SELECTIVE INSURANCE COMPANY OF AMERICA v. SMILEY BODY SHOP, INC. et al
Filing
82
ORDER denying Jeffrey Smiley and Smiley Body Shop, Inc.'s 76 Motion for Protective Order or, in the Alternative, to Stay Discovery. See Order. Signed by Magistrate Judge Mark J. Dinsmore on 10/27/2016. (SWM)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
SELECTIVE INSURANCE COMPANY OF
AMERICA,
Plaintiff,
vs.
SMILEY BODY SHOP, INC.,
JEFFREY SMILEY,
GREG CALLAHAN,
Defendants.
______________________________________
CINCINNATI INSURANCE COMPANY,
Intervenor Plaintiff,
vs.
SELECTIVE INSURANCE COMPANY OF
AMERICA,
SMILEY BODY SHOP, INC.,
JEFFREY SMILEY,
GREG CALLAHAN,
Intervenor Defendants.
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No. 1:16-cv-00062-JMS-MJD
ORDER ON DISCOVERY MOTION
Pending before the Court is Jeffrey Smiley and Smiley Body Shop, Inc.’s (collectively,
“Smiley”) Motion for a Protective Order or, in the Alternative, to Stay Discovery. [Dkt. 76.]
For the following reasons, the Court DENIES Smiley’s Motion.
1
I. Background
This matter arises out of an insurance dispute. The underlying state court lawsuit
involves a tort action brought by Defendant Greg Callahan against Smiley after an automobile
accident. While defending Smiley in the underlying tort case subject to a reservation of rights,
Plaintiff Selective Insurance (“Selective”) brought suit in this Court seeking a declaration that it
has no obligation to defend or indemnify Smiley under Smiley’s insurance policy. Selective now
seeks discovery of the statements Jeffrey Smiley has made to his insurance providers, which
Smiley contends are subject to insurer-insured privilege. Smiley thus moves the Court for a
protective order “prohibiting disclosure and excusing non-disclosure of information protected by
the insurer-insured privilege” or, in the alternative, to stay discovery in this matter until the
conclusion of the underlying tort action. [Dkt. 76 at 1.]
II. Motion for Protective Order
Smiley’s Motion seeks a protective order, not to keep his statements to insurance
providers out of Selective’s hands, but to ensure that Callahan—the plaintiff in the underlying
state court action—cannot use them in the tort case. In support, Smiley primarily relies upon the
insurer-insured privilege recognized by the Indiana Supreme Court in Richey v. Chappell, 594
N.E.2d 443 (Ind. 1992). In response, Selective argues that the insurer-insured privilege does not
apply to this case and that, even if it did apply, Smiley waived the right to assert it through their
conduct. In reply, Smiley again argues that the privilege applies in this action as against
Callahan. Smiley reiterates that any other conclusion would undermine its assertion of privilege
in the underlying action.
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The Federal Rules of Civil Procedure limit discovery to nonprivileged materials that are
relevant and proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1). In diversity cases
such as this one, the Federal Rules of Evidence incorporate by reference the privilege laws of the
state providing the underlying substantive law. Fed. R. Evid. 501. Based upon their
submissions, the parties appear to agree that Indiana law applies. 1 Regardless, “[c]ourts do not
worry about conflict of laws unless the parties disagree on which state’s law applies.” Wood v.
Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991). As that is not the case here, the Court will
apply Indiana privilege law in assessing Smiley’s Motion. In so doing, the Court takes as
axiomatic that evidentiary privileges are to be strictly and narrowly construed. Shanabarger v.
State, 798 N.E. 2d 210, 215 (Ind. Ct. App. 2003) (“Inasmuch as [a] privilege prevents the
disclosure of relevant information and impedes the quest for truth, the privilege should be
narrowly construed.”); see Mem’l Hosp. for McHenry Cty. v. Shadur, 664 F.2d 1058, 1061 (7th
Cir. 1981) (“First, because evidentiary privileges operate to exclude relevant evidence and
thereby block the judicial fact-finding function, they are not favored and, where recognized, must
be narrowly construed.”); see also Valero Energy Corp. v. United States, 569 F.3d 626, 630 (7th
Cir. 2009) (“This circumscribed reading of the tax practitioner-client privilege is in sync with our
general take on privileges, which we construe narrowly because they are in derogation of the
search for truth.”); Howard v. Dravet, 813 N.E.2d 1217, 1222 (Ind. Ct. App. 2004) (“The
attorney-client privilege should be narrowly construed because the privilege may prevent the
disclosure of relevant information.”).
1
No party contends that the voluminous, 353-page insurance agreement that is the subject of this suit
contains a provision requiring the application of the law of a different state.
3
The Indiana Supreme Court recognized the insurer-insured privilege in Richey v.
Chappell, 594 N.E.2d 443 (Ind. 1992). Richey was a personal injury case in which the plaintiff
sought discovery of statements made by the defendant to his insurance provider. Both the
defendant and insurance provider objected to the request. The court reasoned that the privilege
was required to facilitate candid disclosure from insured to insurer and thereby aid the insurer in
its defense of the insured in the underlying liability cases:
One of the primary duties placed upon insurers by the issuance of a liability
insurance policy is the obligation to defend claims filed by third persons against
the insured. In order to effectively defend the claim, the insured must be
questioned about sensitive matters which may be embarrassing, incriminating, or
detrimental to the insured. The failure to cooperate may invalidate coverage, and
even an insured's constitutional right against self-incrimination may not override
the insured’s duty to cooperate with the insurance company. In connection with
its obligation to defend claims, the insurance company retains an attorney, not
usually of the insured’s own choosing, to represent the insured. Statements from
the insured are then used by the attorney to assist in the defense of the insured,
just as statements given by plaintiffs to their own attorneys are used to assist in
the prosecution. Uncertainty about whether the insured’s statements are
discoverable gives rise to a conflict about whether a statement should be given at
all, and undermines what should be a cooperative relationship among the insured,
insurer and attorney. An insured’s relationship to the insurance company requires
full disclosure by the insured without fear that the statement may be later obtained
by the claimant.
Id. at 446. On this basis, the court “conclude[d] that in third-party actions such as this one”—
videlicet, actions brought by non-insurer plaintiffs against an insured—“statements given by an
insured to his insurance company are privileged and are not subject to discovery by the third
party.” Id. at 445 (emphasis added).
Unlike Richey, however, this matter is a “first-party” case brought by an insurer to
determine its rights and liabilities vis-à-vis its insured. The Court finds that the Richey insurerinsured privilege does not extend to this first-party case and that the underlying tort plaintiff’s
status as party-defendant in this action does not change this conclusion. This is so
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notwithstanding the seemingly broader language in Richey identified by Smiley. As Smiley
points out, Richey also states that “statements from the insured to the insurer concerning an
occurrence which may be made the basis of a claim by a third party are protected from
disclosure.” Id. at 447. But this language does not warrant the broad reading attributed to it by
Smiley for several reasons.
First, the Richey court recognized that discovery of insurer-insured materials in “firstparty” claims stands on a different ground than discovery in a third-party action. The court in
fact expressly approved of the Indiana Court of Appeals’ decision to compel discovery of
insurer-insured statements in Cigna-INA/Aetna v. Hagerman-Shambaugh, 473 N.E.2d 1033 (Ind.
Ct. App. 1985), reasoning that the rationale in that case was “sound” because “HagermanShambaugh was a first-party claim involving an action by the insured against its insurer over
whether a particular loss was covered by the policy . . . .” Id. at 447. Hagerman-Shambaugh is
much more closely aligned with this case than Richey, again with the caveat that the tort plaintiff
was not party to that case. But the Richey court distinguished its case from HagermanShambaugh on the basis of the type of claim in that case. This case is a “first-party claim” over
whether a claim is “covered by the policy”; it is not “a claim brought by a third party against the
insured.”
Second, other jurisdictions recognizing the insurer-insured privilege also make the
distinction between third-party and first-party actions. The Richey court, for example,
specifically endorsed the Illinois Supreme Court’s approach to the privilege as an extension of
attorney-client privilege, quoting at length from that court’s decision in People v. Ryan, 197
N.E.2d 15, 18 (Ill. 1964). The Illinois Supreme Court has elsewhere explained that insurerinsured “documents may enjoy privileged status as to party opponents in the underlying
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litigation, but they cannot be privileged from insurers who may bear the ultimate burden of
payment. While the parties are now adverse concerning the issue of coverage, no such adversity
exists as to the underlying litigation.” Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 579
N.E.2d 322, 336 (Ill. 1991). The attorney-client privilege that may have applied in the
underlying action had no applicability in the declaratory judgment action, suggesting that the
insurer-insured privilege must likewise give way in this case. Again, Waste Management is not a
perfect parallel to this case, as the underlying tort action had already settled in that case. But
Waste Management—like Richey—distinguished the need for privilege in the underlying action
from the absence of privilege in the declaratory judgment action on the basis of the type of claim.
Finally, this Court is “loathe to fiddle around with state law,” Insolia v. Philip Morris
Inc., 216 F.3d 596, 607 (7th Cir. 2000), and has repeatedly been admonished to “choose the
narrower interpretation” of state law and “avoid speculation about trends in diversity cases,”
Birchler v. Gehl Co., 88 F.3d 518, 521 (7th Cir. 1996). Particularly when this reluctance to
unearth new realms of state law is coupled with the imperative that privileges be construed
narrowly, the interests of furthering the truth-seeking mission of the Court must take precedence
and dictate that the insurer-insured privilege not be expanded as Smiley suggests.
That the Court would be extending Richey if it ruled as Smiley requests is underscored by
the fact that Smiley has not identified any first-party declaratory actions proscribing discovery of
documents on the basis of insurer-insured privilege. Among the cases relied upon by Smiley are
Strack & Van Til, Inc. v. Carter, 803 N.E.2d 666, 674 (Ind. Ct. App. 2004), a third-party case
involving a slip-and-fall negligence action, and In re Quantum Chemical/Lummus Crest, No. 90
C 778, 1992 WL 71782, at *2–4 (N.D. Ill. Apr. 1, 1992), also a third-party tort case. Quantum
Chemical, moreover, was limited to addressing the argument of a third party that the insured
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waived attorney-client privilege by providing a document to its insurer. 1992 WL 71782, at *2
(“The issue in dispute is whether the privilege was waived by QUANTUM when it released
Document 150 to various in-house staff members and counsel for its insurers.”). Neither of these
cases is sufficiently analogous to affect the Court’s conclusions.
While the policy which underlies the insurer-insured privilege of encouraging candid
disclosures between insurer and insured is undoubtedly important, there are countervailing
considerations as well. The insurer “must be allowed to show that the so-called insured”—or the
insured’s claim—“is a stranger to the policy.” Old Republic Ins. Co. v. Chuhak & Tecson, P.C.,
84 F.3d 998, 1002 (7th Cir. 1996) (Posner, C.J.). In short, while there is ample case law
establishing that the insurer-insured privilege applies to third-party lawsuits, there is no case (and
certainly no Indiana Supreme Court case) extending its application to first-party lawsuits to
determine the scope of an insurer’s coverage. This Court is constrained by precedent requiring
privileges to be narrowly construed and by precedent requiring that the Court narrowly interpret
novel state law. The insurer-insured privilege does not apply to this case.
III. Motion to Stay Discovery
In the alternative, Smiley asks the Court to stay discovery while the underlying statecourt action proceeds, arguing that discovery in this matter will prejudice his defense in the tort
case. Selective opposes a stay, arguing that it would be prejudiced thereby if forced to defend an
action that it ultimately had no obligation to either defend or indemnify. Selective further argues
that the Stipulated Protective Order sufficiently addresses Smiley’s concern of prejudice in the
underlying case. Selective maintains that the issues in this case are distinct from the issues of
liability in the underlying case and that it seeks discovery solely regarding Smiley’s employment
relationship with the other parties and Smiley’s potential breach of its insurance contract. In
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reply, Smiley argues that the protective order cannot prevent the use of information learned from
this matter from being used in the underlying case. Smiley also argues that resolving the
coverage issues in this case will involve the same facts as the underlying case.
A court may stay discovery through an exercise of its inherent authority to manage
litigation or through its authority under Federal Rule of Civil Procedure 26(c). See, e.g., E.E.O.C.
v. Fair Oaks Dairy Farms, LLC, No. 2:11 CV 265, 2012 WL 3138108, at *2 (N.D. Ind. Aug. 1,
2012) (citing Landis v. North American Co., 299 U.S. 248, 254–55 (1936)); see also Fed. R. Civ.
P. 26(c)(1) (“The court may, for good cause, issue an order to protect a party or person from
annoyance, embarrassment, oppression, or undue burden or expense . . . .”). The party seeking
a stay has no absolute right to a stay; rather, that party “bears the burden of proof to show that
the Court should exercise its discretion in staying the case.” Cloverleaf Golf Course, Inc. v. FMC
Corp., No. 11–CV–190–DRH, 2011 WL 2838178, at *2 (S.D. Ill. July 15, 2011) (citing Indiana
State Police Pension Trust v. Chrysler LLC, 556 U.S. 960, 961 (2009)).
To carry its burden, the movant must show that good cause exists for the stay in this
specific case; the good cause determination encompasses factors such as whether the stay will
prejudice the non-movant, whether the stay will simplify the issues in the case, and whether
the stay will reduce the burden of litigation for the parties or the court. Fair Oaks Dairy
Farms, 2012 WL 3138108, at *2 (citing Abbott Laboratories v. Matrix Laboratories, Inc., 2009
WL 3719214, *2 (N.D. Ill. 2009)) (“[The Court should] balance interests favoring a stay against
interests frustrated by the action in light of the court's paramount obligation to exercise
jurisdiction timely in cases properly before it.”). District courts have “extremely broad
discretion” in weighing these factors and in deciding whether a stay should
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issue. Cloverleaf, 2011 WL 2838178, at *2 (emphasis in original) (citing Crawford–El v.
Britton, 523 U.S. 574, 598 (1998)).
The Seventh Circuit has addressed specific factors that courts should consider when faced
with a motion to stay in the context of a declaratory judgment action where an underlying
liability action is pending: 2
[T]he federal court should consider (among other matters) whether the declaratory
suit presents a question distinct from the issues raised in the state court
proceeding, whether the parties to the two actions are identical, whether going
forward with the declaratory action will serve a useful purpose in clarifying the
legal obligations and relationships among the parties or will merely amount to
duplicative and piecemeal litigation, and whether comparable relief is available to
the plaintiff seeking a declaratory judgment in another forum or at another time.
Nationwide Ins. v. Zavalis, 52 F.3d 689, 692 (7th Cir. 1995). This inquiry requires “review[ing]
the overlap between the federal and state proceedings in light of the substantive law that
informed the declaratory judgment action and the underlying liability case.” Med. Assur. Co. v.
Hellman, 610 F.3d 371, 379 (7th Cir. 2010) (Wood, C.J.).
Mere factual overlap is insufficient to demonstrate that a stay is required under Medical
Assurance. In that case, the insurance company sought a declaration that it had no duty to
defend the defendant in an underlying medical malpractice case because the defendant breached
his duty to cooperate under the insurance policy. Id. at 380. This inquiry undoubtedly
overlapped with the underlying merits in the malpractice case; “[i]n Indiana, . . . an insurer
cannot prevail on that theory unless it can show that the breach resulted in actual prejudice” on
the merits. Id. (citing Employers Mut. Cas. Co. v. Skoutaris, 453 F.3d 915, 924 (7th Cir. 2006);
Ky. Nat’l Ins. Co. v. Empire Fire & Marine Ins. Co., 919 N.E.2d 565, 585–87 (Ind. Ct. App.
2
To the extent Smiley relies upon case law from other jurisdictions setting out other tests for making such
a determination in this context, this Court rejects them as the Seventh Circuit, which binds this Court, has
spoken on the issue.
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2010). The potential factual overlap was of minimal importance because the legal issues were
distinct. In fact, the court observed that the continuation of the ongoing state proceedings “may
provide guidance to the parties and the court in resolving the actual-prejudice inquiry.” Id. at
381.
Under Zavalis and Medical Assurance, it is clear that Selective’s claim that it has no duty
to defend Smiley does not “overlap” with the underlying action as the court used that term.
Whether Selective can prove that Smiley failed to cooperate turns on distinct legal issues from
whether Smiley is ultimately liable in tort for the automobile accident. Smiley additionally
argues that Selective’s coverage arguments regarding Smley’s employment relationship to the
other parties involves overlapping issues, as Callahan has asserted a respondeat superior claim in
the underlying case. But even if some of the facts used to determine whether Selective must
defend Smiley overlap with the respondeat superior determination, “the scope of [Smiley’s]
insurance coverage is not at issue in the state court actions.” Medical Assur. Co., 610 F.3d at
381. Smiley does not contend that the respondeat superior inquiry is legally identical to the
scope of insurance determination, and this Court declines to assume that it is. Moreover,
Selective is entitled to challenge its claim to coverage based upon the employment relationship
with facts, such as Smiley’s statements to Selective, which would be privileged in the underlying
case. Thus, the factual records and perhaps even the factual issues with regard to the respondeat
superior claim and the coverage litigation will also be distinct.
Several other Zavalis factors also weigh against a stay. Determining Selective’s duties to
Smiley on the complete record “will serve a useful purpose in clarifying the legal obligations and
relationships among the parties.” 52 F.3d at 692. Further, “comparable relief” will not be
available to Selective if this case is stayed because it would then be required to defend the
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underlying case without the opportunity to show that it had no duty to do so. Id. As the Seventh
Circuit has explained: “The purpose of the Declaratory Judgment Act is to facilitate efficient
outcomes. Here, that purpose is best effected by allowing [Selective] to go forward with its
challenge to its duty to defend” because the issues raised by its challenge are “sufficiently
distinct” from the issues on the merits of the tort case. Medical Assur. Co., 610 F.3d at 381.
Though Seventh Circuit precedent on stays in declaratory judgment actions provide no
basis to stay this case, this Court may still order a stay under its inherent authority if Smiley can
demonstrate good cause. This good cause determination must take into account any prejudice
that Selective may suffer. As Selective points out, a stay of discovery in this case would
preclude Selective from contesting its obligation to provide Smiley’s defense until after it has
already provided said defense in the underlying suit. Thus, a stay would undoubtedly prejudice
Selective.
As to Smiley, without a stay, Callahan will receive some information that he has no right
to use in the underlying case—both under the insurer-insured privilege, which all parties agree
applies in that case, and under the stipulated protective order in this case. The stipulated
Protective Order in this case provides: “Information that is produced or exchanged in the course
of this action and designated under this Order may be used solely for the preparation, trial and
any appeal of this action, as well as related settlement negotiations, and for no other purpose,
without the written consent of the Designating Party.” [Dkt. 74 at 4 (emphasis added).] This
Protective Order minimizes any prejudice that Smiley may suffer as a result of disclosure of the
insurer statements and of deposition questions referring thereto. Further minimizing the
prejudice, as represented by Selective and uncontested by Smiley, is the fact that discovery
appears to be closed in the underlying case. [See Dkt. 78 at 13.] The Protective Order in this
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case would foreclose even the possibility of reopening discovery in the underlying case based on
information learned from the insurer statements or deposition testimony about the statements,
and the Court declines to assume that any party will violate the terms of the Protective Order.
The cases to which Smiley cites do not suggest that this is the incorrect result. Old
Republic, for example, reasoned that no discovery in the declaratory judgment action was
required because the insurance company’s responsibility for defending the tort defendant was
apparent from the face of the complaint. 84 F.3d at 1002 (“But no one reading Kearns’s
complaint would so doubt that Josephson had represented Kearns in the course of Josephson's
employment by Chuhak & Tecson as to be justified in putting Josephson and the law firm to the
expense of responding to requests for discovery.”). Such facial clarity is absent here.
Both Wells Dairy, Inc. v. Travelers Indemnity Co. of Illinois, 241 F. Supp. 2d 945 (N.D.
Iowa 2003), and Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153 (Cal. 1993), involved
a stay of all proceedings “[t]o eliminate the risk of inconsistent factual determinations.”
Montrose, 861 P.2d at 1162; Wells Dairy, 241 F. Supp. 2d at 977 (“Thus, a stay is warranted to
protect Wells from being prejudiced by inconsistent factual determinations.”). Smiley makes no
argument that it may face inconsistent factual determinations if there is no stay of discovery in
this case and instead focuses solely on the prejudice that it will suffer in its defense if discovery
proceeds.
Finally, in American Family Mutual Insurance Co. v. Williams, the court stayed
discovery based upon the pendency of fully-briefed dispositive motions—not based on the
defendants’ claim of interference with insurer-insured privilege. No. 1:14-CV-248-SEB-DKL,
2015 WL 1421101 (S.D. Ind. Mar. 27, 2015). In fact, the court directed the parties to “move for
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a case-management conference” “[i]f and when the Court denies the motions,” and otherwise
denied the defendant’s motion to stay discovery without prejudice.
H.G. Christman Construction Company, Inc. v. Amerisure Mutual Insurance Co. is
equally inapposite, as the Minute Entry to which Smiley cites granted an unopposed motion to
stay discovery in one sentence, pending the resolution of a motion to dismiss. Order on
November 18, 2005 Telephonic Status Conference and Order Settling Settlement Conference and
Related Deadlines, H.G. Christman, No. 1:05-cv-0743-DFL-TAB (S.D. Ind. Nov. 22, 2005),
ECF No. 33. The Minute Entry from H.G. Christman clearly has no persuasive value in this
case.
Smiley has failed to meet its burden of demonstrating the appropriateness of a stay in this
case. The protective order largely mitigates any possible prejudice to Smiley, whereas a stay of
discovery would cause significant prejudice to Selective. The Court declines to assume that any
party would violate the Court’s protective order and use, in any way, the information learned
from this case to further its cause in any other case, including the underlying tort case between
Smiley and Callahan.
IV. Conclusion
The evidence sought is concededly relevant to the merits of this case and, as the Court
has explained, is not privileged in this lawsuit. It is also concededly privileged in the underlying
tort action; Callahan has no right to use, and is prohibited by the Protective Order from using,
any information gleaned from the insurer’s statements or any deposition statements based
thereon in the underlying case. These propositions are not mutually exclusive. In so concluding,
the Court reiterates that the Protective Order in force provides that no information provided in
discovery or otherwise learned from this case may be used in any other matter. With this
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understanding, the Court DENIES Smiley’s Motion for a Protective Order or, in the Alternative,
to Stay Discovery. [Dkt. 76.]
SO ORDERED.
Dated: 27 OCT 2016
Distribution:
Service will be made electronically
on all ECF-registered counsel of record via
email generated by the court’s ECF system.
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