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Insurance Company Required to Divulge Bad Faith Discovery in a Breach of Contract Action

In SUMMIT TOWERS CONDOMINIUM ASSOCIATION, INC. v. QBE INSURANCE CORPORATION, 23 Fla. L. Weekly Fed. D191a (S.D. Fla. April 5, 2012), U.S. District Court Judge Patricia A. Seitz held that Magistrate Judge Andrea A. Simonton, who was assigned to handle discovery matters in an insurance breach of contract action, did not act contrary to law or clearly err when she ordered insurer's Rule 30(b)(6) witness to answer questions regarding financial incentives, general business practices, and bad faith.  The case also has interesting footnotes on how insurance attorneys need to be more civil in the litigation process.

The insurer supported its arguments that such discovery is not discoverable with numerous citations to state court cases that stand for the general proposition that discovery related to bad faith claims is improper in a first-party insurance breach of contract action. Nevertheless, consistent with Buckley Towers Condominium, Inc., v. QBE Insurance Corp., 2008 WL 2645680 (S.D. Fla. June 26, 2008), the Court found that the questions were relevant to whether an insurer's initial determination that damages did not exceed deductible was reasonable and also to rebut claims of fraud alleged by insurer. The Court explained "[t]hat 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 [the insurer]."

In addition, the Court found that insurance company's counsel's instructions to deponent not to answer based on relevancy and objections to form did not comply with federal rules of procedure or applicable authorities and cited Federal Rule of Civil Procedure 30, which provides, in relevant part:

"A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3)."

Fed. R. Civ. P. 30(c)(2) (emphasis added). Because defense counsel instructed the insurer's witness not to answer deposition questions on legal bases other than those specified in Rule 30(c)(2), the Court found defense counsel's actions improper.
In addition, the Court found that an order compelling the deponent to produce information that he relied on, other than his experts, that would support insurer's affirmative defense that the Plaintiff fraudulently inflated its claims was consistent with governing rules and authorities, as discovery was relevant, calculated to lead to admissible evidence, and tailored to the issues of case. This was so held, despite the fact that Magistrate Judge Simonton indicated that “[n]ormally, the claims handling procedures are not discoverable at the breach of insurance contract stage.” The judge allowed some discovery on this issue because the insurance company had asserted as an affirmative defense that the Plaintiff fraudulently inflated its claim.

While the case delved into other discovery issues beyond the scope of this blog, what is also interesting is the Court's open admonition of the actions of defense counsel in the case . The Court openly invited the Plaintiff to file a motion for sanctions against defense counsel stating "[defense counsel's] conduct was not justified and sanctions are appropriate should Plaintiff file such a motion."

What this case reminds us is that just because Florida state court cases tell us generally that claims handling procedures and other such issues are not normally discoverable at the breach of insurance contract stage, the federal courts will look to its procedural rules to decipher what is and what is not discoverable. Rule 30 is very limited on what is not discoverable. Therefore insurers will need to be extra vigilant in the affirmative defenses it chooses to employ in defending a breach of contract action in Florida, as more than just the original contractual dispute itself may be at issue in discovery.

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