If you surveyed lawyers of all stripes involved in tort litigation, you would probably find that the overwhelming majority hate insurance companies. Plaintiffs’ lawyers, of course, hate them because insurance companies won’t give them all the money they want. Defense lawyers who seek coverage for claims against their clients hate it when insurance companies deny coverage. And even insurance defense lawyers often hate the hand that feeds them because insurance company bureaucrats micromanage what they can and can’t do, which restrict their ability to practice law and defend cases.
(We are excluding, of course, all insurance companies our firm represents, as well as all insurers who willing provide coverage for our clients’ claims. You guys are the best!)
What really makes our blood boil is when insurance companies pressure insureds to take actions that could compromise the insured’s defense of cases. In theory, an insurance company should facilitate its customer’s defense of a claim, because the insurer ultimately may have to pay the final judgment or settlement, and because the insurer should have its client’s best interests at heart. But just as love flies out the door when money comes innuendo, the insurer’s theoretical regard for its insured’s defense flies the coop when the insured actually asks the insurer for money. The latest example is Smith & Nephew, Inc. v. New Hampshire Insurance Co., 2010 U.S. Dist. LEXIS 135760 (W.D. Tenn. Dec. 22, 2010).
Smith & Nephew faced mass tort claims from certain prosthetic knee implants it made and sued to obtain coverage from its excess insurers. Discovery commenced, and the parties entered into a stipulated protective order to preserve the confidentiality of information exchanged in discovery. Based on the description in the opinion, it was a standard protective order providing that materials designated as confidential could be used only in the coverage litigation.
Smith & Nephew then designated as confidential and produced boatloads of documents relating to its defense of the tort claims. The defendant insurance companies moved to lift the confidentiality designations on some documents. But why? The opinion doesn’t offer a good reason, and we are hard-pressed to think of a legitimate reason. Plaintiffs’ lawyers often contest confidentiality designations in the hope of being able to share supposedly dirty documents with the press and other plaintiffs’ lawyers, but insurance companies shouldn’t want to do that.
As the dispute evolved, Smith & Nephew had to move to clarify or amend the protective order to provide that documents potentially prejudicial to Smith & Nephew’s defense could be designated confidential. Smith & Nephew argued that the documents it produced to its insurers would help the underlying tort claimants make their cases against Smith & Nephew, and the prophylactic measures were needed “to prevent the insurer from assisting underlying claimants in order to avoid coverage.” Id. at *22-23 (citing two cases stating that insurers should not be permitted to aid the underlying plaintiffs in an effort to defeat coverage).
Incredibly, the defendant insurance companies opposed this motion. Again, why? Why did they want to make public documents that their insured said could be prejudicial to its defense of claims?
We can think of no legitimate reasons, but plenty of illegitimate ones.
Instead of legitimate reasons, the insurers offered arguments that would need to put on some weight to be considered makeweight. The insurers argued that only eight claims were pending against Smith & Nephew, citing no doubt that well-known maxim that the law disregards prejudice if it happens in fewer than 10 active cases. The insurers argued further that most claims had had no activity for months – because of course claims can’t come back to bite an insured if the claimant hasn’t actively litigated the case for the last couple of months. Everyone knows that. Finally, the insurers said that these claims were likely to settle because other claims have settled. Wasn’t it Blackstone who said that the law does not trouble itself with trifles such as increasing the settlement value of a case?
The court was not persuaded. “[D]espite what might be lessened prejudice at this stage in the litigation, the potential prejudice of either making additional settlements difficult or impossible to strike or driving up the price to resolve current or future claims is still significant enough to satisfy the good cause requirement of Rule 26(c).” Id. at *28-29.
Defendants also asked the court to require Smith & Nephew to prove that any document is in fact prejudicial (instead of “merely” potentially prejudicial) in order to keep the document confidential. Sure, why not make Smith & Nephew put down in writing and file with the court a document explaining exactly how a document could help the underlying tort claimants prove their case? The court rejected this bit of insanity as well. Id. at *29.
Finally, the insurers asked that documents not be confidential if they could be obtained in discovery by the underlying claimants. The court rightly found that this speculative analysis would add an unnecessary burden to the management of discovery. Id. The court also agreed with Smith & Nephew that “the discovery disclosures in this case should not be a ‘one-stop repository . . . for underlying claimants to mine in advancing their own claims’ without the need for their ‘appropriately drafted discovery requests.’” Id. (citations omitted). The court therefore held that the protective order should be modified. Id. at 31-32.
We are glad that the court was not swayed by the insurance companies’ tactics, which threatened to turn discovery into a road map for the underlying tort claimants. It is unfortunate – and even more unfortunate that it is hardly unexpected – that some insurance companies engage in tactics that can prejudice their insureds to avoid covering claims.