Shaffer et al v. State Farm Mutual Automobile Insurance Company
MEMORANDUM (Order to follow as separate docket entry) (eo)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
BARRY SHAFFER and
STATE FARM MUTUAL
AUTOMOBILE INSURANCE CO.,
Civil Action No. 1:13-cv-01837
Judge Sylvia H. Rambo
On February 14, 2014, following a conference call with the parties
related to a discovery dispute concerning Defendant’s redactions to its claims log and
based on the representations of counsel, the court ordered Defendant to submit
unredacted versions of all redacted and partially redacted pages of the claims log to
the court for an in camera review. The court has reviewed the claims log and
considered the parties’ positions with regard to the contested information. Thus, this
dispute is ripe for disposition.
Because the court writes primarily for the parties, it only need set forth
the following details essential to explain its reasoning.
This case arises out of a September 5, 2008 motor vehicle accident
involving Plaintiff Barry Shaffer. Plaintiff claims that he sustained painful and
severe injuries as a result of the accident, including injuries to his neck, head, and
back. He has lost income and incurred costs for medical treatment, therapy, and
similar miscellaneous expenses. Defendant State Farm Mutual Automobile
Insurance insured Plaintiff and his wife, Plaintiff Kimberley Shaffer, at the time of
the accident. With State Farm’s consent, Plaintiffs settled their claim with the other
driver and sought additional coverage under the underinsured motorist (“UIM”)
provision in their policy.
Plaintiffs’ UIM policy provided benefits of $100,000 per person and
allowed for stacking of coverage, totaling $200,000 on the policy. On March 12,
2012, Plaintiffs submitted a demand to State Farm requesting settlement in the
amount of $150,000, an amount less than the available UIM limits of $200,000.
Plaintiffs have provided State Farm with medical records and other information to
assist in evaluating the claim. According to Plaintiffs, State Farm has not made an
offer of settlement.
Plaintiffs filed a complaint in the Dauphin County Court of Common
Pleas on May 31, 2013, which was removed to this court by State Farm on July 3,
2013. (Doc. 1.) Plaintiffs assert claims for breach of contract (Count I) and a
violation of Pennsylvania’s Bad Faith Statute, 42 Pa. Cons. Stat. § 8371 (Count II).
(Doc. 1-1.) On July 10, 2013, State Farm filed a motion to dismiss for failure to state
a claim, challenging only Plaintiff’s bad faith claim, which the court denied. (Doc.
13.) The parties are currently engaged in fact discovery that is set to conclude on
March 28, 2014. (Doc. 17.) Plaintiffs’ counsel contacted the court about the instant
discovery dispute regarding the redacted portions of the claims log. The court has
reviewed the unredacted and partially redacted pages of the claims log in camera.
Federal Rule of Civil Procedure 26(b)(1) provides for a broad scope of
discovery, recognizing that the “mutual knowledge of all the relevant facts gathered
by both parties is essential to proper litigation.” Hickman v. Taylor, 329 U.S. 495,
507-08 (1947). Accordingly, under this rule, relevance is broader than admissibility
at trial, in the sense that it “is allowed ‘if the information sought appears reasonably
calculated to lead to the discovery of admissible evidence.’” Josephs v. Harris Corp.,
677 F.2d 985, 991 (3d Cir. 1982) (quoting Fed. R. Civ. P. 26(b)(1)). Although the
discovery rules should generally be given broad and liberal treatment, these rules,
like all of the Federal Rules of Civil Procedure, are subject to the overarching
philosophy of Rule 1 that they “be construed to secure the just, speedy, and
inexpensive determination of every action.” Fed. R. Civ. P. 1. In keeping with this
instruction, the relevance requirement of Rule 26(b)(1) must be “firmly applied.”
Herbert v. Lando, 441 U.S. 153, 177 (1979) (quoting Fed. R. Civ. P. 26(c)).
Relevance is defined in Rule 401 of the Federal Rules of Evidence, which states that
“relevant evidence” is evidence having “any tendency to make [the existence of] a
fact [that is of consequence to the determination of the action] more or less probable
than it would be without the evidence.” Fed. R. Evid. 401.
Plaintiffs claim State Farm breached the UIM policy. To establish a
breach of contract claim in Pennsylvania, one must prove: “(1) the existence of a
contract, including its essential terms[;] (2) a breach of a duty imposed by the
contract[;] and (3) resultant damages.” McShea v. City of Phila., 995 A.2d 334, 340
(Pa. 2010). Plaintiffs further claim that State Farm’s conduct in investigating their
claim constitutes bad faith. To recover under the bad faith statute, one must show,
by clear and convincing evidence: “(1) that the insurer lacked a reasonable basis for
denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of
reasonable basis.” Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233 (3d
Cir. 1997) (citing Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688
(Pa. Super. Ct. 1994)); Kojsza v. Scottsdale Ins. Co., Civ. No. 3:12-cv-1602, 2014
WL 198569, *6 (M.D. Pa. Jan. 15, 2014) (citing Post v. St. Paul Travelers Ins. Co.,
691 F.3d 500, 523 (3d Cir. 2012)) (“Bad faith must be proven by clear and
Actionable bad faith encompasses behavior beyond the denial of a claim
without a reasonable basis, including an insurer’s investigation of a claim. “[T]he
broad language of [S]ection 8371 was designed to remedy all instances of bad faith
conduct by an insurer . . . . Therefore, . . . [a]n action for bad faith may also extend to
the insurer’s investigative practices.” Hollock v. Erie Ins. Exch., 842 A.2d 409, 415
(Pa. Super. Ct. 2004) (internal quotation marks and citations omitted). Implicit in the
statute is “the requirement that the insurer properly investigate claims prior to
refusing to pay the proceeds of the policy to its insured.” Bombar v. West Am. Ins.
Co., 932 A.2d 78, 92 (Pa. Super. Ct. 2007).
The insurer may defeat a claim of bad faith by “showing that it had a
reasonable basis for its actions.” Post, 691 F.3d at 522. Even questionable conduct
giving the appearance of bad faith is insufficient to establish bad faith so long as the
insurer had a reasonable basis to deny coverage. Id. at 523.
The parties dispute whether Plaintiffs are entitled to have access to the
entire claims file created by State Farm pertaining to the UIM claim. While State
Farm has submitted the claims file to Plaintiffs pursuant to a discovery request, it has
redacted significant portions thereof. Plaintiffs request the court to permit discovery
of the entire file. In an effort to resolve the instant dispute, the court ordered State
Farm to submit unredacted versions of the redacted portions of the claims file to the
court for an in camera review.1
An insurer-defendant’s claims file may be discoverable in a bad faith
case like this one, as information in that file on the defendant’s actions related to the
claim is relevant or could lead to potentially relevant information. See, e.g.,
Robertson v. Allstate Ins. Co., Civ. No. 98-cv-4909, 1999 WL 179754, *3 (E.D. Pa.
Mar. 10, 1999) (finding that the plaintiff could discover claims file in bad faith case,
but applying the work product doctrine to limit the plaintiff’s attempt to discover
“the unredacted UIM claims file and all documents associated with the file”).
However, the work product privilege protects “the mental impressions, conclusions,
opinions, or legal theories of an attorney or other representative of a party
concerning the litigation.” United Coal Cos. v. Powell Const. Co., 839 F.2d 958,
966 (3d Cir. 1988). The work product doctrine is not applicable merely because the
material was prepared by or for the agents of an insurer. Id. An insurer’s attorney
“may invoke work product protection in favor of documents prepared by it in
anticipation of litigation,” but Rule 26(b)(3) was “not intended to protect all
insurance claim files from discovery.” Mattison v. Imbesi, Civ. No. 97-cv-2736,
1998 WL 720061, *2 (E.D. Pa. Oct. 6, 1998). “An insurance company cannot
reasonably argue that the entirety of its claims files are accumulated in anticipation
During the conference call with the parties pertaining to this discovery dispute, the court
requested that State Farm submit to the court an explanation for its redactions in conjunction with its
submission of the claims file. State Farm failed to do so, and thus, the court will presume that State
Farm is invoking the work product privilege.
of litigation when it has a duty to investigate, evaluate[,] and make a decision with
respect to claims made on it by its insureds.” Id. (quoting Lyvan v. Harleysville Ins.
Co., Civ. No. 93-cv-6145, 1994 WL 533907, *3 (E.D. Pa. Sept. 29, 1994)).
The court has reviewed the redacted portions of the claims file to
determine which portions are subject to privilege. In doing so, the court was unable
to determine the basis for much of the redaction, but notes that several portions were
likely redacted because the pages contained information pertaining to reserves or the
insurance adjusters’ impressions or conclusions. The court will address each in turn.
State Farm has redacted all information in the claims file pertaining to
reserves. “An insurance reserve is a pool of funds allocated to satisfy obligations
that may arise under a claim.” Peco Energy Co. v. Insurance Co. of N. Am., 852
A.2d 1230, 1232 n.3 (Pa. Super. Ct. 2004). Pennsylvania law “requires insurance
companies to set aside reserves upon notice of potential losses under their policies.”
Fidelity & Deposit Co. of Md. v. McColloch, 168 F.R.D. 516, 525 (E.D. Pa. 1996)
(citing 40 P.S. § 71). There is competing treatment of whether reserve information is
discoverable in a bad faith lawsuit. Some courts have determined that information
related to reserve values is not discoverable. See, e.g., Kaufman v. Nationwide Mut.
Ins. Co., Civ. No. 97-cv-1114, 1997 WL 703175, *1 (E.D. Pa. 1997) (“[P]rocedure
for setting reserves . . . is confidential information which a court should not order to
be disclosed unless the relevance of the information is clear and disclosure is
necessary.”). Other courts, however, have found that “reserves, of course, must have
some relationship to the insurer’s estimation of the insured’s potential liability.
Otherwise, the setting aside of reserves would serve little, if any purpose.” North
River Ins. Co. v. Greater N.Y. Mut. Ins. Co., 872 F. Supp. 1411, 1412 (E.D. Pa.
1995). Thus, the amount set aside for reserves “is certainly germane to any analysis
[the defendant-insurer] made of” the claim’s value and is relevant to the
determination of whether the defendant-insurer acted in bad faith in processing the
Since Plaintiffs claim State Farm has acted in bad faith during its
investigation of their UIM claim, the amount set aside for reserves is relevant to the
determination of whether State Farm acted in bad faith in processing the claim, and
therefore, the court will order disclosure of such information.
Insurance Adjuster’s Impressions, Conclusions, and
State Farm has also redacted portions of the claims file which include
the insurance adjusters’ impressions, conclusions, and opinions. Mental impressions
and opinions of a party and its agents are not generally protected by the work product
doctrine unless they are prepared in anticipation of litigation. See Safeguard
Lighting Sys., Inc. v. North Am. Specialty Ins. Co., Civ. No. 03-cv-4145, 2004 WL
3037947, *2 (E.D. Pa. Dec. 30, 2004) (citing United States v. Nobles, 422 U.S. 225,
238 (1975)). To that end, “work product prepared in the ordinary course of business
is not immune from discovery.” Id. (citing Holmes v. Pension Plan of Bethlehem
Steel Corp., 213 F.3d 124, 138 (3d Cir. 2000)). Thus, as stated recently by this court
in Keefer v. Erie Ins. Exch., Civ. No. 13-cv-1938, 2014 WL _____ (M.D. Pa. Mar. 7,
2014), the gravamen of a claim of work product protection necessarily requires an
assessment of when litigation was anticipated, which is a determination not subject
to a bright-line rule. As recognized by the Third Circuit, “[p]rudent parties anticipate
litigation and begin preparation prior to the time suit is formally commenced.”
Martin v. Bally’s Park Place Hotel & Casino, 983 F.2d 1252, 1260 (3d Cir. 1993)
(citing In re Grand Jury Proceedings, 604 F.2d 798, 803 (3d Cir. 1979)). Thus,
whether litigation was reasonably anticipated is a fact-dependent inquiry.
Although the court lacks the necessary evidence to determine when
State Farm reasonably anticipated litigation, the court has reviewed the claims file
with this standard in mind, and concludes that certain portions of the record were
prepared in anticipation of litigation and should be protected. The accompanying
order reflects the court’s findings in this regard.
Based on the foregoing and in accordance with the accompanying order,
the court will order the production of certain parts of the redacted claims file and
allow other parts to remain protected based on the work product privilege.
An appropriate order will issue.
s/Sylvia H. Rambo
SYLVIA H. RAMBO
United States District Judge
Dated: March 10, 2014.
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