Condominium Insurance Law : Condo Insurance Lawyers & Attorneys : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables & West Palm Beach

In Pepperwood of Naples Condominium Association, Inc. v. Nationwide Mutual Fire Insurance Company, the condominium association filed a motion asking the Court to order Nationwide to provide better responses to its request for document production in the bad faith case. No. 2:10–cv–753 (M.D. Fla. October 3, 2011). The Pepperwood case involves a situation where the condominium association sued Nationwide for bad faith damages for not promptly paying all insurance proceeds from the 2004 and 2005 hurricane damages and forcing it to incur additional expenses in the claim presentation through an appraisal process. Since the last discovery order from the Court, Nationwide sent a response to the condominium association request for production of documents, but also objected and claimed privilege to some of the requests.

Of particular importance, is Nationwide’s claim of attorney-client privilege and work product protection to one of the requests.

Request for Production No. 4 states: Copies of all correspondence, notices, reports or other communications between you and your representatives and PEPPERWOOD or its representatives regarding the hurricane damage at PEPPERWOOD'S insured property located at 4955 Pepper Circle B, 4693 Rattlesnake Hammock Road D, 4967 Rattlesnake Hammock Road E, 4957 Pepper Circle C, and 4973 Pepper Circle F, Naples, Collier County, Florida.

Response: Please see the documents produced in response to Request # 1.

Nationwide's response to Request No. 1 was:

The claim files (excluding privileged and protected documents) are being scanned and Bates Numbered, and upon return from the undersigned's vendor will be forwarded under separate cover along with a Privilege Log identifying any redactions.

Nationwide withheld approximately 24 categories of documents under claims of attorney-client privilege and work product protection. The Court discussed the elements of the attorney-client privilege: (1) Where legal service advice of any kind is sought, (2) from a professional legal advisor in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are at his instance permanently protected, (7) from disclosure by himself or by the legal advisor, (8) except the protection may be waived.

Nationwide argued that none of the allegedly privileged items involve communication between Nationwide and Pepperwood. The items Nationwide claimed privilege to were communications between Nationwide and its defense counsel or notes regarding defense strategy.

The Middle District Court analyzed the Florida Supreme Court’s holding in Allstate Indem. Co. v. Ruiz, 899 So.2d 1121 (Fla. 2005), which some believe to have eliminated the attorney client privilege as a discovery shield in bad faith litigation with respect to all materials generated prior to resolution of the underlying coverage dispute. The Middle District Court noted the importance of the entire claim file, including the impressions and advice of counsel in discovery during bad faith cases.

The Court noted that even though there was no lawsuit filed related to any coverage dispute over Pepperwood’s claims, there was a period of time during which coverage was disputed by Nationwide. The Court overruled Nationwide’s claims of attorney-client privilege and work product protection with regard to documents generated prior to the filing of the bad faith lawsuit—the period during which coverage was disputed. The Court ordered Nationwide to produce those documents to Pepperwood. The Court further held that it would conduct an in camera review of documents generated after the bad faith lawsuit was filed to determine whether the objections are proper.

The rationale behind this case and Ruiz is that insurers should not be allowed to shield documents and information from discovery in bad faith cases by asserting expansive claims of privilege where insurers’ claims handling decisions are at issue.

The customary practices regarding objections to discovery can vary greatly in federal and state courts in Florida. During the discovery phase of the Pepperwood case, the condominium association served a Request for Production on Nationwide containing the following request:

Request No. 1: A copy of any and all civil remedy notices (“CRN”) and related correspondence, including Nationwide's responses to the CRN, regarding similarly situated policy holders as Pepperwood from January 2004 until the present.

Nationwide objected because it believed the request was overbroad, vague with regard to the terms “similarly situated policyholders,” harassing, irrelevant and not likely to lead to the discovery of admissible evidence. Despite the objections to the Request, Nationwide additionally stated:

Subject to these objections and without waiver of the same, this request seeks information that is publicly available online from the Florida Department of Financial Services [FDFS], and can be obtained from that source as easily by Plaintiff as by the Defendant.

Nationwide reserved its objections to the Request, yet answered it anyway. The Court stated that “if an objection to a discovery request is raised, and then the question is answered ‘subject to’ or ‘without waiving’ the objection, this court is reluctant to sustain the objection.” The Court stated that the Federal Rules of Civil Procedure do not give a party the option of sustaining objections yet filing answers to requests. In the order, the judge stated that such objections are a waste of the time and resources of both parties and the court and that answering subject to an objection “lacks any rational basis.”

The Court ordered Nationwide to respond to the Request and provide the information related to Civil Remedy Notices of similarly situated policyholders because the information is relevant to the allegations in the complaint that Nationwide “as a general business practice, intentionally and/or in such reckless disregard for the rights of the insureds, utilizes unfair claims handling practices for financial gain and profit.” The Court was not persuaded by Nationwide’s objection that the information requested was available as public information through the Department of Financial Services’ civil remedy filings on its website. Only the civil remedy notice form is available online, and the other information requested is within Nationwide’s control and unavailable to the association.

It should be noted that the opinion is by a magistrate judge who interpreted the Federal Rules of Civil Procedure. Magistrate judges typically decide discovery disputes between parties in federal court in Florida. Some federal judges in Florida, and likely other jurisdictions, issue detailed discovery orders that prohibit the parties from objecting to discovery requests on this exact basis, and they state that parties may be sanctioned for such behavior. As reflected by this order, what may be a common objection in Florida state courts can be disfavored by our federal courts. Parties may find themselves on thin ice if they assume that the same customary practices apply.

The claim involved damages to condominium association property from Hurricane Wilma. The association filed a lawsuit against their insurer in January 2010 as the claim remained unpaid. The association’s expert disclosures were due on November 22, 2010, and the insurer would then have until December 22, 2010 to file its own expert disclosures. Pursuant to one Court-approved extension, the association submitted “initial” reports of two of its experts, but not for two other experts. In late January 2011, the association served the expert report of its meteorologist. The next day, the insurance company filed its motion to strike the association’s expert disclosures. In its opposition, the association asked the Court to deem the meteorologist report timely filed due to “excusable neglect,” “good cause,” “substantial justification,” and “harmless error.”

Pursuant to Federal Rule 26, if a party fails to provide information or identify a witness as required by the Rule, that party is not allowed to use that information or witness to supply evidence on a motion, at a hearing or at a trial, unless the failure was substantially justified or is harmless. That sanction of exclusion is automatic and mandatory unless the sanctioned party can show that its violation of Rule 26 was either justified or harmless.

The District Court ultimately struck three of the association’s experts, holding, the association’s failure to comply with Rule 26 was neither substantially justified nor harmless. The Court did not strike the association’s meteorological expert report, finding that the failure to timely disclose his report was harmless.

Recently, the U.S. District Court for the Northern District of Florida ruled that an insurer’s claim files are not automatically entitled to protection under the work product doctrine in a first-party insurance dispute. Bartram, LLC v. Landmark American Ins. Co., No. 10-28, 2011 WL 528206 (N.D. Fla. Feb. 4, 2011). The claim in that case involved damages to an apartment complex in Gainesville, Florida, as a result of alleged construction defects. The Plaintiff submitted claims to the builder’s risk insurers for payment. The plaintiff filed suit against the Defendant insurers seeking a declaratory judgment that its losses were covered under the policies and alleging breach of contract by the Defendants in failing to pay for the losses. The Defendant had not formally denied the Plaintiff’s claims at the time suit was filed. A discovery dispute arose between the parties in the lawsuit, where the insurer claimed that each request for production was protected by the work product doctrine. The Plaintiff sought an order compelling the insurer to produce the responsive documents, including the claim file.

The Court held that the date which triggers the application of the work product doctrine in a first-party property coverage dispute is the date of the formal denial of the claim by the insurer. An insurer that wishes to withhold documents prepared before that date must show that the documents were prepared in anticipation of litigation for the work product protection to apply.

Recognizing that there was no denial of coverage before the suit was filed, the Court ordered the insurers to produce all documents prepared before the date the suit was filed, with the exception of any attorney-client communications.

The insurers had refused to produce these documents before the Plaintiff filed a Motion to Compel their production with the Court. In reading the case, the insurers even conceded in their response to the Plaintiff’s motion that they should have produced the documents prepared before the suit was filed. The insurers withheld the production of those documents for so long and then simply conceded that they should have produced them when it went before the Court. It should be noted that the lawsuit was filed in February 2010, and the Order compelling the production of those documents was issued in February 2011. It seems that withholding the documents for a year during the litigation, only to concede that they should have been produced should yield some kind of consequence, yet there were none addressed in the Court’s ruling.

Insurers that choose to wrongfully withhold this type of information essentially attempt to force policyholders to litigate the breach of contract case with their arms tied behind their backs. Fortunately, the District Court did order the production of the documents, so the policyholder may not be forced to litigate under such constraints. It should be noted that Florida state courts may apply a different rule regarding the work product privilege in first-party property claim disputes.

Unfortunately for the policyholder, no such privilege exists for their documents. Unlike an insurer, a condominium association cannot make broad claims that everything created as a result of a claim is protected. As I mentioned last week in The Cooperation Clause and Document Production: A Condominium Association's Difficult Task, document production is a very intensive process, especially for an association with hundreds of thousands of pages of information to sort through. Even a small and innocent mistake could lead to an insurer screaming from the rooftops and attempting to void an otherwise valid claim.

For condominium associations in particular, many times attorneys become involved in an insurance claim from the very beginning. In many instances, the independent or insurance adjuster is moved to the side early in the process and replaced by the insurer’s attorney, who ends up directing the adjustment and making the final determination of coverage.

For many years, insurers have claimed that all of the work that these attorneys performed in the adjustment of the claim was privileged because of the work product and attorney-client privilege. When insurers acted in bad faith by denying valid claims, the insurer could refuse to produce relevant documents which reflected this improper behavior during the bad faith litigation.

Fortunately, Florida courts caught on to this tactic and have stopped the insurer’s attempts to improperly hide its bad faith conduct by invoking attorney-client and work product privilege on materials in the claim file.

The Florida Supreme Court’s ruling in Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005) set the precedent in preventing insurer’s from concealing bad faith activities with claims of privilege. Specifically, Ruiz overruled previous case law and found that work product documents created in the breach of contract action were part of the claim file and must be turned over in subsequent bad faith litigation.

There has been some debate over whether the Court’s ruling in Ruiz prevented insurers from relying on attorney-client privilege to keep from producing documents related to the underlying breach of contract action or adjustment process.

This was the exact question which Sandalwood Estates Homeowner’s Association recently faced in the Southern District Court of Florida. After Hurricanes Frances and Wilma, Sandalwood suffered significant damages. When the insurer did not promptly pay the full amounts due under the policy, the parties proceeded to appraisal. The result of the appraisal was an award of around $5,000,000 more than was originally offered by the insurer.

Sandalwood filed suit alleging that the insurer had acted in bad faith in handling the insurance claims. During the discovery phase of the lawsuit, the insurer claimed that many of the documents requested did not have to be produced because they were protected by the attorney-client privilege.

The District Court disagreed, holding that while the documents may have privileges attached to them in a breach of contract action, documents dealing with the handling of the claim were part of the claim file and discoverable in a bad faith action. As the court stated, “…courts in Florida have consistently held that the Florida Supreme Court intended Ruiz to extend to claim file materials that would otherwise be protected by attorney-client privilege.” Sandalwood Estates Homeowner’s Assn’s Inc. v. Empire Indemnity Insurance Company, No. 09-80787, 2010 WL 411088 (S.D. Fla. January 28, 2010)

With the complexity and amount of money involved in condominium claims, there is a growing trend of insurers bringing in attorneys very early in the process. When acting in this capacity, the materials in the claims file should not be privileged simply because the attorney is involved. While this is obviously not the first time a court has found that these documents should be produced, the Sandalwood case is an important victory for condominium associations and other policyholders who are at the mercy of the insurer after a devastating loss.