Opinion
No. CV 09 5013702
March 22, 2010
MEMORANDUM OF DECISION RE MOTION FOR COMPLIANCE, #109
This case involves the apparent theft of closing funds in the approximate amount of $338,000 by Attorney Joseph Kriz, (Kriz), a closing agent for the defendant, Lawyers Title Insurance Corporation (LTIC). In the amended complaint in this case, dated October 21, 2009, the plaintiff, US Bank National Association as Trustee, alleges a failure to honor a closing protection letter and title binder, common law indemnification, breach of implied covenant of good faith and fair dealing, and engaging in unfair or deceptive acts or practice in the conduct of trade or commerce in violation of the Connecticut Unfair Trade Practices Act (CUTPA).
The original lender which provided the mortgage loan was BNC Mortgage, Inc. (BNC). The complaint alleges that LTIC issued a Letter of Protection to BNC specifically with regard to a refinancing loan to a borrower, Steven G. Merrick. The complaint goes on to allege that BNC assigned, sold or transferred its servicing rights on the loan to Chase Home Finance, LLC. Subsequently, Mortgage Electronic Registration Systems, Inc., as Nominee for BNC Mortgage, Inc., assigned the original loan to the plaintiff herein, US Bank National Association as Trustee for SASCO 2007-BC4.
On September 3, 2009, the plaintiff served interrogatories and requests for production upon the defendant, and the defendant timely objected to certain of the discovery requests. After an attempt by counsel to address the underlying discovery dispute did not resolve all issues, the plaintiff filed a motion for compliance. The defendant filed an objection to the motion for compliance, and the court ordered the matter set down for oral argument. The plaintiff also filed a reply to the defendant's objection.
The discovery served probes into four areas: (1) policies and procedures relating to the denial of closing protection letter claims and title claims; (2) title company policies and procedures involving training and supervision of agents; (3) relationship between setting reserves and denial of claims; and (4) auditing or other records relating to Kriz' conduct as a title agent. The defendant's objections rest on three areas. First, LTIC objects to certain requests because the information is not relevant in the absence of a claim of bad faith and the plaintiff has not asserted such a claim in its complaint. Second, several of the plaintiff's discovery requests, the defendant argues, are overly broad. Third, LTIC asserts its claims file and information on reserves are not discoverable on the ground of privilege — attorney/client — and/or work product.
To the extent a request is overly broad, the court will limit its scope. See orders, specifically, production requests 13 and 14 and interrogatory 27.
I DISCUSSION
Practice Book § 13-2 provides: "In any civil action . . . where the judicial authority finds it reasonably probable that evidence outside the record will be required, a party may obtain . . . discovery of information or disclosure . . . of papers, books, or documents material to the subject matter involved in the pending action, which are not privileged, whether the discovery or disclosure relates to the claim or defense of the party seeking discovery or the claim or defense of any other party . . ." It further provides that "a party may obtain discovery of documents and tangible things otherwise discoverable . . . and prepared in anticipation of litigation . . . only upon a showing that the party seeking discovery has substantial need of the materials . . . and is unable without undue hardship to obtain the substantial equivalent of the materials by other means." § 13-3.
A BAD FAITH
The defendant, LTIC, argues that the plaintiff is not entitled to the discovery of its reserves and claims file because the information is irrelevant absent a cause of action based on allegations of bad faith. The plaintiff counters that it has asserted causes of action for "Breach of the Implied Covenant of Good Faith and Fair Dealing," and violations of CUTPA. The plaintiff argues that implicit in the allegation that the covenant of good faith and fair dealing has been breached is the allegation that the defendant acted in bad faith. It argues that alleged violations of CUTPA also implicate bad faith actions on the part of the defendant. Nonetheless, the defendant argues that the plaintiff in its amended complaint dated October 21, 2009, does not allege a cause of action for bad faith.
"The relevant legal principles are well established. [I]t is axiomatic that the . . . duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship . . . In other words, every contract carries an implied duty requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement . . . The covenant of good faith and fair dealing presupposes that the terms and purpose of the contract are agreed upon by the parties and that what is in dispute is a party's discretionary application or interpretation of a contract term." (Internal quotation marks omitted.) Keller v. Beckenstein, 117 Conn.App. 550, 563, 979 A.2d 1055 (2009).
"To constitute a breach of [the implied covenant of good faith and fair dealing], the acts by which a defendant allegedly impedes the plaintiff's right to receive benefits that he or she reasonably expected to receive under the contract must have been taken in bad faith . . . Bad faith has been defined in our jurisprudence in various ways. Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive . . . Bad faith means more than mere negligence; it involves a dishonest purpose . . . [B]ad faith may be overt or may consist of inaction, and it may include evasion of the spirit of the bargain . . ." (Citation omitted; internal quotation marks omitted.) Id., 563-64.
In the plaintiff's bad faith count, it alleges that: "[LTIC] attempt to avoid payment of its obligations under the Subject Letter of Protection is a breach of the implied covenant of good faith and fair dealing which is, under Connecticut case law, implicit in every contract." Although the appellate courts of this state have not addressed precisely what facts need to be alleged to sustain a bad faith claim, "a majority of trial courts have held [however] that plaintiffs must plead facts that go beyond a simple breach of contract claim and enter into a tortious conduct which is motivated by a dishonest or sinister purpose." (Internal quotation marks omitted.) Lynch v. Covenant Ins. Co., Superior Court, judicial district of Hartford, Docket No. 09 5027821 (August 11, 2009).
See also Crespan v. State Farm Mutual Automobile Ins. Co., Superior Court, judicial district of Litchfield, Docket No. CV 05 4002121 (January 13, 2006); Bernard v. Buendia, Superior Court, judicial district of Fairfield, Docket No. CV 04 4003054 (July 20, 2005); O G Industries, Inc. v. Travelers Property Casualty Corp., Superior Court, judicial district of Litchfield, Docket No. CV 01 0084433 (September 7, 2001); Ferriolo v. Nationwide Ins. Co., Superior Court, judicial district of New Haven, Docket No. CV 97 403433 (March 11, 1998); Grant v. Colonial Penn Ins. Co., Superior Court, judicial district of Fairfield, Docket No. CV 95 0321277 (January 16, 1996) ( 16 Conn. L. Rptr. 49).
A minority of cases adopt a less stringent approach, however, and judges have concluded in these cases that plaintiffs are not required to allege specific acts of bad faith if they allege facts that "reasonably infer that an improper motive or reckless indifference of the interest of others" exists. Algiere v. Utica National Ins. Co., Superior Court, judicial district of New London, Docket No. CV 04 0569670 (February 7, 2005). In Algiere, the court concluded that the plaintiff's allegations that "the defendant . . . knowingly, willfully, deliberately and repeatedly ignored the workers' compensation commission orders" and that "such continued defiance is unlikely to be attributable to an honest mistake or mere negligence" were sufficient to allege a bad faith claim. Id. In the present case, the plaintiff does not allege facts from which it can be inferred that the defendant's denial of coverage was motivated by a dishonest purpose or ill will.
See also Morin v. Tracy, Driscoll Co., Superior Court, judicial district of Hartford, Docket No. CV 03 0823241 (May 26, 2004) (allegation that insurance broker " knowingly omitted material information from the [insurance] application" sufficient to state cause of action for breach of covenant of good faith and fair dealing); McGill v. Mutual of Omaha Ins. Co., Superior Court, complex litigation docket at Middletown, Docket No. X04 CV 04 0104343 (September 28, 2004) ("plaintiffs need only allege sufficient facts or allegations from which it may reasonably be inferred that the defendant breached the implied covenant of good faith and fair dealing").
The plaintiff argues that it has alleged violations of CUTPA, which also implicate bad faith actions on the part of the defendant. Although this court is not being asked to rule on the sufficiency of the pleading as to a CUTPA claim, there is nothing implicit in a CUTPA claim as to bad faith allegations. The elements of a CUTPA claim have been articulated in numerous cases and broken down into the elements which include: (1) whether the practice without necessarily having been previously considered unlawful, offends public policy as has been established by statutes, common law, or otherwise; (2) whether it is immoral, unethical, oppressive, or unscrupulous; and (3) whether it causes substantial injury to consumers, competitors, or to businessmen. See e.g., Ramirez v. Health Net of the Northeast, Inc., 285 Conn. 1, 19, 938 A.2d 576 (2008). On the other hand, "[b]ad faith is defined as the opposite of good faith, generally implying a design to mislead or to deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation not prompted by an honest mistake as to one's rights or duties. Bad faith is not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity . . . It contemplates a state of mind affirmatively operating with furtive design or ill will." Buckman v. Peoples Express, Inc., 205 Conn. 166, 171, 530 A.2d 596 (1987).
B CLAIMS FILE AND RESERVES
Two of the discovery requests pertain to the claims file and any information regarding reserves which the defendant has created. The defendant objects to those requests based upon privilege. It also argues that reserves are discoverable only when there are allegations of bad faith. The court will first address whether the reserves created by the defendant are discoverable or privileged.
a. Reserves
The plaintiff requests the defendant's insurance reserve information arguing that this information is discoverable as it was made in the ordinary course of business. In support, the plaintiff cites to Country Life Ins. Co. v. St. Paul Surplus Lines Ins. Co., United States District Court, Docket No. 031224 (C.D. Ill. October 12, 2005) and Central Georgia Anesthesia Services v. Equitable Life Assurance Society, United States District Court, Docket No. 50624 (M.D. July 25, 2007). In response, the defendant argues that the reserves are privileged and, thus, not subject to discovery.
It is unclear why the plaintiff has cited to Country Life Ins. Co. v. St. Paul Surplus Lines Ins. Co., United States District Court, Docket No. 031224 (C.D. Ill. October 12, 2005) as this opinion does not even reference discovery, but rather, discusses whether a jury may award attorney fees when an insurance company's delay was vexatious and unreasonable. Georgia Anesthesia Services v. Equitable Life Assurance Society, United States District Court, Docket No. 50624 (M.D. July 25, 2007) is discussed below.
While no Connecticut authority has ruled on the discoverablity of insurance reserves, other courts around the country have struggled with this issue. The discoverability of reserve information involves two issues: relevance and privilege. Many courts deny requests for insurance reserves, also called loss reserves, on the grounds that such information simply is not relevant to the underlying cause of action. 17A G. Couch, Insurance (3d Ed. 1995) § 251:29, p. 48-49. Most courts, however, are willing to permit discovery if the underlying action involves allegations of bad faith because the mind set of the insurer then becomes relevant to the underlying cause of action. Id., § 251:29, p. 49. At least one Alaskan court has gone so far to state that "the reserve is established in the ordinary course of business." Loyal Order of Moose v. International Fidelity Ins. Co., 797 P.2d 622, 628 n. 14 (1990). Of course, the request for this information typically prompts an objection from the insurer on the grounds that the information is privileged due to the attorney-client relationship or privileged as work product as the defendant asserts here. T. Sukel M. Pipkin, "Discovery and Admissibility of Reserves," 34 Tort Ins. L.J. 191, 208 (1998). For these reasons it has been suggested "that the discoverability of reserve information is, and should be, determined on an ad hoc basis in light of the precise issues in the case, the likelihood that reserve information would be relevant to those issues, and the demonstrated purpose of setting the reserve in the case at bar." 17A G. Couch, supra, § 251:29, p. 49. Therefore, each of these theories of general relevance, bad faith and privilege are discussed in further detail below.
1. Relevance
"Our rules of practice provide guidelines to facilitate the discovery of information relevant to a pending suit." Sanderson v. Steve Snyder Enterprises, Inc., 196 Conn. 134, 139, 491 A.2d 389 (1985). Discovery is permissible "if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Practice Book § 13-2.
In Lipton v. Superior Court, 48 Cal.App. 4th 1599, 1605, 56 Cal. Rptr.2d 341 (1996), the plaintiff requested reserve information in the pursuit of his bad faith action against his professional liability insurer. The defendant objected that this information was not relevant. Id., 1615. The court held "at least for the purposes of discovery . . . loss reserve information cannot be deemed, a priori, irrelevant." Id., 1605. Nevertheless, the court reasoned that "the fact that a reserve had been set by the insurer might well be relevant to show that the insurer must have had some knowledge that a potential for coverage existed." (Emphasis in original.) Id., 1614. "In addition, an argument can be made for the proposition that loss reserve information might have some relevance to the question of whether . . . the insurer had conducted a proper investigation or given reasonable consideration to all of the factors involved in a specific case which might expose its insured to an excess verdict. On the other hand, depending on the circumstances of a particular case, there may be no relevance whatever." (Emphasis in original.) Id. The Lipton court decided that because there was a claim for bad faith, the information would undoubtedly assist the plaintiff in " evaluating his bad faith claim and preparing it for trial." (Emphasis in original.) Id., 1616.
2. Bad Faith
Considering the importance courts place on bad faith, it is important to analyze it further. "[E]xamination with respect to the reserve may develop evidence on the issue of defendant's bad faith. Bad faith is a state of mind which must be established by circumstantial evidence. The actions of the defendant in respect to the reserve are relevant. Negligent investigation and uninformed evaluation of the worth of the [underlying] claims go to the heart of the case since serious and recurring negligence can be indicative of bad faith." Groben v. Travelers Indemnity Co., 49 Misc.2d 14, 17, 266 N.Y.S.2d 616 (1965), aff'd., 282 N.Y.S.2d 214 (1967).
For example, in Stone v. Allstate Ins. Co., United States District Court, Docket No. 2000059 (S.D.W.V. July 24, 2000), the plaintiff alleged bad faith and requested discovery of the insurance reserve. The court stated that "notwithstanding the fact that [the defendant] was on notice as to the seriousness of [the plaintiff's] injuries, [the defendant] failed to set a reserve at the policy limits and did not raise the amount until well after it has been established that the other driver was 100% at fault and that [the plaintiff] was a paraplegic." Id. "Thus, evidence of the time of the increase is relevant circumstantial evidence for a showing of bad faith, and is probative." As a result, the court allowed discovery of the insurance reserves. Id.
In Central Georgia Anesthesia Services v. Equitable Life Assurance Society, United States District Court, Docket No. 50624 (M.D. July 25, 2007), the court permitted discovery of insurance reserves where bad faith was alleged. The court reasoned "[t]he overwhelming majority of courts . . . find reserves discoverable, especially in cases involving bad faith claims because, although mandated, the reserves do bear relationship to the insured's calculation of its potential liability." Id. "[T]he parties [in this case] argue[d] over the intended numerical values of the benefits payable under the policy. As such, the reserve may reveal what [the] defendants understood the benefit under the policy to be at the time they entered into the agreement." Id.
3. Privilege
"Whether the attorney-client privilege or attorney work product doctrine applies to prevent discovery of reserve information depends, in large part, on the extent of involvement by attorneys in the process leading to establishment of reserves." T. Sukel M. Pipkin, supra, 208. The court in Rhone-Poulenc Roer Inc. v. Home Indemnity Co., 139 F.R.D. 609 (1991), viewed the scope of this privilege broadly. The court found that "[a]lthough these risk management documents . . . may not have in themselves been prepared in anticipation of litigation, they may be protected from discovery to the extent that they disclose the individual case reserves calculated by defendants' attorneys. The 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., 614.
Conversely, the court in National Union Fire Ins. Co. v. Continental Illinois Group, United States District Court, Docket No. 857080 (N.D.Ill. July 22, 1988), ordered the discovery of the loss reserves because the defendant had failed to persuade the court that the method used to create its reserves caused them to be work product. The defendant testified that the reserve was established by the management of the insurance company as well as the company's counselor. The court noted that "[it was] not clear [that] the setting of the reserve was identical with the thought processes of counsel . . . Since the burden is on [the defendant] to establish its work product immunity, the court finds that it has failed to do so and that the questions concerning reserves must be answered." Id.
4. Application to the Instant Case
Examining the facts in the present case, the court will apply the foregoing analysis to determine if the reserve information should be subject to discovery. Such information is not relevant to the underlying cause of action simply because the plaintiff has alleged that the defendant breached the implied covenant of good faith and fair dealing as well as alleging a violation of CUTPA, without any specific allegations of bad faith. (See discussion above concerning bad faith allegations.) On the other hand, it is relevant to the bad faith claim, if, in fact, one was alleged. If the plaintiff can withstand any scrutiny in the bad faith issues, the next hurdle will be the question of whether the information is privileged. While the defendant has asserted that this information is privileged, it has not provided any information to suggest how the reserves were created for the court to decide whether the privilege should apply. Thus, it has not met its burden of showing that the reserve information was created by an attorney and for the purposes of litigation. Therefore, the reserve information requested would be subject to discovery, if there was a sustainable claim of bad faith. Because the court concludes the plaintiff has not alleged bad faith, the court determines that the reserve information is not subject to discovery.
b. Claims File
As to whether the claims file is discoverable, "[a] claim file typically contains many things. Some of the items may be subject to attorney-client privilege. These, most typically, are communications involving counsel for the insured and concern the defense of the underlying action. These items are subject to the attorney-client privilege, though there are some twists. In general, the privilege belongs to the client, who is the insured. See, e.g., Rienzo v. Santangelo, 160 Conn. 391, 395, 279 A.2d 565 (1971). In this case, however, the defendant claims no policy was issued, and therefore, there is no third party communication to be privileged. The privilege, if any, pertains to the defendant who reasonably expects the attorney is protecting its interests. A similar analysis pertains to work product: the mental impressions of attorneys and, at times, others, are protected, and other material prepared in anticipation of litigation is protected unless there is a sufficient showing of need. It does appear to be true that in some situations material within the insured-attorney-insurer triangle may be required to be disclosed to others within the group, at least if the material was prepared prior to the falling out, and yet still maintain its privileged status as to other parties." Royal Indemnity v. Tera Firma, Superior Court, judicial district of Middlesex, Complex Litigation docket, No. X04 CV 05 4005063 (February 1, 2007). The same principle applies here, where there was no third party, clearly any work performed which would qualify as work product would likewise enjoy the privilege.
Considering the above principles, the defendant shall disclose all or parts of its claims file to the plaintiff. If the defendant believes it has an interest in maintaining the confidentiality of any specific documents sought by the plaintiff, such as its own work product or other privileged documents, it shall create a specific privilege log for review in camera by the court to determine whether such documents should be produced.
In light of the foregoing, the motion for compliance is hereby ordered:
As to Interrogatory 2 — denied.
As to Interrogatory 4 (e)-(g) — denied.
As to Interrogatories 6, 7, 8 — denied.
As to Interrogatory 9 — granted.
As to Interrogatory 13 — granted.
As to Interrogatory 14 — withdrawn.
As to Interrogatory 15 — denied.
As to Interrogatory 16 — granted.
As to Interrogatory 22 — denied.
As to Interrogatory 27 — granted, however, limited to Connecticut.
As to Interrogatory 31 — granted.
As to Interrogatory 32 — denied.
As to production request 3 — withdrawn.
As to production request 4 — Defendant shall create privilege log of the claims file and submit any documentation it is claiming as privileged, etc., to the court for an in camera review as provided for above.
As to production request 6 — granted.
As to production request 9 — denied without prejudice.
As to production request 10 — granted.
As to production request 11 — denied.
As to production request 12 — denied without prejudice.
As to production request 13 — granted, however, limited to any audits, etc., specifically conducted by or on behalf of Lawyers Title.
As to production request 14 — granted, however, limited to Kriz only.
As to production request 15 — granted.
As to production request 16 — denied.
All discovery requests shall be provided as set forth above within forty-five (45) days of the date of this memorandum.
So ordered.