Cosgrove v. National Fire & Marine Insurance Company
ORDER denying 127 Plaintiff's Motion for a Hearing and granting 121 Plaintiff's Motion to Compel. Defendant shall produce its communications with the Graif firm to the extent those communications occurred prior to September 17, 2013 and addressed the coverage issues in the underlying case on which defendant based its settlement decisions. Signed by Judge H Russel Holland on 9/2/16.(LSP)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
KAREN COSGROVE, a single person,
NATIONAL FIRE & MARINE INSURANCE )
COMPANY, a foreign insurer,
Motion to Compel
Plaintiff moves to establish waiver of the attorney-client privilege as to communications between defendant and its coverage counsel regarding settlement of the underlying
case and to compel production of all documents containing such communications.1 This
motion is opposed.2 Oral argument was requested3 but is not deemed necessary.
Plaintiff is Karen Cosgrove.
Defendant is National Fire & Marine Insurance
Docket No. 121.
Docket No. 125.
Docket No. 127.
Plaintiff hired WTM Construction to remodel her home. Plaintiff alleges that “there
were various defects in, and damage arising out of, the remodeling work.”4 Plaintiff filed
suit in state court against WTM and William and Lana Mitzel, the owners of WTM, seeking
damages arising out of the remodel work (the underlying case).5 WTM was insured by
defendant and defendant defended WTM under a reservation of rights.6 The firm of Righi
Hernandez (Righi) was retained by defendant to represent WTM.7
In October 2010, Righi advised defendant that “[w]e believe the settlement value of
[the underlying] case is in the range of $85,000 to $110,000, inclusive of attorney’s fees and
cost[s].”8 On December 28, 2010, Righi “request[ed] ... authority to provide Plaintiff with an
Offer of Judgment for $110,000.”9 In March 2011, Righi “recommend[ed] authority up to
$105,000 to submit an Offer of Judgment to Plaintiff....”10
Complaint at 2, ¶ 8, Exhibit A, Notice of Removal, Docket No. 1.
Id. at ¶ 9.
Id. at ¶ 10.
Letter from National Fire to WTM Construction, Inc. at 1, Exhibit D, Motion to
Compel [etc.], Docket No. 121.
Letter from Righi Hernandez to Anne Rohling at 11, Exhibit E at 12, Motion to
Compel [etc.], Docket No. 121 (emphasis omitted).
Letter from Righi Hernandez to Anne Rohling at 8, Exhibit F, Motion to Compel
[etc.], Docket No. 121.
Letter from Righi Hernandez to Anne Rohling at 9, Exhibit E at 23, Motion to
Compel [etc.], Docket No. 121.
In February 2011, plaintiff made a $109,000 Offer of Judgment and Righi requested
“authority of up to $109,000 with which to negotiate a settlement.”11 Defendant rejected this
offer. Plaintiff contends that there is no documentation in the claims file as to why the offer
In late 2011 or early 2012, defendant retained the firm of Graif Barrett & Matura to
provide advice about coverage under the WTM policy.
In January 2012, the parties mediated the underlying case. Plaintiff contends that the
Graif firm was involved in the mediation. Anne Rohling, defendant’s adjuster who was
handling the case, requested $23,000 in settlement authority.12 Rohling had also done a case
analysis pursuant to which she estimated the value of the underlying case at $74,000.13
Rohling testified that she could only speculate that the difference between the $23,000
amount and $74,000 amount was based on a discussion with Rick Ratz, her supervisor.14
Defendant ultimately offered $30,000 to settle the case during the mediation, “$8,000
of which was National Fire money, and 22,000 was in conjunction with moneys that had
Letter from Richard L. Righi & Gregory E. Williams to Anne Rohling at 2, Exhibit
H at 3, Motion to Compel [etc.], Docket No. 121.
Videotaped Deposition of Anne Rohling at 163:5-8, Exhibit I, Motion to Compel
[etc.], Docket No. 121.
Id. at 175:17-19.
Id. at 176:5-6.
been collected from subcontractors.”15 In August 2012, defendant made an offer of judgment
in the underlying case of $22,500.16
Rohling testified that defendant’s settlement decisions were based on a determination
that there was a 80 percent chance that defendant would be able to defeat coverage based
on exclusions in WTM’s policy.17 Rohling testified that in coming up with that number (the
80% chance of success), she considered “[h]ow we consistently handle[d] the issue in the
past, and – in general, how we consistently handle[d] an issue in the past from court to court,
state to state, and in general, what – what advice the coverage counsel has contributed.”18
Rohling testified that she did not “recall if I came up with that number based on something
we normally do or if I talked to coverage counsel about it.”19 She also testified that
“[g]enerally, that would be something I would discuss with coverage counsel. Specifically
[as to the underlying case], I do not know.”20
Deposition of Rick Ratz at 31:19-32:3, Exhibit J, Motion to Compel [etc.], Docket No.
Letter from Richard L. Righi to Anne Rohling (dated Jan. 22, 2013) at 2, Exhibit L,
Motion to Compel [etc.], Docket No. 121.
Rohling Deposition at 179:19-180:3, Exhibit I, Motion to Compel [etc.], Docket No.
Id. at 188:10-15.
Id. at 180:14-17.
Id. at 180:22-24.
Rohling testified that it would be consistent with defendant’s practice for the analysis
of how she determined that defendant had an 80 percent chance of success to be documented in the claim file.21 Rohling testified that it is possible that the redacted portion of her
case summary22 might provide some indication as to how the 80 percent number was
reached.23 At her deposition, Rohling agreed that “as part of the duty of good faith, an
insurer must document its investigation and its evaluation in such a way that the timing and
adequacy of what it did can be independently reviewed[.]”24
In January 2013, with trial in the underlying case just three months away, Mr. Righi
requested $120,000 in settlement authority because he could not “guarantee that I will be
able to pull a rabbit out of my hat on this one.”25
In April 2013, plaintiff, WTM, and the Mitzels settled the underlying case and in
September 17, 2013, “they executed a Morris agreement....”26 “Under the Morris Agreement,
WTM assigned to Cosgrove all of its rights, title, interests, proceeds, causes of action, and
Id. at 183:22-184:6.
Exhibit A at NFM-Cosgrove 03350, Motion to Compel [etc.], Docket No. 121.
Rohling Deposition at 177:3-5, 184:17-186:24, Exhibit I, Motion to Compel [etc.],
Docket No. 121.
Id. at 62:1-8.
Letter from Richard Righi to Anne Rohling at 2, Exhibit L, Motion to Compel [etc.],
Docket No. 121.
Complaint at 2, ¶ 12, Exhibit A, Notice of Removal, Docket No. 1.
claims of any kind whatsoever related to the project that WTM may have had against its
insurers, including [defendant].”27
Plaintiff alleges that pursuant to the Morris Agreement, the state court “entered a
stipulated judgment ... in favor of Cosgrove ... in the amount of $443,690.”28 “Under the
Morris Agreement, the parties agreed that if Cosgrove recovered an amount less than
$443,690 from National Fire, WTM would be required to make payment to Cosgrove in the
amount of up to $25,000 for damages sustained by Cosgrove relative to the remodeling
Plaintiff alleges that defendant then intervened in the underlying case and after a
reasonableness hearing, the state court “determined that the net reasonable settlement
amount ... to which [defendant] may be bound was $254,373, thus ensuring that Cosgrove
would collect less than the $443,690 agreed upon amount and that WTM would be required
to pay $25,000 to Cosgrove.”30 Plaintiff alleges that she has demanded payment of $254,373
from defendant but that defendant has refused to make any payment.31
Id. at 3, ¶ 13.
Id. at ¶ 14.
Id. at ¶ 15.
Id. at ¶ 19.
Id. at 3-4, ¶ 20.
Based on these allegations, plaintiff has asserted a breach of contract and a bad faith
claim against defendant. Plaintiff alleges that defendant has breached the WTM insurance
policy “by failing [to] meet its indemnity obligations under the insurance policy and by
failing to make payment for the $254,373 judgment.”32 Plaintiff also alleges defendant has
breached the WTM insurance policy
by waiting an unreasonable amount of time to make a determination as to indemnification and/or giving untimely notice to
WTM that it would not indemnify it for any damages awarded
Cosgrove or judgment entered against WTM, thereby prejudicing and damaging WTM by precluding it from (a) settling the
matter for a lesser amount, (b) avoiding a larger judgment, and
(c) avoiding the $25,000 payment to Cosgrove.
Plaintiff’s bad faith claim is also based on the allegation that defendant waited “an
unreasonable amount of time to make a determination as to indemnification and/or by
untimely giving notice to WTM that it would not indemnify it for any damages awarded to
Cosgrove or for judgment entered against WTM[.]”34 Plaintiff also alleges that it was a
breach of the duty of good faith for defendant to seek “to reduce the amount of judgment
from $443,690 to $254,373, thereby ensuring that WTM would be liable to Cosgrove for the
Id. at 4, ¶ 26.
Id. at ¶ 27.
Id. at 4-5, ¶ 29.
$25,000 payment.”35 Plaintiff further alleges that defendant breached its duty of good faith
when it rejected her $109,000 settlement offer, which was less than the policy limits.36
Plaintiff alleges that defendant “gave more consideration to its interests than WTM’s and
thereby placed its interests before WTM’s when it rejected the offer – an offer that was
predicated on WTM’s and National Fire’s own assessment of the damages Cosgrove had
incurred as a result of WTM’s conduct on the project.”37
Plaintiff has requested that defendant produce its communications with the Graif firm
to the extent that the communications 1) occurred during the underlying case and 2)
addressed the coverage issues on which defendant based its decision not to settle the
underlying case. Defendant has asserted attorney-client privilege as to its communications
with the Graif firm.38 Plaintiff now moves to compel production of these communications.
Plaintiff contends that the Graif communications are relevant to her bad faith claim.
“An insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a
claim (an ‘objective’ test), and either knows it is acting unreasonably or acts with such
reckless disregard that such knowledge may be imputed to it (a ‘subjective’ test).” Nardelli
Id. at 5, ¶ 30.
Id. at 5-6, ¶¶ 34-40.
Id. at 6, ¶ 38.
See Privilege Log, Exhibit B, Motion to Compel [etc.], Docket No. 121.
v. Metropolitan Group Property and Cas. Ins. Co., 277 P.3d 789, 794–95, (Ariz. Ct. App.
Defendant contends that its conduct was objectively reasonable and that its
settlement decisions were subjectively reasonable.
Defendant does not necessarily dispute that the Graif communications may be
relevant to its claim that its settlement decisions were subjectively reasonable. Rather,
defendant contends that it should not be compelled to produce these communications
because they are subject to the attorney-client privilege.
“In diversity actions, questions of privilege are controlled by state law.” In re
California Public Utilities Com’n, 892 F.2d 778, 781 (9th Cir. 1989). “The attorney-client
privilege is absolute. It is not qualified like the deliberative process privilege or the work
product doctrine. Thus, if a communication is privileged, it normally cannot be obtained in
discovery no matter how relevant it might be to the claims or defenses at issue in the action.”
Arizona Dream Act Coalition v. Brewer, No. CV–12–02546–PHX-DGC, 2014 WL 171923, at
*4 (D. Ariz. Jan. 15, 2014).
Plaintiff argues that defendant has impliedly waived its privilege as to the
communications in question. In Arizona, courts consider three factors to determine whether
there has been an implied waiver of privilege:
“(1) [whether the] assertion of the privilege was a result of some
affirmative act, such as filing suit, by the asserting party; (2)
[whether] through this affirmative act, the asserting party put
the protected information at issue by making it relevant to the
case; and (3) [whether] application of the privilege would have
denied the opposing party access to information vital to his
Burch & Cracchiolo, P.A. v. Myers, 351 P.3d 376, 382 (Ariz. Ct. App. 2015) (quoting State
Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169, 1174 (Ariz. 2000)).
“[T]here is no question that express reliance on an advice-of-counsel defense would
constitute an implied waiver....” Lee, 13 P.3d at 1175. “The question here is whether and
when an assertion short of an express advice-of-counsel defense waives the privilege.” Id.
In Lee, the court found that when an insurer defends a bad faith claim exclusively on
the basis that its actions were objectively reasonable and “merely ask[s] its expert witness[es]
to evaluate the reasonableness of its conduct under the statutes, the case law, and the policy
language,” the insurer has not impliedly waived the attorney-client privilege because it has
not put any advice it received from counsel at issue. Id. at 1177. But, the court found that
an insurer impliedly waives the privilege when it
has asserted some claim or defense, such as the reasonableness
of its evaluation of the law, which necessarily includes the
information received from counsel. In that situation, the party
claiming the privilege has interjected the issue of advice of
counsel into the litigation to the extent that recognition of the
privilege would deny the opposing party access to proof
without which it would be impossible for the factfinder to fairly
determine the very issue raised by that party. We believe such
a point is reached when, as in the present case, the party
asserting the privilege claims its conduct was proper and
permitted by law and based in whole or in part on its evaluation
of the state of the law. In that situation, the party’s knowledge
about the law is vital, and the advice of counsel is highly
relevant to the legal significance of the client’s conduct.
Id. at 1179. As the court explained,
We assume client and counsel will confer in every case, trading
information for advice. This does not waive the privilege. We
assume most if not all actions taken will be based on counsel’s
advice. This does not waive the privilege. Based on counsel’s
advice, the client will always have subjective evaluations of its
claims and defenses. This does not waive the privilege. All of
this occurred in the present case, and none of it, separately or
together, created an implied waiver. But the present case has
one more factor—State Farm claims its actions were the result of
its reasonable and good-faith belief that its conduct was permitted by law and its subjective belief based on its claims agents’
investigation into and evaluation of the law. It turns out that the
investigation and evaluation included information and advice
received from a number of lawyers. It is the last element,
combined with the others, that impliedly waives the privilege.
State Farm claims that its actions were prompted by what its
employees knew and believed, not by what its lawyers told
them. But a litigant cannot with one hand wield the
sword—asserting as a defense that, as the law requires, it made
a reasonable investigation into the state of the law and in good
faith drew conclusions from that investigation—and with the
other hand raise the shield—using the privilege to keep the jury
from finding out what its employees actually did, learned in,
and gained from that investigation.
Id. at 1183.
Here, defendant’s subjective reasonableness claim is based on a determination that
there was an 80 percent chance of defeating the insured’s claims based on policy exclusions
in the WTM policy. Rohling testified that she could not specifically recall if she relied on
coverage counsel’s advice to make this determination, but that she would generally have
discussed such a matter with coverage counsel. Given that the 80% chance of success
determination involves an evaluation of the law, it is highly likely that Rohling’s
determination was informed by counsel’s advice. In making her determination, which
involved a legal evaluation, it is more probable than not that Rohling not only consulted the
Graif firm, but necessarily relied on the information and advice she received.
“Under Lee, to waive the attorney-client privilege, a party must make an affirmative
claim that its conduct was based on its understanding of the advice of counsel—it is not
sufficient that the party consult with counsel and receive advice.“ Everest Indemnity
Insurance Co. v. Rea, 342 P.3d 417, 419 (Ariz. Ct. App. 2015). By arguing that its settlement
decisions were subjectively reasonable based on its adjustor’s evaluation of the law,
defendant has made an affirmative claim that is almost assuredly based on Rohling’s
understanding of the advice she received from coverage counsel. “[W]hen an insurer raises
a defense based on factual assertions that, either explicitly or implicitly, incorporates the
advice or judgment of its counsel, it cannot deny an opposing party the opportunity to
discover the foundation for those assertions in order to contest them.” Mendoza v.
McDonald’s Corp., 213 P.3d 288, 302 (Ariz. Ct. App. 2009). Because defendant has raised a
defense that is highly likely to have incorporated the advice or judgment of its coverage
counsel, defendant cannot shield its communications with the Graif firm. It would be unfair
to not give plaintiff an opportunity to discover what advice Rohling might have received
from coverage counsel.
In sum, the court finds that defendant’s affirmative act of claiming that its conduct
was subjectively reasonable has put its communications with the Graif firm at issue and that
this information may be vital to plaintiff’s case. Thus, defendant has impliedly waived the
attorney-client privilege as to its communications with the Graif firm to the extent those
communications addressed the coverage issues in the underlying case on which defendant
based its settlement decisions. But plaintiff is only entitled to those communications that
pre-date the Morris Agreement. Any communications that occurred after the Morris
Agreement was executed are unlikely to be relevant to plaintiff’s bad faith claim.
Plaintiff’s motion for a hearing39 is denied. Plaintiff’s motion to compel40 is granted.
Defendant shall produce its communications with the Graif firm to the extent those
communications occurred prior to September 17, 2013 and addressed the coverage issues in
the underlying case on which defendant based its settlement decisions.
DATED at Anchorage, Alaska, this 2nd day of September, 2016.
/s/ H. Russel Holland
United States District Judge
Docket No. 127.
Docket No. 121.
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