United States District Court, D. South Carolina, Beaufort Division
CONTRAVEST INC., CONTRAVEST CONSTRUCTION COMPANY, and PLANTATION POINT HORIZONTAL PROPERTY REGIME OWNERS ASSOCIATION, INC., as assignee, Plaintiffs,
MT. HAWLEY INSURANCE COMPANY, Defendant.
C. NORTON UNITED STATES DISTRICT JUDGE.
following matter is before the court on defendant Mt. Hawley
Insurance Company's (“defendant”) objections,
ECF No. 140, to the Report and Recommendation of Magistrate
Judge Mary Gordon Baker (the “R&R”), ECF No.
137, recommending the court grant plaintiffs ContraVest,
Inc., ConraVest Construction Company, and Plantation Point
Horizontal Property Regime Owners Association, Inc.'s
(collectively, “plaintiffs”) motions to compel.
ECF Nos. 103, 105, 106, and 113. For the reasons set forth
below, the court adopts the R&R and grants
plaintiffs' motions to compel.
bring claims for declaratory judgment, bad faith, breach of
contract, and unjust enrichment based on defendant's
refusal to provide benefits allegedly owed under certain
polices of excess commercial liability insurance (the
“excess policies”). Compl. ¶¶ 5, 24-48.
Plaintiff ContraVest Construction Company
(“Contravest”) constructed a development known as
Plantation Point in Beaufort County, South Carolina.
Id. ¶ 1. Defendant provided Contravest with
excess commercial liability insurance from July 21, 2003
until July 21, 2007. Id. ¶ 5. In September
2011, plaintiff Plantation Point Horizontal Property Regime
Owners Association, Inc. (the “Owners
Association”) filed suit against Contravest alleging
that the Plantation Point property was defectively
constructed (the “underlying action”).
Id. ¶¶ 10, 11. After repeated demands from
Contravest, defendant refused to defend, indemnify, or
otherwise participate in the underlying action. Id.
¶ 15. Contravest ultimately settled the underlying
action and assigned the Owners Association all rights and
claims it had against defendant for improperly refusing to
participate in that action. Id. ¶ 18. On
December 22, 2014, plaintiffs filed the instant action in the
Court of Common Pleas for Beaufort County. ECF No. 1. The
action was removed to this court on January 22, 2015.
19, 2015, plaintiffs served their first set of requests for
production, seeking the file on Contravest's claim for
excess coverage in connection with the underlying action (the
“Plaintation Point claim”). ECF No. 117 at 1.
Defendant produced the Planation Point claim file with a
corresponding privilege log on July 6, 2015, and later
supplemented its production with the file's electronic
claim notes and a supplemental privilege log on January 13,
2016. Id. On February 29, 2016, plaintiffs served
their second set of requests for production, this time
seeking defendant's files on all of Contravest's
claims under the excess policies. Id. at 1-2. These
files contain information regarding excess coverage claims
involving other Contravest construction projects that
required defendant to evaluate its exposure as
Contravest's excess insurer. Defendant produced these
files on a rolling basis, providing responsive material and
corresponding privilege logs on May 26, 2016, June 7, 2016,
June 14, 2016, and July 7, 2016. Id at 2-4.
filed four separate motions in connection with this
discovery. On June 24, 2016, plaintiffs filed a motion to
compel material withheld in the May 26, 2016 document
production. ECF No. 103. On June 29, 2016, plaintiffs filed a
motion to compel materials withheld from the January 13,
2016, June 7, 2016, and June 14, 2016 document productions.
ECF No. 105. On July 1, 2016, plaintiffs filed another motion
to compel defendants to comply with their February 29, 2016
requests for production. ECF No. 106. Defendant filed a
consolidated response to these motions on July 18, 2016. ECF
No. 110. Plaintiffs filed yet another motion to compel,
seeking additional documents related to the July 7, 2016
production. ECF No. 113. Defendant filed a response to the
July 7, 2016 motion to compel on August 15, 2016. ECF No.
117. Plaintiffs filed a reply on August 25, 2016. ECF No.
120. The magistrate judge held a hearing on September 19,
2016, and issued the R&R on December 12, 2016. ECF No.
137. Defendant filed objections to the R&R on January 9,
2017, ECF No. 140, and plaintiffs filed a reply on January
20, 2017. ECF No. 141. The matter is now ripe for the
Federal Rule of Civil Procedure 26
Federal Rules of Civil Procedure provide that a party
“may obtain discovery regarding any nonprivileged
matter that is relevant to any party's claim or defense
and proportional to the needs of the case.”
Fed.R.Civ.P. 26(b)(1). “Information within this scope
of discovery need not be admissible in evidence to be
discoverable.” Id. “The court may, for
good cause, issue an order to protect a party or person from
annoyance, embarrassment, oppression, or undue burden or
expense.” Fed.R.Civ.P. 26(c)(1). “The scope and
conduct of discovery are within the sound discretion of the
district court.” Columbus-Am. Discovery Grp. v.
Atl. Mut. Ins. Co., 56 F.3d 556, 568 n.16 (4th Cir.
1995) (citing Erdmann v. Preferred Research, Inc. of
Ga., 852 F.2d 788, 792 (4th Cir. 1988)).
Federal Rule of Civil Procedure 7
to Federal Rule of Civil Procedure 72(a), when a party
objects to the decision of magistrate judge on a
nondispositive matter, the court must determine whether the
magistrate judge's decision was “clearly erroneous
or  contrary to law.” “A court's
‘finding is clearly erroneous when . . . the reviewing
court[, after reviewing all of the evidence] . . . is left
with the definite and firm conviction that a mistake has been
committed.” Wilson v. Jacobs, No.
0:14-cv-4006, 2016 WL 690869, at *1 (D.S.C. Feb. 22, 2016)
(alteration added) (quoting United States v. U.S. Gypsum
Co., 333 U.S. 364, 395 (1948)). “[T]he phrase
‘contrary to law' indicates plenary review as to
matters of law.” Haines v. Liggett Group Inc.,
975 F.2d 81, 91 (3d Cir. 1992).
R&R organized its analysis according to three broad
issues: (1) whether communications in the defendant's
claim files are protected by the attorney-client privilege or
work-product doctrine, (2) the discoverability of information
regarding defendant's reinsurance and reserves, and (3)
whether plaintiffs waived any objection to the privilege logs
produced in connection with the July 6, 2015 document
production.Defendant similarly organizes its
objections by issue, arguing that: (1) the R&R's
attorney-client privilege analysis erred by relying on
City of Myrtle Beach v. United Nat. Ins. Co., No.
4:08-cv-1183, 2010 WL 3420044, at *5 (D.S.C. Aug. 27, 2010),
ECF No. 140 at 6-11; (2) even if it were proper to apply
City of Myrtle Beach, the R&R erred in finding
that plaintiffs made a prima facie showing of bad faith,
id. at 11-20; (3) the R&R erred in finding that
reinsurance information is relevant, id. at 20-21;
(4) the R&R erred in finding that reserve information is
relevant and not subject to the work-product doctrine,
id. at 21-24; (5) the R&R erred in finding that
other information in the claim files was not protected by the
work-product doctrine, id. at 24-25; and (6) the
R&R erred in finding that the plaintiffs did not waive
their objections to the July 6, 2015 privilege log,
id. at 25-27. The court addresses each objection in
At-Issue Waiver in the Bad Faith Context
has claimed that numerous communications in its claim files
are protected by the attorney-client privilege. Defendant
challenges the magistrate judge's evaluation of its
privilege claim, arguing that the magistrate judge erred by
applying City of Myrtle Beach, 2010 WL 3420044, at
*5. Id. at 6-11.
South Carolina law, “[t]he attorney-client privilege
protects against disclosure of confidential communications by
a client to his attorney.” State v. Owens, 424
S.E.2d 473, 476 (S.C. 1992). The privilege consists of the
following essential elements:
(1) Where legal advice of any kind is sought (2) from a
professional legal adviser in his capacity as such, (3) the
communications relating to that purpose (4) made in
confidence (5) by the client, (6) are at his instance
permanently protected (7) from disclosure by himself or by
the legal adviser, (8) except the protection be waived.
Tobaccoville USA, Inc. v. McMaster, 692 S.E.2d 526,
529-30 (S.C. 2010) (quoting State v.
Doster, 284 S.E.2d 218, 219-20 (S.C. 1981)). South
Carolina also recognizes that an insured is entitled to
recover damages caused by an insurer's breach of the
covenant of good faith and fair dealing when the insured
(1) the existence of a mutually binding contract of insurance
between the plaintiff and the defendant; (2) a refusal by the
insurer to pay benefits due under the contract; (3) resulting
from the insurer's bad faith or unreasonable action in
breach of the implied covenant of good faith and fair dealing
arising under the contract; (4) causing damage to the
Founders Ins. Co. v. Richard Ruth's Bar & Grill
LLC, No. 2:13-cv-03035-DCN, 2016 WL 3219538, at *5
(D.S.C. June 8, 2016).
attorney was involved in the insurer's decision to deny
coverage, much of the information relevant to a
plaintiff's bad faith claim may fall under the scope of
the privilege. The fact that the attorney-client privilege
covers relevant information is, in and of itself, no reason
to abrogate the privilege. The entire purpose of the
privilege is to preclude discovery of otherwise relevant
information in an effort to promote “a relationship
between the attorney and the client whereby utmost confidence
in the continuing secrecy of all confidential disclosures
made by the client within the relationship is
maintained.” Doster, 284 S.E.2d at 219.
However, not every communication that falls within the
ordinary scope of the privilege is entitled to protection.
Id. at 220. “The public policy protecting
confidential communications must be balanced against the
public interest in the proper administration of
justice.” Id. These policy concerns have led
some courts to restrict the availability of the privilege in
bad faith cases. In fact, some states have determined that
the privilege is simply inapplicable in bad faith cases.
E.g. Boone v. Vanliner Ins. Co., 744 N.E.2d 154, 158
(Ohio 2001) (“[I]n an action alleging bad faith denial
of insurance coverage, the insured is entitled to discover
claims file materials containing attorney-client
communications related to the issue of coverage that were
created prior to the denial of coverage.”).
City of Myrtle Beach court determined that South
Carolina law favors a different approach. As the magistrate
[T]he City of Myrtle Beach decision . . . addressed
the application of the attorney-client privilege in bad faith
actions. The court first emphasized South Carolina's
requirement that the proponent of the privilege establish the
absence of waiver.  Drawing support from the “widely
accepted approach” in Hearn v. Rhay, 68 F.R.D.
574, 581 (E.D. Wash. 1975), the court held that “if a
defendant voluntarily injects an issue in the case, whether
legal or factual, the insurer [voluntarily] waives,
explicitly or impliedly, the attorney-client
privilege.” Id. Applying this test to the
plaintiff's motion to compel, the court found that the
defendant insurer injected a number of issues into the case
through its answer and affirmative defenses, but had not
shown that these issues did not waive the privilege.
Id. at *7. The court specifically noted that even
though the defendant did not contend that it reasonably
relied on the advice of counsel, defendant still bore the
burden of disproving waiver. Id.
In reaching its conclusion, the City of Myrtle Beach
court made one other significant finding: “that the
City has presented a prima facie case of bad faith.”
City of Myrtle Beach, 2010 WL 3420044, at *7. To
understand the function of the prima facie requirement, one
must first understand the predicament a defendant insurer
faces in a bad faith action. Because any defendant insurer
who opposes a bad faith claim is almost forced to assert its
own good faith, the City of Myrtle Beach approach
makes it rather difficult for a defendant to avoid waiver.
The City of Myrtle Beach court even recognized that
its “ruling amount[ed] to a virtual per se
waiver of the privilege.” The prima facie showing
requirement serves to constrain this effect and prevent
automatic waiver whenever a plaintiff brings a bad faith
claim. Though the City of Myrtle Beach court did not
explain the significance of this finding in detail, the
Hearn decision on which it relied supports this
understanding of the doctrine. Recognizing the damage the
proposed exception could do to the attorney-client privilege,
the Hearn court held that “[a] substantial
showing of merit to plaintiff's case must be made before
a court should apply the exception to the attorney-client
privilege defined herein.” Hearn, 68 F.R.D. at
R&R at 14-15. The R&R went on to apply City of
Myrtle Beach and found that the documents at issue in
this case were not protected by the privilege. Id.
argues that the City of Myrtle Beach decision has
been displaced by South Carolina Supreme Court Justice Costa
Pleicones's concurrence in Davis v. Parkview
Apartments, which criticized Hearn-the case
that announced the basic approach adopted in City of
Myrtle Beach-as inconsistent with the well-established
rule that waiver of the attorney-client privilege must be
“unequivocal” and “implied waiver should be
treated with caution.” 762 S.E.2d 535, 549 (S.C. 2014),
reh'g denied (S.C. Sept. 11, 2014). The R&R
rejected defendant's reliance on the Davis
concurrence on the grounds that (1) it was not a controlling
decision and (2) other courts in this district have applied
City of Myrtle Beach without hesitation. R&R at
are both good reasons to reject the Davis
concurrence. A federal court sitting in diversity
jurisdiction must apply the law of the state's highest
court-here, the Supreme Court of South Carolina. Private
Mortg. Inv. Servs., Inc. v. Hotel & Club Assocs.,
Inc., 296 F.3d 308, 312 (4th Cir. 2002). Where the
state's highest court has not spoken on an issue, the
court must predict how the court would rule. Id. In
making this prediction, the court may consider
all available legal sources, including restatements of the
law, treatises, law review commentaries, decisions from other
jurisdictions whose doctrinal approach is substantially the
same, and the majority rule. The court may also consider well
considered dicta, and recent ...