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Contravest Inc. v. Mt. Hawley Insurance Co.

United States District Court, D. South Carolina, Beaufort Division

March 31, 2017




         The 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.[1] For the reasons set forth below, the court adopts the R&R and grants plaintiffs' motions to compel.

         I. BACKGROUND

         Plaintiffs' 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. Id.

         On May 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.

         Plaintiffs 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 court's review.

         II. STANDARD

         A. Federal Rule of Civil Procedure 26

         The 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)).

         B. Federal Rule of Civil Procedure 7

         Pursuant 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).


         The 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.[2]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 turn.

         A. At-Issue Waiver in the Bad Faith Context

         Defendant 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.

         Under 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 shows:

(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 insured.

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).

         When an 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.”).

         The City of Myrtle Beach court determined that South Carolina law favors a different approach. As the magistrate judge explained:

[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 582.

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. at 15-19.

         Defendant 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 18-19.

         These 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.[3] 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 ...

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