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Cox v. Continental Casualty Co.

United States District Court, W.D. Washington, Seattle

May 16, 2014

KATHRYN COX et al., Plaintiffs,
v.
CONTINENTAL CASUALTY COMPANY, Defendant.

ORDER ON MOTION TO DISMISS AND MOTIONS TO COMPEL

MARSHA J. PECHMAN, Chief District Judge.

THIS MATTER comes before the Court on Defendant Continental Casualty Company's ("Continental's") Motion to Dismiss (Dkt. No. 13) all counts of Plaintiffs' Complaint (Dkt. No. 1-1) alleging bad faith, breach of contract, violation of the Washington Insurance Fair Conduct Act ("IFCA"), violation of the Consumer Protection Act ("CPA"), and negligence-all arising out of Continental's professional liability policy with Plaintiffs' former dentist Dr. Duyzend. In addition, Continental moves to compel the production of attorney-client privileged documents from (1) the Cox Plaintiffs, regarding Dr. Duyzend and/or Continental's ability to settle and their own willingness to settle (Dkt. No. 37 at 6-9), (2) the Cox Plaintiffs, related to the termination of their former counsel (Dkt. No. 37 at 9-10), (3) Gregory Harper (the attorney who represented Dr. Duyzend after Continental recommended he obtain separate counsel) (Dkt. No. 48), and (4) Stuart Kastner, former personal counsel to Dr. Duyzend (hired after the judgment against Dr. Duyzend had been entered) (Dkt. No. 41). Having reviewed the Motion to Dismiss, Plaintiffs' Response (Dkt. No. 14), Defendant's Reply (Dkt. No. 42); the April 4 LCR Joint Submission (Dkt. No. 37); the April 25 LCR Joint Submission Regarding Continental's Motion to Compel Mr. Harper (Dkt. No. 48); Defendant's Motion to Compel Mr. Kastner (Dkt. No. 41), Plaintiffs' Response (Dkt. No. 43), Mr. Kastner's Response (Dkt. No. 45), Plaintiff's Reply (Dkt. No. 47); and all related papers, the Court hereby GRANTS the Motion to Dismiss in part and DENIES it in part and DENIES each of the motions to compel.

Background

In their Complaint, originally filed in state court, Plaintiffs allege Continental is liable for the tort of bad faith and related claims in its handling of hundreds of dental malpractice claims against its insured, Dr. Duyzend. (Compl., Dkt. No. 1-1 at 5.) Plaintiffs bring the action on behalf of Dr. Duyzend pursuant to a settlement and assignment of claims from Dr. Duyzend to Plaintiffs. (See Dkt. No. 1-1 at 7.) The claims are based on the manner in which Continental sought to settle the malpractice allegations: Over the course of several years from 2008 to 2012, Continental settled individual claims sequentially rather than pursuing a global settlement of all claims against its insured. (Dkt. No. 1-1 at 6.) Plaintiffs allege there were multiple opportunities to pursue such a settlement, including a suggestion in 2008 by Plaintiffs' former counsel Mr. Longfelder, who represented 198 former patients of Dr. Duyzend, that Continental tender the policy limits. (Dkt. No. 13-1 at 2, cited in Dkt. No. 1-1 at 6.) According to Plaintiffs, Continental failed to respond to Mr. Longfelder's letter. (See Dkt. No. 1-1 at 6.) Plaintiffs concede Continental attempted to negotiate a global settlement with the remaining claimants, including Plaintiffs, four years later. (Dkt. No. 1-1 at 7; Dkt. No. 13 at 12.) After rejecting the proposed settlement, Plaintiffs proceeded to arbitration and secured a $35, 212, 000 judgment against Dr. Duyzend. (Dkt. No. 1-1 at 7.) Some of the judgment was recovered from Dr. Duyzend's personal assets prior to the filing of the bad faith complaint. (Dkt. No. 1-1 at 7.)

In the summer of 2013, soon after the judgment against Dr. Duyzend was entered, Continental filed an interpleader and declaratory judgment action in this Court regarding the disposition of remaining policy limits and Continental's remaining obligations under the policy. (See Case No. C13-1508MJP.) Pursuant to the Parties' stipulation (Case No. 3-13-1508MJP, Dkt. No. 81), the interpleader action has now been partially mooted by Continental's disbursement of remaining policy limits to the Plaintiffs and partially consolidated with this action, which seeks to determine Continental's contract, tort, and statutory liability for damages beyond the policy limits.

Continental now moves to dismiss the bad faith action on the basis that its conduct as alleged by Plaintiffs fails to state a claim for bad faith, breach of conduct, violation of the IFCA, violation of the CPA, or negligence. (Dkt. No. 13.) In separate but related motions, Continental moves to compel the production of attorney-client privileged documents from (1) the Cox Plaintiffs, regarding Dr. Duyzend and/or Continental's ability to settle and their own willingness to settle, on the basis that Plaintiffs put the information at issue by bringing a bad faith claim (Dkt. No. 37 at 6-9), (2) the Cox Plaintiffs, related to the termination of their former counsel, on the basis that they put these communications at issue by stating in their complaint that they terminated their former attorney because they were tired of "delays" by Continental in processing their claims (Dkt. No. 37 at 9-10), (3) Mr. Harper, on the basis that Dr. Duyzend waived his privilege when he asked Mr. Harper to provide the documents to Plaintiffs, that Plaintiffs waived the privilege by bringing the bad faith claim, and that some of the documents are not privileged because they were communications between Mr. Harper, Dr. Duyzend, and counsel for Plaintiffs (Dkt. No. 48 at 2-3), and (4) Mr. Kastner, on the basis that Dr. Duyzend waived his privilege with Mr. Kastner by providing Plaintiffs with attorney-client privileged documents from Mr. Harper and that Plaintiffs waived the privilege by bringing the bad faith claim (Dkt. No. 41 at 1-2).

Analysis

I. Motion to Dismiss

a. Legal Standard

To survive a motion to dismiss, a complaint must state a claim for relief that is plausible on its face. Fed.R.Civ.P. 12(b)(6); Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id . Plausibility does not mean probability, "but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id . Merely reciting the elements of a cause of action will not suffice. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555 (2007).

The Court follows a two-step approach when deciding whether a complaint survives a 12(b)(6) motion. Iqbal , 556 U.S. at 678-79. First, "a court must accept as true all of the allegations contained in a complaint" unless the allegations are legal conclusions. Id . Second, the Court must decide whether the claim for relief is plausible-a context-specific task. Id . The Court may consider "documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice" when making its determination. United States v. Ritchie , 342 F.3d 903, 908 (9th Cir. 2003).

b. The Tort of Bad Faith

Washington recognizes that an insurer can incur liability "for a failure to adjust or compromise a claim within the limits of liability, if that failure is attributable to negligence or bad faith." Hamilton v. State Farm Ins. Co., 83 Wn.2d 727, 791 (1974). Indeed, "it is the affirmative duty of the insurer to make a good faith attempt to effect settlement." Id . (citing Burnham v. Commercial Cas. Ins. Co. , 10 Wn.2d 624 (1941)). "The flat refusal to negotiate, under circumstances of substantial exposure to liability, a demonstrated receptive climate for settlement, and limited insurance coverage may show lack of good faith as well." Id . (citing Tyler v. Grange Ins. Ass'n , 3 Wn.App. 167, 179 (1970)). A frequently stated standard for assessing an insurer's good faith is that an insurer must make its decision as to whether to settle or go to trial "as though no policy limit of liability existed." See, e.g., Tyler v. Grange Ins. Assoc. , 3 Wn.App. 167, 178 (1970). In other words, the insurer must regard the portion of the potential judgment that lies beyond the policy limits with as much gravity as it regards the threat to its own policy funds. Whether an insurer acted in bad faith is ultimately a question of fact. See Smith v. Safeco Ins. Co. , 150 Wn.2d 478, 485 (2003).

Continental alleges that Plaintiffs fall short of plausibility because they have not adequately alleged that an opportunity to settle the claims on a global basis existed. (See Dkt. No. 13 at 14.) But the existence of an unmistakable "opportunity" to settle all claims is not an explicit element of the tort of bad faith in Washington. See Safeco Ins. Co. , 150 Wn.2d at 485 ("Claims by insureds against their insurers for bad faith are analyzed applying the same principles as any other tort: duty, breach of that duty, and damages proximately caused by any breach of duty."). While an insured must plausibly allege that the insurer's conduct was "unreasonable, frivolous, or unfounded, " id., Washington courts have not yet given a clear answer to the question whether an insurer has an affirmative duty to initiate settlement negotiations in the absence of a within-limits offer by claimants. See 3 Appleman on Insurance ยง 23.02(6)(d)(iii) (describing a split of authority among the states on the question).

The weight of the evidence, however, indicates Washington does not consider a withinlimits offer a requirement. See, e.g., Moratti ex rel. Tarutis v. Farmers Ins. Co. of Washington , 162 Wn.App. 495, 504 (2011) ("We can give no credence to Farmers' assertion that it did not have to respond until [two years later] because no settlement offer or demand was made or suit filed until then."); id. at 507-08 ("An insurer has a duty make a good faith effort to settle a claim, including an obligation to conduct good faith settlement negotiations sufficient to ascertain the most favorable terms available."). Language used or approved by the Washington Supreme Court also implies that an offer by the claimants is not a necessary prerequisite-for example, references to "the affirmative duty of the insurer to make a good faith attempt to effect settlement." Hamilton, 83 Wn.2d at 791; cf. Travelers Indem. of Conn. v. Arch Specialty Ins. Co., No. C11-1601JLQ, 2013 WL 6198966 (E.D. Cal. Nov. 23, 2013) ("California case law, and the California Insurance Code speak of a 2017duty to effectuate settlement'. It is not merely a duty to accept reasonable settlement offers. 2017Effectuate' means 2017to put into force or operation.' Therefore, to act in good faith, and to attempt to effectuate settlement, Travelers was required to do something in an attempt to bring about a settlement.") (citations omitted).

The facts needed to prove a "demonstrated receptive climate for settlement, " Hamilton, 83 Wn.2d at 791, are undefined. Claimants at minimum need to broach the topic of settlement, but Plaintiffs adequately allege that fact. See Dkt. No. 13-1 at 2 (letter from Plaintiffs' former counsel at the time he represented 198 claimants to Continental, stating, "I suggest that a tender of the policy limits of $8 million be considered as a way to protect Dr. Duyzend's personal assets from judgment on these claims"). Continental's demand that Plaintiffs plausibly allege not only a "receptive climate for settlement" but an unmistakable offer from all known and potential claimants accompanied by an explicit promise of a release from liability (Dkt. No. 13 at 15) has no apparent basis in Washington law. Instead, Continental cites a First Circuit case applying Massachusetts law, Peckham v. Continental Cas. Ins. Co. , 895 F.2d 830 (1st Cir. 1990), which held that the question whether claimants would have settled within policy limits is a causation question properly determined by a ...


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