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Muhler Company Inc. v. State Farm Fire & Casualty Co.

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

June 10, 2019

THE MUHLER COMPANY, INC., individually and as assignee of Window World of North Charleston, LLC, Plaintiff,



         This matter is before the court on defendant State Farm Fire & Casualty Co's (“State Farm”) motion to reconsider or for clarification, ECF No. 37. In addition, the court previously granted in part and denied in part Muhler's motion to compel based on attorney-client privilege issues, and it now considers the remaining portion of the motion to compel based on the work product doctrine pursuant to State Farm's supplemental briefing, ECF No. 38. For the reasons set forth below, the court grants the motion to reconsider or for clarification and further grants in part and denies in part the remaining portion of the motion to compel.

         I. BACKGROUND

         The relevant facts of this case can be found in the court's previous order on Muhler's motion to compel. ECF No. 36. Muhler filed its second motion to compel on February 12, 2018. ECF No. 26. State Farm opposed the motion, citing attorney-client privilege and work product doctrine. ECF No. 27 at 1. The court granted in part and denied in part the motion to compel on September 25, 2018, identifying which documents were or were not subject to attorney-client privilege. ECF No. 36 at 13-18. The court also instructed State Farm to submit supplemental briefing on the documents that it withheld on the basis of the work product doctrine because despite raising the protection of the work product doctrine, neither party substantively argued why the documents were or were not protected by the work product doctrine.

         State Farm submitted its supplemental brief on November 7, 2018. ECF No. 38. On the same day, State Farm also filed a motion for reconsideration or for clarification. ECF No. 37. Muhler responded to both the supplemental brief and the motion on December 12, 2018. ECF No. 41. State Farm replied to both on January 4, 2019. ECF No. 44. On April 5, 2019, the court issued an order taking the motion to reconsider under advisement and requesting supplemental briefing on an issue raised in the motion to reconsider. ECF No. 47. Muhler submitted a supplemental brief on April 18, 2019. ECF No. 50. State Farm responded on May 1, 2019, ECF No. 51, and Muhler replied on May 8, 2019, ECF No. 52. Now the motion to reconsider or for clarification and the remaining portion of the motion to compel are ripe for review.


         A. Motion to Reconsider or for Clarification

         In its motion for reconsideration or for clarification, State Farm raises two main issues. First, State Farm argues that the court improperly raised the at-issue exception to attorney-client privilege sua sponte and reserved its ruling on documents that may be subject to the exception.[1] Second, State Farm contends that it is unclear over which documents the court reserved its ruling. Based on Muhler's response to this argument and upon further review of the issue, the court determined that it needed Muhler to clarify whether or not Muhler was actually contesting the privilege of documents containing communication between State Farm and its coverage counsel, which would implicate the at-issue exception. The source of this uncertainty is explained in greater detail in the court's April 5, 2019 order, but in short, the uncertainty was based on Muhler challenging entries in State Farm's privilege log that contained communication between State Farm and its coverage counsel.

         In supplemental briefing, Muhler subsequently clarified that it does not challenge the claimed attorney-client privilege between State Farm and its coverage counsel. Muhler explained that it inadvertently included two of the privilege log entries containing these communications in its list of challenged entries. Muhler also explained the other entries containing communications with coverage counsel that it challenged were not meant to challenge the portions of the document containing that communication. Muhler went on to explain that it “was and is amenable to the Court's inquiry” into the at-issue exception, ECF No. 50 at 2; however, because Muhler does not challenge the privilege of communication between State Farm and its coverage counsel, the court declines to consider the application of the at-issue exception here. As a result, the court vacates the portion of its September 25, 2018 order discussing the at-issue exception, and State Farm need not produce privilege log entries 85, 154, and the portions of entries 4, 11, 16, 17, 19, 28, 29, 32, 35, 38, 42, 44, 47, 48, 212, 246, and 250 that contain communications with State Farm's coverage counsel.

         B. Work Product Doctrine

         State Farm asserts that various documents for which Muhler seeks to compel production are protected by the work product doctrine. Federal law governs the work product doctrine. State Farm Fire & Cas. Co. v. Admiral Ins. Co., 225 F.Supp.3d 474, 483 (D.S.C. 2016). The doctrine protects from discovery any “documents and tangible things that are prepared in anticipation of litigation or for trial by or for [a] party or its representative (including the . . . party's attorney, consultant, surety, indemnitor, insurer, or agent).” Fed.R.Civ.P. 26(b)(3)(A). The party claiming work product protection has the burden of establishing entitlement to the protection. In re Martin Marietta Corp., 856 F.2d 619, 626 (4th Cir. 1988).

         “The application of the work product doctrine is particularly difficult in the context of insurance claims.” Kidwiler v. Progressive Paloverde Ins. Co., 192 F.R.D. 536, 541-42 (N.D. W.Va. 2000). “[I]nsurance companies have a duty to investigate, evaluate, and adjust claims made by their insureds. The creation of documents during this process is part of the ordinary course of business of insurance companies, and the fact that litigation is pending or may eventually ensue does not cloak such documents with work-product protection.” HSS Enters., LLC v. Amco Ins. Co., 2008 WL 163669, at *4 (W.D. Wash. Jan.14, 2008) (internal citation omitted). “Because an insurance company has a duty in the ordinary course of business to investigate and evaluate claims made by its insureds, the claims files containing such documents usually cannot be entitled to work product protection.” Pete Rinaldi's Fast Foods, Inc. v. Great Am. Ins. Cos., 123 F.R.D. 198, 202 (M.D. N.C. 1988); see also St. Paul Reinsurance Co. v. Commercial Fin. Corp., 197 F.R.D. 620, 636 (N.D. Iowa 2000) (“[A]n insurer's investigation of whether coverage exists is required and the conduct of that much of its investigation is assuredly in the ordinary course of its business, not ‘in anticipation of litigation.'”).

         For the work product doctrine to apply in the insurance context, “[t]he document must be prepared because of the prospect of litigation when the preparer faces an actual claim or a potential claim following an actual event or series of events that reasonably could result in litigation.” Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992). Indeed, “insurance claim files generated in relation to investigating and defending against third-party claims are generally considered work-product because they were clearly prepared for the purposes of the underlying litigation, rather than in the insurer's ordinary course of business.” Smith v. Scottsdale Ins. Co., 40 F.Supp.3d 704, 720 (N.D. W.Va. 2014), aff'd, 2014 WL 4199207 (N.D. W.Va. Aug. 22, 2014), and aff'd, 621 Fed.Appx. 743 (4th Cir. 2015). The proponent of work product protection must establish that the “driving force behind the preparation of each requested document” is the prospect of litigation. Id. An insurer may claim the protection of work product doctrine without the existence of an attorney-client relationship. State Farm Fire & Cas. Co., 225 F.Supp.3d at 483.

         There are two types of work product: fact work product and opinion work product. In re Allen, 106 F.3d 582, 607 (4th Cir. 1997). “Fact work product can be discovered upon a showing of both a substantial need and an inability to secure the substantial equivalent of the materials by alternate means without undue hardship.” In re Grand Jury Proceedings, Thursday Special Grand Jury Sept. Term, 1991, 33 F.3d 342, 348 (4th Cir. 1994). In contrast, opinion work product “is even more scrupulously protected as it represents the actual thoughts and impressions of the attorney.” Id.

         State Farm argues that certain documents contain both opinion and/or fact work product and therefore protected by the work product doctrine. In response, Muhler argues that the documents should be produced pursuant to two exceptions. First, Muhler argues that in the context of bad-faith insurance litigation, opinion work product is not protected because the mental impressions of counsel are at issue. In the alternative, Muhler argues that State Farm's documents that contain fact work product should be produced because Muhler has a substantial need for them and there is no substantial equivalent to these documents. The court finds that neither exception applies here.

         a. At-Issue Exception to Work Product Doctrine

         “[O]pinion work product enjoys a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances.” In re Allen, 106 F.3d at 607 (internal quotations omitted). The Fourth Circuit declined to recognize an exception for discovery of opinion work product from an earlier, terminated lawsuit that contained an “operative fact” in a subsequent lawsuit, or in other words, a general at-issue exception to work product protection. Duplan Corp. v. Moulinage et Retorderie de Chavanoz, 509 F.2d 730, 735 (4th Cir. 1974); see also Washington v. Follin, 2016 WL 1614166, at *14 n.37 (D.S.C. Apr. 22, 2016) (explaining that the Fourth Circuit has not recognized the at-issue exception to the work product doctrine). However, since Duplan, some district courts within the Fourth Circuit have permitted discovery of opinion work product under the at-issue exception in bad faith insurance actions. See Charlotte Motor Speedway, Inc. v. Int'l Ins. Co., 125 F.R.D. 127, 131 (M.D. N.C. 1989) (applying the at-issue exception for settlement documents that were claimed as work product because whether the insurance company reached the settlement agreement in good faith was directly in issue); MAG Mut. Ins. Co. v. Brown, 2015 WL 13648556, at *15 (D.S.C. July 24, 2015) (“Courts have held that when the activities of counsel are directly at issue in a case, documents relevant to those activities are discoverable, even though they are work product.”); Liberty Mut. Fire Ins. Co. v. J.T. Walker Indus., Inc., 2010 WL 1345287, at *9 (D.S.C. Mar. 30, 2010), modified, 817 F.Supp.2d 784 (D.S.C. 2011) (ordering production of “internal opinion work product to the extent it is relevant to MI Window's bad faith claim”).

         For example, in Charlotte Motor Speedway, Inc., Charlotte Motor Speedway entered into a directors' and officers' liability insurance policy with the defendant. 125 F.R.D. at 128. Charlotte Motor Speedway subsequently merged with another company, and the resulting entity was the plaintiff. Minority shareholders objected to the merger and filed a federal securities action and state court appraisal action against Charlotte Motor Speedway and several others who were involved in the merger. The plaintiff subsequently settled the two shareholder actions and then brought an action against the defendant to recover the amount paid in settlement and defense of the actions. The defendant contested whether it was obligated to do so and sought discovery of opinion work product relevant to the settlement agreement. Id. at 129. The U.S. District Court for the Middle District of North Carolina agreed that the opinion work product should be produced because “the discovery of the nature of these activities of counsel goes to whether [the plaintiff] met its obligations under the Policy in constructing the settlement agreement and whether it reached the agreement in good faith.” Id. at 130. The court distinguished Duplan by explaining that “the activities and advice of counsel was not an issue in . . . Duplan. In the instant case, the activities and advice of Plaintiff's counsel in the settlement of the underlying action are inextricably interwoven with the issue of International's liability under the Policy.” 125 F.R.D. at 130. Other courts that have applied the at-issue exception have done so when the party claiming work product protection relies or represents that it is going to rely on the work product in proving its claim. See, e.g., Liberty Mut. Fire Ins. Co., 2010 WL 1345287, at *9 (finding that ...

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