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City of Glendale v. National Union Fire Insurance Company of Pittsburgh, Pa.

United States District Court, Ninth Circuit

April 29, 2013

City of Glendale, a municipal corporation, Plaintiff,
v.
National Union Fire Insurance Company of Pittsburgh, PA; Commerce and Industry Insurance Company; and Chartis Aerospace Adjustment Services, Inc., Defendants.

ORDER

BRIDGET S. BADE, Magistrate Judge.

This matter is before the Court on a motion to compel.[1] Plaintiff, the City of Glendale (City), asserts that the Defendants, National Union Fire Insurance Company of Pittsburgh (National Union), Commerce and Industry Insurance Company (Commerce and Industry), and Chartis Aerospace Adjustment Services, Inc. (Chartis), failed to produce responsive, relevant and non-privileged documents in response to discovery requests. (Doc. 63.) Defendants assert that they properly withheld the disputed documents on the basis of the attorney-client privilege and the work produce doctrine, as listed on their privilege log. (Doc. 65.) As set forth below, the Court denies the motion in part, and grants the motion in part.

I. Background

In August 2009, the City submitted a claim to Defendants seeking insurance coverage for defense costs and indemnification in the Valley Aviation litigation.[2] The City sought coverage under separate general liability policies that Defendants National Union and Commerce and Industry had issued and that Defendant Chartis administered (the Policies). (Doc. 25 ¶ 17.) Chartis retained outside counsel, the Berger Kahn law firm, to conduct a coverage analysis. Berger Kahn attorney Lance LaBelle prepared a coverage letter, dated September 29, 2009, and offered the opinion that Defendants did not have a duty to defend or indemnify the City under the Policies. (Doc. 63, Ex. 1.) On October 15, 2009, Defendants denied coverage for the Valley Aviation litigation. (Doc. 25 ¶ 18, Ex. 6.) In May 2011, the Valley Aviation litigation was tried to a jury and resulted in a verdict and judgment against the City for $2, 275, 642.32. (Doc. 47 ¶ 16.)

On August 15, 2011, the City sent Barry Campbell, the Chartis Assistant Vice President and Claims Manager who had handled their claim in 2009, "daily transcripts and [the] judgment" from the Valley Aviation litigation. (Doc. 63, Ex. 4; Doc. 63-1 at 35.) Campbell forwarded this information to LaBelle at Berger Kahn (Doc. 63-1 at 35.) Shortly thereafter, on August 26, 2011, Campbell received a letter from the City's attorney reasserting the City's coverage position and asking Defendants to reconsider their denial of coverage. (Doc. 25 ¶ 19, Ex. 7; Doc. 67, Ex. 1.) On August 29, 2011, Campbell forwarded that letter to LaBelle at Berger Kahn. (Doc. 67, Ex. 1.) On August 30, 2011, LaBelle advised Chartis that it should anticipate litigation on the coverage issue and recommended that Chartis retain Arizona counsel. (Doc. 63, Ex. 3.) On August 31, 2011, Chartis transferred the claims file from Campbell to Betsy Fulton, a Senior Vice President with Chartis in Arizona, and retained Christian Henrichsen with CKGH Law, P.C. (CKGH) to conduct a coverage analysis. (Doc. 63, Ex. 4; Doc. 63-1 at 24.)

On October 13, 2011, the City filed its complaint in this matter, asserting claims for declaratory judgment, breach of contract, and insurance bad faith arising from Defendants' denial of coverage. (Doc. 1.) Defendants' Arizona counsel, Henrichsen, prepared a coverage letter, dated October 24, 2011, and opined that the Valley Aviation litigation did not trigger a duty to defend or indemnify the City under the Policies. (Doc. 63, Ex. 2.) On October 27, 2011, on Chartis's behalf, Henrichsen sent a letter to the City's attorney advising that CKGH had concluded that there was no coverage under the Policies and Chartis denied coverage for the City's claims related to the Valley Aviation litigation. (Doc. 25 ¶ 25, Ex. 9.)

II. The City's Request for Production of Documents and Defendants' Privilege Log

On August 13, 2012, the City served Defendants with a request for production of documents (RFP) for: (1) the entire file maintained by Berger Kahn relating to the Valley Aviation lawsuit including the Zevnik e-mail[3]; (2) the entire file maintained by CKGH relating to the Valley Aviation lawsuit; (3) all insurance coverage opinion letters issued during the last five years by Berger Kahn and CKGH to any of the Defendants and relating to the interpretation of the insurance policy language at issue in this case ("invasion of the right of private occupancy, " "discrimination, " and the definition of "person"); and (4) all insurance coverage opinion letters issued by these law firms during the past five years to any of the Defendants and relating to Arizona insurance policies and/or the interpretation of Arizona law. (Doc. 63, Ex. 5.)

Defendants objected to the production of these materials and asserted the work product doctrine, attorney-client privilege, and relevance. (Doc. 63, Exs. 6 and 7.) In response to RFP Nos. 1 and 2, Defendants stated that they had produced all non-privileged correspondence, including e-mails, from Berger Kahn and CKGH related to their coverage opinions, but they objected on the basis of the work product doctrine and relevance to the production of the Zevnik e-mail in the Berger Kahn file, copies of cases and statutes, legal research memoranda, internal memoranda, e-mails concerning research, and communications in the CKGH file related to Plaintiff's pending complaint in this matter. (Doc. 63, Ex.7.) Defendants objected that RFP Nos. 3 and 4 were "overbroad as to time, " and on the basis of attorney-client privilege, the work product doctrine, and relevance. ( Id. )

On September 27, 2012, Defendants served the City with a privilege log identifying the materials withheld from their response to the City's discovery. (Doc. 63, Ex. 8.) The privilege log lists ninety-three items, which are described as e-mails, file notes, and coverage opinions in other matters.[4] ( Id. ) The first fifteen items on the privilege log are e-mails and attorney notes from the Berger Kahn file, with various dates in August 2011. (Bates-stamped CORR 88-127 and 152-161.) Ten of these fifteen items are communications between Campbell and LaBelle (Bates-stamped CORR 88-94, 96-103, and 108-127), while the other five items in this category are internal Berger Kahn e-mails regarding status, internal directives, and attorney file notes. (Bates-stamped CORR 95, 104-107, and 152-161.) Items eighty-eight through ninety-three on the privilege log are coverage opinions from either Berger Kahn or CKGH provided to Chartis, with various dates between 2007 and 2012. (Bates-stamped COVOPS 1-85.)

The vast majority of items on the privilege log, seventy-two items, or items sixteen through eighty-seven, are from the CKGH file and consist of e-mails, draft letters, and file notes, and are all dated between August 2011 and February 2012. (Bates-stamped CKGH 175, 189-190, 198-204, 206-210, 213, 220-221, 223, 235, 237-263, 266-268, 283-319, 337, 343-345, 353-354, 358-363, 371-373, 384, 401-402, 405-408, 414-415, 428-430, 449, 452-454, 466-467, 477-482, 485-502, 506-510, 589-590, 593-594, 607-608, 624, 627-628, 652-659, 701-711, and 721). Twenty-three of these items are internal CKGH e-mails, e-mails to Fulton at Chartis, and e-mails to Attorney Terhar regarding the pending bad faith lawsuit (Bates-stamped CKGH 175, 199-204, 208-210, 213, 235, 268, 354, 371-373, 401-402, 408, 414-415, 428-430, 467, and 477-480); forty-one items in this category are internal e-mails or file notes regarding the status of the law firm's investigation and draft opinion letters for Chartis (Bates-stamped CKGH 189-190, 198, 206-207, 220-221, 223, 237-263, 266-267, 283-319, 337, 343-345, 353, 358-363, 384, 405-407, 449, 452-454, 465-466, 481-482, 485-487, 498-502, 506-510, and 657-659); and the remaining eight items in this category are copies of e-mails between Campbell and LaBelle, or e-mails and file notes from Campbell describing conversations and legal advice received from LaBelle, all with dates in August 2011. (Bates-stamped CKGH 589-590, 593-594, 607-608, 624, 627-628, 652-656, 701-711, and 721.)

In the pending motion, the City seeks an order compelling Defendants to disclose all of the materials identified on the privilege log related to the insurance coverage analysis of Defendants' outside counsel, including documents that were communicated to Defendants and internal law firm documents that were not communicated to Defendants. (Doc. 63 at 6.) The City's motion, however, does not specifically identify any of the documents on the privilege log it seeks, except the August 30, 2011 Zevnik e-mail (Bates-stamped CORR 154-161) and the coverage opinions identified in response to RFP Nos. 3 and 4 (Bates-stamped COVOPS 1-85).

III. Defendants' Assertions of the Attorney-Client Privilege and the Work Product Doctrine and the City's Assertions of Waiver

Defendants acknowledge that by asserting an advice-of-counsel defense to the City's bad faith claims, they have waived the attorney-client privilege with respect to communications from their counsel providing advice on the insurance coverage issues that are in dispute in this matter. (Doc. 65 at 5 (citing State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169 (2000)). Defendants assert that, pursuant to this limited waiver of the attorney-client privilege, they have produced all communications from "Berger Kahn in the claims file relating to that firm's 2009 coverage analysis" (Doc. 65 at 5), and they have produced the coverage advice they received from CKGH in 2011. ( Id. at 6.)

Defendants, however, have asserted that this waiver does not extend to their communications with Berger Kahn in August 2011 because they did not rely upon any coverage advice from that firm in 2011. ( Id. at 5-6.) Defendants also argue that Berger Kahn's and CKGH's internal communications and analysis of the coverage issues in 2011 are protected by the work product doctrine, and that this protection is not waived by their limited waiver of the attorney-client privilege because (1) they did not rely upon Berger Kahn in denying coverage to the City in 2011 ( Id. at 6, 10, and 12), and (2) Berger Kahn's and CKGH's internal work product was not communicated to Defendants and therefore they could not have relied upon it in making their coverage decisions. ( Id. at 7-8, and 12.) Defendants also argue that they have not waived the attorney-client privilege for coverage opinions in other matters and that these opinions are not relevant in this case. ( Id. at 12-13.)

The City argues that by asserting the advice of counsel defense, Defendants have waived the attorney-client privilege as to any communications with their attorneys regarding their coverage analysis, including communications with Berger Kahn in 2011. (Doc. 63 at 5-6.) The City argues that this waiver of the attorney-client privilege extends to internal documents contained in the files of Defendants' outside counsel, Berger Kahn and CKGH, even if these documents were not communicated to Defendants. ( Id. at 6.) The City argues that these documents are relevant because Defendants may be liable in bad faith and for punitive damages based on the conduct of outside counsel. ( Id. at 6)

The City also argues that the work product doctrine does not apply to the documents in outside counsels' files because these documents were prepared as part of Defendants' regular claims handling and were not created in anticipation of litigation. ( Id. at 7-9; Doc. 67 at 2-3.). Alternatively, the City argues that even if the work product doctrine applies it has a "compelling need" for these documents for its bad faith claim, even if outside counsel's mental impressions and analysis were not communicated to Defendants, because these attorneys were Defendants' "agents" and the reasonableness of their analysis and conclusions are at issue. (Doc. 63 at 8-10; Doc. 67 at 4-6.) Finally, the City argues that by disclosing some documents related to coverage advice from their attorneys, Defendants must produce all documents on the same subject, pursuant to Federal Rule of Evidence 502. (Doc. 63 at 10-12; Doc. 67 at 6-11.)

The Court will address the potential application of the attorney-client privilege and the work product doctrine, and the potential waiver of these protections, to each category of documents listed on Defendants' privilege log.

IV. Advice-of-Counsel Defense and Waiver of the Attorney-Client Privilege

In diversity jurisdiction cases such as this, state law governs the issue of attorney-client privilege. See Roehrs v. Minnesota Life Ins. Co., 228 F.R.D. 642, 644-45 (D. Ariz. 2005). In Arizona, when a litigant " relies on and advances as a claim or defense a subjective and allegedly reasonable evaluation of the law - but an evaluation that necessarily incorporates what the litigant learned from its lawyer - the communication is discoverable and admissible." State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169, 1175 (Ariz. 2000) (emphasis in original). In Lee, the Arizona Supreme Court explained that the advice-of-counsel defense places the communications between the party and its attorney at issue. Id. at 1177.

The court explained that "[w]hen a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question." Id. Thus, "the advice received from counsel as part of the investigation and evaluation" is relevant to "the court's truth-seeking functions." Id. (emphasis added.) Therefore, the court explained that "[a] litigant cannot assert a defense based on the contention that it acted reasonably because of what it did to educate itself about the law, when its investigation of and knowledge about the law included information it obtained from its lawyer and then use the privilege to preclude the other party from ascertaining what it actually learned and knew. " Id. (emphasis added).

A. Communications Regarding Coverage Advice in this Case

Defendants do not dispute that they waived the attorney-client privilege with respect to their communications with Berger Kahn in 2009 and CKGH in 2011 regarding insurance coverage opinions and advice. Defendants argue, however, that this waiver does not extend to their communications with Berger Kahn in 2011 because they did not rely upon any coverage advice they received from that firm at that time. (Doc. 65 at 3-4, 6.) Defendants argue that they would not be "in a position to use Berger Kahn's coverage advice as a sword and shield'[5] regarding the 2011 coverage position because Chartis will not rely upon anything Berger Kahn did during that time." ( Id. at 6.)

Defendants' argument misconstrues the scope of waiver of the attorney-client privilege that results from asserting the advice-of-counsel defense. As the Arizona Supreme Court explained in Lee, when "an insurer makes factual representations which implicitly rely upon legal advice as justification for non-payment of claims, the insurer cannot shield itself from disclosure of the complete advice of counsel relevant to the handling of the claim." Lee, 13 P.3d at 1178 (emphasis added). The court stated that the privilege is waived when "the insurer directly relies on the advice of counsel as a defense to the bad faith charge. '" Id. (quoting Palmer v. Farmers Ins. Exch., 861 P.2d 895, 901 (Mont. 1993) (emphasis in original)). The court did not state that the privilege is waived only as to the advice that the insurer accepts or relies upon. Instead, the discussion in Lee focused on the advice that a party receives from counsel, not the advice it chooses to rely upon. See id. at 1179.

Defendants' argument, if accepted, would allow an insurer to rely upon and use the advice that supports its coverage position, and at the same time assert that it did not rely upon contrary advice that it received and assert the attorney-client privilege to shield the latter advice from discovery. Thus, as the court stated in Lee, a party cannot assert as a defense that it acted upon "a well-founded belief that the law permitted the action it took" and at the same time "use the privilege to preclude the other party from ascertaining what it actually learned and knew." Id. at 1177. Therefore, the Court finds that Defendants have waived the attorney-client privilege for all communications they received from either Berger Kahn or CKGH regarding insurance coverage advice or opinions related to this matter, including communications from Berger Kahn regarding coverage advice in 2011 and copies or descriptions of those communications contained in the CKGH file.

Defendants must produce the ten items on the privilege log that are described as communications between Campbell and LaBelle in August 2011 (Bates-stamped CORR 88-94, 96-103, 108-127), and the eight items on the privilege log that are from the CKGH file and are described as copies of e-mails between Campbell and LaBelle, or copies of e-mails describing conversations between Campbell and LaBelle, or are notes describing that advice, all of which are dated in August 2011. (Bates-stamped CKGH 589-590, 593-594, 607-608, 624, 627-628, 652-656, 701-711, and 721.)

B. Uncommunicated Coverage Analysis in Outside Counsel's files

The City argues that because Defendants asserted an advice of counsel defense, they have placed at issue whether their outside counsel acted reasonably and in good faith and therefore "the attorney client privilege cannot be used to deny access to any of the documents in the files of [D]efendants' attorneys." (Doc. 63 at 6-7.) The City relies upon the Arizona Court of Appeals' decision in Mendoza v. McDonald's Corp., 213 P.3d 288, 302 (Ariz.Ct.App. 2009), to argue that when an insurer owes a duty of good faith to an insured, it cannot delegate that duty to another party, including an attorney. (Doc. 63 at 6; Doc. 67 at 5-6.) Based on Mendoza, the City argues that "Defendants are legally responsible for any misconduct of coverage counsel who is investigating the City's insurance claim even if the insurer/client is not aware of such conduct." (Doc. 67 at 5.) The Mendoza decision, however, does not support the City's argument that it is entitled to internal documents in the files of Defendants' outside counsel because Defendants asserted an advice-of-counsel defense.

In Mendoza, the plaintiff brought an action in superior court alleging that McDonald's had breached its duty of good faith and fair dealing in handling her workers' compensation claim before the Industrial Commission of Arizona (ICA). 213 P.3d at 291. At the time the plaintiff filed her workers' compensation claim, McDonald's had an internal claims center to process workers' compensation claims, but during the pendency of the plaintiff's claim, McDonald's closed its processing center and retained a third-party administrator to process these claims. Id. at 305 n.28. McDonald's also retained outside counsel to handle the plaintiff's workers' compensation claim in the ICA proceeding. Id. at ...


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