United States District Court, S.D. California
FIDELITY NATIONAL FINANCIAL, INC., CHICAGO TITLE INSURANCE CO., and CHICAGO TITLE CO., Plaintiffs,
NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURG, PA, et al., Defendants.
ORDER AFFIRMING IN PART AND REVERSING IN PART MAGISTRATE JUDGE'S ORDER DENYING SANCTIONS
GONZALO P. CURIEL, District Judge.
Now before the Court is Plaintiffs' (hereinafter "FNF" or "Chicago Title") timely appeal from the Magistrate Judge's September 25, 2012 order declining to impose sanctions on Defendant (hereinafter "NU") for obtaining and using a confidential memorandum prepared by Cumis counsel in the underlying litigation. The Court heard oral argument on December 6, 2013.
For the reasons stated below, the Court affirms in part and reverses in part. 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. Pro. 72(a). The Court holds that NU cannot use the attorney's confidential legal memorandum assessing a settlement offer under the Errors and Omission policy ("E&O, " also called the Miscellaneous Professional Liability Policy) against FNF in this action on the separate Financial Institution Bond ("FIB"). California's Cumis statute required FNF to provide NU's E&O claims department with the attorney's candid and complete evaluation of whether or not to settle the Jr. Holdaways' lawsuit against FNF. Cal. Civil Code § 2860(d). FNF was required to share the case evaluation memorandum with NU to obtain the benefits of the E&O policy. Consequently, the insurer is limited to using the privileged document to evaluate the settlement of the underlying action in connection with that particular insurance policy. The Court concludes that FNF did not directly or impliedly waive the attorney-client privilege in relation to any other insurance policy, including the FIB issued by NU.
In 2006, victims of Rollo Norton's Ponzi scheme began suing FNF (and its subsidiary Chicago Title Co. or "CTC") for negligence, breach of fiduciary duty, and related torts for its failure to recognize and prevent hundreds of fraudulent escrow transactions.
"Because of the size of FNF's and its subsidiaries' operations and because insurance companies will underwrite risks only up to a certain dollar amount, " FNF purchased a "tower of insurance." Loverich Decl. ¶ 4. FNF purchased several types of "Executive Risk" coverage, including Directors and Officers, E&O, and FIB policies. Id. ¶ 3. For each category, FNF bought a primary policy and four levels of excess policies. Id. ¶ 4. Different insurance carriers issued various types of policies. Id. ¶ 9 (NU provided the primary E&O, the third excess E&O, and the primary FIB policies for the 2005-2006 term). This motion concerns the E&O and FIB categories. NU was the primary carrier in these two categories, but eight other insurance companies provided coverage to complete the layers in this "tower." Id.
In July 2006, FNF notified all of its several carriers in its "tower of insurance" of the Norton claims. FNF anticipated a loss exceeding $113 million. In regard to the two primary policies issued by NU, FNF sought coverage under the $15 million E&O policy, which generally applies to third-party losses caused by negligent employees, and its $15 million FIB, which generally applies to first-party loss caused by dishonest employees.
The E&O policy obligated NU to defend the insured against third-party lawsuits. Ex. 3 to Agati Reply Decl. (Insuring Agreement I.B). [Doc. No. 374-4] FNF tendered defense of the underlying actions to NU under the terms of the E&O policy. NU reserved its right to contest indemnity and to recoup defense costs as to claims that were not covered or that exceeded the policy limits.
By contrast, the FIB does not provide for defense costs. FNF, however, tendered a claim for indemnification. NU agreed to investigate but reserved its right to contest coverage under the FIB policy, a dispute that led to the instant lawsuit.
To comply with its duty to defend under the terms of the E&O policy and in light of its reservation of rights, NU hired an independent law firm (Miller Starr) to defend FNF in the underlying lawsuits. The Court refers to Miller Starr as " Cumis counsel." See San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984) (holding that an insurance company must hire an independent attorney to represent its insured when the carrier reserves the right to deny coverage at a later date).
In January 2007, FNF asked the two claims adjustors at NU to create a "firewall" between the E&O and FIB claims departments. The FIB claims adjustor (Wolin) agreed. Ex. 3 to Agati Decl. (1/17/07 entry). The E&O adjustor (Stolzenberg) refused but said he would give it his best effort. NU's outside coverage attorney (Stankowski), however, expressly "declined" to establish a firewall. Ex. 29 to Watnick Opp. Decl. [Doc. No. 347-2] NU also said: "As a courtesy, NU will make its best effort to accommodate your request that separation be maintained between and among the claims file and handler in this [E&O] matter and the Financial Institution Bond." Id.
As the underlying lawsuits developed, FNF apprised NU of their status. Because NU was providing a defense under the E&O policy, FNF was required to provide NU with information relevant to the defense of the underlying actions. See Ex. 3 to Agati Reply Decl. (E&O Policy § VI.B; Endorsement 8; Litigation Management Guidelines §§ III.B.1, IV & Attachment A § I.C). In particular, FNF provided NU with the voluminous deposition transcripts of several Chicago Title employees, many of Norton's victims, Norton himself, and two individuals (Medhi and Kaplan), who purchased Crown Point condominiums.
In May 2007, the Jr. Holdaways offered to settle their suit for $19 million. FNF tendered the settlement to NU under the E&O policy. NU replied that it did not have enough information to evaluate the reasonableness of the Jr. Holdaways' offer. Ex. 4 to Agati Reply Decl. (May 23, 2007 letter). [Doc. No. 374-5] NU demanded a "written evaluation or analysis of the Insureds' potential liability and damages" including but not limited to "(1) an analysis [of] the Insureds' view of the factual and legal basis for plaintiffs' claims; (2) an analysis of Insureds' view of the strengths and weaknesses of the defense case." Id. In particular, NU wanted evidence that the Jr. Holdaways' damages arose out their Crown Point investments with Norton. Id. NU stated it would not contribute to claims that were not covered and reminded FNF of the reservation of rights. Id.
In response, Cumis counsel prepared a legal memorandum analyzing the wisdom of settling the underlying lawsuit in light of the "evidence developed in discovery" and the amount of damages "which may potentially be awarded." Id. The June 27, 2007 memorandum is marked "ATTORNEY-CLIENT PRIVILEGE." Ex. 7 to Watnick Opp. Decl. Because this document is filed under seal, the Court will not quote the contents. It is sufficient to note that it contains Cumis counsel's evaluation of whether to settle the Jr. Holdaway lawsuit or instead proceed to jury trial. The Court refers to the document as the "Settlement Evaluation Memorandum."
FNF's outside coverage attorney (Kenna) mailed the Settlement Evaluation Memorandum to NU's outside coverage counsel. Ultimately, NU contributed to the Jr. Holdaway settlement under the E&O policy. Ex. 6 to Agati Decl. [Doc. 318-2] The following year, FNF sued NU for breaching the separate FIB policy. During discovery, NU produced the non-privileged documents from both claims files to FNF.
It appears that the Settlement Evaluation Memorandum lay dormant in NU's E&O file until 2011. See Agati Decl. ¶ 5; Ex. 8 to Agati Decl. (privilege log includes "Miller Starr liability analysis of underlying claims of Holdaway Jr." as protected by attorney-client privilege, work product, and Cal. Civ. Code § 2860). In June 2011, NU reviewed the contents of the E&O file to prepare two senior executives (Tatulli and Smith) for depositions. The parties disagree about the purpose of these depositions, an issue that the Court discusses below. In any event, during the depositions, FNF asked the senior executives about NU's E&O claims investigation. FNF showed the executives several letters from the E&O file. E.g., Ex. 26 to Watnick Opp. Decl. (Tatulli Depo. at 142-53). Most of the letters were written by either NU's or FNF's outside coverage counsel and marked "privileged." E.g., Exs. 29 & 30 to Watnick Opp. Decl. Tatulli repeatedly testified that he had not seen any of these letters before that day. E.g., Ex. 26 to Watnick Opp. Decl. (Tatulli Depo. at 142-53). Notably, FNF did not introduce, quote, or refer to Cumis counsel's Settlement Recommendation Memorandum at any time during the depositions, or at any other time during this litigation.
Thereafter, NU gave the document to its expert witness (Felton). In July 2011, the expert's initial report cited the Settlement Evaluation Memorandum from the E&O file as evidence that the FIB policy's Discovery and Termination provisions protected NU from covering the Norton claims. Ex. 35 to Watnick Opp. Decl. NU also cites the document as evidence in its motion for summary judgment.
Magistrate Judge's Decision
FNF asked the Magistrate Judge to sanction NU for breaching the alleged agreement to establish a firewall between the separate claims files. FNF sought an order to compel NU to return the document, destroy all copies, and preclude the use of the document for any purposes in this litigation. [Doc. No. 318]
The Magistrate Judge agreed with FNF that the Settlement Evaluation Memorandum "constituted a legal opinion of Chicago Title's potential liability in the underlying lawsuit. Thus, it was a confidential communication between client and lawyer pursuant to California's attorney-client statute. Cal. Evid. Code § 917(a)." Order Denying Motion for Sanctions at 4-5. [Doc. No. 395]
The Magistrate Judge agreed with NU, however, "that the privilege was voluntarily waived when the Memo was provided to NU's E&O claims adjuster and its outside counsel during the claims process." Id. at 5.
The Magistrate Judge rejected FNF's argument that it had a legal duty to provide the Memo to its insurer pursuant to California's Cumis statute. Cal. Civil Code § 2860(d). The cooperation paragraph of that statute states:
When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court. Any ...