hardware, 82 F.R.D. at 680.  Instead, the court formulated an approach whereby any materials containing the mental impressions or personal evaluations of an insurer’s employees need not be produced unless the plaintiff can show a need or hardship great enough to justify overcoming the ordinary privilege.  The court likened this approach to that employed when evaluating the discoverability of work privilege material and documents prepared in anticipation of litigation.

This approach was fine-tuned in Carver v. Allstate Insurance Company, 94 F.R.D. 131 (S.D. Ga. 1982), another arson case in which the Southern District reviewed whether claim file information was privileged because it was prepared in anticipation of litigation.  In demonstrating a case-by-case approach to determining whether the claim file is privileged or discoverable, the court evaluated whether documents prepared by two claims representatives were protected under Federal Rule of Civil Procedure 26(b)(3), which provides that a party may not obtain documents prepared by another party in anticipation of litigation unless the party seeking the documents shows that it has a substantial need of the information and cannot obtain the substantial equivalent of the information through other means without undue hardship.

Judge Alaimo explained that the typical early stages of an insurance investigation into a claim are standard business routines which are not conducted with one eye on possible future litigation.  The court further noted that, on the other hand, at some point “an insurance company’s activity shifts from mere claims evaluation to a strong anticipation of litigation,” and this point is not fixed but rather varies according to the nature of the claim and investigation.  Carver, 94 F.R.D. at 134.  In Carver, Judge Alaimo determined that the point at which litigation was anticipated occurred when the investigation was assigned to a senior claims investigator due to the substantial size of the claimed loss and the indications of arson.  The claim file documents prepared by the initial insurance investigator were held to be discoverable, as they fell before the point of anticipation of litigation, but the claim file materials of the senior investigator were held to be privileged.  Because the plaintiff could not show a substantial need for this latter information which could not be obtained elsewhere, such as through a deposition, plaintiff could not compel its discovery despite the presence of the bad faith allegation.

In Joyner v. Continental Insurance Companies, 101 F.R.D. 414 (S.D. Ga. 1983), the court noted that an insurer’s investigatory claim file takes on additional relevance when bad faith damages are alleged.  The plaintiffs in Joyner lost their house in a fire, and brought suit against Continental for bad faith failure to pay after Continental denied the claim under belief that plaintiffs intentionally set the fire.  During discovery, plaintiffs requested all statements taken by the insurer’s employees during the investigation, which the defendant refused to produce under the grounds that the material was prepared in anticipation of litigation – which defendant claimed to be two days after the investigation began.  Unlike in Carver, here no depositions had yet been taken, through which plaintiffs and the court could have discerned which reports were actually prepared in anticipation of litigation.  Therefore, the court made an unusual ruling whereby it ordered the insurer to prepare abstracts of all documents requested by plaintiff, redacting any portions which would include mental impressions, conclusions, opinion, or legal theory.  Rather than resulting in a clear-cut victory for either side, Joyner instead illustrated that Georgia courts recognize some degree of privilege for an insurer’s claim file, even when bad faith allegations are present.

The process laid out in Carver for determining whether an insurer’s claim file was privileged from production was again employed with approval in Lett v. State Farm Fire & Casualty Company, 115 F.R.D. 501 (N.D. Ga. 1987).  In Lett, another arson case, the plaintiffs requested claim file documents related to the investigation of the fire, which the insurance company refused as being prepared in anticipation of litigation. Following Carver, Judge Forrester determined the point at which the likelihood of litigating the claim became substantial and imminent, and found that this occurred when the investigation was assigned to a Special Investigation Unit agent.  Therefore, the court ruled that any documents prepared after this point were prepared in anticipation of litigation.

Judge Forrester then moved to the second step, which required an evaluation as to whether plaintiffs made a showing of substantial need for the materials and undue hardship in obtaining the equivalent by other means.  Plaintiffs argued that by virtue of their bringing a bad faith claim, the entire claim file should be bared; they claimed that a bad faith claim necessarily requires evidence of the entire investigation, as contained in the claim file.  The court disagreed and emphasized Georgia law holding that bad faith is determined at the time of the trial, not at the time of the denial.  Moreover, the court found that plaintiffs did not show that the information sought was known exclusively by the insurer or that all facts necessary to the bad faith claim could not be elicited through depositions of defendant’s agents and employees.  Lett essentially concluded that bad faith allegations alone are not sufficient to mandate production of an insurer’s claim file materials prepared in anticipation of litigation.

Georgia insurers may breathe a sigh of relief knowing that the mere allegation of bad faith need not open up the entire investigatory claim file.  Instead, Georgia law indicates that a two-part approach will be utilized to determine first whether portions of the claim file will be privileged as being prepared in anticipation of litigation, and secondly whether the plaintiff has a substantial need for the information which cannot be obtained through other means.  From a practical standpoint, this underscores the importance of being able to turn to a distinct point in the investigation as being the moment when the facts and nature of the investigation led to the conclusion that litigation was likely imminent.  While Georgia law does not provide a definitive shield for claim file materials prepared after this point, it nonetheless does offer a reasonable opportunity for withholding some privileged documents from the eyes of plaintiffs.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)