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Ivy Hotel San Diego, LLC; Kelly Hospitality, LLC v. Houston Casualty Co

October 17, 2011

IVY HOTEL SAN DIEGO, LLC; KELLY HOSPITALITY, LLC, PLAINTIFFS,
v.
HOUSTON CASUALTY CO.,
DEFENDANT.
HOUSTON CASUALTY CO., COUNTER CLAIMANT
v.
IVY HOTEL SAN DIEGO, LLC; KELLY HOSPITALITY, LLC, COUNTER DEFENDANTS



The opinion of the court was delivered by: Hon. Bernard G. SkomalU.S. Magistrate Judge United States District Court

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION TO COMPEL HANDLING DOCUMENTS PRODUCTION OF CLAIMS [Doc. No. 43.]

Plaintiffs and Counter-Defendants, Ivy Hotel San Diego, LLC and Kelly Hospitality, LLC (collectively "Ivy Hotel") filed a motion to compel Defendant and Counter-Claimant, Houston Casualty Company, ("HCC") to produce certain claims handling documents. (Doc. No. 43.) HCC filed an opposition to the motion. (Doc. No. 45.) Ivy Hotel filed a reply to the opposition. (Doc. No. 46.)

I. BACKGROUND

Ivy Hotel filed this insurance coverage action alleging breach of contract and breach of the covenant of good faith and fair dealing. (Doc. No. 4.) Ivy Hotel alleges the following:

This matter involves a General Partners Liability Policy purchased from HCC for the policy period from December 1, 2006, through December 1, 2007 ("the Policy.") (Id. at ¶ 13.) The Policy provides coverage for loss, including the insureds' liability to third parties, as well as legal fees and expenses incurred in the defense of covered or potentially covered claims. (Id. at ¶ 14.) The Policy is subject to a $5 million net aggregate limit. (Id.) Pursuant to the Policy, HCC is obligated to pay up to $5 million in legal fees and expenses where there is a claim against the insured first made and reported during the policy period for a "Wrongful Act," which includes "any actual or alleged act, omission, misstatement or breach of duty." (Id. at ¶¶ 15-16.) In addition, HCC "is obligated to use all reasonable efforts to agree with the insured upon a fair and proper allocation of legal fees and expenses as between covered loss and uncovered loss." (Id. at ¶ 16.) Inasmuch as the insurer and insured disagree about the allocation, the insurer is obligated to 'advance on a current basis' legal fees and expenses it believes are covered. (Id.) "The allocation of the remaining legal fees and expenses is subject to resolution through negotiation, arbitration, or litigation." (Id.)

Ivy Hotel filed this action in order to recover legal fees and expenses incurred while defending against a cross-complaint filed in 630 F Street, LCC, et al. v. Krump Construction, Inc., et al., Case No. 37-2007-00072559-CU-BC-CTL ("Krump"). (Id. at ¶¶ 20-21.) The claims against Ivy Hotel in the Krump action allege a number of wrongful acts including, inter alia, breach of an implied agreement, breach of an implied warranty. (Id. at ¶ 22.) Ivy Hotel settled the Krumpaction in 2010. (Id. at ¶¶ 23-24.)

HCC initially denied Ivy Hotel's claim for coverage and defense of the Krump litigation. (Id. at ¶ 27.) Approximately 18 months later, HCC rescinded its coverage denial and agreed to reimburse Ivy Hotel for legal fees and expenses, subject to a full reservation of rights. (Id. at ¶ 28.) HCC also made a proposal for allocation legal fees and expenses as between covered and uncovered loss. (Id. at ¶ 29.) Ivy Hotel informed HCC that it did not agree with the proposed allocation of legal fees and expenses. (Id.) Ivy Hotel submitted invoices totaling $6,963,248.48 in support of its claim for reimbursement. (Id. at ¶ 30.) HCC, however, "failed to review or pay [Ivy Hotel's] invoices for legal fees and expenses in a timely manner and failed to advance defense costs on a current basis, in material breach of its obligations. . . ." (Id. at ¶ 32.)

Facts Relevant to Discovery Dispute

On December 1, 2007, HCC received notice of Ivy Hotel's claim for coverage stemming from the cross-complaint filed in the Krump action (Doc. No. 45 at 6.) On December 27, 2007, HCC informed Ivy Hotel via letter that it retained Ross, Dixon & Bell, LLP to "evaluate and monitor" the coverage matter.*fn1 (Id. at 7; Doc. No. 45-4, Ex. A.) At that time, HCC had "not made a determination as to coverage under the Policy. (Id.) Monique M. Fuentes, Esq., ("Fuentes") was assigned to handle the matter. (Id.; see also Doc. No. 45-5, Ex. B.) On January 22, 2008, Fuentes wrote a letter to Ivy Hotel setting forth her preliminary coverage opinion. (Id.) The letter indicated that HCC did not believe that coverage was "presently available" for the Krumpaction but would be "pleased to review its position" if Ivy Hotel submitted additional information. (Id.) Fuentes communicated these opinions directly to Ivy Hotel's coverage counsel. (Id.)

On May 20, 2009, Ivy Hotel's insurance counsel sent Ms. Fuentes a letter requesting that HCC reconsider its refusal to defend. (Doc. No. 45-4, Ex. C.) Ms. Fuentes responded on July 10, 2009, and reiterated that HCC did not believe coverage was available for the matter. (Id. at Ex. D.) However, "as a showing of good faith," HCC agreed to revisit its coverage denial and agreed to reimburse Ivy Hotel for its costs and expenses incurred in defending the Krump action. (Id.) The agreement to reimburse was "subject to a full reservation of rights." (Id.) Once again Ms. Fuentes communicated directly with Ivy Hotel's insurance counsel. (Id.) Throughout 2009, Ivy Hotel's insurance counsel continued to communicate directly with Ms. Fuentes with respect to forwarding invoices reflecting defense costs and expenses incurred in the Krump action. (Doc. No. 43-6, Exs. 4-7.) ///

On December 18, 2009, Ivy Hotel sent Fuentes another letter regarding its concern that HCC had yet to provide reimbursement payments for incurred defense costs. (Doc. No. 43-6, Ex. 3.) On January 14, 2010, Fuentes informed Ivy Hotel that HCC completed its analysis of the invoices submitted on October 20 and 23, 2009. (Doc. No. 43-11, Ex. 8.) The letter was accompanied by a "Master Invoice Summary" indicating that HCC would reimburse Ivy Hotel $229,327.81. (Id. at 3.) According to HCC, this amount reflected its agreement to "reimburse 25 % of the fees and costs incurred solely in connection with [Ivy Hotel's] defense of the Krump Cross-Complaint." (Id. at 8.) Susan Leddy, HCC's Senior Claims Attorney, mailed the reimbursement check on February 11, 2010. (Doc. No. 45-4, Ex. G.)

II.

IVY HOTEL'S MOTION TO COMPEL

This discovery dispute stems from HCC's responses to Ivy Hotel's First Set of Requests for Production ("RFP"). (Doc. No. 43-13, Ex. 9.) Ivy Hotel requested documents concerning HCC's "handling of the claim for legal fees and expenses incurred in connection with the Krump Cross-Complaint." (Memo Ps&As ISO Mot Compel, Doc. No. 43-1 at 8.) HCC withheld a number of documents on the basis that they are protected by either the attorney-client privilege or work product doctrine. (Id.) HCC produced a 21 page privilege log identifying specific documents withheld. (Doc. No. 43-14, Ex. 10.) HCC, however, only produced and identified documents currently in HCC's physical custody or possession. (Memo Ps&As ISO Mot Compel, Doc. No. 43-1 at 9.) HCC does not believe it is obligated nor able to "force" Fuentes to turn over her work product. (Memo Ps&As ISO Opp'n, Doc. No. 45 at 8.)

The primary dispute between the parties is the scope and applicability of the attorney-client privilege and work product doctrine as they relate to Fuentes and Troutman Sanders-HCC's coverage counsel. Ivy Hotel contends HCC is improperly shielding its claims handling documents from discovery by claiming they are privileged when the facts indicate that the dominant purpose of the relationship between HCC and Fuentes's firm was to handle claims rather than act as outside coverage counsel. (Memo Ps&As ISO Mot Compel, Doc. No. 43-1 at 14.) Ivy Hotel further contends that the documents are not subject to work product protection because they were not prepared in anticipation of litigation. Finally, Ivy Hotel argues that even if HCC could establish that the documents qualify as work product, they are discoverable because: (1) Ivy Hotel has a substantial need for the materials and cannot, without undue hardship, obtain their substantial equivalent, and (2) mental impressions are at issue in this case and Ivy Hotel has a compelling need for information revealing those mental impressions. (Id. at 12-13.)

HCC counters that Ivy Hotel is not entitled to its communications with outside counsel because they are privileged. (Memo Ps&As ISO Opp'n, Doc. No. 45 at 17.) In addition, HCC argues that the documents in Fuentes' file constitute her work product and Ivy Hotel has not established ...


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