INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Insured prevails in coverage dispute
This dispute arose out of environmental cleanup and remediation work at two Superfund sites in Bronson, Michigan. The affected sites included the land on which three manufacturing facilities once operated, along with nearby areas. The Scott Fetzer Company acquired one of those facilities in 1968 when it merged with the facility’s previous operator, Kingston Products Corporation, an Indiana firm. Pursuant to the merger agreement, Scott Fetzer acquired all of Kingston’s assets and liabilities and emerged as the successor corporation. Scott Fetzer then continued to operate the facility from 1968 to 1984.
In 1986, the United States Environmental Protection Agency (EPA) identified Scott Fetzer as a potentially responsible party that would be required to investigate and remediate environmental contamination in Bronson. In the years that followed, the EPA pursued enforcement actions against Scott Fetzer, which led to a consent decree that required Scott Fetzer to finance and perform the necessary remedial work. The owner of a manufacturing facility subsequently operating at the site, ITT, Inc., also sued Scott Fetzer, claiming that it was responsible for some of the contamination at ITT’s facility. That action resulted in a judgment that required Scott Fetzer to reimburse ITT for costs it had incurred in addressing the environmental damage at that facility.
To defray the cost of responding to these claims, Scott Fetzer turned to liability policies issued to it or Kingston in the 1960s. Specifically it identified one general liability policy issued by the predecessor of Arrowood Indemnity Company, two excess blanket catastrophe liability policies issued by a predecessor of Century Indemnity Company, and one umbrella liability policy issued by American Home Assurance Company. It also identified four policies that it believed were issued to Kingston by a predecessor of Travelers Casualty and Surety Company between 1964 and 1968.
Scott Fetzer notified the insurers of the environmental claims being asserted against them, and for many years it sought to invoke the defense and indemnification provisions of the policies and communicated with the insurers about its claims. Ultimately, however, Scott Fetzer asserted, the insurers not only did not provide the coverage and reimbursement it sought, but they did not even provide a final comprehensive coverage determination.
In October 2019, Scott Fetzer filed an action that asserted a breach of contract claim against each insurer, alleging breaches of the insurance contracts at issue. Scott Fetzer also asserted a tort claim against each company based on allegations that they had acted in bad faith when handling Scott Fetzer’s claims. Scott Fetzer sought relief in the form of a declaratory judgment that it was entitled to coverage under the policies, along with monetary damages for breach of contract and bad faith in handling Scott Fetzer’s claims.
Relevant to this appeal were Scott Fetzer’s claims against Travelers, based on four separate policies that Travelers’ predecessor in interest allegedly issued to Kingston from 1964 to 1968. Travelers answered by disputing that the existence of the policies was confirmed, and it denied that it had any obligation to provide coverage for Scott Fetzer’s losses.
Travelers moved to bifurcate the bad faith claim from the breach of contract and declaratory judgment claims and to stay discovery on the bad faith claim. It argued that its request promoted efficiency in that if Scott Fetzer failed to establish entitlement to coverage, then its bad faith claim would have no basis.
The trial court ordered the bad faith claim bifurcated but did not stay discovery on that claim.
Several months later, Scott Fetzer moved to compel Travelers to produce documents that related to its claims handling procedures or guidelines for making coverage determinations, as well as internal documents and communications that related to its handling of Scott Fetzer’s claim. Travelers claimed that the information was a work product that was covered by attorney-client privilege. Scott Fetzer argued that in Ohio the attorney-client privilege did not shield from discovery documents that revealed a defendant’s bad faith.
Travelers argued that Ohio law did not apply because Ohio’s choice of law rules required the court to apply either Michigan or Indiana law to resolve the discovery dispute. Travelers noted that Kingston was an Indiana company that had contracted for the policies in Indiana. Michigan was the site of the insured risk. Michigan law does not recognize a cause of action for bad faith, and Indiana law does not allow discovery of materials covered by attorney-client privilege.
The trial court ordered Travelers to provide it the documents sought in the motion along with a privilege log so that the court could review them in camera. The court subsequently referred the matter to an administrative judge.
The administrative judge reviewed the documents and concluded that for purposes of his review, Ohio law applied to the discovery dispute concerning Scott Fetzer’s bad faith claim. The administrative judge considered whether attorney-client privilege applied in the context of a bad faith claim, and he concluded that Travelers could not withhold attorney-client communications that were probative of good faith in processing, evaluating, or refusing to pay Scott Fetzer’s claim. The administrative judge ordered that some of the documents be produced, albeit with redactions for attorney-client communications that did not concern the bad faith claim and that others could be withheld entirely because they did not contain communications that concerned Scott Fetzer’s bad faith claim.
Travelers appealed the administrative judge’s order. The trial court subsequently stayed the administrative judge’s order pending that appeal
The court of appeals affirmed. It held that Ohio law governed the bad faith discovery dispute, in part because the cause of action was a tort.
Scott Fetzer argued in the court of appeals that its bad faith claim was appropriately understood as a tort claim and that the court should consider that Ohio was where its alleged injury from bad faith occurred and was therefore the state that had the most significant relationship to the occurrence. Travelers argued that the bad faith claim should be viewed as a contract claim and that the choice of law analysis should apply to the location of the subject matter of the contract and the place of contracting, which were Michigan and Indiana, respectively.
The court of appeals agreed with Scott Fetzer that the bad faith claim was a tort claim, and it concluded that Ohio was the state with the most significant relationship to the parties and to Travelers’ alleged failure to make a timely coverage determination. It upheld the trial court’s application of Ohio law to Scott Fetzer’s bad faith tort claim.
Travelers appealed to the state supreme court, asserting a single proposition of law that governs the choice of law analysis for bad faith claims because they arise out of insurance contracts. The court accepted jurisdiction.
On review of the facts stated by Scott Fetzer and Travelers, the state supreme court affirmed the judgment of the court of appeals.
The Scott Fetzer Company v. American Home Assurance Company, Inc., et al.; Travelers Casualty and Surety Company—Supreme Court of Alabama—No. 2023-3921—November 1, 2023.
