Limits of Reason: Discovery and Evidence in Covenant Judgment Reasonableness Hearings (Part Two)

 In Discovery, Insurance, Tactics

Despite precedent refusing to reopen discovery for intervening insurance companies prior to a trial court’s determination of a settlement’s reasonableness, insurers have become more and more aggressive in exploiting a trial court’s discretion over and the absence of further appellate guidance regarding the parameters of a reasonableness hearing to press for a reopened, wide-open discovery process—including discovery of privileged attorney-client communications and attorney work product—and multi-day reasonableness hearings as costly and involved as the trial the settling parties were trying to avoid.  Simply put, intervening insurance companies are attempting to transform reasonableness hearings into a completely unreasonable process.

Fortunately, courts in Washington and around the country have begun curbing these unreasonable expansions of reasonableness hearings.  For example, courts have rejected arguments that discovery of privileged attorney-client communications or attorney mental impression or opinion work product is necessary to evaluate bad faith, collusion, or fraud, reasoning that such evidence is subjective and, therefore, of no relevance to a trial court’s determination of objective reasonableness.     Dana v. Piper, 173 Wn. App. 761, 773, 776, 295 P.3d 305 (2013); see also PETCO Animal Supplies Stores, Inc. v. Insurance Co. of N.A., No. CIV. 10-682 SRN/JSM, 2011 WL 2490298, at *24 (D. Minn. June 10, 2011); Chomat v. Northern Ins. Co. of New York, 919 So.2d 535, 538 (Fla. Dist. Ct. App. 2006); Metropolitan Life Ins. Co. v. Aetna Cas. & Sur. Co., 249 Conn. 36, 56, 730 A.2d 51, 61 (1999).  These various courts have so held even when the factors that a trial court utilizes in determining objective reasonableness include evidence of possible bad faith, collusion, or fraud.  Dana, 173 Wn. App. at 776 (“[N]one of these factors depend on whether [the plaintiff] or the [plaintiff’s attorneys] considered the settlement reasonable.”); see also PETCO, 2011 WL 2490298, at *7, *22 (analysis of lack of bad faith, fraud, or collusion in determining settlement’s reasonableness “involve[s] the underlying facts of the case and do[es] not involve the injection of privileged matters”); Chomat, 919 So.2d at 538 (stating the same).

Furthermore, courts around the country have rejected discovery of such privileged and protected materials under a relevance standard.  Dana, 173 Wn. App. at 776; see also U.S. v. Amlani, 169 F.3d 1189, 1195 (9th Cir. 1999) (quoting Southern Calif. Gas Co. v. Public Utilities Comm’n, 784 P.2d 1373, 1381 (Cal. 1990)) (“It is true that ‘privileged communications do not become discoverable simply because they are related to issues raised in the litigation.”); Frontier Refining Inc. v. Gorman-Rupp Co., 136 F.3d 695, 701, (10th Cir. 1998) (“Mere relevance is not the standard.”); 1st Sec. Bank of Wash. v. Eriksen, No. CV06-1004RSL, 2007 WL 188881, at *3 (W.D. Wash. Jan. 22, 2007) (“Mere relevance to defendant’s case is not sufficient.”); Metropolitan, 249 Conn. at 54 (“Merely because the communications are relevant does not place them at issue.”).  In particular, Washington State has recognized that allowing production of privileged materials under a mere relevancy standard, even in the reasonableness hearing context, would render discovery privileges “illusory.”  Dana, 173 Wn. App. at n. 12.

Finally, courts in various jurisdictions have recognized reasonable limits on objective evidence necessary for a trial court’s objective determination of reasonableness.  For example, Florida courts have recognized that “proof of reasonableness is ordinarily established through use of expert witnesses to testify about such matters as the extent of the defendant’s liability, the reasonableness of the damages amount in comparison with compensatory awards in other cases, and the expense which would have been required for the settling defendants to defend the lawsuit.”  Chomat, 919 So.2d at 538.  Likewise, Minnesota courts have reasoned that proof of reasonableness is established through “customary evidence on liability and damages, expert opinion of trial lawyers evaluating this ‘customary’ evidence; verdicts in comparable cases; the likelihood of favorable or unfavorable rulings on legal defenses and evidentiary issues; [and] the judge’s own personal experience with jury awards in similar areas if the tort action had been tried.”  PETCO, 2011 WL 2490298, at *20.

Accordingly, thoroughly-reasoned and highly persuasive precedent from around the country establishes that a reasonableness hearing can proceed with little more than the testimony of “reasonableness experts” and arguments made based on the objective, non-privileged evidence already generated and exchanged in discovery by the settling parties.  As a necessary corollary, if a trial court feels the need to reopen discovery prior to a reasonableness hearing at all, the “discovery” should be limited to an exchange of “reasonableness expert” reports and ensuring the reasonableness hearing’s participants have access to the materials already exchanged in discovery.

In conclusion, covenant judgment settlement agreements and assignment of bad faith claims present a powerful option for dispute resolution in cases involving underinsured defendants and malfeasant insurers.  Armed with the above precedent and principles, plaintiff attorneys can preserve the efficacy of this option and fight off “last gasp” self-serving intervening insurer attempts to use reasonableness hearings as a costly trial proxy.

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