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Continental Casualty Co. v. St. Paul Surplus Lines Insurance Co.

March 30, 2010

CONTINENTAL CASUALTY COMPANY, PLAINTIFF,
v.
ST. PAUL SURPLUS LINES INSURANCE COMPANY; DOES 1 THROUGH 10, INCLUSIVE, DEFENDANTS.



ORDER

This Order addresses the discovery motions heard by this court on December 10, 2008,*fn1 the related motion for sanctions based on the alleged spoliation of evidence referred to this court and heard on March 25, 2009, and the court's in camera review of withheld documents ordered May 28, 2009. Attorney Jeffrey A. Dollinger appeared on behalf of Continental; Marc J. Derewetzky appeared on behalf of St. Paul; and George J. Stephan represented both himself and Crown.

I. BACKGROUND

This action, originally filed in Yolo County Superior Court, was removed on August 24, 2007, based on diversity jurisdiction. 28 U.S.C. § 1332. Plaintiff Continental Casualty Company ("Continental") is incorporated and has its principal place of business in Illinois; defendant St. Paul Surplus Lines Insurance Company ("St. Paul") is incorporated and has its principal place of business in Minnesota. Continental seeks declaratory relief, equitable contribution, indemnity and subrogation from St. Paul.

This case arises out of an underlying wrongful death action litigated in Yolo County Superior Court. LeeAnn Coupe et al. v. Crown Lift Trucks, et al., Case No. P-002-1064 ("underlying action" or "Coupe action"). That action arose out of a 2001 industrial accident in Roseville, California, in which Daniel Coupe, an independent contractor/employee of West Coast Conveyor and Equipment, Inc., was killed while operating a forklift. The forklift was manufactured and maintained by Crown Equipment Corporation and/or Crown Credit Company dba Crown Lift Trucks ("Crown"), and leased to Tasq Technology, Inc. ("Tasq"). Both Tasq and Crown tendered their defense of the Coupe action to Continental.*fn2 Tasq held primary general liability and commercial umbrella liability policies issued by Continental, with limits of $1,000,000 and $25,000,000, respectively, which included the duty to defend. Continental immediately agreed to defend Tasq and hired defense counsel.

Crown also held a primary general liability policy issued by St. Paul, with coverage limited to $5,000,000, pursuant to which St. Paul held the right, but not the duty, to defend Crown, subject to a $250,000 self-insured retention requirement ("SIR"). Continental initially refused to defend Crown, and for two years funded Tasq's cross-action against Crown. During this time, Crown funded its own defense and filed a cross-action against Tasq. The cross-actions sought to determine the companies' relative liabilities and indemnity obligations, e.g., whether Crown furnished an adequately maintained forklift, and whether Coupe was properly trained to operate it.

On December 15, 2005, Continental assumed Crown's defense in the Coupe action, subject to a reservation of rights, and by securing independent "Cumis counsel," third party herein, Mr. George Stephan.*fn3 See Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567, 570 (E.D. Cal. 2002) ("Under San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 [](1984), an insured has a right to be provided independent counsel by the carrier when a conflict of interest exists between the insured and the carrier. California courts have upheld the validity of the Cumis decision, and the substantive elements of Cumis have been codified in California Civil Code Section 2860.").

A year later, Continental, on behalf of both Tasq and Crown, settled the Coupe action for $3.5 million. Dckt. No. 21-1, ¶ 9 (Stipulation of Facts for Cross-Motions for Summary Judgment). At Crown's insistence, the settlement was silent as to apportionment of fault between Crown and Tasq.*fn4 Id.

Preceding this settlement, Continental sent two letters to St. Paul informing it of a settlement conference scheduled for October 10, 2006, and inviting St. Paul's participation. The letters informed St. Paul that Continental may seek from it contribution or indemnification for Crown's obligations. See Dckt. Nos. 21-11 and 21-12. The first of these letters, dated September 21, 2006, indicated that "[i]t has come to Continental Casualty's attention that St. Paul provided general liability coverage to Crown... which was apparently in place at the time of the fatal accident," and stated that Continental was "uncertain if St. Paul already has been notified of this action..." Dckt. No. 21-11 at 1. The second letter, dated October 9, 2006, stated that "[i]f St. Paul wishes to have any input in the settlement process, you should have a representative present, with authority." Dckt. No. 21-12 at 1. St. Paul responded to neither letter. However, St. Paul has conceded that it became aware of the Coupe action at the time it was filed. See Dckt. No. 64 at 5:20-21; Dckt. No. 57, Coles Decl., Ex. A, ¶ 3.

Following the settlement, Continental filed the instant action against St. Paul in Yolo County Superior Court on July 18, 2007. See Dckt. No. 1, Ex. A. Continental represents that the $3.5 million settlement reflected $1 million under Tasq's primary policy, and $2.5 million under its umbrella policy. Continental now contends that the $2.5 million settlement payment made from the Tasq umbrella policy was paid on behalf of Crown, and seeks this amount from St. Paul. St. Paul filed its answer in Superior Court, id. at Ex. B, and removed the action to this court on August 23, 2007. Dckt. No. 1-1.

Continental filed a motion for partial summary judgment to establish the priority of coverage between Continental's umbrella policy and St. Paul's primary policy as to Crown's liability, if any, arising out of the Coupe action and settlement. See Dckt. No. 20. St. Paul also moved for summary judgment, arguing that the dispute between the insurers is not yet ripe because there has been no legal apportionment of liability between Tasq and Crown, and that even if the claims were ripe, they should be barred by Continental's unclean hands, a "no action" clause in St. Paul's insurance contract, and the SIR. See Dckt. No. 29.

The district judge continued the hearing on the parties' cross-motions for summary judgment to permit the parties an opportunity to resolve their discovery disputes, which were heard on December 10, 2008. Dckt. Nos. 41-53. After the hearing, and pending a decision on the discovery matters, Continental filed, on December 30, 2008, a motion for sanctions against St. Paul, based in part on documents at issue in the parties' discovery disputes. Dckt. No. 57. The district judge referred the sanctions motion to the undersigned on February 5, 2009, and the matter was heard on March 25, 2009. Dckt. Nos. 62, 68. On May 28, 2009, after attempting unsuccessfully to resolve the pending discovery matters on the parties' papers, the undersigned ordered that all documents withheld on a claim of privilege be submitted for in camera review. Dckt. No. 72. That review has been completed and the court issues the following order.

II. DISCOVERY MOTIONS

Pending before this court are four discovery motions regarding Continental's requests for documents from St. Paul, Stephan, and Crown; and St. Paul, Stephan, and Crown's objections thereto. Specifically, (1) St. Paul moves to quash subpoenas issued to Stephan and Crown which seek communications between St. Paul and Crown and/or Crown's agents (including Stephan) regarding the Coupe action, Dckt. No. 42;*fn5 (2) Stephan and Crown also move to quash those subpoenas, Dckt. No. 47; (3) Continental moves to compel St. Paul to produce documents, including communications between St. Paul and Crown and/or Stephan, and for "monetary sanctions against St. Paul for its alleged dilatory tactics, failure to provide documents, failure to provide a privilege log in a timely manner, and concealing the existence of these responsive and relevant documents," Dckt. No. 48;*fn6 and (4) St. Paul moves for a protective order in response to Continental's motion to compel, Dckt. No. 49. All four motions involve documents which have been withheld by St. Paul, Stephan, and/or Crown on the grounds of attorney-client privilege, attorney work product, and/or the mediation privilege, and which can be divided into two general categories: (1) communications that were to, from, or shared with St. Paul (including communications between Stephan and St. Paul, between Crown and St. Paul, and between Stephan and Crown that were shared with St. Paul*fn7 ); and (2) communications between Stephan and Crown that were not shared with St. Paul. Those categories of documents, and the respective privilege/protection arguments regarding the documents, are addressed below.

A. Standards

Federal Rule of Civil Procedure 26 provides that "[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense[.]" Fed. R. Civ. P. 26(b)(1). Information that a party claims is privileged or subject to protection as trial-preparation material may be withheld from discovery pursuant to Rule 26(b)(5) if the party expressly makes the claim and provides a detailed privilege log, and if necessary, "[a] party or any person from whom discovery is sought may move for a protective order." Fed. R. Civ. P. 26(b)(5), 26(c)(1). However, the opposing party may also to move to compel discovery. Fed. R. Civ. P. 37(a)(1).

Rule 45 governs subpoenas. In relevant part, Rule 45(c)(3)(A) provides that an issuing court must quash or modify a subpoena if the subpoena "requires disclosure of privileged or other protected matter, if no exception or waiver applies; or... subjects a person to undue burden." Rule 45 further provides that, "[a]t any time, on notice to the commanded person, the serving party may move the issuing court for an order compelling production or inspection." Fed. R. Civ. P. 45(c)(2)(B)(I).

B. Preliminary Arguments

1. Ripeness/Standing

St. Paul, Crown, and Stephan argue that Continental lacks standing to pursue the discovery matters because its underlying claims are not yet ripe. Dckt. No. 46 at 7; Dckt. No. 52 at 12. They argue that Continental's claims will become ripe only if this court finds that Crown bears some liability in the underlying wrongful death action, and that such liability is not indemnified by Tasq. This argument, and Continental's response, mirror an argument presented by the parties' cross-motions for summary judgment. That is, Continental wants to first establish priority of coverage, while St. Paul, Crown, and Stephan want to first establish apportionment of liability and indemnity. However, the order in which those issues will be addressed has already been resolved by the district judge. The district judge continued the summary judgment motions for the purpose of facilitating discovery of the facts and evidence bearing on the very questions St. Paul, Crown, and Stephan wish to defer. Discovery has not been bifurcated or phased in this case, and the parties specifically stated in their Joint Status Report that they "do not currently foresee the need to conduct discovery in phases." Dckt. Nos. 8, 9.

Apart from the apparent relevance of the discovery to the pending summary judgment motions, the cases relied upon by St. Paul, Crown, and Stephan in support of their ripeness argument are unhelpful. The cases reiterate the general Article III standing requirement that federal jurisdiction is limited to actual cases and controversies. These cases are inapposite to the pending motions. Rather, the weight of authority favors full discovery at this juncture, consistent with both the federal rules and California's broad public policies supporting good faith settlements in multiple tortfeasor actions without first requiring an apportionment of liability. See, e.g., Mullen Lumber Co. v. Chandler, 185 Cal.App.3d 1127 (1986) (noting important public policies of maximizing recovery to the injured party, encouraging settlements, and apportioning liability in subsequent actions for equitable indemnity); Hartford Accident & Indem. Co. v. Super. Ct., 29 Cal.App.4th 435, 440 (1994) ("in cases involving duplicate or overlapping insurers the courts have prorated the responsibility by focusing on contractual issues rather than on 'fault' concepts, and have ordered proration based on the proportion each insurer's coverage bore to the total coverage provided by all policies" (citations omitted)); N. Ins. Co. of N.Y. v. Allied Mut. Ins. Co., 955 F.2d 1353, 1360 (9th Cir. 1992) ("No specific rule governs [suits among insurers seeking equitable contribution]. Courts should consider the nature of the claim, the relation of the insured to the insurers, the particulars of each policy and any other equitable considerations."). Therefore, the ripeness argument with regard to discovery is without merit.

2. Relevance

St. Paul, Crown, and Stephan also argue that the subpoenas should be quashed because "Continental has failed to articulate any basis for why the documents sought might be relevant to any claim in this case." Dckt. No. 52 at 16. Continental responds that the documents are relevant to St. Paul's awareness "of the fact and substance of the settlement agreement," and therefore to St. Paul's "no consent" defense set forth in its motion for summary judgment. Id. at 27. Because the communications between St. Paul, Crown, and Crown's counsel (Stephan) are relevant to St. Paul's knowledge of the Coupe action and/or the settlement process therein, the subpoenas will not be quashed on relevance grounds.*fn8

C. Communications

Between (a) Stephan and/or Crown and (b) St. Paul Most of the documents withheld by St. Paul, Stephan, and Crown involve communications (1) between Stephan and St. Paul regarding the Coupe action; (2) between Crown (including individuals in Crown's legal department) and St. Paul regarding the Coupe action; and (3) between Stephan and Crown regarding the Coupe action that were shared with St. Paul.*fn9 The analysis for all of those communications is similar and, accordingly, they will be considered together.

1. Attorney-Client Privilege

a. Parties' Contentions

St. Paul, Stephan, and Crown all argue that the communications that they have withheld are protected by the attorney-client privilege. Specifically, they contend that communications between Stephan and St. Paul regarding the Coupe action are covered by the attorney-client privilege; that communications between Crown's legal department and St. Paul regarding the Coupe action are covered by the attorney-client privilege; and that communications between Stephan and Crown regarding the Coupe action (which are covered by the attorney client privilege) remain privileged (i.e., the privilege is not waived) even though they were shared with Crown's insurer, St. Paul. They argue that the attorney-client privilege, as codified in the California Evidence Code, is liberally construed in favor of the exercise of the privilege and contend that each of the aforementioned categories of communications should be protected by that privilege.*fn10 Dckt. No. 51 at 31-37; Dckt. No. 52 at 16-22.

The attorney-client privilege St. Paul, Stephan, and Crown seek to assert is based on the tripartite relationship that exists in an insurance context between insured, defense counsel, and insurer. St. Paul, Stephan, and Crown argue that communications among the parties to that tripartite relationship are protected by the privilege because of the required disclosures among those parties, and that the privilege that attaches to communications between the insured and defense counsel is not waived when those communications are shared with the third member of the tripartite relationship, the insurer (here, St. Paul). They argue that "[i]n the context of insurance, the tripartite relationship between insured, defense counsel, and insurer requires disclosure of information that falls under the protection of Cal Evid. Code section 952; otherwise, the insured and its defense counsel could not fulfill their 'duty... to disclose to the insurer all information concerning the action....'" Dckt. No. 51 at 33; Dckt. No. 52 at 19 (quoting Rockwell Int'l Corp. v. Super. Ct., 26 Cal.App.4th 1255, 1264 (1994)).

St. Paul, Stephan, and Crown acknowledge that under California law communications among retained defense counsel, the insured, and the insurer are protected by the attorney-client privilege when the insurer is defending the insured without reservation (since both the insurer and the insured are considered to be clients of defense counsel), Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567, 571 (E.D. Cal. 2002). Indeed, this is the heart of the tripartite relationship. However, they argue that situation in this case is unique because the insurance policy between Crown (the insured) and St. Paul (the insurer) does not require St. Paul to defend Crown but does require, as a condition of coverage, that Crown provide information to St. Paul regarding claims that could potentially reach St. Paul's coverage once the self-insured retention has been satisfied, including copies of complaints and reports on significant developments. Dckt. No. 51 at 34; Dckt. No. 52 at 19. Essentially, St. Paul, Stephan, and Crown contend that this court should extend the attorney-client privilege to cover communications between Stephan and St. Paul regarding the Coupe action; communications between individuals in Crown's legal department and St. Paul regarding the Coupe action; and communications between Stephan and Crown regarding the Coupe action that were shared with St. Paul, because a failure to do so "would drive a wedge between the insurer and the insured to demand disclosure of confidential communications required as a condition to coverage to third parties, such as Continental here." Dckt. No. 51 at 35; Dckt. No. 52 at 21.

Continental counters that the communications at issue are not protected by the attorney client privilege. Dckt. No. 51 at 13-17; Dckt. No. 52 at 28-32. Specifically, Continental argues that the tripartite attorney client relationship referenced above is only created when there is a joint relationship and/or joint interest in defending the interests of the insured/insurer. Continental contends that because St. Paul's policy was an indemnity only policy, in which St. Paul did not retain counsel for Crown, did not pay for Crown's defense counsel, was not involved in investigating or evaluating the Coupe action, and never acknowledged any duty to defend or indemnify Crown. It is Continental's position that because St. Paul did not share any joint interest in Crown's defense, there was no tripartite attorney client relationship among St. Paul, Crown, and Stephan and communications between St. Paul and Crown, between St. Paul and Stephan, and between Crown and Stephan but shared with St. Paul, are not protected by the attorney client privilege. Id. Continental argues that the communications between Crown's legal department and St. Paul were not intended for the information or assistance of Crown's attorney, and that therefore, the attorney client privilege cannot and does not apply to those communications. Dckt. No. 51 at 16-17; Dckt. No. 52 at 31-32.

b. Discussion

In California, evidentiary privileges are statutorily created and must be strictly construed. See, e.g., Wells Fargo Bank v. Super. Ct., 22 Cal.4th 201, 208 ("the courts of this state have no power to expand [statutory privileges] or to recognize implied exceptions"). The attorney-client privilege is codified in sections 950 through 962 of the California Evidence Code. The privilege protects "confidential communication[s] between client and lawyer." Cal. Evid. Code § 952. "If a 'confidential communication between client and lawyer' exists, the client has a privilege protecting against disclosure (§ 954), and the attorney has an obligation to refuse disclosure unless otherwise instructed by the client (§ 955)." Scripps Health v. Super. Ct., 109 Cal.App.4th 529, 533 (2003). The privilege encompasses not only oral and written statements, but the transmission of non-privileged documents, the disclosure of which may reveal the transmitter's intent or strategy. Mitchell v. Super. Ct., 37 Cal.3d 591, 600 (1984). The party claiming the privilege has the burden of demonstrating that the communication was made in the course of an attorney-client relationship. Cal. Evid. Code § 917(a); see also, e.g., Wellpoint Health Networks, Inc. v. Super. Ct., 59 Cal.App.4th 110, 123 (1997).

The purpose of the attorney-client privilege is to "encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). "'The privilege is given on grounds of public policy in the belief that the benefits derived therefrom justify the risk that unjust decisions may sometimes result from the suppression of relevant evidence. Adequate legal representation in the ascertainment and enforcement of rights or the prosecution or defense of litigation compels a full disclosure of the facts by the client to his attorney.'" People v. Canfield, 12 Cal.3d 699, 705 (1974) (quoting City & County of San Francisco v. Super. Ct., 37 Cal.2d 227, 235 (1951)).

The attorney-client relationship is more complex in the context of insurance litigation. When there is a single, common goal shared by an insurer and its insured of minimizing or eliminating liability to a third party, California courts have recognized that a unique tripartite relationship exists among those parties (the insurer and the insured) and the defense counsel hired to defend against third-party liability. In that tripartite relationship, both the insurer and the insured are considered the clients of the defense counsel, and an attorney-client privilege is shared among all of them. As the court explained in San Diego Navy Federal Credit Union v. Cumis Insurance Society ("Cumis"), 162 Cal.App.3d 358 (1984), "[i]n the usual tripartite relationship existing between the insurer, insured and counsel, there is a single, common interest shared among them. Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same." Id. at 364. The theory is an extension of California Evidence Code section 952, which provides that confidential communications involve those communications between a client and his or her lawyer in confidence by a means which "discloses the information to no third persons other than those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted...." Cal. Evid. Code § 952; see also Am. Mut. Liab. Ins. Co. v. Super. Ct., 38 Cal.App.3d 579, 593-594 (1974); Glacier Gen. Assurance Co. v. Super. Ct., 95 Cal.App.3d 836 (1979) (each a medical malpractice action in which the court found that counsel represented both the insured and insurer under a "joint defense" theory as set forth in Cal. Evid. Code § 962); see also Great Am. Surplus Lines Ins. Co. v. Ace Oil Co. 120 F.R.D. 533, 537 (E.D. Cal. 1988) (relying on American Mutual to find a common interest between an insurer and its managing general agent who independently retained counsel); Britz Fertilizers, Inc. v. Bayer Corp., 2009 WL 604940 (E.D. Cal. 2009) (relying on American Mutual and Glacier to find a "tripart relationship" among counsel, defendant, and defendant's insurer which retained defendant's counsel).

California courts have characterized the "tripartite relationship" among insured, insurer, and common defense counsel as follows: "In California, it is settled that absent a conflict of interest, an attorney retained by an insurance company to defend its insured under the insurer's contractual obligation to do so represents and owes a fiduciary duty to both the insurer and insured." Gafcon, Inc. v. Ponsor & Assocs., 98 Cal.App.4th 1388, 1406-07 (2002). Thus, "until... a conflict arises, the insurer has the right to control defense and settlement of the third party action against its insured, and is generally a direct participant in the litigation." Id. at 1407.

The relationship is based on a shared interest in defending against third-party liability and begins when the insurer acknowledges a duty to defend the insured and provides a defense to the action. Lectrolarm v. Pelco, 212 F.R.D. 567, 571 (2002) ("Where an insurer has agreed that it has a duty to defend and to indemnify its insured, they are both clients of the lawyer... and the attorney client privilege applies to protect communications between the lawyer and the insurer.").

However, when a conflict arises between the insurer and insured, such as a dispute over coverage, California law requires the insurance company to hire separate counsel for the insured. "A different situation is presented... when some or all of the allegations in the complaint do not fall within the scope of coverage under the policy. In such a case, the standard practice of an insurer is to defend under a reservation of rights where the insurer promises to defend but states it may not indemnify the insured if liability is found. In this situation, there may be little commonality of interest." Cumis, 162 Cal.App.3d at 364 (footnote omitted). Under such a scenario, "an insurance company must pay for independent counsel for its insured when there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights to deny coverage under an insurance policy." Kroll & Tract v. Paris & Paris, 72 Cal.App.4th 1537, 1542-43 (1999); N. Ins. Co. of N.Y. v. Allied Mut. Ins. Co., 955 F.2d 1353, 1359 (9th Cir. 1992). As set forth in California Civil Code section 2860, which substantially codifies the Cumis decision, the obligation to provide independent counsel to an insured rests on the insurer with the duty to defend the insured, Cal. Civ. Code ...


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