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Cosgrove v. National Fire & Marine Insurance Co.

United States District Court, D. Arizona

September 2, 2016

KAREN COSGROVE, a single person, Plaintiff,
NATIONAL FIRE & MARINE INSURANCE COMPANY, a foreign insurer, Defendant.


          H. Russel Holland United States District Judge.

         Motion to Compel

         Plaintiff moves to establish waiver of the attorney-client privilege as to communications between defendant and its coverage counsel regarding settlement of the underlying case and to compel production of all documents containing such communications.[1] This motion is opposed.[2] Oral argument was requested[3] but is not deemed necessary.


         Plaintiff is Karen Cosgrove. Defendant is National Fire & Marine Insurance Company.

         Plaintiff hired WTM Construction to remodel her home. Plaintiff alleges that “there were various defects in, and damage arising out of, the remodeling work.”[4] Plaintiff filed suit in state court against WTM and William and Lana Mitzel, the owners of WTM, seeking damages arising out of the remodel work (the underlying case).[5] WTM was insured by defendant and defendant defended WTM under a reservation of rights.[6] The firm of Righi Hernandez (Righi) was retained by defendant to represent WTM.[7]

         In October 2010, Righi advised defendant that “[w]e believe the settlement value of [the underlying] case is in the range of $85, 000 to $110, 000, inclusive of attorney's fees and cost[s].”[8] On December 28, 2010, Righi “request[ed] ... authority to provide Plaintiff with an Offer of Judgment for $110, 000.”[9] In March 2011, Righi “recommend[ed] authority up to $105, 000 to submit an Offer of Judgment to Plaintiff....”[10]

         In February 2011, plaintiff made a $109, 000 Offer of Judgment and Righi requested “authority of up to $109, 000 with which to negotiate a settlement.”[11] Defendant rejected this offer. Plaintiff contends that there is no documentation in the claims file as to why the offer was rejected.

         In late 2011 or early 2012, defendant retained the firm of Graif Barrett & Matura to provide advice about coverage under the WTM policy.

         In January 2012, the parties mediated the underlying case. Plaintiff contends that the Graif firm was involved in the mediation. Anne Rohling, defendant's adjuster who was handling the case, requested $23, 000 in settlement authority.[12] Rohling had also done a case analysis pursuant to which she estimated the value of the underlying case at $74, 000.[13]Rohling testified that she could only speculate that the difference between the $23, 000 amount and $74, 000 amount was based on a discussion with Rick Ratz, her supervisor.[14]

         Defendant ultimately offered $30, 000 to settle the case during the mediation, “$8, 000 of which was National Fire money, and 22, 000 was in conjunction with moneys that had been collected from subcontractors.”[15] In August 2012, defendant made an offer of judgment in the underlying case of $22, 500.[16]

         Rohling testified that defendant's settlement decisions were based on a determination that there was a 80 percent chance that defendant would be able to defeat coverage based on exclusions in WTM's policy.[17] Rohling testified that in coming up with that number (the 80% chance of success), she considered “[h]ow we consistently handle[d] the issue in the past, and - in general, how we consistently handle[d] an issue in the past from court to court, state to state, and in general, what - what advice the coverage counsel has contributed.”[18]Rohling testified that she did not “recall if I came up with that number based on something we normally do or if I talked to coverage counsel about it.”[19] She also testified that “[g]enerally, that would be something I would discuss with coverage counsel. Specifically [as to the underlying case], I do not know.”[20]

         Rohling testified that it would be consistent with defendant's practice for the analysis of how she determined that defendant had an 80 percent chance of success to be documented in the claim file.[21] Rohling testified that it is possible that the redacted portion of her case summary[22] might provide some indication as to how the 80 percent number was reached.[23] At her deposition, Rohling agreed that “as part of the duty of good faith, an insurer must document its investigation and its evaluation in such a way that the timing and adequacy of what it did can be independently reviewed[.]”[24]

         In January 2013, with trial in the underlying case just three months away, Mr. Righi requested $120, 000 in settlement authority because he could not “guarantee that I will be able to pull a rabbit out of my hat on this one.”[25]

         In April 2013, plaintiff, WTM, and the Mitzels settled the underlying case and in September 17, 2013, “they executed a Morris agreement....”[26] “Under the Morris Agreement, WTM assigned to Cosgrove all of its rights, title, interests, proceeds, causes of action, and claims of any kind whatsoever related to the project that WTM may have had against its insurers, including [defendant].”[27]

         Plaintiff alleges that pursuant to the Morris Agreement, the state court “entered a stipulated judgment ... in favor of Cosgrove ... in the amount of $443, 690.”[28] “Under the Morris Agreement, the parties agreed that if Cosgrove recovered an amount less than $443, 690 from National Fire, WTM would be required to make payment to Cosgrove in the amount of up to $25, 000 for damages sustained by Cosgrove relative to the remodeling work.”[29]

         Plaintiff alleges that defendant then intervened in the underlying case and after a reasonableness hearing, the state court “determined that the net reasonable settlement amount ... to which [defendant] may be bound was $254, 373, thus ensuring that Cosgrove would collect less than the $443, 690 agreed upon amount and that WTM would be required to pay $25, 000 to Cosgrove.”[30] Plaintiff alleges that she has demanded payment of $254, 373 from defendant but that defendant has refused to make any payment.[31]

         Based on these allegations, plaintiff has asserted a breach of contract and a bad faith claim against defendant. Plaintiff alleges that defendant has breached the WTM insurance policy “by failing [to] meet its indemnity obligations under the insurance policy and by failing to make payment for the $254, 373 judgment.”[32] Plaintiff also alleges defendant has breached the WTM insurance policy

by waiting an unreasonable amount of time to make a determination as to indemnification and/or giving untimely notice to WTM that it would not indemnify it for any damages awarded Cosgrove or judgment entered against WTM, thereby prejudicing and damaging WTM by precluding it from (a) settling the matter for a lesser amount, (b) avoiding a larger judgment, and (c) avoiding the $25, 000 payment to Cosgrove.[33]

         Plaintiff's bad faith claim is also based on the allegation that defendant waited “an unreasonable amount of time to make a determination as to indemnification and/or by untimely giving notice to WTM that it would not indemnify it for any damages awarded to Cosgrove or for judgment entered against WTM[.]”[34] Plaintiff also alleges that it was a breach of the duty of good faith for defendant to seek “to reduce the amount of judgment from $443, 690 to $254, 373, thereby ensuring that WTM would be liable to Cosgrove for the $25, 000 payment.”[35] Plaintiff further alleges that defendant breached its duty of good faith when it rejected her $109, 000 settlement offer, which was less than the policy limits.[36]Plaintiff alleges that defendant “gave more consideration to its interests than WTM's and thereby placed its interests before WTM's when it rejected the offer - an offer that was predicated on WTM's and National Fire's own assessment of the damages Cosgrove had incurred as a result of WTM's conduct on the project.”[37]

         Plaintiff has requested that defendant produce its communications with the Graif firm to the extent that the communications 1) occurred during the underlying case and 2) addressed the coverage issues on which defendant based its decision not to settle the underlying case. Defendant has asserted attorney-client privilege as to its communications with the Graif firm.[38] Plaintiff now moves to compel production of these communications.


         Plaintiff contends that the Graif communications are relevant to her bad faith claim. “An insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a claim (an ‘objective' test), and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it (a ‘subjective' test).” Nardelli v. Metropolitan Group Property and Cas. Ins. Co., 277 P.3d 789, 794-95, (Ariz.Ct.App. 2012). Defendant contends that its conduct was objectively reasonable and that its settlement decisions were subjectively reasonable.

         Defendant does not necessarily dispute that the Graif communications may be relevant to its claim that its settlement decisions were subjectively reasonable. Rather, defendant contends that it should not be compelled to produce these ...

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