While relying on its investigation to make determinations as to coverage and the amount of damages after a loss has occurred, insurance companies often take the position that their claims handling processes, general business practices, and financial incentives to delay, underestimate, and/or deny claims are not relevant or discoverable in litigation over breaches of the insurance contract. While some courts have bought in to this proposition, the tides are turning as more and more judges are seeing the disingenuousness of the argument.
This issue recently arose in Summit Towers Condominium Association, Inc. v. QBE Insurance Corporation, a breach of contract action by the association over Hurricane Wilma damages. During the discovery, Summit Towers’ attorneys attempted to illicit testimony from QBE’s Corporate Representative regarding, among other things, QBE’s claims handling procedures, reinsurance information, and financial incentives (also known as contingent loss ratio bonuses).
QBE’s attorney, however, refused to allow the Corporate Representative to answer the questions posed claiming that they were not relevant in a breach of contract action and therefore not discoverable.
After the deposition, Summit Towers asked the appointed Magistrate Judge to compel QBE’s Corporate Representative to continue the deposition and answer the questions posed. Summit Towers contended, among other things, that because QBE had alleged that the claim was fraudulently inflated, a wider discovery should be allowed to allow Summit Towers to rebut the accusations.
Magistrate Judge Simonton overruled the objections and ordered QBE to produce its Corporate Representative again to answer the questions posed. In doing so, Magistrate Simonton succinctly stated:
I am going to tell you right now I am ordering those questions to be answered at a deposition. I am going to follow the same logic that was filed I believe by Judge Torres [Buckley Towers Condominium, Inc. v. QBE Insurance Corp., 2008 WL 2645680 (S.D. Fla. June 26, 2008)], and the relevancy objection is overruled at a deposition. If it is not privileged, then the witness needs to answer the question[.]
Despite the Magistrate’s ruling, however, QBE continued its attempt to protect evidence of its claims handling procedures, general business practices, and financial incentives by appealing the Magistrate’s Order to the District Court Judge. This effort again fell flat when the Honorable Patricia Seitz issued an Order denying QBE’s objections to the Magistrate Judges rulings.
Regarding the portion of the Order compelling QBE to answer questions relating “financial incentives, general business practices and bad faith or good faith and fair dealing”, Judge Seitz stated:
Magistrate Judge Simonton’s ruling is neither clearly erroneous nor contrary to law. Consistent with Buckley Towers and QBE’s affirmative defense of fraud, inquiry into the investigation process and analysis of an insured’s claim is relevant in this breach of contract action. The questions at the deposition are relevant to whether QBE’s initial determination that damages did not exceed the deductible was reasonable and also to rebut the claims of fraud alleged by QBE.
In relation to QBE’s argument that the questions were, in essence, premature bad faith discovery, the Judge Seitz stated:
That there is some overlap with this evidence and evidence that is relevant to a bad faith claim is of no consequence where, as here, the probative value of that evidence to the breach of contract claim outweighs any prejudice to QBE.
Fraud defenses are becoming all too common in first party property insurance claims. Some carriers, such as QBE allege fraud in almost every case that there is a disagreement regarding the amount of loss and causation of damages, even if there is no evidence to support such an accusation.
Orders like the one mentioned above show that courts are taking notice of these patterns and practices and are no longer allowing insurers to “hide the ball” in discovery by claiming that information that will rebut the alleged fraud defense is not relevant and is not discoverable.