Lillieroos v. Starr Indemnity & Liability Company
Filing
179
ORDER granting in part 134 Motion to Compel. Signed by Honorable Timothy D. DeGiusti on 8/26/2015. (mb)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
RONG L. LILLIEROOS,
Plaintiff,
v.
STARR INDEMNITY & LIABILITY
COMPANY, a foreign insurance
company,
Defendant,
and
STARR INDEMNITY & LIABILITY
COMPANY, a foreign insurance company,
Defendant/Third-Party Plaintiff,
v.
CO-ORDINATED BENEFIT PLANS, INC.
Third-Party Defendant.
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Case No. CIV-12-1359-D
ORDER
Before the Court is the Motion to Compel [Doc. No. 134] of Third-Party Defendant
Co-Ordinated Benefit Plans, Inc. (CBP). A response [Doc. No. 158] has been filed by ThirdParty Plaintiff Starr Indemnity & Liability Company (Starr) and CBP has filed a reply [Doc.
No. 163]. In addition, the Court conducted a hearing on this matter on August 10, 2015. The
matter, therefore, is ready for decision.
I.
Background
Starr insured Plaintiff, Rong L. Lillieroos (Plaintiff), pursuant to the terms of a short-
term medical insurance policy. Plaintiff submitted a claim under the policy arising from a
medical procedure she underwent. CBP denied the claim on grounds that Plaintiff’s
condition was pre-existing and, therefore, not covered by the policy. Plaintiff then filed suit
against Starr and brought claims under Oklahoma law for breach of contract and breach of
the duty of good faith and fair dealing. During the course of litigation, Starr conceded
liability as to Plaintiff’s claims.
Starr filed a third-party complaint against CBP and alleged CBP breached the terms
of the parties’ Third-Party Administrator Agreement (Agreement).
Pursuant to the
Agreement, CBP acted as third-party administrator of Starr’s claims. Under the terms of the
Agreement, CBP must indemnify Starr for damages proximately caused by CBP’s gross
negligence. CBP has no obligation to indemnify Starr for inherent business risks. Starr
alleges that CBP acted with gross negligence by, inter alia, making the decision to deny
Plaintiff’s claim based on an alleged pre-existing condition and ignoring her administrative
appeal of that denial.
Several months later, Plaintiff settled her claims with Starr. CBP is not a party to the
settlement. Although the terms of the settlement are confidential, it is undisputed that at
Starr’s request, the settlement was allocated between Plaintiff’s bad faith claim and an
unasserted claim that Plaintiff was considering adding through amendment of the complaint.
2
Plaintiff learned of the basis for the unasserted claim during discovery. According to the
parties’ contentions, the medical policy at issue required Starr to pay the medical bills of its
policyholders at a “usual and customary rate.” Instead, however, Starr paid medical claims
based on a rate referred to as an “RBRVS” rate – a rate similar to, or less than, the standard
Medicare rate. It is alleged that over CBP’s objections, Starr directed CBP to pay claims –
including Plaintiff’s claim – at the RBRVS rate. It is further alleged that Starr saved
multiple millions of dollars utilizing the RBRVS rate in the course of its business dealings.
According to CBP, under Oklahoma law, the savings to Starr is a relevant factor in
determining Starr’s exposure to Plaintiff for punitive damages.
The settlement resulted from a mediation between Plaintiff and Starr. CBP was
present during the mediation but, as stated, did not participate in the settlement. Starr’s
representative at the mediation was John Cabrita, Jr., Associate Vice President of Program
Business Claims (Cabrita). Cabrita has been deposed by CBP.1 During his deposition,
Cabrita testified that he had full settlement authority on behalf of Starr and that he made the
decision to settle the action as to Plaintiff’s claims against Starr based on his review of
correspondence and other memoranda from Starr’s counsel representing it in this action,
Murray Abowitz, and the Hogan Lovells law firm, a firm routinely retained by Starr with
1
CBP is unable to depose another employee of Starr involved in the settlement, Dick Thomas,
as Mr. Thomas is now deceased. Moreover, Starr contends that Cabrita had the “sole responsibility
for choosing whether to settle [Plaintiff’s] allegations and under what terms to settle them.” See
Starr’s Response at pp. 6-7.
3
respect to bad faith litigation brought against it. Cabrita testified he also relied upon his years
of experience in the insurance industry and information received from Plaintiff’s counsel.
CBP seeks production of the documents Cabrita and other Starr employees reviewed
and relied upon in reaching Starr’s settlement with Plaintiff. CBP contends the information
is vital to the defense of its indemnification claim.
The parties agree that CBP has no obligation to indemnify Starr as to the portion of
the settlement allocated to the unasserted claim related to Starr’s use of the RBRVS rate.
CBP contends that the allocation of 20% of the settlement to that unasserted claim is
unreasonably low and is the result of collusive action by Starr. According to Cabrita, he
determined an even smaller percentage allocation was appropriate – 10% – but ultimately
agreed to the mediator’s recommendation for a 20% allocation. Plaintiff has made clear she
has no interest in the allocation of the settlement amounts and has made no recommendations
with respect thereto.
Starr objects to the production of documents requested by CBP, asserting protections
of the attorney-client privilege and work-product doctrine. Starr further objects to the scope
of discovery requested and contends that to the extent CBP seeks documents that post-date
the settlement, those documents are not relevant. Alternatively, CBP requests the Court
conduct an in camera review of the documents requested prior to determining whether
production is required.
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II.
Analysis
The parties agree that whether Starr must produce the subject documents depends
upon whether Starr has waived the attorney-client privilege by placing the advice of counsel
at issue. Pursuant to Rule 501 of the Federal Rules of Evidence, in this diversity action,
Oklahoma law governs the scope of that privilege. Seneca Ins. Co. v. Western Claims, Inc.,
774 F.3d 1272, 1275 (10th Cir. 2014).
The parties further agree that “at issue” waiver is governed by the Hearn test. See
Seneca, 774 F.3d at 1276 (applying Hearn test in determining application of attorney-client
privilege under Oklahoma law). Under the Hearn test, waiver occurs when the following
requirements are met: (1) the party asserting the privilege did so as a result of some
affirmative act, such as filing a lawsuit; (2) the affirmative act placed the protected
information at issue by making it relevant to the case; and (3) the party opposing assertion
of the privilege would be denied access to information vital to its defense if the privilege
were applied. Seneca, 774 F.3d at 1276 (citing Frontier Refining, Inc. v. Gorman-Rupp Co.,
136 F.3d 695, 699 (10th Cir, 1998); Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975)).
The Tenth Circuit has made clear that the first two prongs of the Hearn test should
not be construed in a manner that would create a “meaningless threshold that would allow
admission of any potentially relevant advice from an attorney.” Seneca, 774 F.3d at 1277
(quotations omitted). Instead, the affirmative act is a “crucial” requirement. Id.
5
In Seneca, the affirmative act was not merely bringing an action to recover the amount
of the settlement in the underlying litigation, but also relying on advice of counsel “as a
reason – if not the primary reason – for settling [the underlying litigation].” Id. Two
communications from counsel – prepared during the underlying litigation and relied upon to
settle that litigation – were at issue in Seneca. First, an attorney named James N. Isbell
provided correspondence to Seneca contemporaneously with the issuance of a loss report
prepared by Seneca’s Claims Examiner, John Mrakovcic. The loss report suggested a
settlement range of $200,000 to $500,000. The attorney’s correspondence: (1) detailed
Seneca’s handling of the claim; (2) summarized Oklahoma law regarding bad faith; (3) made
suggestions regarding Seneca’s appraisal or replacement options; and (4) suggested that
Seneca’s failure to pay the claim could make it vulnerable to a bad faith claim and, therefore,
punitive damages. Second, about four months after the first correspondence, a lawyer from
a different firm, Murray Abowitz, provided correspondence to Seneca which similarly
addressed potential deficiencies and flaws with respect to the claims handling and further
addressed the potential for bad faith exposure.2 As the Tenth Circuit found, “[c]onsistent
with Abowitz’s advice” Seneca settled the underlying litigation for $1 million. Id. at 1274.
Specifically, in Seneca, at trial Mrakovcic testified that he relied on both the Isbell and
Abowitz correspondence in handling the claim and that Gregory Crapanzano, Seneca’s Vice
President of Property Claims, told him that Seneca settled the underlying litigation based on
2
Mr. Abowitz represents Starr in this litigation.
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Abowitz’s advice. Crapanzano also testified at trial. Crapanzano concluded the settlement
was reasonable based on “conversations with counsel” and “conversations with the home
office.” Two other witnesses testifying on behalf of Seneca also testified that they relied on
Abowitz’s advice in particular in determining the settlement amount in the underlying
litigation.
Under these circumstances, the Tenth Circuit found the first two factors of the Hearn
test satisfied. The Court distinguished its prior holding in Frontier Ref. Inc. v. Gorman-Rupp
Co., 136 F.3d 695 (10th Cir. 1998), a case in which the court concluded the attorney-client
privilege had not been waived as a result of the plaintiff’s affirmative act of bringing an
indemnity claim. In Frontier, “the court framed the issue as whether ‘Frontier had waived
its attorney-client privilege in bringing th[e] indemnity action against [the defendant].”
Seneca, 774 F.3d at 1277 (citing Frontier, 136 F.3d at 700 (emphasis added)). But in
Frontier, the company did not rely on protected information to justify its right to recovery
in the indemnity action or the settlements, or to determine the reasonableness of the
underlying settlements. Id. Conversely, in Seneca, the affirmative act included not only
Seneca’s decision to sue, but also Seneca’s express reliance on advice of counsel as the
reason for settling the underlying lawsuit. Id.
Although these first two factors were crucial factors, the third Hearn factor was
dispositive in the Seneca case. The court determined the privileged information was vital to
the defense because the information contained in the Isbell and Abowitz correspondence was
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not available from any other source. The court again found Frontier distinguishable on this
point:
This case, however, differs significantly from Frontier in that
the ‘other sources’ – namely Seneca’s officers – generally did
not rely on their own reasons for settling with Route 66 for $1
million. Instead, they chose to rely on ‘advice of counsel’ to
justify the reasonableness of the settlement.
Id. at 1277. Under this scenario, the court found that allowing Seneca to rely on advice of
counsel to establish the reasonableness of the settlement while excluding the contents of that
advice from the defendant would contravene the principle that the privilege cannot be used
as both a sword and a shield. Id. at 1277-78.
In the instant action, the affirmative act at issue is Starr’s conduct in bringing the
third-party indemnity claim against CBP. To prevail on the indemnification claim, Starr must
establish that CBP’s gross negligence proximately caused the damages claimed by Plaintiff.
CBP contends the denial of Plaintiff’s claim was made in good faith and, therefore, its
conduct did not cause the damages claimed by Plaintiff.
CBP further attempts to place the reasonableness of the settlement at issue relying on
the 80/20 allocation of the settlement between the bad faith claim and the unasserted claim.
Because the parties agree that CBP is not liable for that portion of the settlement attributable
to the unasserted claim, CBP wants to attribute a greater percentage allocation of the
settlement to the unasserted claim.
8
Cabrita testified that Starr’s decision to settle was not based on any of its own
conduct, but instead, based on CBP’s conduct. See Cabrita Deposition [Doc. No. 135] at pp.
88-89.3 Although Cabrita’s testimony provides an “other source” through which CBP can
inquire as to the reasonableness of the settlement, Cabrita testified that he primarily, if not
exclusively, relied upon information received from counsel to determine the reasonableness
of any settlement.4 Starr contends it will prove its indemnity claim without relying on any
advice of counsel evidence. But CBP contends Cabrita’s testimony shows he did rely on
advice of counsel and without the ability to test the underlying basis for Cabrita’s decision
through examination of that evidence, Starr will impermissibly be using the protected
information as a shield and a sword.
As to the unasserted claim, i.e., the RBRVS issue, Cabrita testified that he did not
think the RBRVS issue had merit. Cabrita Deposition at pp. 92-96. He further testified that
settlement of the RBRVS issue was based on a cost-of-litigation analysis and that the
percentage allocated to the claim was based on a cost factor and not due to Starr’s culpable
conduct. See id at pp. 93-94, 103-104. He testified the settlement amount did not include
any amounts attributable to punitive damages in relation to the RBRVS issue. Id. at p. 104.
3
CBP filed Cabrita’s Deposition under seal to protect the confidential nature of the settlement
between Plaintiff and Starr. The Court has addressed portions of the Cabrita Deposition in this
Order but has not revealed any confidential terms of the settlement in doing so.
4
Cabrita testified the only information he relied upon to evaluate the case was correspondence
from Starr’s counsel, the mediation correspondence from Plaintiff’s counsel, and his experience in
the industry. See Cabrita Deposition at pp. 52, 53, 62, 116-117.
9
He repeatedly testified that he thought the RBRVS issue lacked merit. He further testified
that no analysis regarding exposure due to the RBRVS issue was conducted independent of
the information contained in correspondence from Starr’s counsel and Plaintiff’s counsel. Id.
at pp. 104-105.
In contrast to Mr. Cabrita’s testimony and his view that the RBRVS issue was factored
into the settlement as a cost of litigation, prior to reaching the settlement with Starr,
Plaintiff’s counsel stated during its negotiations that Starr’s largest exposure was based on
the RBRVS issue. See Correspondence [Doc. No. 134-8] at p. 4, ¶ 8. Plaintiff’s counsel
further believed the savings to Starr would be a factor in determining a punitive damage
award under Oklahoma law.5 Plaintiff’s counsel later threatened a potential class action
lawsuit based on the RBRVS issue. See Correspondence [Doc. No. 134-10]. Plaintiff’s final
demand letter, prior to settlement, again emphasized the scope of the RBRVS issue and the
potential for a class action, and that Starr faced exposure to significant punitive damages in
relation thereto. See Correspondence [Doc. No. 134-11].
Under the particular circumstances presented, prior to making a determination as to
the waiver issue, the Court believes an in camera review of the subject documents is
warranted. The Court must determine whether Starr’s employee, Cabrita, generally relied
on his own reasons in reaching the settlement, or whether Cabrita in fact relied on advice of
5
Plaintiff’s counsel cited Oklahoma’s uniform jury instruction No. 5.9 as support, which
provides that factors that may be considered in determining a punitive damage award include, inter
alia, “[t]he profitability of the misconduct to the Defendant.” See Correspondence at p. 3, ¶ 7.
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counsel. The Court is hard-pressed to make this determination in light of Cabrita’s testimony
that he alone made the settlement determination and his simultaneous acknowledgment that
he relied on information from counsel to make that determination and did not conduct any
independent examination of the claim. The virtual equipoise of Cabrita’s testimony may,
itself, deem the protected information vital to CBP’s defense. Certainly, the parties have
strategically framed the factual record with the competing holdings of Frontier and Seneca
at the forefront.
Moreover, the rather dramatic variance between Cabrita’s view of the significance of
the RBRVS issue and the view expressed by Plaintiff’s counsel leads the Court to believe
an in camera review is a prudent and necessary step in resolving the parties’ discovery
dispute. In sum, whether the documents at issue are vital to CBP’s defense cannot be
accurately ascertained without such an in camera review.
III.
Conclusion
The Court directs Starr to produce to the Court for in camera review documents
actually reviewed by Mr. Cabrita (or any other Starr employee) to reach the settlement with
Plaintiff. The documents shall be temporally limited to those generated on or before April
8, 2014, the date of the settlement.
IT IS THEREFORE ORDERED that the Motion to Compel [Doc. No. 134] of ThirdParty Defendant Co-Ordinated Benefit Plans, Inc. is GRANTED in part, as set forth more
fully herein.
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IT IS FURTHER ORDERED that Defendant Starr Indemnity & Liability Company
shall produce the documents for in camera review within fourteen (14) days of the date of
this Order.
IT IS SO ORDERED this 26th day of August, 2015.
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