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American States Insurance Co. v. Insurance Co. for State of Pennsylvania

United States District Court, E.D. California

January 15, 2015

AMERICAN STATES INSURANCE COMPANY, Plaintiff,
v.
INSURANCE COMPANY FOR THE STATE OF PENNSYLVANIA, Defendant.

ORDER

ALLISON CLAIRE, Magistrate Judge.

On January 7, 2015, the court held a hearing on plaintiff's motion for a protective order. Lisa Pan appeared telephonically on behalf of plaintiff American States Insurance Company and Frank Kaplan appeared on behalf of defendant Insurance Company for the State of Pennsylvania. On review of the motions, the documents filed in support and opposition, upon hearing the arguments of plaintiff and counsel, and good cause appearing therefor, THE COURT FINDS AS FOLLOWS:

FACTUAL BACKGROUND

In February 2007, Sierra Pacific Industries ("Sierra") took part in and won a bid to participate in a timber harvesting operation in Plumas County, California (hereinafter the "Timber Project"). ECF No. 59 at 2. Sierra then hired Eunice Howell, dba Howell's Forest Harvesting ("Howell"), to perform timber harvesting operations for the Timber Project. Id. at 3. Sierra and Howell entered into an agreement to that effect on March 15, 2007 ("Logging Agreement"). Id . The Logging Agreement required that Howell purchase insurance at its own expense for the agreement's duration. Id.

Plaintiff issued a commercial insurance policy to Howell effective July 5, 2007 to July 5, 2008 (the "American Policy"). Id. at 4. Insurance Company for the State of Pennsylvania ("ISOP" or "Defendant") issued a commercial policy to Sierra, with an effective policy period of October 31, 2006 to October 31, 2007 (the "ISOP Policy"). Id. at 5. The ISOP Policy states, in relevant part: "We will pay on behalf of the insured those sums in excess of the Retained Limit that the insured becomes legally obligated to pay by reason of liability imposed by law or assumed by the insured under an insured contract...." Id. at 6-7. The ISOP Policy also states that ISOP will defend claims seeking damages covered by the terms of the policy when

b) [d]amages are sought for bodily injury, property damage, personal injury or advertising injury covered by this Policy but not covered by any underlying insurance listed in the Schedule of underlying insurance or any other underlying insurance providing coverage to the insured....

Id. at 7. Further, the policy states

2. When we assume the defense of any claim or suit:
a) We will defend any claim or suit against the insured seeking damages on account of bodily injury, property damage... even if such claim or suit is groundless, false of fraudulent, but we have the right to investigate, defend and settle the claim or suit as we deem expedient.

Id.

On September 3, 2007, "the Moonlight Fire" ignited in or near the Plumas National Forest in Greenville, California, burning approximately 65, 000 acres in the area. Id . At the time of the Moonlight Fire, two Howell employees were allegedly operating bulldozers on private property in the area. Id . A number of lawsuits were subsequently filed against Sierra, Howell, and other landowners by a variety of plaintiffs for conduct arising out of the Moonlight Fire in this court and Plumas County Superior Court. Id. at 9-11. On or before August 2009 Sierra retained Downey Brand LLP ("Downey Brand") to defend it in these actions. Id. at 9. Sierra then tendered its defenses to plaintiff under the American Policy. Id. at 11. Although plaintiff agreed to Sierra's proposed defenses it attempted to retain alternative counsel for Sierra. Id . Sierra refused to work with alternative counsel and instead continued retaining Downey Brand. Id. at 9-10. Sierra thereafter tendered its defenses to ISOP, which also accepted them without reservation. Id. at 11.

American paid more than $13 million for Sierra's defense in the Moonlight Fire lawsuits through August 17, 2012, including $5, 380, 365.75 in attorneys' fees and $7, 853, 924.94 in expert costs and other expenses. Id . Although plaintiff has requested that ISOP share in the payment of Sierra's defense costs, ISOP has refused. Id . On December 2011, ISOP entered into an agreement with Sierra, whereby ISOP agreed to pay, from approximately October 2011, Downey Brand attorneys' and paralegals' fees at "fifty percent (50%) of a blended rate basis of $300/hour for lawyers and $80/hr for paralegal, but in no event shall ISOP pay more than the difference between the actual blended rate and what [American] pays." Id.

On February 7, 2011, Sierra filed a complaint against plaintiff alleging that it was obligated to provide independent counsel in the Moonlight Fire lawsuits pursuant to California Civil Code ยง 2860 (hereinafter "Coverage Action"). Id. at 12. On August 1, 2011, plaintiff filed a counterclaim seeking a declaration that Sierra's refusal to relinquish control of its defense to plaintiff breached its duties under the American Policy and/or breached the implied covenant of good faith and fair dealing, thereby excusing plaintiff's duty to defend. Id . Plaintiff's counterclaim sought, among other things, reimbursement of some or all of its payments of Sierra's defense costs in the Moonlight Fire lawsuits. Id . While these claims were being litigated plaintiff paid Sierra's defense fees and costs in the Moonlight Fire lawsuits. Id.

On July 17, 2012, the parties in one of the actions against Sierra, United States of America v. Sierra Pacific Industries, et al., Case No. 2:09-CV-02445-JAM-EFB (E.D. Cal. Aug. 31, 2009), filed a settlement agreement (the "Federal Settlement Agreement"). Id. at 13. The Federal Settlement Agreement required that Sierra pay $17 million within sixty (60) days. Id . The Federal Settlement Agreement also required Sierra to pay an additional "$30 million in twice-yearly payments of $3 million each, on January 1 and July 1 every year starting January 1, 2013, until full payment is received, " as well as transfer title of certain land to the United States. Id.

Plaintiff contributed $1 million to the settlement in accordance with the American Policy. Id. at 13. ISOP paid the entire $10 million policy limit of the ISOP Policy to the United States in partial satisfaction of Sierra's obligation under the Federal Settlement Agreement. Id. at 14.

PROCEDURAL BACKGROUND

This action was filed by plaintiff on June 1, 2012, against ISOP. ECF No. 1. The operative complaint is plaintiff's TAC, filed on March 11, 2014, which includes claims for declaratory relief and equitable contribution. ECF No. 59 at 15, 18. ISOP filed an answer on March 24, 2014, arguing that it had no duty to defend Sierra in any of the Moonlight Fire lawsuits and that if it did, that obligation did not arise until Sierra paid $2 million in litigation fees or damages. ECF No. 60 at 8-9, 12. ISOP also argues that plaintiff is judicially estopped from arguing that it provided anything less than full coverage to Sierra because it took the contrary position in the Coverage Action. Id. at 10-11.

On October 6, 2014, plaintiff filed the motion for a protective order presently before the court. ECF No. 64. Plaintiff's motion explains that while the parties have agreed that a protective order should be issued, they disagree over whether the protective order should (1) include an "attorneys' eyes only" designation to protect plaintiff's underwriting policies in this matter, and (2) limit ISOP's ability to inquire into the reasonableness of the defense fees and costs that plaintiff incurred providing a defense to Sierra. Id. at 2. Accordingly, plaintiff requests that the court issue a protective order that includes the foregoing provisions not stipulated to by ISOP. Id. at 7. On November 7, 2014, Frank Kaplan, an attorney for ISOP, filed a declaration attaching a number of exhibits including: (1) a copy of the logging agreement between Sierra and Howell; (2) the protective order issued in the Coverage Action; (3) a copy of select pages from plaintiff's insurance policy issued to Howell; and (4) a copy of plaintiff's amended initial disclosures. ECF No. 66 at 1. On the same day the assistant vice president of AIG Claims, Inc. (the claims administrator for ISOP), James Drake, filed a declaration stating that ISOP has paid approximately $3, 444, 260.84 in legal fees for Sierra's defense and including as an exhibit the agreement between Sierra and ISOP wherein ISOP agreed to indemnify Sierra for its litigation costs in the Moonlight Fire lawsuits and participate in its defense. ECF No. 67 at 1.

On November 7, 2014, the parties filed their joint statement, detailing their attempts to meet and confer and the discovery requests at issue in plaintiff's motion for a protective order. ECF No. 68. On November 10, 2014, Magistrate Judge Delaney recused herself from this matter, resulting in it being reassigned to the undersigned. ECF No. 69. On November 11, 2014, plaintiff filed a notice rescheduling the hearing on its motion for January 7, 2014. ECF No. 70.

LEGAL STANDARDS

The scope of discovery under Federal Rule of Civil Procedure 26(b) is broad: "Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense." Fed.R.Civ.P. 26(b)(1). "Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence." Id . As the Supreme Court reiterated in Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978), relevance "has been construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case." 437 U.S. at 351 (citing Hickman v. Taylor, 329 U.S. 495, 501 (1947)).

However, under Rule 26(c)(1), the court may, for good cause, issue an order to protect a party from "annoyance, embarrassment, oppression, or undue expense or burden, including... that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way" Fed.R.Civ.P. 26(c). Under Rule 26(c), "the party asserting good cause bears the burden, for each particular document it seeks to protect, of showing that specific prejudice or harm will result if no protective order is granted." Foltz v. State Farm Mut. Aut. Ins. Co., 331 F.3d 1122, 1130 (9th Cir. 2003). "Where a business is the party seeking protection, it will have to show that disclosure would cause significant harm to its competitive and financial position. That showing requires specific demonstrations of fact, supported where possible by affidavits and concrete examples, rather than broad, conclusory allegations of harm." Contratto v. Ethicon, Inc., 227 F.R.D. 304, 307 (N.D. Cal. 2005) (citation omitted); see also Beckman Indus., Inc. v. Int'l Ins. Co., 966 F.2d 470, 476 (9th Cir. 1992) (citation omitted). The court is vested with broad discretion to permit or deny discovery. Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir. 2002).

DISCUSSION

I. Background of Dispute

On June 12, 2014, plaintiff provided ISOP a draft stipulated protective order for consideration in this case. ECF No. 68 at 7. On July 30, 2014, plaintiff sent a letter to ISOP inquiring into the status of the draft stipulated protective order. Id . On August 2, 2014, plaintiff served interrogatories and demands for production of documents upon ISOP. Id . On August 11, 2014, ISOP emailed plaintiff a redline draft stipulated protective order, with proposed changes. Id. at 8. On the same day ISOP served requests for admission, interrogatories and demands for production of documents upon plaintiff. Id . On August 15, 2014, the parties conferred by telephone concerning some of ISOP's proposed changes to the draft stipulated protective order, primarily (a) the definition of employee and employees, including who at ISOP may have access to disclosed information; (b) an "attorneys' eyes only" designation for confidential business information; and (c) the parties' obligation upon termination of litigation. Id . On August 20, 2014, plaintiff emailed ISOP as a follow-up to the meet and confer session. Id . On September 19, 2014, the parties further met and conferred regarding (a) the production of Sierra's invoices and billing records subject to ...


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