TWENTY FORTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE SEPTEMBER 18th - 20th, 2013

TWENTY FORTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE SEPTEMBER 18th - 20th, 2013 LEGAL, PRACTICAL AND ETHICAL CONSIDERATIONS CONFRONTING SURETIES AND FIDELITY CARRIERS IN RESPONDING TO DISCOVERY REQUESTS FOR INFORMATION CONCERNING UNRELATED CLAIMS PRESENTED BY: SUSAN EVANS JONES, ESQ. Wolf, Horowitz & Etlinger, LLC 99 Pratt Street, Suite 401 Hartford, Connecticut 06103 Tel: (860) 724-6667 Fax: (860) 293-1979 THEA FOGLIETTA SILVERSTEIN Travelers Bond & Financial Products 1500 Market Street - Suite 2900 Philadelphia, PA 19102

LEGAL, PRACTICAL AND ETHICAL CONSIDERATIONS CONFRONTING SURETIES AND FIDELITY CARRIERS IN RESPONDING TO DISCOVERY REQUESTS FOR INFORMATION CONCERNING UNRELATED CLAIM FILES It is common for a surety to receive numerous claims under the same bond or against the same principal on different projects. Fidelity insurers may receive similar claims from different policyholders seeking coverage under analogous policy provisions and often deny various claims from different policyholders on the basis of similar exclusions. Typically, information on each of these claims is kept in separate claim files for each particular claim. A surety or fidelity carrier generally expects that, if a claim is in litigation, it will be required to disclose its claim file with respect to that particular claim. It generally does not expect that it will be required to disclose claims files relative to other claims. However, opposing parties often seek information on other claims through the discovery process. Such requests might include requests for information regarding all claims received under a particular bond or on a particular project, requests for information regarding all claims received on other bonded projects with the same principal, requests for information regarding claims involving the same bond language, requests for information regarding claims seeking coverage under similar fidelity policy provisions, and requests for information regarding claims where the fidelity carrier denied coverage on the basis of the same exclusion as the subject claim. The surety or fidelity insurer will typically object to requests for discovery of information regarding other claims on the basis that such information is not relevant to the subject claim and that such requests are overly broad and unduly burdensome. This paper addresses the legal, practical and ethical issues confronting sureties and fidelity carriers when objecting and responding to discovery requests for information on other claims. The scope and limitations of discovery are set forth in Federal Rule of Civil Procedure 26. State court rules may contain similar provisions defining the scope and limitations of discovery. Rule 26(b)(1) of the Federal Rules of Civil Procedure sets forth the scope of discovery and states, in pertinent part: Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party s claim or defense-- including the existence, description, nature, custody, condition and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible

evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(C). 1 Rule 26(b)(2)(C), which sets for the limitations on discovery, provides, in pertinent part: On motion or on its own, the court may limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it determines that:... (iii) the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues. 2 When discovery is sought from a surety or fidelity insurer on other claims besides the claim that is the subject of the litigation, a surety or fidelity carrier will want to consider the scope and limitations of discovery under the federal or state court rules in determining its ethical obligations to respond to such requests. In the surety context, a court considered whether a surety was required to disclose information regarding other claims in Green Construction Co. v. Kansas Power and Light Co. 3. An opposing party sought to have the surety respond in deposition to matters regarding other claims on construction performance bonds handled by the surety to which the surety raised a defense of lack of notice. 4 The surety objected, claiming that the request was burdensome and oppressive and that a great amount of labor time would be needed to adequately respond. The surety also objected on the basis that such information was not relevant. The surety represented that nearly 62,400 bond claims had been filed during the requested time period and that it did not have an index or filing code system for the claims. Therefore, production of the requested information would require manual examination of each of the claims files. The court stated that the critical analysis should be whether the need for such information, considering its relevancy and the nature of the case, outweighs the burden of the request. The court found that, although the claims histories might have some relevance, that relevancy was outweighed by the burden the request placed on the surety. 5 The court therefore granted the surety s request for a protective order. In the fidelity context, a court considered whether a policyholder was entitled to discover information regarding its fidelity insurer s treatment of similar claims of other policyholders in Retail Ventures, Inc. v. National Union Fire Insurance Co. of Pittsburgh. 6 The policyholder brought suit against National Union seeking coverage 1 Fed. R. Civ. P. 26(b)(1). 2 Fed. R. Civ. P. 26(b)(2)(C). 3 732 F.Supp. 1550 (D. Kan. 1990). 4 Id. at 1554. 5 Id. 6 No. 2:06-CV-443, 2007 WL 3376831 (S.D. Ohio Nov. 8, 2007).

under a computer fraud insurance policy for a computer hacking incident. The plaintiff sought discovery of, not only the claims file and underwriting file regarding its claim, but also of documents concerning claims made by other policyholders for coverage for computer fraud losses. The plaintiff argued that such information was central to the insurer s defenses. The insurer argued that the requests amounted to a burdensome fishing expedition, were irrelevant to the issues in the case, and that information regarding other claims was privileged, confidential, proprietary and subject to other insureds rights to privacy. The court held that the requests were overbroad and unduly burdensome and further noted it was not persuaded that information regarding claims of other policyholders was relevant to the plaintiff s claim. The court therefore denied the plaintiff s motion to compel production of information regarding a fidelity insurer s treatment of similar claims of other policyholders. 7 However, in BancInsure, Inc. v. Peoples Bank of the South, 8 a court held that information regarding other claims was subject to disclosure. The insurer had denied the insured s claims under a financial institution bond and directors and officers policy. The insurer brought a declaratory judgment action and the insured brought a counterclaim alleging bad faith claims in addition to a breach of contract claim. 9 The insured sought discovery of information regarding all other litigation in the prior five years involving bond or policy claims relating to alleged fraudulent activities by bank employees. The insured later agreed to limit its request to litigation in which the insured bank prevailed against the insurer. The insurer objected on the basis that such information was irrelevant and that compliance would be overly burdensome because it does not maintain a list of litigation categorized by subject or result and would have to manually search its files to obtain the requested information. 10 The court held the information sought was relevant and found the insurer had not met its burden of specifically articulating or establishing how each request was overly burdensome. 11 It ordered the insurer to produce the requested information on other claims, though it limited the request from five years to three years. 12 Courts have also considered whether information regarding other claims is discoverable in other insurance contexts, such as employment practices insurance, third-party liability, uninsured motorist coverage, disability insurance and health insurance, which may be instructive in the surety and fidelity arena. For instance, in St. Paul Reinsurance Co. v. Commercial Financial Corp., 13 a policyholder counterclaimed against its insurer alleging bad faith in a declaratory action brought by the insurer to determine coverage under an employment practices insurance policy. The policyholder sought to discover information regarding other bad faith claims brought against the 7 Id. at *5. 8 No. 3:11cv78-TSL-MTP, 2012 WL 139208 (S.D. Miss. Jan. 18, 2012). 9 Id. at *1. 10 Id. at *3. 11 Id. 12 Id. 13 197 F.R.D. 620 (N.D. Iowa 2000).

insurer. The court held that permitting such discovery would be to authorize a fishing expedition with little or no relevance to the merits of the bad faith claim. 14 In Moses v. State Farm Mutual Auto Insurance Co., 15 the plaintiff sought discovery of information regarding all no-fault claims handled by a particular insurance adjuster. The court held that this information was not relevant to the issues in the case, which it found were limited to the defendant s conduct regarding the plaintiffs claim for insurance benefits and the adequacy of the defendant s reasons for that conduct. The court held that the insurer s conduct regarding the insurance claims of others was of no consequence to the subject claim. 16 In Leksi, Inc. v. Federal Insurance Co., 17 a policyholder brought suit against several of its insurers seeking defense and indemnity under various insurance policies for lawsuits brought against it. The plaintiff sought discovery of information regarding the insurer s application of the same policy language to similar claims made by other insureds. The plaintiff argued such information was relevant to the insurers intent and interpretation of the policies. The court found that information regarding the insurers interpretation of the language of an identical policy in an identical situation would be relevant. However, it further reasoned that while the relevance of information regarding other insureds may be established, it was remote. Therefore, the court held that information regarding the files of other insureds was not discoverable because, although potentially remotely relevant, its production would be unduly burdensome and disproportionate to the litigation. 18 The court noted that the production of files of other insureds would not only involve enormous inconvenience and management difficulties, but would also entail a frightening potential for spawning unbearable side litigation, which the court viewed as defeating the spirit of the discovery rules. 19 In Missouri Pacific Railroad Co. v. Aetna Casualty & Surety Co., 20 the plaintiff sought discovery of information regarding other claims, arguing that this information would be relevant to demonstrate the insurer s interpretation of similar policy provisions. The court reasoned that the conduct of the insurer regarding other claimants would become relevant only if the policy terms were determined to be ambiguous and assuming the claims of others were predicated on substantial similar occurrences and pursuant to similar ambiguous policy provisions. 21 The court denied the plaintiff s motion to compel discovery of other claims without prejudice to its renewal if the court later found any policy terms ambiguous. 22 14 Id. at 643-44. 15 104 F.R.D. 55 (N.D. Ga. 1983). 16 Id. at 57. 17 129 F.R.D. 99 (D.N.J. 1989). 18 Id. at 105-06. 19 Id. at 106. 20 No. 3-93-CV-1898-D, 1995 WL 861146 (N.D. Tex. May 17, 1995). 21 Id. at *2. 22 Id. at *3.

In Fidelity & Deposit Co. of Maryland v. McCulloch, 23 the insured sought discovery of information regarding all lawsuits brought by or against other policyholders in which coverage was disputed and in which the relevant policy provisions were disputed. The insured argued this information might reveal inconsistent positions taken by the insurer and was relevant to whether the disputed policy language was ambiguous. 24 The court found the discovery requests amounted to nothing more than a fishing expedition and would run counter to Federal Rule of Civil Procedure 1, which requires that the rules be construed and administered to secure the just, speedy, and inexpensive determination of every action. 25 North River Insurance Co. v. Greater New York Mutual Insurance Co. 26 involved a dispute between a primary and excess carrier arising out of the handling of a personal injury action against the parties insured. The excess insurer alleged the primary insurer acted in bad faith in refusing to settle the personal injury action for within the policy limits, causing the excess insurer to ultimately settle the case for an amount far in excess of the primary policy limits after the underlying trial resulting in a verdict well in excess of the primary policy limits. 27 In discovery, the excess insurer sought information regarding any other bad faith actions brought against the primary insurer in the prior seven years. The primary insurer objected on the basis of relevancy. The court noted that any other bad faith cases would involve totally different facts and circumstances from the case before it. It further stated that such information was not only highly unlikely to be relevant to whether the primary insurer acted in bad faith in the subject case, but did not even appear reasonable calculated to lead to the discovery of admissible evidence. The court disallowed the discovery on prior claims, finding that such discovery was a fishing expedition, causing needless expense and burden to all concerned. 28 In Clark Equipment Co. v. Liberty Mutual Insurance Co., 29 the insured sought discovery of information on other environmental and delayed manifestation claims. The insurer argued that other claims raise too many other variables to be relevant. The insurer also submitted several affidavits detailing the massive burden involving time, effort, and expense, as well as the disruption of business operations, that would be imposed on [the insurer] if discovery of other policyholder claims would be allowed. 30 The court denied the discovery on other claims, finding that the existence of so many variables made the possibility of relevance too remote; the manner in which the claims of other policyholders was handled would create extended mini-trials; and such discovery would exceed the rational limits that must be set on the extent of discovery in complex litigation. 31 23 168 F.R.D. 516 (E.D. Pa. 1996). 24 Id. at 525. 25 Id. at 526. 26 872 F.Supp. 1411 (E.D. Pa. 1995). 27 Id. 28 Id. at 1412. 29 No. C.A. 89C-OC-173, 1995 WL 867344 (Apr. 21, 1995). 30 Id. at *2. 31 Id. at *3.

In Adams v. Allstate Insurance Co., 32 the insured brought an action against its automobile insurer alleging that the insurer acted in bad faith in connection with two claims for underinsured motorist benefits. The court held that past claims asserted by other insureds were not relevant to the bad faith causes of action at issue in the case. Likewise, in Kaufman v. Nationwide Mutual Insurance Co., 33 an insured brought suit against its insurance carrier in connection with an underinsured motorist claim and sought discovery of information regarding prior bad faith actions filed against the insurer over a seven year period. The court noted that the prior bad faith cases would necessarily involve totally different facts and circumstances. 34 It further found that, even if these prior bad faith cases had some relevance, the burden and expense of producing the information outweighed the likelihood of finding relevant material. 35 In Shellenberger v. Chubb Life America, 36 the insured sought information regarding each suit filed against the insurer for failure to pay disability benefits. The insured argued such information was relevant to show whether there was a repeated practice of denying disability benefits. The insurer objected on the basis that the request was overly broad and unduly burdensome and further argued that information regarding other claims was completely irrelevant to the issue of whether it acted in bad faith in this particular case. The court agreed with the insurer and stated that the fact of other suits was unlikely to be relevant to the issue of whether the insurer acted in bad faith with respect to the claim before the court. 37 In Steinkerchner v. Provident Life & Accident Insurance Co. 38, the insured claimed breach of a disability insurance policy as well as bad faith and violation of the state consumer protection act. The insured sought discover of each disability claim that the insurer had denied in the state in the last three years. The insurer objected on the basis that the request was overly broad, unduly burdensome and not reasonably calculated to lead to the discovery of admissible evidence. The insured moved to compel a response, arguing such information was necessary to show a pattern of improper denials, and the trial court granted its motion. 39 The insurer filed an application for an extraordinary appeal of this discovery order. 40 The appellate court held that the insurer s conduct regarding the unique claims of others was not relevant to whether it properly handled the claim in the subject case. It further found that the insured s speculative accusations about a course of conduct were not sufficient to demonstrate the relevance of the insured s handling of other claims. It therefore reversed the trial court s order allowing the discovery on other claims. 41 32 189 F.R.D. 331 (E.D. Pa. 1999). 33 No. CIV. A. 97-1114, 1997 WL 703175 (E.D. Pa. Nov. 12, 1997). 34 Id. at *2. 35 Id. 36 No. CIV. A. 95-4514,1996 WL 92092 (E.D. Pa. Feb. 29, 1996). 37 Id. at *3. 38 No. 01-A-01-9910-CH-00039, 1999 WL 734545 (Tenn. Ct. App. Sept. 22, 1999). 39 Id. at *1. 40 Id. at *2. 41 Id. at *3.

Marker v. Union Fidelity Life Insurance Co. 42 involved a claim by an insured under a health insurance policy for payment in connection with an elective appendectomy. The insurer denied the claim on the basis that the contract only covered sickness or accident and not an elective hospitalization. 43 In discovery, the insured sought identification of and information regarding all suits against the insurer arising out of denial or termination of benefits under health insurance policies as well as information regarding all claims related to appendectomies that were denied on the basis that the procedure was not necessitated by sickness or injury. The insurer objected on the basis of relevancy and undue burden. The insurer represented that responding to such discovery requests would consume approximately 100 hours and cost approximately $6,000 or more to create a computer software program which would identify such claims, after which each claims file would need to be manually reviewed. 44 The court found that the insured was not entitled to information regarding prior lawsuits filed against the insured. It reasoned that, considering the nature of the controversy, the complexity of the lawsuit, the importance of the discovery to the lawsuit and the monetary amount involved, the plaintiff failed to demonstrate a sufficient need for the information. It determined that the case at issue was not complicated, involved a small amount of money, and did not involve great issues of philosophic, social or institutional importance. Therefore, it held that information about other lawsuits or claims could not be deemed crucial to such a case. 45 It further reasoned that [m]ere incantations that an opponent has acted in bad faith will not convert a simple contract lawsuit into a license to burden or harass one s adversary. Conclusory claims of bad faith may not be the bases for conducting marginally relevant discovery which is by its nature burdensome. 46 In determining whether information regarding other claims is discoverable, a court will typically weigh the potential relevance of such information against the burden to the responding party. Whether information on other claims is considered relevant will depend in large part on the specific claims made by the opposing party and the defenses asserted by the surety or fidelity carrier. Whether or not bad faith claims are asserted against the surety or fidelity carrier will also be important in determining whether such information may be reasonably calculated to lead to the discovery or admissible evidence. Ethically, a surety or fidelity carrier will want to determine the specific nature of the burden it will face when responding to a request for information on other claims when objecting to such requests on the basis that they are overly burdensome. This likely includes consideration of how the files are organized and categorized, the number of files potentially implicated and the labor involved in searching for and reviewing the potentially implicated files. Furthermore, as indicated by several of the cases discussed 42 125 F.R.D. 121 (M.D.N.C. 1989). 43 Id. a 122. 44 Id. at 123. 45 Id. at 124-25. 46 Id. at 125.

in this paper, courts may be more receptive the surety or insurer s argument that requests for other claims are unduly burdensome where affidavits are submitted detailing precisely why the subject request is overly burdensome. It may be prudent to include in such affidavits a statement as to whether files are categorized or stored in such a manner as to be able to electronically search them to determine which are responsive to the subject requests. It also may make sense to include in such affidavits information regarding the anticipated labor involved in searching and reviewing other claim files, including the anticipated number of hours required and anticipated costs involved in conducting the review. As indicated in the cases discussed in this paper, courts have in some cases allowed discovery on other claims where the insurer has failed to demonstrate why responding to such requests would be burdensome. Therefore, the articulation of the precise nature of the burden of producing such information is not only ethically appropriate, but may increase the likelihood of success in defeating requests for information on other claims. As a practical matter, even if the surety or fidelity carrier is not requested to produce information regarding other claims, it may need to consider its ethical obligations to produce such information if it finds its way into the subject claim file. For instance, where a surety is handling several claims with the same principal, it may be that communications exist which reference several of these claims. The claims handler may write to the principal to request information regarding several of the claims. The principal may also take it upon itself to address several claims in one responsive letter. In these situations, the surety will want to consider whether it has an ethical duty to produce such information even if the opposing party has not sought discovery on other claims. If reference to other claims exists in the same document as information regarding the subject claim, this information may be discoverable. A surety or fidelity carrier can seek to avoid such unwanted disclosure of information on other claims by keeping each communication isolated to a particular claim. While it may be more timeconsuming to send six emails to a principal each requesting more information on a particular claim as opposed to sending one email referencing all of the claims, this separation of information will be helpful in avoiding unnecessary disclosure of information regarding other claims. When a surety or fidelity carrier receives requests from an opposing party for information regarding other claims, it must consider its ethical obligations to respond to such requests in light of the nature of the subject claim, the scope of the information sought and the applicable court rules defining the scope and limitations of discovery. A surety or fidelity carrier will often object when requests are made by the opposing party for information regarding other claims on the basis that the information sought is not reasonably calculated to lead to the discovery of admissible evidence and such requests are overly broad and unduly burdensome. The success of such objections will likely depend on the nature of the litigation, including the claims made by the opposing party, the defenses asserted by the surety or fidelity carrier and whether bad faith claims are asserted against the surety or fidelity carrier. The articulation of the nature of the burden faced is also critical to the success of such objections.

THEA FOGLIETTA SILVERSTEIN is Senior Claim Counsel with Travelers Bond & Financial Products, working out of the Philadelphia, Pennsylvania office. Thea received her law degree in 1987 from Whittier College School of Law in California, after which she practiced in the Phoenix, Arizona offices of Snell & Wilmer, LLP. Thea became a partner with Snell & Wilmer in 1993. Her practice focused in the areas of commercial and health care law and business litigation. Thea moved to Rome, Italy from 1998 to 2000 where she was associated with the Rome law offices of Simmons & Simmons Grippo. Upon returning to the United States, she practiced as a contract surety attorney and authorized agent with Atlantic Surety Consulting Company for AIG and Insurance Company of the State of Pennsylvania. In October 2006, Thea joined Travelers Bond and Financial Products as Claim Counsel in the Philadelphia office. Thea handles Contract Surety claim matters and provides legal support for underwriting in the South Central Territory. Thea is admitted to practice law in Pennsylvania, Washington, DC, Arizona, and California. SUSAN EVANS JONES is an associate with Wolf, Horowitz & Etlinger, LLC in Hartford, Connecticut. She focuses her practice on surety and fidelity law as well as insurance coverage and defense. Susan received her undergraduate degree from Skidmore College (B.A., cum laude, 1999). She received her law degree from the University of Connecticut School of Law (J.D., with high honors, 2004). Susan is a member of the American Bar Association (Tort and Insurance Practice Section, Fidelity and Surety Law Committee, Insurance Coverage Litigation Committee), Connecticut Bar Association, DRI and Connecticut Defense Lawyers Association. She regularly writes and presents on topics related to fidelity and surety law and is a past co-chair of the Fidelity Law Association Annual Conference. Susan is admitted to practice in Connecticut and Massachusetts. She can be reached by telephone at 860-724-6667 or by email at sevans@wolfhorowitz.com.