Atrium 5 Limited v. Butchee
Filing
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ORDER re 66 Discovery Dispute Conference. It is hereby ORDERED that Plaintiff Atrium 5 Limited produce unredacted copies of the in camera documents as they relate to commissions, fees, and reserve amounts, except to the extent that the records contain attorney-client privileged information. Signed by Magistrate Judge Reona J. Daly on 1/6/17. (dam)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
ATRIUM 5 LIMITED,
Plaintiff,
vs.
LATOIYA BUTCHEE,
Defendant,
CERTAIN UNDERWRITERS AT
LLOYD’S LONDON, et al.,
Third-Party Defendants.
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Case No. 3:16 CV 3 SMY/RJD
MEMORANDUM AND ORDER
DALY, Magistrate Judge:
This matter comes before the Court pursuant to the Discovery Dispute Conferences on
August 22, 2016 and on December 12, 2016. (Docs. 42, 66.) On January 4, 2016, Plaintiff
commenced this action seeking a declaration of rights with respect to an insurance policy issued
to Plaintiff. (Doc. 1.) On July 1, 2016, Defendant filed a third party complaint asserting breach
of contract, bad faith refusal to settle, and estoppel against Certain Underwriters at Lloyd’s,
London, (“Lloyd’s”) and negligence against Cutler Insurance Agency. LLC (“Cutler Insurance”).
(Doc. 26.) On August 22, 2016, during a discovery dispute conference, Magistrate Judge Philip
M. Frazier ordered Plaintiff to submit the documents identified in its privilege logs for in camera
review. (Doc. 42.) On November 18, 2016, the Court requested additional argument with regard
to the objections and privileges related to commissions, fees, and reserve amounts and set a
discovery dispute conference, which was held on December 12, 2016. (Doc. 61.)
FACT ALLEGATIONS
To provide the necessary context for this discovery dispute, the Court will provide a brief
overview of the fact allegations in the complaints. This case is based on a six-month insurance
policy on a vacant property issued by Plaintiff (the insurer) to Defendant (the insured) on June
18, 2015. (Doc. 1.) On May 26, 2015, the insured purchased a vacant property (the “Property”)
for $20,000. In the application for the insurance policy, the insured represented that she had no
loss exceeding $25,000 on any rented or owned property within three years; that the Property
was vacant; and that the Property was secured against unauthorized entry. The application
warned that providing false information could result in the denial of a claim or a void policy.
On July 3, 2015, the fire department responded to a fire in the building on the Property,
and the suspected cause of the fire was arson. The insured submitted a claim to the insurer, and
during the investigation, the insured testified that: (1) on February 25, 2015, she had purchased a
different property for $25,000, which she insured with Allstate for $100,000; (2) on March 3,
2015, that property sustained a fire loss; and (3) Allstate paid her approximately $100,000 for the
loss. The insured further testified that the prior owners had access to the building on the
Property through at least July 1, 2015. On September 2, 2015, the insurer denied the claim on
the Property, citing material misrepresentations in the insurance application. The insurer seeks a
declaratory judgment that the insurance policy is void due to the material misrepresentations
regarding the prior loss and due to breach of warranty with respect to the prior owner’s access to
the Property.
On July 1, 2016, the insured filed a third party complaint against Lloyd’s and Cutler
Insurance. (Doc. 26.) According to the insured’s complaint, Lloyd’s is the insurer, and Cutler
Insurance assisted Defendant in obtaining the policy at issue. The insured alleges claims of
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breach of contract, bad faith refusal to settle a claim, and estoppel against Lloyd’s and claims of
negligence against Cutler Insurance.
She specifically alleges that Cutler Insurance acted
negligently by submitting the application of insurance without asking the insured questions or
reviewing the application with the insured.
DISCUSSION
The parties’ arguments focus on the issue of relevance. Plaintiff also asserted in its brief
and privilege log that much of the information requested is proprietary and confidential. The
Court finds that these concerns can be addressed through a protective order. See Andrew Corp.
v. Rossi, 180 F.R.D. 338, 340 (N.D. Ill. 1998) (“to facilitate discovery, confidential information
is customarily made available under a protective order”).
Under the Federal Rules of Civil Procedure, “parties may obtain discovery regarding any
nonprivileged matter that is relevant to any party’s claim or defense.” Fed. R. Civ. P. 26(1).
“Information within this scope of discovery need not be admissible in evidence to be
discoverable.” Id.
“Rule 26 vests this Court with broad discretion in determining the scope of
discovery, which the Court exercises mindful that the standard for discovery under Rule 26(b)(1)
is widely recognized as one that is necessarily broad in its scope in order to allow the parties
essentially equal access to the operative facts.” Scott v. Edinburg, 101 F. Supp. 2d 1017, 1021
(N.D. Ill. 2000). The Seventh Circuit has recognized a trial court’s “broad discretion over
discovery matters.” Spiegla v. Hull, 371 F.3d 928, 944 (7th Cir. 2004).
Commissions
The insured seeks to discover the commissions paid for the insurance policy to the
coverholder, 1 J.M. Wilson, who entered into the insurance policy with the insured as the
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“Coverholder” means “a company or partnership authorised by a Managing Agent to enter into a contract or
contracts of insurance to be underwritten by the members of a syndicate managed by it in accordance with the terms
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insurer’s agent. The insurer argues that the commissions are irrelevant to the legal claims in this
action. The insured responds that the commissions are relevant with respect to J.M. Wilson’s
credibility, relationship with the insurer, and whether J.M. Wilson acted with due diligence.
The Court notes the questions raised by the complaints regarding the issuance of the
insurance policy and understands that J.M. Wilson had a role in issuing the insurance policy.
While the requested information may not be relevant to the insurer’s claims, it is relevant to the
insured’s claim of estoppel presented in the third party complaint. Under Illinois law, “equitable
estoppel may be defined as the effect of the person’s conduct whereby the person is barred from
asserting rights that might otherwise have existed against the other party who, in good faith,
relied upon such conduct and has been thereby led to change his or her position for the worse.”
Geddes v. Mill Creek Country Club, Inc., 751 N.E.2d 1150, 1157 (Ill. 2001). “The general rule
is that where a person by his or her statements and conduct leads a party to do something that the
party would not have done but for such statements and conduct, that person will not be allowed
to deny his or her words or acts to the damage of the other party.” Id. The insurer has
represented that J.M. Wilson acted as its agent in issuing the insurance policy, and the insured
alleges that the conduct of the insurer’s agent estops the insurer from asserting fraud as a
contractual defense. 2
Considering that the scope of the estoppel claim encompasses the conduct of the agent
that issued the policy, J.M. Wilson’s credibility and relationship with the insurer are relevant
of a Binding Authority.” Lloyds, https://www.lloyds.com/the-market/i-am-a/delegated-authority/compliance-andoperations/about-coverholders (last visited on December 16, 2016). As counsel for the insurer explained, J.M.
Wilson acted as the agent for the insurer, and Cutler Insurance acted as the agent for the insured.
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In the third party complaint, the insured specifically alleges that Cutler Insurance rather than J.M. Wilson acted as
the insurer’s agent. However, this discrepancy does not negate the relevance of this line of inquiry for purposes of
discovery; the gist of the estoppel claim is that the insurer (through an agent) induced her misrepresentations on the
policy application.
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issues. Therefore, the Court finds the commissions paid to J.M. Wilson are relevant to the claims
in this case for purposes of discovery.
Investigation Fees
The insured also seeks to discover the fees paid to various entities that participated in the
investigation of the insurance claim, including McLarens Global Claims, the local adjuster,
Atrium Risk Management Services, and the insurer’s law firm. As with the commissions, the
insurer argues that the fees paid are irrelevant to the legal claims before the Court, and the
insured argues that the fees are relevant to the relationship between the parties.
The insured alleges a claim of bad faith refusal to settle. The relevant factors for such
claims include the advice of the insurer’s adjusters and counsel, O’Neill v. Gallant Ins. Co., 769
N.E.2d 100, 106-07 (Ill. App. 2002), as well as the manner of investigation of the insurance
claim. Id.; Cook ex rel. Cook. v. AAA Life Ins. Co., 13 N.E.3d 20, 37 (Ill. App. 2014); Buais v.
Safeway Ins. Co., 656 N.E.2d 61, 64-65 (Ill. App. 1995). The Court understands these entities
participated in the investigation of the insurance claim in some capacity. Thus their conduct may
be relevant to the insured’s bad faith claim, and the fees paid may be relevant for purposes of
credibility or motive. Therefore, the Court finds the investigation fees are relevant to the claims
in this case for purposes of discovery. However, the Court also will grant the insurer’s request to
redact attorney-client privileged information from these records. To the extent invoices from
attorneys are to be produced, the insurer may redact specific entries describing the work
performed, leaving only the dollar amounts billed.
Reserve Amounts
The insured further seeks to discover the reserve amounts for the policy at issue. 3 The
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“A ‘loss reserve’ is, in simple terms, the insurer’s own estimate of the amount which the insurer could be required
to pay on a given claim. This not only helps insurers ‘budget’ their finances, but is generally required by statute or
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insurer argues that reserve amounts are not relevant to the issue of whether an insurance policy
covers a claim. The insured responds that the reserve amount is relevant to the investigation
process of the insured’s claim and relates to the claim of bad faith. Under Illinois law, for a bad
faith determination, “a trial court must consider the totality of the circumstances, including the
insurer’s attitude, whether the insured was forced to sue to recover, and whether the insured was
deprived of the use of her or his property.” Am. States Ins. Co. v. CFM Const. Co., 923 N.E.2d
299, 308 (Ill. App. 2010).
In support of its argument, the insurer cites two cases. First, in Spearman Indus., Inc. v.
St. Paul Fire & Marine Ins. Co., 128 F. Supp. 2d 1148, 1154 (N.D. Ill. 2001), the court granted a
motion in limine to prohibit references to the setting or computation of reserve amounts. The
court distinguished between claims involving first party insurance and third party insurance
claims and found reserve amounts irrelevant to first party insurance claims, reasoning that for
first party insurance claims, “the policy either provides coverage or does not.” Id. The court
stated, “in first-party insurance, the insurer’s good faith is determined (1) by the manner and
depth of its investigation, and (2) the determination of whether there was a good faith factual or
legal question as to whether the loss was covered.” Id. In Harleysville Lake States Ins. Co. v.
Lancor Equities, Ltd., 2014 WL 5507572, at *6-7 (N.D. Ill. 2014), the court relied on the
reasoning in Spearman but also distinguished the bad faith claims under Illinois law from those
in other jurisdictions. More specifically, bad faith claims under Illinois law are ancillary to a
breach of contract claim, whereas other jurisdictions allow bad faith claims as separate torts. Id.
at *6-7; see also Cramer v. Ins. Exch. Agency, 675 N.E.2d 897, 902-04 (Ill. 1996).
regulation as to the aggregate of the claims against the insurer.” 17A Couch on Ins. § 251:29. Although the parties
primarily refer to “reserve amounts” rather than “loss reserves,” the context of the dispute suggests that the terms are
interchangeable.
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The Court is not persuaded by the reasoning of Spearman and Harleyville Lake States
Ins. The Court observes that Spearman was decided under the more stringent standards for
admissibility. See Fed. R. Civ. P. 26(1). (“Information within this scope of discovery need not
be admissible in evidence to be discoverable.”).
Furthermore, at the discovery dispute
conference, the insured noted that the reserve amounts may have been considered during the
investigation of the insurance claim, which relates directly to the elements of a bad faith claim as
set forth in Spearman. Additionally, the Court finds the distinction in Harleyville Lake States
Ins. inapposite in light of Illinois’ requirement that a court consider the totality of the
circumstances for bad faith determinations. Significantly, other courts have allowed parties to
discover reserve amounts, reasoning that the information is relevant to whether the insured acted
in bad faith. See Cummins, Inc. v. Ace Am. Ins. Co., 2011 WL 130158, at *12 (S.D. Ind. Jan. 14,
2011); Country Life Ins. Co. v. St. Paul Surplus Lines Ins. Co., No. 03-1224, 2005 WL 3690565,
at *9 (C.D. Ill. Jan. 31, 2005); see also 17A Couch on Ins. § 251:29 (“Overall, there is little
unanimity on the discovery of an insurer’s loss reserves.”).
Because bad faith claims are
determined with reference to the totality of the circumstances, the Court finds the reserve
amounts are relevant to the claims in this case for purposes of discovery.
CONCLUSION
Based on the foregoing, it is hereby ORDERED that Plaintiff Atrium 5 Limited produce
unredacted copies of the in camera documents as they relate to commissions, fees, and reserve
amounts, except to the extent that the records contain attorney-client privileged information.
SO ORDERED.
DATED: January 6, 2017
s/
Reona J. Daly
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UNITED STATES MAGISTRATE JUDGE
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