Bad Faith: Illinois Federal Court Allows Discovery of Insurer’s Financial Incentives

Verdict in excess of limits exposes insurer to discovery of past bad faith claims and excess verdicts, as well as outside counsel fees and in-house incentives.

An Illinois district court, applying federal civil procedure and Illinois law, ordered insurers, American Physicians Assurance Corporation (“APAC”) and American Physicians Capital (“APC”), to comply with certain discovery requests relevant to the insured’s, The Surgery Center at 900 North Michigan Avenue LLC’s (“The Surgery Center”), bad faith claim due to the fact that the insurers did not settle an underlying case within limits when it had the opportunity. The discovery requests focused on bringing to light potential financial incentives the insurers and underlying defense counsel may have had and also on other claims of bad faith or negligence that had been brought against the insurers.

In the underlying case, Gwendolyn Tate sued The Surgery Center after she became a quadriplegic allegedly as the result of complications from a surgery.  APAC was The Surgical Center’s malpractice carrier on a policy with a $1 million limit.  APAC retained the law firm of Lowis & Gellen as defense counsel for the personal injury case.   According to The Surgery Center, defense counsel told APAC that Ms. Tate’s case was weak and that The Surgery Center had a 90% chance of winning.  Shortly thereafter, Ms. Tate made a settlement demand for the $1 million policy limits.  APAC rejected the offer.   Prior to the trial, APAC reminded The Surgery Center that the policy limit was $1 million and that, although it remained confident in the case,  a verdict could be in excess of that and, therefore, The Surgery Center might want to retain independent counsel.  After the trial began, The Surgery Center inquired whether anything could be done to avoid continuing with the trial.  The Surgery Center alleges that neither counsel nor APAC informed it of any other options at that point.  The jury returned a verdict against The Surgery Center for $5.2 million.  The Surgery Center sued the underlying defense firm for legal malpractice and the insurers for breach of fiduciary duty and breach of the duty to act in good faith.

As a part of discovery, The Surgery Center requested the personnel files of those involved with the Tate claim and other documents that it thought might shed light on whether the insurance companies had bonus and incentive programs that could arguably lead to bad faith handling of claims.  The insurers didn’t dispute the relevance of the documents requested, but rather argued that The Surgery Center already had discovery that demonstrated that APAC had no bonus programs.  The insurers pointed to a seven year old deposition of an APAC vice president of claims that stated that APAC’s only bonus program was based on the overall company performance, and that no bonuses were awarded to adjusters based on claim outcomes.  The court disagreed with the insurers’ contention that The Surgery Center, and ultimately the court, must “take the APAC’s vice president’s word for it.”   According to the court, “[t]he plaintiff should not be forced to rely on the questioning by an unknown attorney in a different case at a 2009 deposition in a case from 2007 in Kentucky.”  The court ordered the insurers to comply with the discovery request.

The court also ordered the insurers to provide the discovery sought regarding the amount of fees APAC paid to defense counsel for all cases during the time period in which the Tate claim was pending.  The Surgery Center argued that “the precise amount of money the firm had been paid by the defendants can show a close relationship that can skew the firm’s representation of the insured in the defendants’ favor.”  The court agreed and found that the financial tie between law firm and insurer is relevant.  It ordered the insurers to provide the relevant information.

The Surgery Center also requested information on every suit brought against the APAC for bad faith or negligence for the time period of 2003 – 2011.  It reasoned that the information was relevant to its punitive damages claim.  According to the court, “[a]pparently the theory is that if the plaintiff can show a multiplicity of bad acts extending over a long period of time, it will be entitled to seek more in compensation in damages in this case.”  The court ruled that the requested information was relevant, and ordered the insurers to comply, but narrowed the time frame to the past four years.

The court also granted The Surgery Center’s other motions to compel with regard to the information it sought related to the change of lead defense counsel, information regarding other cases in which a policy limit demand was made and was rejected by the carrier and an excess verdict returned, and email communications concerning the underlying Tate claim that were identified on an inadequate privilege log.  The Surgery Center at 900 North Michigan Avenue, LLC v. American Physicians Assurance Corporation, Inc., No. 15 cv 4336 (N.D. Ill. Nov. 29, 2016).