| Latest News |
|---|
| Login Form |
|---|
| Archive |
|---|
| Protesting Insurer Protective Orders | | Print | |
| Written by Clint Miller | |
|
Link to Article Defendants in insurance bad-faith cases will try to prevent you and similarly situated counsel from sharing documents. Don’t let them get away with it. Charles m. Miller A few years ago, lawyers defending insurance companies in bad-faith cases began insisting on protective orders before producing any documents concerning a company’s claims operation. They argued that documents such as claims manuals, personnel files, compensation information, or any materials related to how a company runs its claims operation are trade secrets and that the insurer would suffer a serious competitive disadvantage if this information got into the hands of competitors. Over time, courts have become more and more willing to issue a protective order without any consideration of its merits or justification. Today, it is common for defense counsel in bad-faith cases to request protective orders and for courts to grant them.1 Plaintiff lawyers representing policyholders frequently agree to these orders. The reasoning is simple: Why should a plaintiff lawyer get involved in a protracted discovery battle over a protective order when it is more efficient to agree to the proposed order and get the documents? Or why get involved in a battle over a protective order when such an order might be negotiated as part of a favorable settlement for the policyholder? Before doing so, the lawyer should consider whether such an order is justified. The purpose of this article is to discuss why such orders may not be supported in the law or in fact. Unless the case involves unusual or extraordinary facts, it may be detrimental for plaintiff attorneys to agree to the types of protective orders that insurance defense lawyers commonly request because they prevent the sharing of information between similarly situated counsel. If you have an action against an insurance company and agree to a protective order so that you may obtain critical documents concerning that company’s claims operation, the protective order is likely to provide that you may not use those documents in your other cases against the same insurer or share them with other plaintiff lawyers who also have actions against it. This not only increases litigation costs, but it also makes it harder for plaintiffs to obtain the documents. The insurance industry benefits—not so much because it is protected against competitors, but because litigation against it is made that much more difficult. It is well established that the party seeking a protective order to prevent the disclosure of discovered documents has the burden of demonstrating that “good cause” exists for the order. 2 Good cause is established by showing that disclosure will cause a clearly defined and serious injury to the party seeking the order. The party must show the injury with specificity; broad allegations of harm, unsubstantiated by specific examples or articulated reasoning, will not support a finding of good cause. Some courts have applied a general balancing test when considering whether to grant a protective order: [T]he court . . . Must balance the requesting party’s need for information against the injury that might result if uncontrolled disclosure is compelled. When the risk of harm to the owner of [a] trade secret or confidential information outweighs the need for discovery, disclosure [through discovery] cannot be compelled, but this is an infrequent result. Once the court determines that the discovery policies require that the materials be disclosed, the issue becomes whether they should “be disclosed only in a designated way,” as authorized by the last clause of rule 26(c)(7) . . . . Whether this disclosure will be limited depends on a judicial balancing of the harm to the party seeking protection (or third persons) and the importance of disclosure to the public. Courts also have a great deal of flexibility in crafting the contents of protective orders to minimize the negative consequences of disclosure and serve the public interest simultaneously. Whether the courts use a balancing test or simply impose a burden of proof, protective orders generally have been disfavored. An insurance company seeking a protective order must overcome this hurdle to achieve protection for its documents. Whether it can meet this burden often depends on whether it can show that its claims-handling policies and procedures deserve trade secret protection. Roadblocks to secrecy insurance companies commonly request protective orders that contain two critical components. First, the order prohibits the plaintiff’s lawyer from sharing any of the documents designated as confidential with anyone other than parties involved in the case. Second, the order gives the insurer the unilateral right to decide what documents will be designated confidential and, therefore, subject to the protective order. Critically, the insurer’s designation of documents as confidential is not subject to court review unless you challenge that designation within a specified time period. An insurance company seeking a protective order for trade secret protection will commonly argue that, if the requested protective order is not granted, the company will suffer a competitive disadvantage because other insurers will then have access to the company’s claims-handling policies and procedures and may be able to obtain economic value from the disclosure. ortunately, this argument runs into some major roadblocks. Burden of proof. The first roadblock lies in the definition of a trade secret itself. “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. A trade secret can lose protected status under certain circumstances: [T]rade secrets will lose their character as private property when the owner divulges them or when they are discovered through proper means. It is well recognized that a trade secret does not offer protection against discovery by fair and honest means such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is, starting with the known product and working backward to divine the process. To show a court that its documents deserve trade secret protection, an insurance company must present evidence that it derives economic value from them. Insurers frequently offer declarations from their employees in an attempt to meet this burden. These employee declarations, however, often are merely general statements alleging that, if the requested documents are made available to the public, the company’s competitors will gain some undefined competitive advantage. Such declarations are insufficient to establish trade secret protection. Rather, for each particular document it seeks to protect, the insurance company has the burden of showing that “specific prejudice or harm will result if no protective order is granted,” by providing “specific demonstrations of fact, supported where possible by affidavits and concrete examples, rather than broad, conclusory allegations of potential harm.” Accordingly, you should insist that the insurance company meet its burden of proof with regard to each document it proposes to protect. Without such proof, the protection should not be granted. Documents obtained outside the litigation. The second roadblock that an insurance company may face is that usually some of the company’s written claims-handling policies and procedures have already seen the light of day. In other words, the trade secret status of the insurer’s documents may have been lost because they have been made generally available. An insurance company’s documents may not be subject to protection when the insurer disclosed the documents previously without seeking a protective order, a court heard the insurer’s arguments seeking a protective order and rejected them, or the insurer voluntarily exchanged information with other insurers regarding its claims-handling practices and procedures. Where the insurer has voluntarily exchanged its information, it has waived any trade secret protection. For example, consider the conduct of a former ceo of farmers group, inc., During a presentation to employees, in which he talked about a program to reengineer the company’s claims operations: We conducted a study of what we perceived were the top companies in the united states today that have effective claims operations. Look at the list [of companies] . . . . It’s an enviable group. It’s great to just be among them. But we needed to understand them before we could understand ourselves. And literally, we received permission to go and visit each of these companies. And a staff of people actually went to these companies, sat down with their claims people to understand their strategies, their technology, where they’re headed. These comments illustrate that insurance claims operations are not castles surrounded by high walls and a moat but rather are porous organizations. Insurers exchange information among themselves regarding their claims operations and should not receive trade secret protection for the information they share. Recently, the Colorado supreme court rejected an attempt by an insurance company to impose a protective order on documents that were obtained outside the pending case and that therefore were not subject to protective order. The court observed that it has been held that the court may not issue an order limiting a party in the use it may make of information not acquired under the discovery rules, even though had the same information been sought through discovery the opposing party would have been entitled to a protective order. Indeed, in interpreting federal rule of civil procedure 26(c)(7), federal courts have routinely limited the scope of the rule to materials acquired solely as a result of discovery in the pending case. And documents that have been introduced at trial also may not be subject to a protective order. Thus, plaintiff lawyers should think twice about agreeing to any proposal that a protective order apply to documents obtained outside the pending litigation. Public documents. Another roadblock to trade secret protection is that some insurer documents are available to the public and subject to public scrutiny. Insurance companies are heavily regulated by the states, and they may not have trade secret protection as a result of that regulated status. Under most state insurance codes, the state insurance department is charged with performing market-conduct examinations, which often include a review of the insurance company’s claims operation. The national association of insurance commissioners (naic) market regulation handbook directs the reviewing agency to inspect “claim procedure manuals, adjuster training manuals, and claim bulletins.” A state insurance department also will review an insurer’s claims operations, including its claims-procedures manuals and guidelines, to determine whether it complies with the naic model unfair claims settlement practices act (model act), which expressly provides that it is an unfair claims practice to fail “to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under [the insurer’s] policies.” For example, under the model act, the naic multistate market conduct examination report of the state farm insurance group, which covered the years between 1990 and 2000, reported that state farm provided approximately 143,000 pages of documents in response to [the participating] states’ initial and supplemental requests for information and documents. In addition, 832 claim files, claims newsletters, 37 personnel files, 30+ training or other videos and information requested as a part of the on-site examination [were] received in varying formats. The review of such documents by insurance commissioners frequently becomes public record. In other words, an insurer’s internal claims-handling policies and procedures are not only subject to review by a state agency but may also become available to the public generally. Insurers cannot reasonably contend that release of their claims-handling policies and procedures will be detrimental when those same documents are subject to public review and disclosure as a result of market-conduct examinations. Similarly situated counsel if you decide that a protective order is necessary, the order should permit sharing of documents among similarly situated counsel. Several federal courts have held that a defendant is not entitled to a protective order merely to protect discovery from being shared among litigants or potential litigants. Orders permitting the sharing of documents are strongly favored because they preserve judicial resources by eliminating the need for the same discovery to take place in each separate case involving the same defendant. As one court noted: [W]hen litigants seek to use discovery in aid of collateral litigation on similar issues . . . Access in such cases materially eases the tasks of the court and litigants and speeds up what may otherwise be a lengthy process . . . . [W]e are impressed with the wastefulness of requiring the [collateral party] to duplicate discovery already made. The sharing of documents among similarly situated counsel is often critical in insurance bad-faith cases. Such cases might require evidence of the insurer’s pattern and practice of wrongfully denying claims in order to prove bad faith or support a claim for punitive damages. The ability to meet this burden may be unreasonably limited if documents cannot be shared among similarly situated counsel. If you think a defendant will successfully seek a protective order, consider proposing one early in the litigation and before the defense offers its own. The insurer is likely to reject a proposed order that contains a provision allowing sharing of documents among similarly situated counsel. Nonetheless, the fact that you suggested one may put you and the policyholder in a more positive light when the issue is brought before the court. Instead of being viewed as a roadblock to discovery, you have a better chance of being seen as the party that wishes to facilitate it. Protective orders proposed by insurance companies have become an impediment to cost-effective and efficient discovery in insurance bad-faith litigation. To prevent them from unnecessarily burdening the discovery process, you should argue either that the insurance company’s claims-handling policy and procedure documents are already in the public domain or that the insurer cannot meet its burden of proof regarding the harm it will allegedly suffer if the order is not granted. If, however, the court deems that an order is necessary, you should strive to have it include an explicit provision for sharing documents among similarly situated counsel. A former insurance claims representative and manager, charles m. Miller practices law in berkeley, california. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it © 2007, Charles m. Miller. Webmaster's Comments: I have spoken against this for years. Not only do protective orders hide the truth and distort justice, but judges wrongfully grant Vacatur, which literally erases the entire court record, thus destroying our precedential system. It is no coincidence that appellate judges get free vacations to posh resorts and huge "speaking" fees from corporations. See http://www.tripsforjudges.com There were a lot of notes in this article that I removed for brevity. If you want it in its entirety, go to the Article Link above. |
| < Prev | Next > |
|---|