Burke v. Ability Insurance Company et al
Filing
150
MEMORANDUM OPINION AND ORDER granting in part and denying in part 73 First MOTION to Compel PLAINTIFFS MOTION TO COMPEL REGARDING DEFENDANT, ABILITY RESOURCES, INC., granting in part and denying in part 68 First MOTION to Compel Regarding Defendant Ability Insurance Company Signed by U.S. District Judge Karen E. Schreier on 5/31/2013. (KC)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
TERRY BURKE as personal
representative of the estate of
Berniece Hermsen, and in his
capacity as previous attorney in fact
for Berniece Hermsen,
Plaintiff,
vs.
ABILITY INSURANCE COMPANY,
f/k/a Medico Life Insurance
Company;
ABILITY RESOURCES, INC.;
ABILITY RESOURCES HOLDINGS,
INC.;
ABILITY REINSURANCE HOLDINGS
LIMITED, BERMUDA; and
ABILITY REINSURANCE LIMITED,
BERMUDA,
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CIV. 12-4051-KES
MEMORANDUM OPINION
AND ORDER
Defendants.
Plaintiff, Terry Burke, personal representative of the estate of Berniece
Hermsen and in his capacity as previous attorney in fact for Hermsen, brought
this claim against defendants alleging breach of contract, bad faith, fraud, and
misrepresentation stemming from the scope of coverage of Hermsen’s long-term
care insurance policy. Docket 31. Burke moves to compel production of
documents related to this litigation from both Ability Insurance Company (AIC)
and Ability Resources Inc. (ARI) claiming that the requested discovery is
relevant, narrowly tailored, and not subject to privilege. Dockets 68 & 73. Both
AIC and ARI objected to a number of the requests for production and opposed
Burke’s motions to compel in a joint response. Dockets 91 & 96. The court
grants the motion to compel in part and denies the motion in part.
BACKGROUND
Mutual Protective Insurance sold a policy of long-term care insurance to
Hermsen, a South Dakota resident, in January of 2000. Docket 31 ¶ 5.
Generally, Hermsen’s policy required that nursing or long-term care benefits be
given to an insured who meets the qualifications contained in the policy.
Hermsen entered an assisted living facility on January 5, 2009. Docket 31 ¶ 19.
She and her family1 submitted a claim for benefits under her policy on
January 13, 2009. Docket 31 ¶ 20. On February 27, 2009, Hermsen received a
denial letter stating that she did not meet the eligibility requirements of her
policy. Id.
Hermsen filed a second claim for benefits around July 30, 2009. Because
Hermsen’s condition had deteriorated since she entered the assisted living
facility, her second request for benefits under her policy was approved. Nearly
two years later, and after Hermsen died, counsel for Hermsen’s estate contacted
AIC and requested that AIC pay the unpaid benefits to Hermsen’s estate for the
period of time that Hermsen was not covered under the policy in 2009. AIC
issued checks to the estate in an amount totaling $17,050.93 for unpaid
1
Terry Burke is Hermsen’s nephew. Docket 31 ¶ 20.
2
benefits from January 5, 2009, to August 2, 2009. Hermsen died on July 19,
2010. Docket 91 at 5.
Meanwhile, Hermsen’s and many other insureds’ long-term care
insurance policies were acquired by Medico Life Insurance Company. Docket 31
¶ 6. In September of 2007, Medico Life Insurance Company was acquired by
ARI, and Medico became AIC. Docket 31 ¶¶ 6-7. While AIC is the entity that
contracts with insureds to purchase insurance, AIC and its owner, ARI, have a
number of related entities. Ability Resources Holdings, Inc. is the holding
company for ARI. AIC contracts with Ability Reinsurance (Bermuda) Limited to
act as a reinsurer of its risk, and AIC pays approximately 75 percent of its
premium revenues to Ability Reinsurance (Bermuda) Limited as the payment for
providing reinsurance. Docket 31 ¶ 9. Finally, Ability Reinsurance Holdings
Limited is the holding company of Ability Reinsurance (Bermuda) Limited.
Donald Charsky is the president and CEO of Ability Resources Holdings, the
holding company above AIC and ARI.
On March 23, 2012, Burke brought this cause of action on behalf of
Hermsen’s estate against all five Ability entities alleging breach of contract, bad
faith, fraud, and misrepresentation stemming from the scope of coverage of
Hermsen’s long-term care insurance policy. Docket 1. The three noncontracting
defendants, Ability Resources Holdings, Inc., Ability Reinsurance Holdings
Limited, and Ability Reinsurance (Bermuda) Limited, moved to dismiss
3
themselves as parties to the action on July 23, 2012. Docket 40. The court
denied the motion to dismiss. Docket 105 at 25.
On July 12, 2012, Burke issued 25 requests for production to both ARI
and AIC. On August 20, 2012, AIC and ARI objected to those requests and did
not provide any documents. AIC eventually agreed to comply with request for
production number 1, which related to Hermsen’s claim file. As to the other
requests, defendants objected based on relevance, undue burden, and that the
requests were overly broad or contained confidential or privileged material.
Although they initially objected to many of the requests for production, AIC and
ARI have since produced over 1,100 documents totaling over 5,500 pages
throughout the pendency of the case.
The parties agree that they made efforts to meet and confer to resolve
these discovery disputes as required by the local and civil rules. The parties
could not reach a resolution. As a result, on November 21, 2012, Burke moved
to compel AIC to comply with his discovery requests. Docket 68. On
November 26, 2012, Burke moved to compel ARI to produce similar discovery.
Docket 73. Defendants2 filed a joint response in resistance to the motion to
compel. Docket 91. The court will take up the remaining portions of the motion
to compel.
2
Because Burke’s motions to compel only relate to AIC and ARI, when
the court refers to defendants in the remainder of this order it is generally
referring to AIC and ARI.
4
STANDARD OF REVIEW
The scope of discovery in a civil case is governed by Federal Rule of Civil
Procedure 26, which provides:
Unless otherwise limited by a court order, the scope of discovery is
as follows: Parties may obtain discovery regarding any nonprivileged
matter that is relevant to any party’s claim or defense–including the
existence, description, nature, custody, condition, and location of
any documents or other tangible things and the identity and
location of persons who know of any discoverable matter. For good
cause, the court may order discovery of any matter relevant to the
subject matter involved in the action. Relevant information need not
be admissible at the trial if the discovery appears reasonably
calculated to lead to the discovery of admissible evidence. All
discovery is subject to the limitations imposed by Rule 26(b)(2)(c).
Fed. R. Civ. P. 26(b)(1). The court will limit the extent of discovery if it
determines the discovery is unreasonably duplicative, cumulative, can be
obtained from a more convenient source, or if the expense or burden of
discovery outweighs its benefit. Fed. R. Civ. P. 26(b)(2)(C).
The scope of discovery under Rule 26(b) is extremely broad. See 8 Charles
Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 2007, 36-37
(1970) (hereinafter “Wright & Miller”). The reason for the broad scope of
discovery is that “[m]utual knowledge of all the relevant facts gathered by both
parties is essential to proper litigation. To that end, either party may compel the
other to disgorge whatever facts he has in his possession.” 8 Wright & Miller
§ 2007 at 39 (quoting Hickman v. Taylor, 329 U.S. 495, 507-08 (1947)). The
federal rules distinguish between discoverability and admissibility of evidence.
5
Fed. R. Civ. P. 26(b)(1), 32, and 33(a)(2). Therefore, the rules of evidence assume
the task of keeping out incompetent, unreliable, or prejudicial evidence at trial.
These considerations are not inherent barriers to discovery, however.
The advisory committee's note to the 2000 amendments to Rule 26(b)(1)
offers guidance on how courts should define the scope of discovery in a
particular case:
Under the amended provisions, if there is an objection that
discovery goes beyond material relevant to the parties’ claims or
defenses, the court would become involved to determine whether the
discovery is relevant to the claims or defenses and, if not, whether
good cause exists for authorizing it so long as it is relevant to the
subject matter of the action. The good-cause standard warranting
broader discovery is meant to be flexible.
The Committee intends that the parties and the court focus on the
actual claims and defenses involved in the action. The dividing line
between information relevant to the claims and defenses and that
relevant only to the subject matter of the action cannot be defined
with precision. A variety of types of information not directly
pertinent to the incident in suit could be relevant to the claims or
defenses raised in a given action. For example, other incidents of
the same type, or involving the same product, could be properly
discoverable under the revised standard . . . . In each instance, the
determination whether such information is discoverable because it
is relevant to the claims or defenses depends on the circumstances
of the pending action.
The rule change signals to the court that it has the authority to
confine discovery to the claims and defenses asserted in the
pleadings, and signals to the parties that they have no entitlement
to discovery to develop new claims or defenses that are not already
identified in the pleadings. . . . When judicial intervention is
invoked, the actual scope of discovery should be determined
according to the reasonable needs of the action. The court may
permit broader discovery in a particular case depending on the
6
circumstances of the case, the nature of the claims and defenses,
and the scope of the discovery requested.
Fed. R. Civ. P. 26 advisory committee’s note to 2000 Amendments, subdivision b.
The same advisory committee's note further clarifies that information is
discoverable only if it is relevant to the claims or defenses of the case or, upon a
showing of good cause, to the subject matter of the case. Id. “Relevancy is to be
broadly construed for discovery issues and is not limited to the precise issues
set out in the pleadings. Relevancy . . . encompass[es] ‘any matter that could
bear on, or that reasonably could lead to other matter that could bear on, any
issue that is or may be in the case.’ ” E.E.O.C. v. Woodmen of the World Life Ins.
Soc’y, Civ. No. 03-165, 2007 WL 1217919, at *1 (D. Neb. Mar. 15, 2007)
(quoting Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)). The
party seeking discovery must make a “threshold showing of relevance before
production of information, which does not reasonably bear on the issues in the
case, is required.” Id. (citing Hofer v. Mack Trucks, Inc., 981 F.2d 377, 380 (8th
Cir. 1993)). “Mere speculation that information might be useful will not suffice;
litigants seeking to compel discovery must describe with a reasonable degree of
specificity, the information they hope to obtain and its importance to their case.”
Id. (citing Cervantes v. Time, Inc., 464 F.2d 986, 994 (8th Cir. 1972)).
Once the requesting party has made a threshold showing of relevance, the
burden shifts to the party resisting discovery to show specific facts
demonstrating that the discovery is not relevant, or how it is overly broad,
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burdensome, or oppressive. Penford Corp. v. Nat'l Union Fire Ins. Co., 265 F.R.D.
430, 433 (N.D. Iowa 2009); St. Paul Reinsurance Co. v. Commercial Fin. Corp.,
198 F.R.D. 508, 511 (N.D. Iowa 2000). The articulation of mere conclusory
objections that something is “overly broad, burdensome, or oppressive,” is
insufficient to carry the resisting party's burden–that party must make a specific
showing of reasons why the relevant discovery should not be had. Cincinnati Ins.
Co. v. Fine Home Managers, Inc., Civ. No. 09-234, 2010 WL 2990118, at *1 (E.D.
Mo. July 27, 2010); see also Burns v. Imagine Films Entm't, Inc., 164 F.R.D. 589,
593 (W.D.N.Y. 1996).
DISCUSSION
I.
Reserves
Burke made a number of requests for production that relate to the
reserves set by Ability. The language in the first of those requests is as follows:
Request for Production Number 2: Any and all documents
that show or relate to claim reserves with respect to Berniece
Hermsen’s claim, or the manner of assigning claim reserves with
respect to Berniece Hermsen’s claim. If records do not exist with
respect to the particular claim, Defendants should provide records
showing how reserves are set for claims in the aggregate.
Defendants objected to these requests as irrelevant, privileged, and
confidential. Later defendants said that no documents exist pertaining to
reserves for Hermsen’s claim and they refused to provide documents relating to
aggregate reserves because it was irrelevant.
8
“Reserves are an insurer’s estimates of potential losses due to claims on
its policies.” Spirco Envt’l Inc. v. Am. Int’l Speciality Lines Ins. Co., Civ. No. 051437, 2006 WL 2521618, at *1 (E.D. Mo. Aug. 30, 2006) (citing J.C. Assocs. v.
Fid. & Guar. Ins. Co., Civ. No. 01-2437, 2003 WL 1889015, at *1 (D.D.C. 2003)).
Evidence related to reserves is generally relevant because “[t]he failure of an
insurer to offer a reasonable amount to settle a claim, on a claim of bad faith
breach of duty, might be evidenced by the insurer’s setting aside a substantially
greater amount of reserve for that claim.” Id. (citation omitted).
The Eighth Circuit Court of Appeals has found that evidence of reserves or
case estimate information may be admissible to the issue of whether an insured
made settlement offers in good faith. Kirchoff v. American Cas. Co. of Reading,
Pa., 997 F.2d 401, 405 (8th Cir. 1993). On the other hand, the Eighth Circuit
has also stated that individual or specific case reserves may be protected by the
work product privilege if they are prepared in anticipation of trial or for
litigation. Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). This is
because “[t]he individual case reserve figures reveal the mental impressions,
thoughts, and conclusions of an attorney in evaluating a legal claim. By their
very nature they are prepared in anticipation of litigation and, consequently,
they are protected from discovery as opinion work product.” Id. (citing Hickman
v. Taylor, 329 U.S. 495, 512 (1947)). Evidence pertaining to aggregate reserve
9
information, however, is discoverable and generally not protected by the work
product doctrine or the attorney-client privilege. Id. at 402-03.
Because defendants stated that individual reserves do not exist for
Hermsen’s claim, the court does not have to determine if the privilege applies to
this type of document or whether it is discoverable. The court does conclude,
however, that evidence related to reserves in the aggregate is relevant,
discoverable, and not protected by privilege because evidence suggests that they
were prepared in the ordinary course of business. See Lyon v. Bankers Life &
Cas. Co., Civ. No. 09-5070, 2011 WL 124629, at *11 (D.S.D. Jan. 14, 2011)
(“ ‘The aggregate reserve information in the risk management documents serves
numerous business planning functions, but we cannot see how it enhances the
defense of any particular lawsuit.’ The requested documents are neither
privileged nor protected.”) (quoting Simon, 816 F.2d at 401). Moreover, any
argument pertaining to privilege cannot properly be addressed by the court at
this time because defendants have not submitted a privilege log on this topic.
Defendants argue that this type of evidence, and other evidence related to
their financial condition, cannot be conducted at this stage of the litigation
because SDCL 21-1-4.1 prevents discovery of evidence related to punitive
damages from commencing unless the court finds by clear and convincing
evidence following a hearing that there is a reasonable basis to believe the
defendant engaged in willful, wanton, or malicious conduct. This court has
10
previously held on numerous occasions, however, that SDCL 21-1-4.1 is a
procedural statute that conflicts with the federal rules of evidence, which means
that the statute is not applied by federal courts sitting in diversity. See
Houwman v. Gaiser, Civ. No. 10-4125, 2011 WL 4345236, at *10 (D.S.D.
Sept. 15, 2011) (“Therefore, the statute’s requirement of a hearing before
commencing discovery, as well as the statute’s language, does not apply to this
action in federal court.”); Lillibridge v. Nautilus Ins. Co., Civ. No. 10-4105, 2013
WL 870439, at *7 (D.S.D. Mar. 7, 2013) (“Therefore, Lillibridge does not have to
meet the heightened burden found in SDCL 21-1-4.1 to begin discovery on the
issue of punitive damages, and Lillibridge may proceed with discovery without
court order.”).
Defendants also argue that their financial condition is not relevant to this
case. The court disagrees. The South Dakota Supreme Court has held that “a
defendant’s net worth is a guideline for assessing the amount of punitive
damages.” Roth v. Farner-Bocken Co., 667 N.W.2d 651, 670 (S.D. 2003). The
court has also stated that “defendant’s financial resources are an appropriate
yardstick for determining punitive damages.” Id. Because Burke has alleged a
claim of punitive damages and the exact business or financial relationships
between all defendants is unclear, evidence of all defendants’ financial
condition, including aggregate reserves, is relevant to a material issue in this
11
case and is discoverable. Thus, the motion to compel as to request for
production number 2 is granted.
Burke’s next requests for production are related to the prior issue of
reserves and specifically pertain to an electronic media search. The specific
requests are:
Request for Production Number 3: Any and all documents
from any Electronic Storage Media computer used by or accessible
to the following individuals, and which contain the term “reserve” or
“reserves”: (a) Donald Charsky; (b) Ray Nelson; (c) Dan Cathcart; (d)
Imran Siddiqui; (e) Douglas Kaden. The scope of this request is
January 2, 2009, to present, or whatever period of time the
Electronic Storage Media will allow. This request includes but is not
limited to word processing documents, e-mails, spreadsheet or
accounting programs, PDF documents that allow optical character
recognition, or any other type of digital data that is capable of
electronic search.
Request for Production Number 20: Any and all e-mails to
or from Ray Nelson, Donald Charsky, Donald Catchcart [sic],
Michael Crow, Douglas Kaden, Imran Siddiqui, or Fred Yoshua,
related to establishing reserves, setting reserves, or changes in
reserves. The scope of this request is January 1, 2009, to present.
Like the court’s conclusion for request for production number 2, the court
also finds that the requested discovery for requests for production numbers 3
and 20 are relevant and are not privileged so far as they pertain to aggregate
reserves. The burden now shifts to Ability to show that these requests are overly
broad, burdensome, or oppressive.
Ability cannot carry this burden because it has done nothing more than
state broad, boilerplate, or cursory objections. See Continental Ill. Nat’l Bank &
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Trust Co. of Chicago v. Caton, 136 F.R.D. 682, 684-85 (D. Kan. 1991) (“All
discovery requests are a burden on the party who must respond thereto. Unless
the task of producing or answering is unusual, undue or extraordinary, the
general rules require the entity answering or producing the documents to bear
that burden.”). Defendants have not stated that they cannot conduct the
searches, only that it would require review of numerous documents that are
irrelevant to Hermsen’s claim for benefits. Defendants failed to articulate how
this discovery is extraordinary or unusual; thus, defendants have not carried
their burden. See Kirschenman v. Auto-Owners Ins., 280 F.R.D. 474, 491 (D.S.D.
2012) (noting that while the insurance company claims that it has 4500 files
that are not currently sorted electronically, defendant did “not assert that they
cannot be sorted.”).
The requests are not overly broad because they are limited to specific
employees within Ability who may have knowledge about reserves, they are
limited in time, and they are generally self-limiting. Also, the court cannot
establish whether any privilege applies because defendants did not submit a
privilege log pertaining to this information. Accordingly, defendants will produce
documents responsive to these requests, and the motion to compel related to
requests for production numbers 3 and 20 is granted.
13
Burke requested actuary reports or communications related to reserves
for long-term care policies that are issued to defendants. The requests
specifically state:
Request for Production Number 18: Copies of all periodic
reports from any actuaries or the actuarial department of any
Defendant, related to Defendants’ long-term care policies. The scope
of this request is September 27, 2007, to present.
Request for Production Number 19: Any and all
communications between actuaries employed by Defendants and
outside actuaries or actuary firms, related to establish reserves,
setting reserves, or changes in reserves. The scope of this request is
January 1, 2009, to present.
Burke states that reports, emails, or communications to or from
defendants’ employees and actuaries or between specific employees related to
reserves are relevant because they will help form the basis for how defendants
set reserves or can help Burke understand what is included in defendants’
reserves. This court has already determined that Burke’s prior requests related
to reserves are relevant and discoverable in this case when discussed in the
aggregate because it could lead to admissible evidence related to punitive
damages. Additionally, defendants have admitted that “[t]he Companies’
reserves are regularly reviewed by outside parties, including (i) an outside
actuary who reviews their calculations and the adequacy of reserves.” Docket 91
at 13. Because these reports, emails, or communications relate to setting the
aggregate for defendants’ reserves, the court finds that they are relevant.
14
Accordingly, Burke’s motion to compel as it relates to requests for production
numbers 18 and 19 is granted.
II.
Employment Files and Compensation
Burke requested a number of documents that are related to the personnel
files and the compensation scheme for the employees who handled Hermsen’s
claim–including upper management. The specific requests are as follows:
Request for Production Number 4: Copies of any
employment related files maintained by Defendants which relate to
the following persons, and any other person who handled,
supervised, audited and/or reviewed Plaintiff’s claim, as well as the
personnel files of all persons in the chain of command above those
persons: Anita Gold, Amy Taylor, Grace Nogueira, Anne Ingoldsby,
Donald Charsky, and Donald Lawler. This request includes (but is
not limited) to personnel files, human resources files, compensation
files, or files by any other name or description that are used to hold
documents or data related to that person’s employment.
Request for Production Number 5: All compensation
agreements between any Defendant and each of its officers or
directors. This includes, but is not limited to, agreements for wages,
deferred compensation, bonuses, incentive agreements, stock
options, loans, or any other potential form of consideration.
ARI and AIC objected to the requests as irrelevant, overly broad, and
confidential. ARI later produced the personnel files for Anita Gold, Amy Taylor,
Grace Nogueira, Anne Ingoldsby, Donald Charsky, and Donald Lawler. Burke
still requests the personnel files or compensation agreements for defendants’
directors.
First, courts in the District of South Dakota have routinely found
personnel files in insurance bad faith cases to be relevant and discoverable. See
15
Lyon, 2011 WL 124629, at *8 (“[T]he district court in the Western Division of the
District of South Dakota has traditionally and uniformly allowed discovery of
personnel files in insurance bad faith cases.”). This is because “[p]ersonnel files
may reveal an inappropriate reason or reasons for defendant’s action with
response to plaintiff’s claim or an ‘inappropriate corporate culture.’ ” Signature
Development, LLC v. Mid-Continent Cas. Co., Civ. No. 11-5019, 2012 WL
4321322, at *13 (D.S.D. Sept. 18, 2012) (citing Lyon, 2011 WL 124629, at *8).
Second, this court has found that upper management personnel files are
discoverable in bad faith cases. See Kirschenman v. Auto-Owners Ins., Civ. No.
09-4190, 2012 WL 1493833, at *2 (D.S.D. Apr. 27, 2012) (“But according to
established law in this district, upper-level personnel files are discoverable in a
case alleging bad faith.”). Thus, defendants’ assertion that these files are not
relevant because directors or officers did not handle Hermsen’s claim is without
merit.
Request for production number 5 requests the production of
compensation agreements between any of the named entity defendants and their
directors or officers. Like a personnel file, bonus and incentive information for
the directors or officers as upper-level employees of defendant companies is also
relevant and discoverable when an insurance bad faith claim is alleged. See
Hurley v. State Farm Mut. Auto. Ins. Co., Civ. No. 10-4165, 2012 WL 1600796, at
*4 (D.S.D. May 7, 2012) (“It is well established in this district that information
16
about bonuses and incentives for upper-level employees is generally
discoverable in cases alleging that an insurance company acted in bad faith in
denying an insured’s claim in violation of South Dakota law.”).
This type of information raises confidentiality concerns, but it can be
protected through the entry of a protection order that will prevent the
dissemination of confidential information. Although the parties have a current
protection order in place, it only pertains to the business documents of AIC,
rather than ARI. Docket 116. The parties shall execute a similar confidentiality
agreement that pertains to the confidential or trade secret information of ARI.
With that additional protection, Burke’s motion to compel as to requests for
production numbers 4 and 5 is granted, and defendants will produce the
personnel files or compensation agreements of the parties listed, their
supervisors, and directors if defendants have access3 to these documents.
In request for production number 12, Burke seeks information about
stock options issued by any defendant company. The specific request is:
Request for Production Number 12: Any and all documents
related to valuation of stock options issued by any Defendant,
regardless of whether the basis of the valuation is carrying value,
3
“The rule that has developed is that if a party ‘has the legal right to
obtain the document,’ then the document is within that party’s ‘control’ and,
thus, subject to production under Rule 34.” Beyer v. Medico Ins. Grp., Civ. No.
08-5058, 2009 WL 736759, at *5 (D.S.D. Mar. 17, 2009) (quoting 8A Charles
Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice &
Procedure § 2210 at 397 (2d ed. 1994)).
17
book value, actual value, or any other means or basis of evaluation.
The scope of this request is September 27, 2007, to present.
Defendants object to this request as being irrelevant, overly broad, unduly
burdensome, and confidential. Defendants state that these documents do not
pertain to Burke’s claim. Defendants later stated that they do not issue stock
options. Burke argues that this evidence is relevant to show defendants’
managers have a personal interest in protecting the company’s money and to
deny claims like Hermsen’s because they have the ability to buy reduced price
stock. Burke also claims that the value of stock options could offer a candid
explanation of defendants’ financial history.
The court concludes that stock options for upper management and
individuals involved in the denial of Hermsen’s claims could be considered a
form of compensation, which is relevant and discoverable. See Anspach v. United
of Omaha Life Ins. Co., Civ. No. 10-5080, 2011 WL 3862267, at *9 (D.S.D.
Aug. 31, 2011) (“Personnel files may reveal whether a particular employee was
rewarded financially for denying a certain number or percentage of claims or
achieving a particular outcome with regard to claims handling. This is certainly
relevant to [plaintiff]’s bad faith and punitive damages claims.”). If documents
exist that relate to the valuation of stock options issued by any defendant and
AIC or ARI have access to this information, then it will be provided to Burke.
The court has already entered a protection order that protects AIC’s
confidential documents and has now ordered that the parties enter into a
18
protection order that similarly shields ARI. Thus, defendants’ concerns about
the dissemination of proprietary or confidential information is resolved.
Accordingly, Burke’s motion to compel related to request for production number
12 is granted.
III.
Corporate Structure
Burke requests a number of documents that relate to defendants’
business or corporate structure. The first request is:
Request for Production Number 13: For each Defendant,
copies of any and all articles of incorporation, corporate charters,
by-laws (or bye-laws), memorandum of association, and limited
liability company operating agreements, including any amendments
or exhibits thereto, or any other similar documents showing
formation of a legal entity, including, but not limited to, similar
documents designed by other names under laws or rules applicable
to Bermuda entities.
Defendants stated that the request is not relevant, is overly broad, and is
confidential. Defendants eventually produced their own articles and by-laws,
but did not produce documents for any other defendants because it did not
“have in its possession, custody, or control, any documents responsive to this
request for any of the other Defendants in this matter.” The court finds that
these documents are relevant to this case as typical background discovery and
to help establish the relationship between all defendants. If defendants have
access to these documents, then they will produce them to Burke.
Burke also requests information related to agreements or contracts
between defendants. Specifically, the request is:
19
Request for Production Number 11: Any and all documents
evidencing agreements or contracts of any kind, including
amendments, exhibits, documents incorporated by reference, or
documents referred to in the agreement, between or among any of
the Defendants since January 1, 2007.
Defendants objected to this request on the grounds that it is irrelevant,
overly broad, and confidential. Defendants stated that they have since
completed production of all agreements between AIC and ARI or any other
remaining defendant except for one agreement between ARI and Ability
Reinsurance (Bermuda) Limited.
The court finds that contracts or agreements between the defendants is
relevant to this case. In particular, reinsurance agreements and other
agreements between the parties are relevant to the makeup of an insurance
company and could lead to the discovery of admissible evidence. See Lyon, 2011
WL 124629, at *18 (“The relationship between [the insurer] and its reinsurers is
relevant to determining if there is a pattern of conduct or an isolated incident of
denial of plaintiff’s long-term care insurance coverage. Discovery of this
relationship is permissible under Rule 26(a)(1)(A)(iv) and may well lead to
admissible evidence under Rule 26(b)(1).”). Any concerns about confidentiality
can be addressed through the parties’ protection orders. Because defendants
have admitted there may still be one contract they have not produced, Burke’s
motion to compel as to this request is granted.
20
Burke also requests documents that were for the use of or referenced by
defendants’ directors at board meetings or for use by certain committees in
preparation for committee meetings. Those specific requests state:
Request for Production Number 14: For each Defendant,
any and all documents provided to directors for use or reference at
board meetings. This would include, but not be limited to, minutes
of previous meetings, agendas, reports, studies, accountings,
spreadsheets, power point slides or presentations, or other
documents. The scope of this request is January 1, 2007, to
present.
Request for Production Number 15: Any and all documents
provided to or circulated amongst members of any audit committee,
investment committee, risk management committee, or
compensation committee, for their preparation, use or reference,
during meetings of that committee. This would include, but not be
limited to, minutes of previous meetings, agendas, reports, studies,
accountings, spreadsheets, power point slides or presentations, or
other documents. The scope of this request is January 1, 2007, to
the present.
Defendants objected to these requests as irrelevant, overly broad, and
confidential because these documents are not relevant to plaintiff’s claims. AIC
and ARI eventually agreed to produce their own documents subject to a
protective order, but said that they did not have any documents in their
possession, custody, or control related to any of the other defendants.
Defendants now state that they have already produced all non-privileged
documents that are responsive to their own companies. ARI stated that it would
also produce board minutes and materials for some meetings of the Bermuda
companies’ boards.
21
If ARI or AIC have documents responsive to requests for production
numbers 14 or 15 or have access to such documents other than those already
provided, then they will produce those documents to Burke. Items given to
defendants’ board of directors like meeting minutes, agenda items, and other
related documents are relevant to a number of issues the court has already
discussed, such as: claims handling, risk management, compensation or
incentives for employees, or defendants’ financial condition. Similarly, the court
finds that any document used by the audit committee, investment committee,
risk management committee, and compensation committee of any defendant
could lead to the discovery of admissible evidence relating to the relevant topics
discussed above. Burke’s motion to compel as to requests for production
numbers 14 and 15 is granted.
Burke also seeks the production of email communication between specific
individuals that pertain to defendants’ business operations. His request is:
Request for Production Number 16: Any and all e-mail
communications and attachments to or from any of the following
individuals which is related to the business operations of any of the
Defendants: (a) Donald Charsky; (b) Donald Cathcart; (c) Michael
Crow; (d) Douglas Kaden; (e) Imran Siddiqui; and (f) Fred Yosua.
The scope of this request is January 1, 2010, to present.
Defendants initially objected to this request as being irrelevant, overly
broad, unduly burdensome, vague and ambiguous, confidential and privileged.
Defendants stated that the request is vague because it uses the term “business
operations” and does not define it so that defendants can understand what is
22
requested. Burke agreed to narrow the request to four individuals for an eightmonth window. Defendants suggested 26 search terms to further narrow the
request. Burke did not agree to the use of these search terms.
Burke argues that this information is relevant because the purpose is to
explore control of the Ability entities and is aimed at the individuals likely to be
involved in control. The court finds that the request, as it is currently worded, is
too broad, unduly burdensome, or vague. The request would essentially ask for
all emails from the parties at issue, and the majority of those emails would not
be relevant to any of the claims raised in this case. The court finds that the
search terms offered by defendants would properly narrow and tailor this
request. Burke may propose additional terms to further focus the request to find
documents that could reasonably lead to discovery of admissible evidence. In
the meantime, defendants will produce the documents that AIC stated it already
identified as responsive to the original request and as applied to the specific
individuals, the temporal scope of the original request, and using the search
terms proposed. Accordingly, this request is granted in part and denied in part.
Burke asked for emails that relate to an investment strategy of
defendants. Specifically, Burke requests:
Request for Production Number 17: All e-mails and
attachments to or from the following individuals which contain the
terms “hold to maturity,” or “HTM”: Donald Charsky, Eileen
Sweeney, Donald Cathcart, Douglas Kaden, Imran Siddiqui. The
scope of this request is September 27, 2007, to present, or as far
back as the hardware will allow.
23
Defendants objected to this request as irrelevant, overly broad, unduly
burdensome, confidential, and privileged. Burke argues that the information is
relevant because these terms describe defendants’ investment strategy and
would lead to admissible evidence of defendants’ financial condition. Moreover,
Burke claims that communications about HTM assets are likely to show which
people within the hierarchy of defendants’ companies make the investment
decisions and what degree of control the parent companies exercise over the
subsidiary companies. For these reasons, the court finds this information to be
relevant to defendants’ financial condition and business hierarchy.
The court also finds that any confidentiality concerns have been alleviated
through the entry of the parties’ protection orders. Any privilege concerns
cannot be addressed absent the submission of a privilege log. Thus, if
documents responsive to this request exist and defendants have access to them,
they will provide the documents to Burke. Burke’s motion to compel as to this
request is granted.
IV.
Discovery from Prior Litigation
Burke has requested all documents that were previously disclosed in prior
South Dakota litigation and the Hull litigation in Montana. Those specific
requests are:
Request for Production Number 24: Please produce all
documents previously produced in prior South Dakota litigations.
(See definitions). Note: in lieu of physically producing those
materials, you may stipulate that Plaintiff’s counsel can utilize the
24
materials previously produced, and that the documents will be
subject to the same terms of confidentiality previously established
in prior actions.
Request for Production Number 25: Please produce all
documents previously produced in the prior Montana litigation re:
Arlene Hull . . . in lieu of physically producing those materials, you
may stipulate that Plaintiff’s counsel can utilize the materials
previously produced, and that the documents will be subject to the
same terms of confidentiality previously established in prior actions.
Defendants object to both of these requests as irrelevant, overly broad,
unduly burdensome, and confidential. Defendants assert that Burke cannot
establish that all of the prior discovery is relevant to this claim, and he must
make specific requests for production to establish relevancy. Burke argues that
these requests were used to avoid duplicating the production of materials
already in the possession of Burke’s counsel and to avoid time and expense
necessary to reproduce the same documents.
But the court has no knowledge of what was produced in prior litigation in
South Dakota and Montana. The court will not compel defendants to produce all
documents from prior litigation when Burke has not established how they will
be relevant or what that prior discovery contains. If Burke wishes that
defendants produce more documents related to prior litigation, he will have to
issue tailored requests that establish a legal or factual nexus to this claim. The
motion to compel is denied as to requests for production numbers 24 and 25.
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V.
Policy Information
Burke requested information related to benefit qualifiers or other terms
contained in defendants’ policies through an electronic search of specific
employees’ media devices. The specific request is:
Request for Production Number 6: Any and all documents
from any Electronic Storage Media used by or accessible to Donald
Charsky, Donald Lawler, Fred Yosua, Anne Ingoldsby, Grace
Nogueira, or Amy Taylor, which contain any of the following search
terms: ambiguous, ambiguity, medical necessity, medically
necessary, ADL, ADLs, ADL’s, Activities of daily living, cognitive
impairment, continual supervision, continuous supervision,
withdraw, withdrawn. The scope of this request is limited to
January 1, 2011, to present, or to that period which the Electronic
Storage Media will allow.
Defendants objected to the request as irrelevant, overly broad, unduly
burdensome, confidential, and privileged. Defendants state that AIC ran the
proposed search terms, reviewed the documents, and began production of
responsive, non-privileged documents. Defendants note that they agreed to run
the search terms but do not agree to produce a document just because it
contains a search term but may not be relevant to this case.
Defendants do not get to pick and choose which documents they think are
relevant to Burke’s claim. “The use of specific words or key phrases in electronic
searches of computerized claim files has been approved historically in this
district.” Lyon, 2011 WL 124629, at *11 (citing McElgunn v. CUNA Mutual Grp.,
Civ. No. 06-5061, Docket 84 at 2-3 (D.S.D. 2007); Brown Bear v. CUNA Mut.
Grp., 266 F.R.D. 310, 323 (D.S.D. 2009)). Burke has agreed to limit the request
26
to the electronic media that any of the individuals in the request accessed at any
time since January 1, 2011. The court finds that this request is self-limiting
because it is premised on the date from which defendants’ computer software
system will allow and will conduct a search based on reference to these words
and the corresponding documents containing these words.
Documents produced through defendants’ software programming will
illustrate how defendants apply policy eligibility requirements and how they
process those claims, which is directly related to Burke’s claims of breach of
contract, fraud, misrepresentation, and bad faith. Defendants will produce the
documents responsive to this request and let Burke sort the discovery. It is not
unduly burdensome or overly broad for Burke to request that the media actually
used or accessed by the custodians be searched for the listed search terms.
Defendants argue, however, that they cannot determine whether a
custodian accessed a database during a specific period, so they will have to run
the proposed terms across the custodians’ hard drives, email folders, and home
directories. Defendants also claim that although employees have access to
shared folders, that does not mean a custodian wrote it, read it, or knows about
it; thus, the search should be limited to hard drives, email folders, and home
directories because those locations are far more likely to be probative of a
custodian’s knowledge. Defendants will run the proposed search terms across
27
the locations suggested and any other electronic media to which these
custodians have access.
Confidentiality concerns can be addressed by the entrance of the parties’
protection orders. Privilege cannot be addressed at this time because defendants
did not submit a privilege log related to this information. Burke’s motion to
compel as to request for production number 6 is granted.
Burke also requested documents that relate to the claim files of other
Ability policyholders whose claims were denied or benefits terminated because
they did not meet the benefit qualifiers. The specific request provides:
Request for Production Number 9: Any and all claim files
related to claims by policyholders in the Medico Block, where the
claim was either denied, or benefits terminated based on failure to
meet benefit qualifiers. The scope of this request is limited to claims
denied, terminated or withdrawn from January 1, 2011, to present.
Defendants objected that the request is irrelevant, overly broad, unduly
burdensome, confidential, and privileged. Defendants also state that a
confidentiality agreement or protection order is insufficient to meet the
obligations of an insurer under HIPAA. Defendants then stated they would
consider the request after an explanation of relevance and the entry of an
appropriate protection order.
In another long-term care insurance bad faith case against Ability’s
predecessor, the district court in South Dakota found that the defendant had to
produce “all documents related to other claims made, where the claims were
28
denied or terminated for lack of medical necessity, or for failure to meet benefit
qualifiers.” Beyer v. Medico Ins. Grp., 266 F.R.D. 333, 336 (D.S.D. 2009). Prior
denied claims may be relevant to an issue actually in dispute in the case. See
Lyon, 2011 WL 124629, at *13 (stating that material from other claims “is
relevant to the defendants’ intentions as to . . . coverage, as it will shed light on
how the defendants have approached other [coverage] issues and used
exclusionary clauses.”) (quotations and citations omitted). Thus, the requested
information here is relevant.
Defendants have not established how this request would be unduly
burdensome and have not provided a privilege log, so any claim of privilege is
without merit. And the court has already ordered that a protection order for
both AIC and ARI be entered in this case that can sufficiently protect
policyholder information and alleviate defendants’ concerns about
confidentiality.
Defendants have agreed to provide documents that relate to South Dakota
claims, that are for policyholders with 694 or 698 non-tax qualified policies, and
documents with the policyholder’s last name redacted. First, the court will not
restrict this request to South Dakota claims or the type of policy involved. Burke
is seeking evidence of a pattern or practice of reprehensible behavior by
defendants, and discovery of claims involving denial of benefits based on failure
to meet benefit qualifiers from outside of South Dakota or from different types of
29
policies may still lead to the discovery of admissible evidence in this case. See
Lillibridge v. Nautilus Ins. Co., Civ. No. 10-4105, 2013 WL 1896825, at *6 (D.S.D.
May 3, 2013) (noting that prior bad faith cases unrelated to property coverage
from outside of South Dakota “may be relevant to show Nautilus’s knowledge
and conduct and whether a pattern and practice of inadequate investigation,
offering unreasonably low settlement offers, or other reprehensible conduct is
being repeated among policyholders.”).
Second, it is not necessary for defendants to redact the last names of the
policyholders. The court has already concluded that the protection orders can
shield policyholder information from dissemination, and these names will be
included to speed up discovery and to allow Burke to associate claim file
documents with one another or to conduct independent investigation. See
Kirschenman, 280 F.R.D. at 490 (stating that the insurance company would
disclose the names and contact information of the other policy holders who
experienced a similar loss to plaintiff’s loss because the existing protection order
prevented publication or dissemination of confidential documents). Defendants
will, however, redact the specific information that Federal Rule of Civil
Procedure 5.2 requires, such as: full social security numbers, taxpayeridentification numbers, or birth dates. See Fed. R. Civ. P. 5.2; Lyon, 2011 WL
124629, at *19 (“[A]ll personal identifiers associated with this documentation
30
must be protected and redacted before defendant complies with this request.”).
Accordingly, the motion to compel for request number 9 is granted.
VI.
Regulatory Matters
Burke has requested documents that detail prior complaints or regulatory
actions brought against defendants regarding long-term care policies. The first
request is:
Request for Production Number 7: Any and all documents
relating to complaints made to state regulators involving
Defendants’ handling of long-term care insurance coverage since
January 2, 2011.
Defendants objected to this request as irrelevant, overly broad, unduly
burdensome, and privileged. This is a case where Burke alleges that defendants
engaged in breach of contract, bad faith, fraud, misrepresentation, and also
made a request for punitive damages. For a bad faith claim in South Dakota, the
question “is whether the insurer’s investigation or decision to deny a claim was
unreasonable and was made in knowing or reckless disregard of the facts at the
time the insurer made its decision to litigate rather than to settle.” Dakota,
Minnesota & Eastern R.R. Corp. v. Acuity, 771 N.W.2d 623, 632 (S.D. 2009). To
receive punitive damages Burke must establish that defendants acted with
actual or presumed malice. Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 69899 (S.D. 2011) (citing SDCL 21-3-2).
Among the factors that a court considers when it is determining the
appropriate amount of punitive damages, if any, is the degree of reprehensibility
31
of the defendant’s conduct. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S.
408, 419 (2003); Roth, 667 N.W.2d at 666. To make this determination the court
considers whether “the harm caused was physical as opposed to economic; the
tortious conduct evinced an indifference to or a reckless disregard of the health
or safety of others; the target of the conduct had financial vulnerability; the
conduct involved repeated actions or was an isolated incident; and the harm
was the result of intentional malice, trickery, deceit, or mere accident.” Roth,
667 N.W.2d at 666.
The court considers whether an insurance company repeats its misdeeds
as part of a larger pattern or whether its conduct in the plaintiff’s case was a
mere mistake. Id. Thus, the fact that there may have been other regulatory
complaints against defendants that are factually or legally similar to Burke’s
claim is relevant, and the documents related to these regulatory complaints are
discoverable. See Beyer, 266 F.R.D. at 339 (“The court finds that the requested
documents [related to regulatory complaints] are relevant, in that the
documents may reveal evidence that Medico used or uses false bases to deny
claims, and that evidence would not be limited to South Dakota claims only.”).
Accordingly, defendants will produce prior complaints against defendants
regarding long-term care insurance coverage and documents responsive to this
request that relate to the complaints.
32
Defendants produced a number of complaints but redacted personal
information of the insureds contained within. Burke argues that defendants
cannot redact these documents and such redactions have made it difficult to
sort the discovery or to conduct independent investigation.
It is not necessary for defendants to redact the last names of the
policyholders. The court has already concluded that the protection orders can
shield policyholder information from dissemination, and these names will be
included to speed up discovery and to allow Burke to associate claim file
documents with one another or to conduct independent investigation. See
Kirschenman, 280 F.R.D. at 490 (stating that the insurance company would
disclose the names and contact information of the other policy holders who
experienced a similar loss to plaintiff’s loss because the existing protection order
prevented publication or dissemination of confidential documents). Defendants
will, however, redact the specific information that Federal Rule of Civil
Procedure 5.2 requires, such as: full social security numbers, taxpayeridentification numbers, or birth dates. See Fed. R. Civ. P. 5.2; Lyon, 2011 WL
124629, at *19 (“[A]ll personal identifiers associated with this documentation
must be protected and redacted before defendant complies with this request.”).
Burke also asked for documents related to regulatory complaints,
including any responses to the regulatory complaints by defendants. If
defendants have discovery responsive to this request, then they will provide
33
them to Burke. Any claim of privilege cannot be assessed because defendants
did not submit a privilege log. Burke’s motion to compel related to request for
production number 7 is granted.
Burke also seeks discovery that is otherwise related to regulatory actions
against defendants. Specifically, Burke requests:
Request for Production Number 8: Any and all documents
related to actual or proposed regulatory actions related to any
Defendant since January 1, 2010. This includes, but is not limited
to investigations, Market Conduct Examinations, Cease and Desist
Orders, Consent Orders, Corrective Orders, Corrective Action Plans,
or any other regulatory action of any kind. It also includes informal
actions by regulatory agencies, such as, for example, when an
agency alleges unfair or deceptive claim practices and proposes that
Defendant pay fines without initiating formal proceedings.
This request is similar to request for production number 7 except it
focuses more on the consequences of the regulatory complaints or other
allegations against defendants. This request, on its face, is relevant and
discoverable for the same reasons discussed for request for production number
7. Further, evidence relating to prior regulatory actions would be in defendants’
possession, would focus on defendants’ conduct in particular, and would be
part of their institutional knowledge related to their own policies. See Lyon,
2011 WL 124629, at *25 (granting a nearly identical request for production).
Defendants produced all final market conduction examinations and any
other regulatory actions that were in their possession, custody, or control. The
parties still disagree on whether proposed market conduct examinations that
34
are not yet final are discoverable. Defendants argue that those examinations
cannot be disclosed due to SDCL 58-3-14, which provides:
Upon the adoption of the examination report under subdivision 583-12(1), the director shall continue to hold the content of the
examination report as confidential information for a period of thirty
days except to the extent provided in §§ 58-3-20, 58-3-21, and 583-22. Thereafter, the director may open the report for public
inspection so long as no court of competent jurisdiction has stayed
its publication.
Burke argues, however, that the documents are not confidential pursuant
to SDCL 58-3-20, which provides as follows:
The director may use and make public any final or preliminary
examination report, any examiner or company work papers or other
documents, or any other information discovered or developed during
the course of any examination in the furtherance of any legal or
regulatory action.
Here, the Director of the Division of Insurance made these examination
documents public in furtherance of a legal action because they were disclosed
before they were finalized in response to requests in this case. The documents
were released to the public without being subject to a confidentiality order.
There is no requirement under the statute that the legal action be one to which
the director is a party. The court finds that under the plain language of the
statute, the documents are not privileged or confidential.
Defendants rely on SDCL 58-3-22 as additional support for their
contention that the documents are confidential. That statute provides in
pertinent part:
35
All working papers, recorded information, documents, and copies
thereof produced by, obtained by, or disclosed to the director or any
other person in the course of an examination made under this
chapter are confidential and may not be made public by the director
or any other person, except to the extent provided in §§ 58-3-14, 583-20, and 58-3-21 and in any administrative or court proceeding
between the company and the division.
Because these documents fall under the purview of SDCL 58-3-20, and that
statute is specifically excepted from the confidentiality provisions of SDCL 58-322, the court finds these documents are not confidential and are discoverable.
Thus, if defendants have documents responsive to this request, including
proposed market conduct reports or other documents related to regulatory
actions, they will provide those to Burke. Any additional concerns about the
dissemination of confidential information can be addressed through entry of the
parties’ protection orders. Moreover, defendants’ assertion of privilege is not
warranted absent a privilege log. Accordingly, Burke’s motion to compel as to
requests for production numbers 8 and 9 is granted.
CONCLUSION
The court finds that a number of the requests for production in the
motion to compel are relevant and could lead to the discovery of admissible
evidence. These requests are not protected by privilege or any other rationale.
Thus, the motion to compel as to the following requests for production is
granted: 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20. Burke’s
36
motion to compel as to requests for production numbers 24 and 25 is denied
because Burke failed to establish relevancy. Accordingly, it is
ORDERED that Burke’s motion to compel production of documents from
AIC (Docket 68) is granted in part and denied in part.
IT IS FURTHER ORDERED that Burke’s motion to compel production of
documents from ARI (Docket 73) is granted in part and denied in part.
Dated May 31, 2013.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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