No Right to Read Opponent’s Litigation File
Sometimes lawsuits live longer than the career of the judge assigned to hear it. Sometimes the lawsuit takes on a life of its own. In Genesis Insurance Company v. Magma Design Automation, Inc., United States District Court, N.D. California 2016 WL 3057375 (05/31/2016)the USDC for the Northern District of California was called upon to resolve a discovery dispute in an insurance coverage lawsuit that has been pending for ten years.
The discovery dispute arises in litigation involving the following parties:
- Magma Design Automation, Inc. (“Magma”), a local high technology company that carried Director’s and Officer’s (D&O) liability insurance during the time in question;
- Executive Risk Indemnity Inc. (“ERII”), which provided primary D&O coverage to Magma for the policy year 2004 and again for 2005;
- Genesis Insurance Company (“Genesis”), which covered Magma under a D&O excess policy for a year that spanned 2003-2004 (“the 03-04 policy”); and
- National Union Fire Insurance Company (“National Union”), which covered Magma under a D&O excess policy for years spanning 2004-2006 (“the 04-06 policy”).
A patent infringement action was filed against Magma in 2004. As sometime happens, the patent action spawned two shareholder securities lawsuits against Magma that were filed in 2005. For insuring purposes under the D&O policies, the parties needed to prove when the securities actions arose. There was no dispute that ERII had the primary coverage for both 2004 and 2005 but they could not agree which excess carrier had coverage for them. The dispute, still pending after almost ten years was to determine whether National Union, who was on the risk at the time the suits were filed, or Genesis, who was on the risk the year before when the patent case was filed.
Under the terms of the Genesis policy, it would actually have been Genesis if it had received from Magma at the time of the patent action’s filing, a proper “notice of circumstances” advising that a securities lawsuit was looming in the future. Magma said that the notice it had caused to be sent to Genesis back in 2004 said what it needed to say and was sufficient to trigger coverage under the Genesis 03-04 policy for the 2005 securities lawsuits. ERII agreed with Magma, although it also acknowledged that its primary coverage could be deemed invoked for either its 2004 or its 2005 policy (which year made no difference to ERII). Genesis disputed the sufficiency of the “notice” and denied coverage. National Union denied coverage.
The present litigation began by Genesis filing a declaratory relief action against Magma challenging the sufficiency of the “notice.” Before that suit could be addressed by the court, the parties in the securities actions negotiated a settlement. ERII paid its $10,000,000 limits. Genesis, under reservation of rights, paid its $5,000,000 limits. After the settlement, Genesis wanted its money back, either from National Union or Magma. National and ERII also became parties in a flurry of cross-claims and counterclaims. National said it had good policy defenses. Magma just wanted one of the two excess carriers to be held responsible and did not much care which one it was.
The first court ruling on the merits was a summary judgment that declared the 2004 “notice” to Genesis was sufficient, triggering coverage for the 2005 securities actions under the Genesis 03-04 policy. National Union was off the hook.
Genesis appealed the summary judgment, and the Ninth Circuit not only reversed but specifically held that the “notice” was not effective to trigger coverage under Genesis’s 03-04 policy. Genesis was vindicated.
In a subsequent summary judgment ruling, the District Court found that National Union had the excess coverage for the 2005 securities actions and that National Union must reimburse Genesis for the $5,000,000 that it had paid toward the settlement. National Union was back in the picture.
National Union appealed, and the Ninth Circuit reversed. It did not rule out that National Union might ultimately have to come up with the $5,000,000. However, it held that there was no such obligation yet because there had been no exhaustion of ERII’s $10,000,000 primary limit of its 2005 policy. For the moment, National Union could keep control of its funds.
THE LATEST MOTIONS FOR SUMMARY JUDGMENT
Again, summary judgment motions were brought, and the court made a series of rulings:
- The exact same “notice” that Magma sent to Genesis, a notice that the Ninth Circuit held did not trigger coverage under the Genesis policy, was also sent to ERII. Therefore, as a matter of law, the notice to ERII was not sufficient to trigger coverage under ERII’s 2004 primary policy. Thus, ERII was mistaken to book its $10,000,000 payment under its 2004 policy and shall adjust its records to apply it instead to its 2005 policy;
- It followed, then, since ERII’s primary limits for 2005 had been exhausted, that National Union’s excess obligation kicked in;
- Since Genesis paid what National Union should have paid, Genesis was entitled to equitable subrogation, to be reimbursed by National Union for the $5,000,000. Judgment was entered in favor of Genesis and against National Union for that amount, plus interest.
- Based on the record presented, the court declined to rule that National Union had breached its contractual obligations to Magma. That remains an open question. (So does Magma’s bad faith claim against National Union.)
- National Union appealed from the judgment in favor of Genesis. That appeal is pending.
- National Union also moved for summary judgment on Magma’s claims for breach of contract and bad faith. That motion is set for hearing soon.
Magma seeks an order requiring National Union to produce its “claims handling information” (presumably, documents). National Union says, and Magma does not dispute, that this information was produced for the time period starting with the initiation of the securities claims and going up to the date that Magma filed suit against National Union. That is, National Union produced the documents it had about the securities claims, from when they were made to when they were settled. That’s not what Magma wants now. Now it wants the claims handling information about its claim against National Union for excess coverage. In other words, it wants National Union’s claim file for the very claim that is currently in litigation between them.
In opposing this discovery request, National Union primarily relies on the litigation privilege created by California Civil Code § 47(b), which protects any “publication” made “[i]n any…judicial proceeding….”
Magma wants these documents because it believes National Union stubbornly refuses to step up to the plate and acknowledge it is liable for the $5,000,000 excess. Magma relies for support on White v. Western Title Ins. Co., 40 Cal. 3d 870 (1985). There, the court upheld a bad faith judgment against a title insurer that was based on the evidence that the insurer had made two low-ball settlement offers to the insured. True, that decision opened a crack in the very door that Magma seeks to open wide but subsequent courts have not opened it any further and have mostly limited it to its facts. Indeed, the insurer has an absolute right to defend against its insured’s claims, and opening up its litigation file to its insured would undermine its right to a fair day in court.
Ironically, National Union’s initial coverage position (to deny coverage) was precisely the position advocated by its insured, Magma. It was only after Magma’s choice to put the excess risk on Genesis’s 03-04 policy backfired, that Magma then came back to National Union.
As the litigation progressed National Union decided it may have policy defenses that it had not had at the very beginning of the securities actions. It may have been wrong, and–if the latest summary judgment holds up on appeal–will ultimately have to pay, but it seems it should be able to litigate the correctness of its legal position without opening up its litigation strategy.
Magma has not cited and the court did not find any precedential decision that permitted discovery such as is sought here. Magma’s request for post-litigation “claims handling information” (including reinsurance and reserves) is denied.
Although, it often seems that when insurance litigation is concerned that an insurer is less equal than the insured in the eyes of the court. Here, the USDC determined that the insurer was the equal of the insured and would not let the insured peek into the work and plans of its opponent in the lawsuit. The work product protection kept the insurer’s litigation strategy closed to those suing it.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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