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Leahy v. State Farm Mutual Automobile Insurance Co.

Court of Appeals of Washington, Division 1

May 21, 2018

SHANNON LEAHY, Appellant,
v.
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

          Cox, J.

         Shannon Leahy appeals the trial court's discovery orders and its order granting summary judgment to State Farm Mutual Automobile Insurance Company, dismissing her extracontractual claims with prejudice. We hold that the trial court did not abuse its discretion in ruling on discovery matters. But there are genuine issues of material fact on the reasonableness of State Farm's actions in dealing with her UIM claim. We reverse and remand for further proceedings.

         On November 1, 2010, Leahy's car was struck from behind, and she suffered soft tissue injuries to her neck and back. The other driver was at fault, and that driver's $25, 000 liability insurance limit was split between three injured parties. Leahy received only $9, 128.50 of this insurance.

         She had automobile insurance with State Farm, including $25, 000 of personal injury protection insurance (PIP) and another $100, 000 in underinsured motorist coverage (UIM). Leahy received medical treatment for her injuries including chiropractic, massage, and acupuncture services.

         Almost 24 months after the accident, State Farm requested that Leahy undergo an independent medical examination (IME) to determine whether the treatments she was receiving were reasonable and medically necessary.

         State Farm contacted a third party vendor, MES Solutions, and arranged for Leahy to be examined by Dr. Geoff Lecovin, a licensed naturopath, chiropractor, and acupuncturist. Leahy did not object. After the IME, Dr. Lecovin determined that the treatments Leahy received were appropriate but excessive. He determined that, although she was not yet at maximum medical improvement (MMI), she should have been referred for physical therapy after about 20 acupuncture and 20 massage visits because those treatments were no longer helping. He recommended that Leahy have six weeks of twice-weekly physical therapy.

         On December 17, 2012, State Farm informed Leahy's counsel that it would not cover any additional massages or acupuncture treatments because they were no longer reasonable and necessary. State Farm asked Leahy to inform it if either she or her medical providers had new or additional information that she would like it to consider. Leahy did not submit any additional information at that time.

         While being treated for her soft tissue injuries, Leahy had also sought UIM benefits for other injuries. In May 2012, she had informed State Farm that she had been diagnosed with dermatomyocitis (DM) and that the DM was either caused or triggered by the auto accident. DM is an autoimmune disease causing muscle inflammation, fatigue, and rashes. Leahy informed State Farm that she was seeking compensation under her UIM for the medical expenses associated with DM.

         State Farm informed Leahy that it would likely seek medical review to determine whether her DM was caused by the accident. On June 4, 2012, State Farm received a letter of representation from Leahy's attorneys and it assigned the claim to claim representative Leo Jung.

         Jung contacted State Farm's internal injury claim trainers who informed ) him that the cause of DM is unknown but is suspected to be triggered by outside factors such as malignancy, drugs, and infectious agents in genetically predisposed individuals.

         Jung requested a demand letter from Leahy's counsel on September 17, 2012. On June 23, 2013, Leahy's counsel sent a demand letter alleging that the auto accident caused a "lighting up" of Leahy's "dormant DM." The demand estimated Leahy's damages at $287, 900, most of which were medical expenses related to DM. Leahy sought the policy limits of both her PIP and UIM.

         Jung requested that Leahy submit to State Farm all of her medical records for the three years prior to the accident. Leahy did so, and those records made no mention of DM or associated conditions prior to the accident. On December 3, 2013, Jung told Leahy's counsel that he did not have enough information to conclude that the DM had been caused by the accident and made an offer to waive $1, 615 of State Farm's PIP subrogation rights.

         On December 6, 2013, Leahy sent State Farm the medical report of Dr. Paul Brown, a rheumatologist, who had examined Leahy in October 2013 and concluded that her DM was caused by the accident. State Farm then contacted Medical Consultants Network (MCN) to obtain an expert to review Dr. Brown's report.

         MCN selected Dr. Kenneth Ta, a rheumatologist, who concluded that it was more probable than not that Leahy's DM was not caused by the accident. He reported that there was no medical support for a causal relationship between trauma such as that resulting from an accident and DM.

         State Farm made a second offer of a $11, 116.11 waiver of its PIP subrogation rights based on its determination that only Leahy's soft tissue injuries were caused by the accident. Leahy rejected the offer and sued State Farm for her UIM policy limits.

         At the ensuing jury trial, Dr. Brown testified for Leahy and Dr. Ta testified for State Farm. Dr. Lecovin's deposition testimony was also in evidence.

         The jury found in favor of Leahy and awarded her $884, 017.31 in damages. Post-verdict, State Farm paid the $100, 000 UIM policy limit and the remainder of the PIP limit because the jury had also found that Leahy incurred sufficient medical bills within the scope of her PIP to exhaust that coverage.

         Leahy then amended her complaint to add extracontractual claims against State Farm for bad faith insurance practices, violation of the Consumer Protection Act (CPA), and violation of the Insurance Fair Conduct Act (IFCA). She originally brought additional claims, but they were dismissed pursuant to State Farm's first summary judgment motion and are not at issue on appeal.

         Thereafter, the trial court resolved certain discovery disputes related to access to the insurer's claim file and the responsiveness of witnesses at depositions. Finally, the trial court granted summary judgment to State Farm and dismissed Leahy's remaining claims.

         This appeal follows.

         DISCOVERY

         Leahy first argues that the trial court abused its discretion in concluding that portions of State Farm's UIM claim file were protected either by attorney-client privilege or as work product. We hold that this ruling was proper.

         "The attorney-client privilege applies to communications and advice between an attorney and client and extends to documents which contain a privileged communication."[1] "The purpose of the attorney-client privilege is to protect information from public disclosure so that clients will not hesitate to speak freely and fully inform their attorneys of all relevant facts."[2]

          The work product doctrine applies to "documents and tangible things ... prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative."[3] In order to obtain documents protected by the work product doctrine, the party seeking discovery must show a "substantial need" for the materials and that "the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means."[4]

         Whether a party has made the requisite showing of substantial need "is ordinarily vested in the sound discretion of the trial judge, who should look at the facts and circumstances of each case in arriving at an ultimate conclusion."[5]Even if the party shows a substantial need, "the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation."[6]

         We review the trial court's discovery orders for abuse of discretion.[7] We will only reverse the trial court's discovery rulings "'on a clear showing' that the court's exercise of discretion was 'manifestly unreasonable, or exercised on untenable grounds, or for untenable reasons.'"[8]

         Leahy amended her complaint to assert the extracontractual claims on November 5, 2015. On December 18, 2015, she served State Farm with discovery including a request for its "entire unredacted claim file." That file contains information concerning action taken on Leahy's claim, correspondence, evidence gathered during the investigation of the claim, reserves, and notes and worksheets where claims representatives documented their evaluation of her claim.

         State Farm produced significant portions of its claim file with redactions on some pages. All information withheld as privileged was described in a privilege log. State Farm withheld as work product all evaluations and mental impression evidence including settlement authority subsequent to June 23, 2013, the date on which it received the demand letter from Leahy's counsel stating litigation would follow. It also withheld as within the attorney-client privilege all documents concerning litigation strategy including communications with its attorneys in this action for periods after Leahy commenced this suit.

         Leahy moved to compel, claiming that these documents were prepared in the ordinary scope of business and that she had a substantial need for them. State Farm opposed the motion, arguing that once it received the demand letter, it anticipated litigation and all internal evaluations, mental impressions, and legal theories compiled after June 23, 2013, were protected as work product under CR 26(b)(4).

         The trial court entered an order requiring State Farm to submit many of the withheld documents for in camera review. State Farm submitted 342 pages in response to this directive. On August 3, 2016, the trial court issued a letter ruling followed up by an order on September 6, 2016, requiring State Farm to produce 149 of the submitted pages. Leahy moved for reconsideration, but the trial court denied her motion.

         Leahy argues that the trial court abused its discretion in limiting her access to information in State Farm's claims file about claim evaluations and settlement authority. We must disagree.

         Turning first to documents withheld as within the attorney-client privilege, Leahy argues that "attorney-client privilege is rarely, if ever, available to insurers in extracontractual actions." She further argues that "[a]n insured's right to an insurer's claim file maintained for an insured is unambiguous under Washington law." A close reading of the relevant case authority does not support this argument.

         Leahy relies on Cedell v. Farmers Insurance Company of Washington, [9]Barry v. USAA.[10] and Escalante v. Sentry Insurance, [11] to support her contentions. None support her.

         Starting with the most recent, Cedell involved a bad faith insurance claim brought by a homeowner.[12] The supreme court held that "[t]o accommodate the special considerations of first party insurance bad faith claims, except for under- insured motorist (UIM) claims, the insured is entitled to access to the claims file."[13]

         But the court expressly recognized that, unlike other first party bad faith claims,

[t]he UIM insurer steps into the shoes of the tortfeasor and may defend as the tortfeasor would defend. Thus, in the UIM context, the insurance company is entitled to counsel's advice in strategizing the same defenses that the tortfeasor could have asserted.[14]

         Quite simply, in a UIM case like this, the insured must overcome a higher bar before it can discover privileged information.[15] Otherwise, the general rules protecting attorney-client communications and work product apply.

         One way to overcome the bar is by showing that the party's opponent "was engaged in or planning a fraud at the time the privileged communication was made, and ... the communication was made in furtherance of that activity."[16] If the fraud exception is asserted, the court engages in a two-step process first articulated in Escalante.[17] Specifically:

First, the court determines whether there is a factual showing adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to evoke the fraud exception has occurred. Second, if so, the court subjects the documents to an in camera inspection to determine whether there is a foundation in fact for the charge of civil fraud. The in camera inspection is a matter of trial court discretion.[18]'

         In Barry, the court applied the test articulated in Escalante.[19] Denisse Barry alleged that USAA violated the Insurance Code and committed bad faith in requiring her to institute litigation or arbitration to recover amounts due under her insurance policy, failing to timely respond to her claim, and failing to timely act on that claim.[20] The court held that, while Barry's allegations were sufficient "to establish a prima facie case of bad faith insurance and CPA violations, " they were not enough to "constitute a good faith belief that USAA committed fraud."[21]Therefore, the trial court did not abuse its discretion in refusing to inspect the privileged documents in camera.[22]

         Here, as in Barry, any communications between State Farm and its attorneys is privileged for purposes of this bad faith suit unless Leahy could show fraud.[23] But there is absolutely nothing in the record before us that shows fraud or anything suggesting fraud. More importantly, the trial court conducted its own in camera review of documents from the claim file and did not suggest that any fraud had been committed. In any event, it provided to Leahy the remedy to which she would have been entitled under Barry and Escalante.

         Accordingly, Leahy has failed to show that the trial court abused its discretion in determining, after in camera review, that she was not entitled to documents covered by the attorney-client privilege.

         Leahy also contends that trial court abused its discretion in allowing State Farm to withhold documents based on work product. We disagree.

         In Barry, USAA had withheld as work product documents including evaluations, medical records and other materials upon which it relied in making its coverage decision.[24] The court recognized that most of the materials Barry requested were those relied upon by insurance carriers in the regular course of business to determine the limits of UIM coverage.[25] It held that "the only way a court can accurately determine what portions of a file may be exempt from disclosure as work product is by an in camera review of the file."[26]

         Here, State Farm already produced the medical records and documentation it relied upon in making its coverage decision-two of the three types of documents at issue in Barry. And it produced all of Leahy's file before June 23, 2013. Pursuant to Barry, the trial court then conducted an in camera review before concluding that the remainder, involving evaluations and mental processes, was protected as work product.

         While Leahy is correct that there is an established protocol governing discovery in bad faith insurance claims, this trial court followed that protocol by conducting an in camera review. She has nothing to complain about in this respect.

         In her reply brief, Leahy relies on State Farm Fire & Casualty Company v. Justus, to support her contention that she is entitled to the claims file.[27] She argues that "denial of access to insurer claim files in extracontractual claim litigation contravenes the key purposes of discovery - 'the production of all relevant facts and the promotion of the efficient and early resolution of claims."'[28]But Justus did not involve a UIM claim.[29] Moreover, in that case, the remedy was to remand for an in camera hearing and here the trial court has already held such a hearing.[30]

         Leahy further argues that the trial court never addressed whether she had a substantial need for the documents that it determined were work product. She cites to Pappas v. Holloway, as support for her contention that, if the material sought to be discovered is essential to the party's claim or defense, an exception to CR 26(b)(4) should apply.[31] But Pappas concerned a legal malpractice action, not a bad faith insurance claim.[32] And the supreme court reiterated that it is within the trial court's "sound discretion" to determine whether a party has shown substantial need based upon the facts and circumstances of each case.[33]

         Here, the trial court exercised its discretion by looking at the facts and circumstances of the case. First, it conducted an in camera review. Then, it held a hearing to consider Leahy's argument that she had a substantial need for these materials. She argued that she needed these materials in order to show that State Farm's actions were unreasonable. She claimed that without access to its internal valuations and settlement authority, she could not show that State Farm acted in bad faith by offering nothing on her UIM claim. The court considered her arguments and denied her motion. She has failed to show that the trial court abused its discretion in doing so.

         Despite the trial court's exercise of its discretion in deciding that Leahy did not have a substantial need for these documents, Leahy argues that State Farm's internal valuation of her UIM claim and its rationale for its investigation and "low ball settlement offers" are vital to prove her extracontractual claims.

         State Farm produced all of the documentation showing what it did to investigate and settle her claim. Leahy has failed to cite to any Washington authority holding that internal evaluations are "normally discoverable" or any cases where such documents were used by trial or appellate courts in determining whether an insurer's UIM settlement offer was made in bad faith.[34]

         Leahy relies on federal authority.[35] But the work product doctrine in federal cases is a procedural immunity governed by Federal Rule of Civil Procedure 26(b)(4).[36] This court need only follow federal analysis if it finds the reasoning persuasive.[37] Leahy has failed to persuasively argue why this court needs to resort to federal analysis to guide its interpretation of CR 26(b)(4).[38]

         Leahy also argues that State Farm is using discovery as both a "sword and a shield, " producing only evidence that is favorable to it. But examination of the record does not support this contention. The materials relied upon by Jung in his affidavit in support of State Farm's second motion for summary judgment were produced before the June 23, 2013 letter, and State Farm produced all of its claim file prior to that date.

         We also note that at the hearing on State Farm's second motion for summary judgment, the trial court asked Leahy to identify any information that State Farm selectively produced. She could not do so.

         After the parties submitted their appellate briefs, State Farm filed a statement of additional authority attaching Division Two's opinion in Richardson v. Government Employees Insurance Company.[39] Richardson fails to provide helpful guidance.

         Christine Richardson was injured in an auto accident and the at-fault driver's insurance company settled for its $25, 000 policy limits.[40] Richardson had $35, 000 of PIP and $50, 000 in UIM with Government Employees Insurance Company (GEICO). When GEICO stopped paying for Richardson's medical treatments under the PIP policy, Richardson retained an attorney and demanded arbitration.[41] GEICO also retained an attorney, and the PIP arbitrator awarded Richardson the $35, 000 limit of her PIP policy.[42] She then filed a UIM claim, but GEICO determined that she had already been fully compensated and denied UIM coverage.[43] Richardson sued, alleging that GEICO breached its duty to deal in good faith when it wrongfully denied her claims for PIP and UIM benefits.[44] Discovery issues arose, and the trial court performed an in camera review.[45]GEICO had already disclosed its claim file, but the trial court ordered disclosure of all of the documents submitted for review, including most documents related to activity taking place after Richardson sued.[46]

         On appeal, the court held that the trial court erred in requiring GEICO to produce materials compiled after the lawsuit had been filed.[47] The court held that privileged "postlitigation materials, work product, and information in [the] UIM bad faith" action were not discoverable.[48]

         In Richardson, the court specifically held that the postlitigation materials were not discoverable. But the court was not asked to address whether the trial court would have abused its discretion had it determined that a portion of the earlier materials was not discoverable. Also, the opinion notes that the trial court did allow for redaction of some prelitigation documents but does not specify what those documents contained.[49]

         As we read Richardson, had Leahy sought any materials that were prepared after she commenced this action on November 15, 2015, they would have been protected. Because the trial court did not abuse its discretion in protecting documents that State Farm produced after Leahy sent her demand letter but before she filed her extracontractual claims, this case has no bearing on the proper analysis of this argument.

         REASONABLENESS OF DENIAL OF UIM COVERAGE

         Leahy next argues that there are genuine issues of material fact whether State Farm's refusal to pay UIM ...


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