In re Professionals Direct Ins. Co., 2009 WL 2581289 (6th Cir. Aug. 24, 2009), the court denied Professionals Direct Insurance Company’s petition for writ of mandamus to vacate a discovery order entered by the United States District Court for the Southern District of Ohio. In denying the petition, the court limns the extent to which an insurer’s coverage file is subject to discovery in coverage litigation.
The claim arises out of an action for malpractice brought against the Wiles, Boyle, Burkholder & Bringardner Co., an Ohio law firm specializing in insurance defense. In 2001, Wiles was retained by Illinois National Insurance Company to defend a suit against an employee of one of Illinois National’s insureds. Wiles was not successful in its defense, and the plaintiffs obtained a jury verdict in the amount of $8,531,488.68 in damages. The trial court entered judgment on December 30, 2002. Wiles filed a motion for judgment notwithstanding the verdict or, alternatively, for a new trial on January 15, 2003. The trial court denied the motion as untimely, concluding that it had been filed outside the 14-day period provided in the Ohio Rules of Civil Procedure. Wiles appealed this decision to the Ohio Court of Appeals and ultimately to the Ohio Supreme Court.
In late 2003, while the Ohio Supreme Court’s decision was pending, Wiles applied to renew its malpractice insurance policy with Professionals Direct. In its application for renewal, Wiles indicated that “it was not aware of any circumstances, acts, or omissions during the prior twelve months that ‘could reasonably be expected to result in a claim to Professionals Direct.’” 2009 WL 2581289, at *1.
On August 18, 2004, the Ohio Supreme Court affirmed the trial court’s ruling. Thereafter, on September 1, Wiles notified Professionals Direct that Illinois National had a potential malpractice claim against it. In response, Professionals Direct reserved the right to deny the claim pending an investigation into the circumstances under which it arose. In October 2004, Illinois National settled the underlying claim and offered to settle its potential malpractice action for $5,000,000. Professionals Direct represented Wiles in settlement negotiations.
On August 19, 2005, Professionals Direct sent a second letter to Wiles, again reserving its right to exclude the claim from coverage and asking that Wiles provide a written explanation for the delay in reporting Illinois National’s potential claim and its failure to disclose this claim in its application for renewal. On March 23, 2006, Professionals Direct issued its declination of coverage, informing Wiles that the malpractice policy excluded coverage because Wiles failed to give notice of Illinois National’s potential claim either before the expiration of the 2002-03 policy or in its application for renewal. Six days later, Professionals Direct filed an action for a declaratory judgment in the United States District Court for the Southern District of Ohio.
Wiles filed a counter-claim against Professionals Direct, alleging breach of contract and bad faith in processing the Illinois National claim. During discovery, Wiles requested that Professionals Direct produce all documents relating to its bad-faith claim. Professionals Direct refused to produce a number of documents from its coverage file invoking the work-product doctrine and the attorney-client privilege. Following an in camera examination of the documents, the magistrate judge ordered that Professionals Direct disclose many of the documents in its coverage file.
The district court judge rejected Professionals Direct’s objections to the magistrate judge’s discovery order. Professionals Direct then sought a petition for writ of mandamus from the Sixth Circuit to vacate the discovery order.
The Sixth Circuit denied the petition. The court stated that five factors inform its decision as to whether to issue a writ of mandamus:
(1) whether the party seeking the writ has no other adequate means, such as direct appeal, to obtain the relief desired; (2) whether the petitioner will be damaged or prejudiced in a way not correctable on appeal after a final judgment; (3) whether the district court’s order is clearly erroneous as a matter of law; (4) whether the district court’s order contains an oft-repeated error, or manifests a persistent disregard of the federal rule; (5) whether the district court’s order raises new and important problems, or legal issues of first impression.
2009 WL 2581289, at *3. Though, “not every factor need apply… together they must present extraordinary circumstances to justify issuance of the writ.” Id. The court held that the fourth and fifth factors militated against the issuance of a writ.
The court had little difficulty in concluding that Professionals Direct had “shown that it is in danger of irreparable harm and that it has no other adequate means of relief.” Id. As to whether Professionals Direct had other adequate means of relief, the court remarked “Professionals Direct cannot necessarily obtain review by withholding the documents and seeking review of a contempt sanction.” Likewise, in regard to whether the discovery order would prejudice Professionals Direct, the court concluded that “an erroneous forced disclosure of confidential information could not be adequately remedied on direct appeal because a court cannot restore confidentiality to documents after they are disclosed.” 2009 WL 2581289, at *4.
Professionals Direct’s request for a writ foundered on the inquiry into whether the district court’s order was clearly erroneous as a matter of law. First, the court concluded that the work-product doctrine did not apply. “If a document is prepared in anticipation of litigation, the fact that it also serves an ordinary business purpose does not deprive it of protection… but the burden is on the party claiming protection to show that anticipated litigation was the ‘driving force behind the preparation of each requested document.’” Id. Here, the court noted that Professionals Direct did not contest the magistrate judge’s findings that “the earliest litigation could reasonably have been anticipated was August 2005 – when Professionals Direct sent its second reservation-of-rights letter, asked Wiles to explain its failure to disclose the Illinois National claim in its renewal application, and retained counsel in Ohio.” Id. “At this time, the magistrate found, Professionals Direct was seriously evaluating a declaratory judgment action, and that, from this point on, Professionals Direct’s attorneys had dual functions.” Id.
The court rejected Professionals Direct’s argument that “the documents prepared by its attorneys while having ‘dual function’ necessarily have a dual purpose and are thus immune from discovery.” 2009 WL 2581289, at *5 (emphasis in original). Rather, the “fact that Professionals Direct reasonably anticipated litigation at this point does not answer whether it prepared the disputed documents ‘because of’ litigation or not.” Id. (emphasis in original). The court pointedly remarked that “making coverage decisions is part of the ordinary business of insurance, and, if the ‘driving force’ behind the preparation of these documents was to assist Professionals Direct in deciding coverage, then they are not protected by the work-product doctrine.” Id. “Whether the documents at issue here were in fact prepared in anticipation of litigation can only be determined from an examination of the documents themselves and the context in which they were prepared.” Id.
The court observed:
Based on the descriptions in the magistrate’s order and Professionals Direct’s privilege log, it appears these documents fall into three categories: (1) legal memoranda prepared before late August; (2) emails between Professionals Direct and outside counsel concerning the coverage decision; and (3) correspondence between employees of Professionals Direct or between Professionals Direct and its reinsurers regarding the coverage decision.”
Id. Thus understood, the court held that the magistrate judge had made a “reasonable application of the work-product doctrine” in ordering “Professionals Direct to produce documents he found that were prepared ‘because of’ the coverage decision rather than anticipated litigation or were prepared prior to the time Professionals Direct could reasonably anticipate litigation.” Id.
The court further held that Ohio’s attorney-client privilege did not shield production of the documents in question. First, the court rejected Professionals Direct’s argument that Ohio’s statutory attorney-testimonial privilege applied. “As the magistrate here recognized, by its term § 2317.02(A) applies to attorney testimony, not documents held by defendants.” 2009 WL 2581289, at *6.
The court also rejected Professional Direct’s contention that an October 31, 2001 amendment to § 2317.02, which extended the testimonial privilege to communications made to the attorney by a client, did not apply. The court noted that the amendment “did not become effective until after the suit was filed.” Id. “Under Ohio law, statutes are presumed to be perspective in application – i.e. inapplicable to pending cases – absent express legislative instructions to the contrary.” Id. “Neither the text of the amendment nor the committee notes accompanying it expressly make § 2317.02(A) apply retroactively to pending cases.” Id. “Thus it does not apply in this case, and we need not interpret its scope.” Id.
Finally, the court held that the Ohio common-law attorney-client privilege was equally inapplicable. The court explained that in Boone v. Vanliner, 744 N.E.2d 154 (Ohio 2001), the Ohio Supreme Court had established a common-law exception to the Ohio’s attorney-client privilege in cases involving allegations that an insurer denied an insured’s claim in bad faith. 2009 WL 2581289, at *7. The Boone court held that “the attorney-client privilege did not apply to documents containing evidence of bad faith on the part of an insurer.” Id. Rather, an insurer must produce “all claims-file materials related to the issue of coverage that were created prior to the denial of coverage.” Id.
Applying Boone, the court reasoned that “because Professionals Direct elected to defend Wiles under a reservation of rights and litigate the coverage issue instead of simply deny [sic] coverage, there was no coverage denial date.” Id. The court found that the magistrate judge had made a “reasonable application of Boone in selecting March 23, 2006 as his ‘constructive denial date’ because this was the day Professionals Direct informed Wiles that it was going to seek a declaratory judgment that the Illinois National claim was not covered.” The court thus affirmed the magistrate judge’s order that “Professionals Direct… produce all claims-file documents that were produced prior to that date.” 2009 WL 2581289, at *7-*8.
In denying Professionals Direct’s petition, the court observed that neither of the final two factors in “the five-factor test applies with much force here.” 2009 WL 2581289, at *8. Rather, “this case involves the application of two relatively well-developed areas of law to a discovery dispute between private parties; it does not involve ‘new and important problems’ or ‘legal issues of first impression.’” Id. Finally, “the discovery order does not contain a clear error, let alone show a ‘persistent disregard of the federal rules.’” Id.
