NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff, v. MARITIME TERMINAL, INC., Defendant.

 

Civil Action No. 14-14541-DJC

 

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

 

2015 U.S. Dist. LEXIS 83954

 

 

June 29, 2015, Decided

June 29, 2015, Filed

 

 

COUNSEL:  [*1] For National Union Fire Insurance Co. of Pittsburgh, PA, Plaintiff: Robert M. Elmer, LEAD ATTORNEY, Brendan T. Malvey, Taylor, Duane, Barton & Gilman, LLP, Boston, MA.

 

For Maritime Terminal, Inc., Defendant: Gerald J. Petros, LEAD ATTORNEY, Hinckley Allen Snyder LLP, Providence, RI; David A. Wollin, Hinckley, Allen & Snyder LLP, Providence, RI.

 

JUDGES: Denise J. Casper, United States District Judge.

 

OPINION BY: Denise J. Casper

 

OPINION

 

MEMORANDUM AND ORDER

CASPER, J.

 

I. Introduction

Plaintiff National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) has filed this lawsuit against Defendant Maritime Terminal, Inc. (“Maritime”) seeking a declaratory judgment that it owes no duty to defend or indemnify Maritime under Warehouse Legal Liability Policy No. 051766034 (“the Policy”) in connection with three pending civil actions. Maritime has moved to stay the declaratory judgment action.1 D. 12. For the reasons stated below, the Court ALLOWS the motion.

 

1   This motion was originally filed as a motion to dismiss or, in the alternative, to stay. D. 12. At oral argument, Maritime withdrew the request for dismissal. June 10, 2015 Hearing Tr. at 9:21-25. The motion to dismiss is therefore denied as withdrawn.

 

II. Standard [*2]  of Review

Under the federal Declaratory Judgment Act, this Court “may declare the rights and other legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a). The Declaratory Judgment Act is “an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant.” Wilton v. Seven Falls Co., 515 U.S. 277, 287, 115 S. Ct. 2137, 132 L. Ed. 2d 214 (1995) (quoting Public Serv. Comm’n of Utah v. Wycoff Co., 344 U.S. 237, 241, 73 S. Ct. 236, 97 L. Ed. 291 (1952)). “By the Declaratory Judgment Act, Congress sought to place a remedial arrow in the district court’s quiver; it created an opportunity, rather than a duty, to grant a new form of relief to qualifying litigants. Consistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment before trial . . . .” Wilton, 515 U.S. at 288.

 

III. Factual Background

This factual summary is taken from the allegations in National Union’s complaint, D. 4. National Union provided liability insurance to Maritime pursuant to the Policy, which operated from April 1, 2013 to April 1, 2014. D. 4 ¶¶ 22-23; see D. 4-6 at 23 (the Policy). The Policy covered “occurrences” during its period of operation that resulted in “liability of [Maritime] imposed upon [it] by law because of loss or damage to personal [*3]  property owned by customers in the care, custody or control of [Maritime] for storage, under bills of lading, shipping or warehouse receipt . . . .” D. 4 ¶ 24. Maritime’s cold storage warehouse at 276 MacArthur Drive, New Bedford, Massachusetts (“the Warehouse”) was a covered location under the Policy. Id. ¶¶ 10, 25.

The Policy contained several exclusions and limitations. Exclusion “b” excluded coverage for damages caused by or resulting from “misappropriation, secretion, conversion, infidelity or any dishonest act on the part of [Maritime] or other party of interest, his or their employees or agents, or others to whom the property may be entrusted (carriers for hire excepted).” Id. ¶ 31. Exclusion “e”, as amended by Endorsement No. 7, excluded coverage for “loss, damage or expense [caused by] insects, inherent vice, deterioration dampness of atmosphere, inadequate warehouse temperature due to overcapacity, nor for wear and tear.” Id. ¶ 29. Exclusion “k” excluded coverage for damages caused by or resulting from the “infidelity” of Maritime’s officers, employees or persons to whom the insured property was entrusted. Id. ¶ 30. Exclusion “s” excluded coverage for loss or damages resulting [*4]  from “breakdown of, failure or improper operating of any refrigeration machinery or equipment,” id. ¶ 27, although Exclusion “s” provided coverage for loss due to spoilage or contamination resulting from “sudden and accidental breakdown of refrigeration equipment” and “the incorrect or improper setting of temperature controls by [Maritime],” id. ¶ 28.

Between February 19, 2014, and September 5, 2014, three seafood companies that had contracted with Maritime to store various frozen seafood products at its New Bedford warehouse — Alaskan Leader Seafoods, LLC (“Alaskan Leaders”), Kyler Seafood, Inc. (“Kyler Seafood”) and Hygrade Ocean Products, Inc. (“Hygrade”) — separately filed lawsuits (“the Underlying Actions”) against Maritime. Id. ¶¶ 7-11; see D. 4-3 (Alaskan Leaders complaint); D. 4-4 (Kyler Seafood complaint); D. 4-5 (Hygrade complaint). Alaskan Leaders filed in the United States District Court for the District of Massachusetts, and Kyler Seafood and Hygrade filed in Bristol Superior Court. D. 4 ¶¶ 7-9. The three complaints allege that Maritime failed to keep the Warehouse between the agreed range of -5°F and -10°F. Id. ¶¶ 8-16. Alaskan Leader alleges that on or about August 24, [*5]  2013, it learned that Maritime “was, and had been, maintaining a temperature of +15°F within the cold store warehouse during the period commencing June 2013 up to and including August 2013,” causing the frozen seafood cargo stored there to suffer “irreparable harm and damage.” Id. ¶ 13. Kyler Seafood and Hygrade allege that in or about July or August 2013, Maritime informed them that, “due to certain equipment breakdown at the Warehouse, the appropriate sub-zero temperatures had not been maintained for an unspecified period of time, and that [their] products likely had been compromised.” Id. ¶ 14. The plaintiffs in the Underlying Actions allege that in August 2013, Maritime admitted that it had been having difficulties maintaining proper temperatures in the Warehouse and failed to notify them. Id. ¶ 15. They assert numerous claims against Maritime in the Underlying Actions, including breach of contract, breach of bailment, breach of the implied covenant of good faith and fair dealing, negligence and knowing and willful violation of Mass. Gen. L. c. 93A. Id. ¶¶ 17-20.

Maritime requested that National Union defend and indemnify it in the Underlying Actions and the insurer agreed to do [*6]  so under a reservation of rights. Id. ¶¶ 33-34. National Union now seeks a declaration of its rights, duties and liabilities under the Policy with respect to the Underlying Actions. Id. ¶¶ 1, 35. National Union asserts that it is not obligated to defend or indemnify Maritime. Id. ¶¶ 37-42.

 

IV. Procedural History

National Union instituted this declaratory judgment action on December 18, 2014. D. 4. Maritime moved to stay the action on February 10, 2015. D. 12. Maritime contends that National Union’s rights, duties and liabilities under the Policy are already being litigated in the Underlying Actions and, therefore, the Court should stay National Union’s declaratory judgment action pending resolution of the Underlying Actions. Id. The Court heard the parties on the pending motion on June 10, 2015 and took this matter under advisement. D. 24.

 

V. Discussion

“The question for a district court presented with a suit under the Declaratory Judgment Act . . . is ‘whether the questions in controversy between the parties to the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court.'” Wilton, 515 U.S. at 282 (quoting Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 495, 62 S. Ct. 1173, 86 L. Ed. 1620 (1942)). The Supreme [*7]  Court has not provided an exclusive list of factors governing this analysis, but it has noted that district courts should look for guidance to the scope of the pending state court proceedings, the available state court defenses, and whether the claims of all parties in interest can be resolved in the state court proceedings. Id. at 283. Specifically, where “parallel proceedings . . . presenting opportunity for ventilation of the same state law issues [are] underway in state court,” the Supreme Court held in Wilton that these considerations “clearly support” a court’s decision to stay or dismiss a declaratory judgment action. Id. at 290. “A court in deciding whether to exercise its broad discretion to dismiss an action pending the outcome of a parallel state action should compare the nexus between the two suits, considering the totality of the circumstances.” Petricca v. FDIC, 349 F. Supp. 2d 64, 67 (D. Mass. 2004).

The present motion seeks to stay the declaratory judgment action as to both National Union’s duty to defend and duty to indemnify. The parties briefed these issues together, but the Court will focus its analysis on the duty to indemnify, which is triggered “when a judgment within the policy coverage is rendered against [the] insured.” Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 10, 545 N.E.2d 1156 (1989). For [*8]  the reasons set forth below, the Wilton factors weigh in favor of granting a stay as to both the duty to indemnify and the duty to defend.

 

A. Parallel Proceedings

The Supreme Court held that a district court “acted within its bounds in staying [an] action for declaratory relief where parallel proceedings . . . were underway in state court,” Wilton, 515 U.S. at 290, but the Supreme Court has not defined what it means for proceedings to be “parallel.” The First Circuit has not addressed this issue with respect to staying declaratory judgment actions, but it has broadly construed the term “parallel proceedings” in other contexts. See Villa Marina Yacht Sales, Inc. v. Hatteras Yachts, 947 F.2d 529, 533 (1st Cir. 1991) (finding proceedings to be parallel for purposes of abstention despite lack of “perfect identity of issues”); Standard Fire Ins. Co. v. Gordon, 376 F. Supp. 2d 218, 226 (D.R.I. 2005) (noting that the First Circuit’s “broad reading of ‘parallel proceeding’ in other contexts . . . strongly counsels in favor of a similar construction here [in the declaratory judgment context]”). A state proceeding is considered parallel to its federal counterpart where “substantially the same parties are contemporaneously litigating substantially the same issues” and there is a “substantial likelihood that the state litigation will dispose of all claims presented in the [*9]  federal case.” Mass. Biologic Labs. of the Univ. of Mass. v. Medimmune, LLC, 871 F. Supp. 2d 29, 36 (D. Mass. 2012) (internal quotation omitted).

 

1. Same Parties and Claims

Where the same parties are involved in related federal and state court actions and where all claims made in the declaratory judgment action in federal court can be adjudicated in state court, a stay of the declaratory judgment action may be appropriate. See Wilton, 515 U.S. at 283; Aetna Cas. & Sur. Co. v. Kelly, 889 F. Supp. 535, 540 (D.R.I. 1995). National Union is not a named party in the Underlying Actions. Maritime nonetheless argues that the proceedings are parallel insofar as National Union is an “indirect participant” in the Underlying Actions and its claims can be satisfactorily adjudicated in the Underlying Actions under the Massachusetts declaratory judgment statute, Mass. Gen. L. c. 231A. D. 12 at 12.

Maritime is correct that an identity of parties is not required for proceedings to be considered parallel. There need only be an available procedural vehicle in state court by which the federal plaintiff, even if not a party in the state action, can resolve the issues raised in the federal action. See Standard Fire Ins. Co., 376 F. Supp. 2d at 226; see also United States Liability Ins. Co. v. Wise, 887 F. Supp. 348, 351-52 (D. Mass. 1995) (dismissing the insurer’s declaratory judgment action and ruling that although the insurer was not a party to the underlying state court action and could not be joined or intervene, [*10]  it could bring a separate declaratory judgment action in state court and seek consolidation with the existing state court action).

Given the availability of declaratory relief in the forums where the Underlying Actions are pending and National Union’s indirect interest in the Underlying Actions, the Court finds that the absence of identity of parties between the Underlying Actions and the present case does not preclude a stay. See Aetna Cas. & Sur. Co., 889 F. Supp. at 540 (finding that the claims of all parties in interest could be adjudicated satisfactorily in the underlying tort litigation where the tort defendants’ insurer was “an indirect participant in the underlying litigation and [had] the option of raising any coverage questions in state court” under the state declaratory judgment statute).

 

2. Same Factual Issues

“Where adjudication of a declaratory judgment action requires resolution of factual questions that will be litigated in the underlying state court proceeding, practicality and wise judicial administration would counsel against proceeding with the declaratory judgment action.” Standard Fire Ins. Co., 376 F. Supp. 2d at 227. “If there are no common factual issues, it is less likely that considerations of practicality and wise judicial administration would [*11]  warrant a stay. On the other hand, if the declaratory judgment action presents the same factual issues that are the subject of the state court case, a stay may be appropriate.” Aetna Cas. & Sur. Co., 889 F. Supp. at 540 (internal quotation omitted).

In the Underlying Actions, Alaskan Leader, Kyler Seafood and Hygrade allege that Maritime was negligent when it failed “to properly provide, inspect and maintain the condition of the Warehouse, including the refrigeration system.” D. 4-3 ¶ 41; see D. 4-4 ¶ 81, D. 4-5 ¶ 44. They also assert claims for breach of contract and breach of bailment for Maritime’s alleged failure “to store, warehouse, bail, keep and care for, protect and deliver [their] goods in the same good order and condition as at the time it received and accepted [the] goods for storage.” D. 4-3 ¶ 37; see D. 4-4 ¶ 44, D. 4-5 ¶ 30. They further allege that Maritime breached the implied covenant of good faith and fair dealing and committed a knowing and willful violation of Mass. Gen. L. c. 93A when, despite having actual or constructive notice that it was having difficulty maintaining proper temperatures within the warehouse, Maritime “represented and held out to the public” that its warehouse was adequate for storing [*12]  plaintiffs’ products. D. 4-3 ¶ 18, D. 4-4 ¶ 24, D. 4-5 ¶ 20. The claims in the Underlying Actions will, therefore, raise factual questions concerning the cause of the refrigeration equipment failure, the representations that Maritime made about its ability to maintain certain standards necessary to prevent seafood spoilage, Maritime’s notice that it was having difficulty maintaining proper temperatures within the warehouse, Maritime’s alleged failure to notify the seafood companies that it had been experiencing difficulties in maintaining proper warehouse temperatures, and Maritime’s alleged failure to address the problems that were causing the rising temperatures and the product spoilage.

In the present action, National Union in part seeks a declaratory judgment that it owes no duty to indemnify Maritime under the Policy in connection with the Underlying Actions. The duty to indemnify is triggered “when a judgment within the policy coverage is rendered against [the] insured.” Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 10, 545 N.E.2d 1156 (1989). Given the language of the relevant exclusions of the Policy, this inquiry will raise factual issues pertaining to the nature of the Warehouse temperature failure, namely: whether the damages suffered by the [*13]  plaintiffs in the Underlying Actions resulted from the breakdown of, failure or improper operating of any refrigeration machinery or equipment such that coverage is excluded by Exclusion “s”; if the cause of the damages was a breakdown of refrigeration machinery or equipment, whether the damages were caused by the “sudden and accidental” breakdown of refrigeration equipment,” the “sudden and accidental leakage, escape or discharge of . . . refrigerants” or the “incorrect or improper setting of temperature controls” such that Endorsement No. 8 provides coverage; whether the damages caused by or resulted from deterioration or wear and tear such that Exclusion “e” excludes coverage; and finally whether the damages were caused by or resulted from “infidelity” or a “dishonest act” on the part of Maritime such that Exclusions “k” and “b” exclude coverage.

The declaratory judgment action and the Underlying Actions involve overlapping factual questions as to the nature and cause of the temperature failure at Maritime’s Warehouse and Maritime’s good faith in responding to the temperature failure. National Union argues that the present action “can be resolved by application of the law to the [*14]  policy language and certain undisputed facts” and has “very little to do with Maritime Terminal’s actions.” D. 16 at 9-10. The Court disagrees. In the present case, National Union seeks to prove facts directly relevant (and adverse) to Maritime’s defenses in the Underlying Actions. For example, to establish that there is no coverage available for the incidents at issue in the Underlying Actions, National Union will likely argue that the cause of the Warehouse temperature failure was not a sudden or accidental breakdown of equipment, but rather the breakdown or improper operation of refrigeration machinery. This factual question is relevant to the negligence claims alleged against Maritime in the Underlying Actions. National Union’s complaint also suggests that it will argue in the present action that the underlying damages were caused by dishonest acts by Maritime, which bears directly upon the Mass. Gen. L. c. 93A claims in the Underlying Actions. When the coverage questions “turn on factual issues raised in the underlying tort litigation, a stay, generally, should be granted in order to avoid duplicative proceedings, to preserve the insured’s prerogative to select the forum and to [*15]  avoid the risk of inconsistent judgments.” Aetna Cas. & Sur. Co., 889 F. Supp. at 540 (citing Metro. Prop. & Liab. Ins. Co. v. Kirkwood, 729 F.2d 61, 62-63 (1st Cir. 1984)).

At oral argument, counsel for National Union cited Exclusion “s” as the “most important” of the Policy exclusions at issue in this case and argued that this exclusion, which excludes coverage in the case of the breakdown of, failure or improper operating of any refrigeration equipment, does not concern the insured’s liability to the plaintiffs in the Underlying Actions. June 10, 2015 Hearing Tr. at 10:16-20. In light of the negligence counts in each of the Underlying Actions, the Court does not agree. Whether the refrigeration failure was caused by a sudden or accidental breakdown of equipment, improper operation or wear and tear bears upon Maritime’s liability for negligence in the Underlying Actions. Furthermore, the Court sees no basis to focus only on Exclusion “s” in assessing whether to stay this action where the complaint references all of the exclusions enumerated above as possible grounds for exclusion of coverage. The Court also notes that the Underlying Actions may reach different outcomes due to factors such as different possible intervening causes of the plaintiffs’ alleged harm, which may implicate different Policy [*16]  exclusions.

 

B. State Law

State law governs both the present declaratory judgment action and the Underlying Actions. The absence of any issue of federal law weighs in favor of staying this action, although this factor is not dispositive. See Standard Fire Ins. Co., 376 F. Supp. 2d at 231.

 

C. Conflict of Interest

“The prospect that such conflicts may be eliminated is a weighty reason for proceeding with a declaratory judgment action.” Aetna Cas. & Sur. Co., 889 F. Supp. at 540. “The converse is, of course, also true–the prospect that adjudication of the declaratory judgment action will create conflicts of interest counsels against proceeding with a declaratory judgment action.” Standard Fire Ins., 376 F. Supp. 2d at 232. In this case, as a result of the overlapping factual questions in the indemnification analysis and the Underlying Actions, National Union faces a conflict of interest in seeking to prove facts that establish either the lack of a Policy “occurrence” or the applicability of a Policy exclusion where such facts would tend to prove Maritime’s liability in the Underlying Actions. See Aetna Cas. & Sur. Co., 889 F. Supp. at 541 (granting stay of declaratory judgment action as to insurer’s duty to indemnify where litigating the factual questions underlying the duty to indemnify would “convert [the insurer and the insured] from allies to adversaries [*17]  with respect to issues that are critical to adjudication of [the insured’s underlying tort actions]” and noting that these “efforts would be inconsistent with [the insurer’s] obligations as an insurer”).

On balance, the Wilton factors weigh in favor of staying National Union’s action for a declaratory judgment pending resolution of the Underlying Actions.2

 

2   The Court recognizes that the declaratory judgment action and the motion to stay address both National Union’s duty to indemnify and its duty to defend. The parties briefed the issues of the duty to indemnify and duty to defend together. Given that the Court has decided to stay the declaratory judgment as to National Union’s duty to indemnify, and as a practical matter National Union is defending Maritime in the Underlying Actions (under a reservation of rights), the Court finds that “considerations of practicality and wise judicial administration” weigh in favor of also staying the declaratory judgment action as to National Union’s duty to defend. Wilton, 515 U.S. at 288.

 

VI. Conclusion

For the foregoing reasons, the Court ALLOWS Maritime’s motion to stay, D. 12. The case is stayed until January 1, 2016. On or before that date, the parties shall file a joint [*18]  statement updating the Court on the status of the Underlying Actions and advising the Court as to whether a further stay is necessary.

So Ordered.

/s/ Denise J. Casper

United States District Judge

 

 

Kenneth Ingram, et al., Plaintiffs, vs. Great American Insurance Company, et al., Defendants.

 

No. CV-13-02265-PHX-SPL

 

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

 

2015 U.S. Dist. LEXIS 88783

 

 

June 30, 2015, Decided

June 30, 2015, Filed

 

 

COUNSEL:  [*1] For Kenneth Ingram, a single man, Wylie Harrison, a single man, Plaintiffs: James Alan Hertz, Kenneth R Friedman, LEAD ATTORNEYS, Friedman Rubin, Bremerton, WA; Patricia Ronan, Robert J Hommel, LEAD ATTORNEYS, Robert J Hommel PC, Scottsdale, AZ; William Seimon Cummings, Freidman Rubin, Bremerton, WA.

 

For Great American Insurance Company, a foreign insurer, Great American Insurance Company of New York, a foreign insurer, Defendants: John Kristian Wittwer, Steven James Gross, Steven Plitt, Timothy R Hyland, LEAD ATTORNEYS, Kunz Plitt Hyland & Demlong PC, Phoenix, AZ; Travis S Gamble, Wayne B Mason, LEAD ATTORNEYS, Sedgwick LLP – Dallas, TX, Dallas, TX.

 

For RTW Incorporated, an unauthorized entity, Defendant: William George Caravetta, LEAD ATTORNEY, Jones Skelton & Hochuli PLC, Phoenix, AZ.

 

JUDGES: Honorable Steven P. Logan, United States District Judge.

 

OPINION BY: Steven P. Logan

 

OPINION

 

ORDER

Before the Court are the parties’ joint motions for discovery dispute resolution (Docs. 95, 148, 149), motion for extension of time (Doc. 174), and stipulation (Doc. 175). The Court will address each in turn as follows.

 

I. Background

While transporting Department of Defense cargo for M3 Transport, LLC (“M3”), Plaintiffs Kenneth Ingram [*2]  and Wylie Harrison’s commercial truck malfunctioned. (Doc. 1-1 at 7.) On June 3, 2011, Plaintiffs delivered the truck to an M3 terminal in Glendale, Arizona, and remained at a nearby motel awaiting its repair. (Docs. 1-1 at 7-8; 172-1.) While traveling to the M3 terminal in a rental car on June 6, 2011, Plaintiffs were struck head-on by an oncoming vehicle. (Doc. 1-1 at 8-9.) Both Plaintiffs sustained serious injuries. (Doc. 1-1 at 9.)

Plaintiffs filed workers’ compensation claims for wage and medical benefits with Great American Insurance Company (“GAIC”), M3’s insurer, on July 15, 2011. (Doc. 102-11 at 3; Doc. 1-1 at 9.) RTW Incorporated (“RTW”) was retained as the adjustor to administer the claims. (Doc. 102-11 at 3.) On August 30, 2011, the claims adjustor recommended that they be denied. (Doc. 102-5 at 3-4.) On September 16, 2011, RTW issued a Notice of Claim Status denying Plaintiffs’ claims. (Doc. 1-1 at 10, 28.)

Plaintiffs sought review by the Industrial Commission of Arizona (“ICA”) on November 8, 2011 (Doc. 172-1 at 162-163), and hearings were held before an Administrative Law Judge (“ALJ”) between April and June of 2012. Finding Plaintiffs “status did not become off-duty immediately [*3]  as of the time the truck was brought in for repairs,” on October 30, 2012, the ALJ determined that Plaintiffs’ claims were compensable and that they were entitled to benefits. (Doc. 172 at 86-96, 98-108.) M3 requested administrative review on November 28, 2012, and the ALJ summarily affirmed the awards on January 23, 2013. (Doc. 172-1 at 165-179, 181-184.) On February 22, 2013, M3 Transport filed a special action for review of ICA’s decision, which was affirmed by the Arizona Court of Appeals on December 26, 2013. (Doc. 172-1 at 186-189, 191-197); M3 Transport, LLC v. Industrial Commission of Arizona, 2013 Ariz. App. Unpub. LEXIS 1427, 2013 WL 6844147 (Ariz. Ct. App. Dec. 26, 2013).

Plaintiffs filed their original and amended complaint in the Maricopa County Superior Court against M3,1 GAIC, and RTW. (Docs. 1-1 at 5-26; 1-2 at 3-17.)2 On November 6, 2013, Defendants removed this action to federal court. (Doc. 1.) Plaintiffs bring claims for bad faith and punitive damages, alleging there was no legal justification or reasonable basis for Defendants’ interpretation and denial of their workers’ compensation claims.3 They allege Defendants knowingly sought unmeritorious review before the ICA and on appeal before the Arizona Court of Appeals.

 

1   M3 was subsequently dismissed by stipulation of the parties. (Doc. 86.)

2   For purposes [*4]  of this discussion, the Court refers to Defendants interchangeably. In doing so however, the Court notes that it is not a reflection of a factual finding regarding Plaintiffs’ joint venture claim.

3   Under Arizona law, “bad faith arises when the insurer intentionally denies, fails to process or pay a claim without a reasonable basis.” Zilisch v. State Farm Mutual Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276, 279 (Ariz. 2000) (internal citations and quotations omitted). An insurance “carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim.” Id. at 280. “[W]hile fair debatability is a necessary condition to avoid a claim of bad faith, it is not always a sufficient condition. The appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable.” Id.

 

II. Discovery Disputes

Under Rule 26 of the Federal Rules of Civil Procedure, a party is entitled to “obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party.” Fed. R. Civ. P. 26(b)(1). Relevance is construed broadly to encompass any matter that bears [*5]  on, or that reasonably could lead to information that bears on, any issue that is or may be in the case. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 98 S. Ct. 2380, 57 L. Ed. 2d 253 (1978). “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Fed. R. Civ. P. 26(b)(1). “For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action.” Fed. R. Civ. P. 26(b)(1). The Court has broad discretion to permit or deny discovery, as well as in determining relevance for discovery purposes. Little v. City of Seattle, 863 F.2d 681, 685 (9th Cir. 1988); Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir. 2002).

 

A. Production of Materials Subject to Attorney-Client Privilege

Plaintiffs ask that Defendants be compelled to produce unredacted portions of claims files and communications between claims adjustors and Defendants’ counsel that have been previously redacted or withheld on the basis of attorney-client privilege.4 Plaintiffs seek relevant communications relating to the decision to deny coverage (July 15, 2011 — September 16, 2011), to delay payment of benefits, to appeal the ALJ’s decision, and to negotiate settlement (October 29, 2012 — November 28, 2012; January 23, 2013 — February 20, 2013). Plaintiffs argue that Defendants impliedly waived the attorney-client privilege with respect to [*6]  these materials, and the redacted or withheld materials are relevant to their bad faith claims.

 

4   Specifically, Plaintiffs seek the documents identified as redacted for privilege contained in RTW’s Harrison Claim File (Doc. 102-1), RTW’s Ingram Claim File (Doc. 102-2); GAIC’s Claims File (Doc. 102-3), and other communications with GAIC (Doc. 102-4) presumably redacted but not contained in the claims files. (Doc. 102 at 2.)

Under Arizona law,5 an implied waiver of attorney-client privilege may be found, making otherwise privileged material discoverable, where the “(1) assertion of the privilege was a result of some affirmative act, such as filing suit [or raising an affirmative defense], by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” State Farm Mut. Auto Inc. Co. v. Lee, 199 Ariz. 52, 13 P.3d 1169, 1173 (Ariz. 2000) (quoting Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975)). See also Mendoza v. McDonald’s Corp., 222 Ariz. 139, 213 P.3d 288 (Ariz. Ct. App. 2009) (discussing “Hearn test”). Raising an affirmative defense of good faith in response to a bad faith claim in itself is not sufficient to constitute an implied waiver of the attorney client privilege. Lee, 13 P.3d at 1175. Rather, in order [*7]  to impliedly waive the privilege, the party asserting the privilege must assert some claim or defense invoking the subjective reasonableness of its evaluation and that analysis must have incorporated information the litigant learned from counsel. Id. at 1178.

 

5   In diversity jurisdiction cases such as this, state law governs the issue of attorney-client privilege. Roehrs v. Minnesota Life Ins. Co., 228 F.R.D. 642, 644-45 (D. Ariz. 2005).

Here, Defendants do not dispute that claims adjustors conferred and received information from counsel in processing and litigating Plaintiffs’ claims. (See e.g., Doc. 152-1 at 8.) Prior to the initial denial of Plaintiffs’ claims, Kris Wigant, RTW claims adjustor, conferred with counsel Chuck Richards. (See Doc. 102-5 at 2.) Angela Wilson-Travis, GAIC Managed Care Specialist, testified that she received case law from Richards, and subsequently concurred with the decision to deny Plaintiffs’ claims, noting that “[u]pon review of the investigation and various ruling’s provided by defense counsel agree with denial.” (Docs. 102-5 at 2; 109-1 at 12.) Karen Handel, GAIC claims adjustor, testified that counsel “may have provided some information” in deciding whether to pursue an appeal. (Docs. 102-8 at 3; 109-1 at 18.)

Rather, Defendants dispute [*8]  that the attorney-client privilege has been impliedly waived because claims adjustors did not rely on the advice of counsel in making their decisions at any stage. (Docs. 109; 152 at 3.) Defendants’ decisions however, were not independent of counsel’s advice. Under Defendants’ theory of denial, as noted by the ALJ, an evaluation of the law was required in order to evaluate and make the determination on Plaintiffs’ claims at all stages of the underlying action. (See Doc. 172-1 at 87, ¶ 3 (“Whether an Applicant is in the course of employment at the time of injury is a legal determination.”).) Thus, while Defendants’ decisions may have been based on what their agents believed was right, and not based on what their lawyers expressly advised them to do, those decisions necessarily incorporated counsel’s “advice” and consultation on the law. See Lee, 13 P.3d at 1174 (“As part of that evaluation, the agents were informed by counsel. On the basis of this evaluation, including, we must suppose, the information gained from counsel, [Defendants’] agents denied the claims in good faith based on their view of the law, not because of what its lawyers advised.”). Cf. Everest Indem. Ins. Co. v. Rea, 236 Ariz. 503, 342 P.3d 417, 420 (Ariz. Ct. App. 2015) (finding that because “there ha[d] been no showing that [*9]  Everest was in doubt as to any legal issue… [t]he decision Everest made to settle the case was not necessarily the product of legal advice”).

In evaluating Plaintiffs’ claims, Wigant testified that she considered whether Plaintiffs engaged in “leisure activities that … deviate from their work duties” (Doc. 172-1 at 149) and whether their actions “benefited the employer” (Doc. 172-1 at 152). Wilson-Travis testified that based on their evaluation of the facts, they concluded that Plaintiffs “were not within the course and scope of their employment” at the time of the collision. (Doc. 109-1 at 12-13.) Handel believed that there was a valid basis to pursue an appeal based on their investigation and findings, which included their “understanding of the overnight traveling employee rule and how it applied to the facts of this case.” (Docs. 102-8 at 5-6; 109-1 at 18-19.) Ultimately, Defendants state that Plaintiffs’ claims were denied because a threshold condition of compensability had not been met, namely, “the existence of legal causation: whether the accident arose out of and in the course of the worker’s employment.” (Docs. 102-9 at 2-3; 172-1 at 88, ¶ 4; 174-1 at 6-7.) Defendants maintained [*10]  that Plaintiffs’ conduct fell within the scope of non-compensable deviation. (Docs. 102-9 at 5-6; 174-1 at 9-10.) To the extent that Defendants argue that their “evaluation and denial was based on their independent review of the claim and not their consultation with counsel or their subjective view of the law” (Doc. 109 at 5), that argument is belied by the express basis for denying Plaintiffs’ claims (Doc. 102-9 at 2).6

 

6   The Court expresses apprehension as to whether a defense that adjustors reasonably denied Plaintiffs’ claims because they did not satisfy a legal standard, but did not analyze or obtain professional advice on the state of the law to make that determination, is in fact a “good faith” defense. The Court highlights that in their depositions, adjustors were unable to clearly explain the applicable law evaluated or provide any specific underlying analysis for denying Plaintiffs’ claims; Defendants contend the legal interpretation of Plaintiffs’ claims was fairly debatable (Doc. 18 at 5); and Defendants’ own expert maintains that there was no Arizona case law directly on point for the facts presented (Doc. 102-10 at 3).

Defendants further reject that they impliedly waived the [*11]  attorney-client privilege because they have not affirmatively placed the advice of counsel at issue. This argument equally fails. Defendants do not merely deny bad faith and defend on an objective basis as to the reasonableness of their actions. Cf. Mendoza, 213 P.3d at 301 (“when an insurer defends a bad faith claim exclusively on the basis its actions were objectively reasonable and merely asks its expert witnesses to evaluate the reasonableness of its conduct under the statutes, the case law, and the policy language, the insurer has not impliedly waived the attorney-client privilege because it has not put any advice it received from counsel at issue”) (internal brackets and quotations omitted). Rather, Defendants advance an affirmative factual defense that their conduct was objectively and subjectively reasonable and their decisions denying Plaintiffs’ claims were made in good faith based “on the investigation, evaluation and recommendation by its third-party administrator as well as its own consideration of the facts and law.” (Doc. 18 at 5; see also Docs. 7 Aff. Defense ¶¶ 11-12; 109 at 2, fn. 1.) By advancing this defense, Defendants have “affirmatively injected the legal knowledge of its claims managers [*12]  into the litigation and put the extent, and thus the sources, of this legal knowledge at issue… [C]laims managers cannot testify that they investigated the state of the law and concluded and believed they were acting within the law but deny Plaintiffs the ability to explore the basis for this belief and to determine whether it ‘might have known its actions did not conform to the law.'” Lee, 13 P.3d at 1182 (citation omitted). See also Mendoza, 213 P.3d at 302 (“in the bad faith context, when an insurer raises a defense based on factual assertions that, either explicitly or implicitly, incorporates the advice or judgment of its counsel, it cannot deny an opposing party the opportunity to discover the foundation for those assertions in order to contest them.”). Therefore, Defendants have put their agents’ knowledge of the law and the basis for their understanding of what the law required at issue.

Whether Defendants did not reasonably evaluate the claim, or internally concluded Plaintiffs’ claims should be covered but decided to litigate anyway, is relevant to Plaintiffs’ bad faith claim. See Lee, 13 P.3d at 1175 (“State Farm is liable for bad faith if the evidence shows its employees could not or did not reasonably believe that the first party stacking [*13]  claims could be rejected within the bounds of the law.”); Everest, 342 P.3d at 419 (“the party’s knowledge about the law is vital, and the advice of counsel is highly relevant to the legal significance of the client’s conduct”) (internal quotation and citations omitted). Likewise, to the extent Defendants raise an affirmative defense that Plaintiffs’ workers’ compensation claims were fairly debatable (Docs. 7 Aff. Defense ¶ 33; 18 at 5), whether they decided to deny Plaintiffs’ claims against the advice of counsel is relevant to their bad faith claim. See Holmgren v. State Farm Mut. Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992) (in a bad faith insurance claim, the strategy, mental impressions and opinion work product concerning the handling of the claim may be discovered and admitted when they are directly at issue). See also Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, 1137 (Ariz. 1982) (“We disagree with the defendants’ contention that an insurer’s belief that a portion of its insurance contract precludes coverage raises an absolute defense to a claim of bad faith.”).

Comparing and applying Lee, Mendoza, and Everest to the facts of this case, the Court finds that Defendants impliedly waived the attorney-client privilege, thus making the redacted or undisclosed communications discoverable. Plaintiffs are not entitled to discovery of all [*14]  of counsel’s communications, but only to those communications pertaining to the law and information that was part of what Defendants knew in reaching its evaluation of the law. To the extent the documents withheld by Defendants fall outside of this scope, they may continue to withhold portions of its files, but must amend its logs to explain the reasons for withholding communications with specific detail.

 

B. Production of Employee Materials

Plaintiffs next claim they are entitled to discovery of job performance evaluations of claims personnel and of incentive compensation plans available to claims handling personnel. (Doc. 148.) Defendants argue that this material is undiscoverable because it is not relevant, and disclosure of personnel records in an action to which the employee is not a party is an invasion of their expectation of privacy and confidentiality.

The Court finds the potential probative value of the information contained in those records outweigh any privacy concerns. Evidence regarding whether Defendants “set arbitrary goals for the reduction of claims paid” and whether “[t]he salaries and bonuses paid to claims representatives were influenced by how much the representatives [*15]  paid out on claims” is relevant to whether Defendants acted unreasonably and knew it. Zilisch, 995 P.2d at 280 (citing Hawkins v. Allstate Ins. Co., 152 Ariz. 490, 733 P.2d 1073, 1082 (Ariz. 1987)). Likewise, the Court agrees with Judge Sedwick that “an expectation that assessments of work performance and any financial incentives to minimize payments on claims would be kept private is unreasonable.” White Mountain Communities Hosp. Inc. v. Hartford Cas. Ins. Co., 2014 U.S. Dist. LEXIS 170012, 2014 WL 6885828 (D. Ariz. 2014). Further, this information was unavailable through deposition testimony of the employees themselves (see e.g., Doc. 172-1 at 147), and Defendants have not shown that this information would be available by other less intrusive means.

Accordingly, Plaintiffs are entitled to adjustor personnel files, limited to performance, including any participation in an incentive plan. If Defendants cannot redact the records in a manner that protects the personal and sensitive information of the individual employee without also redacting the relevant information discussed here, the parties may jointly seek a protective order for the specific personnel records prohibiting their dissemination to any third party. Therefore, Defendants shall be required to respond to Nos. 3-6 of Plaintiffs’ First Request for Production (Doc. 148-1).

 

C. Production of Defendant-Exchanged Materials

Lastly, Plaintiffs claim they [*16]  are entitled to discovery of an unredacted copy of the contract between the Defendants, and any promotional material or proposal that RTW exchanged with GAIC. (Doc. 149.)

The Court finds both the contract and promotional materials are relevant to the determination of whether this action can proceed against RTW. Generally, because the duty of an insurer to act in good faith is non-delegable, an insured cannot bring a negligence claim against an independent insurance adjuster that owes the insured no duty of care. See Walter v. Simmons, 169 Ariz. 229, 818 P.2d 214, 223 (Ariz. Ct. App. 1991). However, Arizona courts have taken exception to this principle and found that where an “insurer and its agent are engaged in a joint venture… each is jointly and severally liable with the other for a bad faith refusal to pay,” notwithstanding an absence of “proof of profit and loss sharing and … joint right to control.” Farr v. Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 699 P.2d 376, 386 (Ariz. Ct. App. 1984) (finding an adjuster jointly liable for bad faith where it had marketed the insurer’s policy, “collected premiums[,] and handled claims according to guidelines provided by [the insurer]”). See also Sparks, 132 Ariz. 529, 647 P.2d 1127 (finding liability to a third party that handled premiums, investigation and payment of claims, and distributed brochures to induce the purchase of policies); [*17]  cf. West v. Soto, 85 Ariz. 255, 336 P.2d 153 (Ariz. 1959) (under Arizona law, a joint venture requires an agreement, a common purpose, a community of interest, and an equal right of control).

Thus, the fact that Plaintiffs and RTW lacked privity of contract is not dispositive. Whether RTW advertised more aggressive claims handling to promote business with GAIC, or GAIC promised financial benefits to RTW in return for lowering costs by paying out fewer claims is relevant to whether RTW and GAIC are joint venturers and denied Plaintiffs’ claims in good faith. The unredacted terms of agreement in the contract between RTW and GAIC and the promotional materials are relevant to this determination, and the Court finds that Plaintiffs’ request is sufficiently tailored to the relevant materials. Plaintiffs do not seek general advertising information; they request a copy of advertising materials provided by RTW to GAIC “prior to entering into the contract under which RTW, Inc. provided claim adjusting services for the Plaintiffs’ claims.” (Doc. 149-1 at 2.) Therefore, Defendants shall be required to respond to Nos. 1 and 2 of Plaintiffs’ Second Request for Production (Doc. 149-1).7

 

7   Defendants assert that “GAIC and RTW have already produced the relevant [*18]  Services Agreement, which shows the specific financial terms between them and the manner in which RTW would be compensated for its work in adjusting claims… Defendants RTW and GAIC have also previously disclosed the nature of their contractual relationship and directions to RTW regarding specific claims handling issues, including the claims handling guidelines applicable to RTW’s services during the relevant time.” (Doc. 150 at 2.) Defendants shall be required to supplement their response with an unredacted copy of their agreement(s).

 

III. Deadlines

Lastly, Plaintiffs Kenneth Ingram and Wylie Harrison move for an extension of time to file a response to RTW’s Motion for Summary Judgment (Doc. 174), to which Defendants do not oppose (in part) and have joined in a Stipulation (Doc. 175). Having determined that Plaintiffs are entitled to additional discovery that is directly relevant to the underlying issues presented RTW’s motion, rather than extending the deadline to respond, the Court will deny Defendant’s motion and give it an opportunity to refile following completion of discovery. Both parties should be afforded an opportunity to address whether the materials produced impact whether [*19]  RTW should remain a Defendant in this action. Accordingly,

IT IS ORDERED:

1. That the Joint Motions for Discovery Dispute Resolution (Docs. 95, 148, 149) are granted as set forth above;

2. That the stay of the case deadlines is lifted and the deadlines are modified as follows:

 

Discovery Deadline: 08/17/2015

Expert Discovery Deadline: 09/17/2015

Dispositive Motion Deadline: 10/05/2015

 

 

3. That RTW’s Motion for Summary Judgment (Doc. 171) is denied without prejudice with leave to refile upon completion of discovery; and

4. That the Motion for Extension of Time (Doc. 174) and the parties’ Stipulation (Doc. 175) are denied as moot.

Dated this 30th day of June, 2015.

/s/ Steven P. Logan

Honorable Steven P. Logan

United States District Judge