A recent ruling from a federal court in Arizona offers a lesson on the consequences of discovery abuse: The court imposed severe sanctions on an insurer for wrongfully withholding documents requested in discovery.

The case of Sell v. Country Life Insurance Co., 2016 WL 3179461 (D. Ariz., June 1, 2016), involved a claim for disability insurance benefits. Although the insured had undergone three back surgeries, Country Life tried to limit its exposure by characterizing the claim as psychiatric, which would limit the duration of benefit payments to 24 months. A few months later, benefits were denied altogether. The claimant, Brian Sell, then sued Country Life for breach of contract and insurance bad faith.

In the course of discovery during the litigation, Sell’s counsel requested production of all documents referencing the insured, his policy or his claim. Other than the claim file, which was provided, the insurer maintained there were no other responsive documents.

However, as discovery progressed, the defendant produced a redacted draft denial letter, along with a privilege log asserting that the redacted portion of the letter contained “the mental thoughts, impressions and/or work product information prepared by, or on behalf of, defendant’s attorneys.”

Country Life later produced additional records that included four e-mails between the adjuster, the supervisor and a claims attorney, the content of which was redacted based on the assertion of privilege claims. One of the e-mails had the draft denial letter attached.

The plaintiff challenged the assertion of privilege, and after reviewing the original document and holding an evidentiary hearing, the court concluded that the defendant failed to demonstrate the challenged e-mails were exchanged for the purpose of providing or securing legal advice.

The court deemed the privilege claims frivolous. The court revealed that the redaction on the draft claim denial letter was the claim adjuster’s note to a claims attorney, stating, “Rob I don’t want to sign this.” The court held that “under no reasonable application of the attorney-client privilege or the attorney work product protection is [the adjuster’s] statement protected.”

The court explained that privilege may only be invoked if the communication is made in confidence to or from a lawyer “for the purpose of securing or giving legal advice.” The court emphasized that merely because a communication is made to a lawyer does not make it privileged.

Hence, the court concluded, “Even under the most tortured interpretation, [the adjuster’s] statement cannot be construed as a request for legal advice. Nor is there any basis to claim it constitutes attorney work product. It is simply an assertion by [the adjuster] that she did not want to sign the draft denial letter – nothing more.”

The court also revealed the contents of an e-mail in which the adjuster explained the basis for her objection to signing the denial letter and rejected the privilege assertion as to that document as well, finding:

“[The adjuster’s] inquiry at the end of the e-mail (‘Do we really want to deny claim?’) is clearly not asking for legal advice but is instead asking why, based on the evidence in this case, the claim is being denied. It is not a ‘communication[ ] seeking legal advice regarding policy terms’ or a ‘communication[ ] seeking legal compliance review for outgoing correspondence,’ as defendants contended in their briefing to the court.”

The court further concluded that the adjuster presented false testimony at her deposition and at the hearing, remarking, “Instead of testifying in her deposition or at the evidentiary hearing that she maintained her disagreement with the decision to terminate plaintiff’s benefits, which arguably would have bolstered plaintiff’s bad faith claim, [the adjuster] and her lawyers embarked on a path of misleading and deceiving testimony and arguments to plaintiff and this court.”

The court likewise found the supervisor gave false testimony. In addition, the court deemed the defendant’s document retention policy deficient, observing that it “fails to preserve substantial quantities of relevant and discoverable communications regarding the handling of claims. Moreover, the system creates incentives to exclude from the claim file any e-mail communications that could potentially harm defendant’s position in subsequent litigation.”

The court thus ruled that the evidence revealed “a concerted effort to wrongfully withhold evidence, misrepresent the facts and mislead plaintiff and the court to comport with defendant’s and counsels’ false narrative. Defendant and its counsel withheld relevant and discoverable evidence by essentially ignoring requests for production of documents and then by frivolously asserting the documents were privileged.

“They misrepresented the facts surrounding their conduct during discovery by asserting they had conducted reasonable searches in response to plaintiff’s requests when they had not. They misrepresented the facts of the case by redacting highly relevant information and making false assertions of privilege.

“They then presented false deposition and hearing testimony to align with their fabricated account of what occurred. By doing so, defendant and counsel sought to prevent plaintiff and the court from learning the truth about the circumstances surrounding the termination of plaintiff’s disability claim, thereby misleading plaintiff and the court into accepting their narrative.”

Based on that finding, the court entered a default judgment on the plaintiff’s claims “given the nature of the misconduct, and the fact that it was an organized effort among multiple participants to deceive.”

The narrative and findings made here are shocking and because of the extent and scope of the misconduct, key portions of the court’s discussion have been quoted verbatim.

This ruling will undoubtedly trigger efforts in other cases to obtain discovery of e-mails and draft denial letters, along with challenges to assertions of privilege since this ruling raises a legitimate concern as to whether this was an isolated incident or may occur with greater frequency.

The most unfortunate part of what occurred here, though, is that a deserving claimant has been without benefits for four years based on an insurer’s concerted efforts to obstruct a legitimate claim rather than fulfill its contractual obligation to its insured.

This article was initially published in the Chicago Daily Law Bulletin.

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