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West Bend Mutual Insurance Co. v. Zurich American Insurance Co.

United States District Court, N.D. Illinois, Eastern Division

April 11, 2018

WEST BEND MUTUAL INSURANCE COMPANY, Plaintiff,
v.
ZURICH AMERICAN INSURANCE COMPANY, Defendant.

          Thomas Durkin Judge

          MEMORANDUM OPINION AND ORDER

          Jeffrey Cole Magistrate Judge

         This case stems from a lawsuit between construction worker, Daniel Fleck, and construction company, W.E. O'Neil. Mr. Fleck sued WEO when he was injured on a WEO project. WEO tendered defense of the suit to its primary insurer, the plaintiff in this case, West Bend. Mr. Fleck won the suit and gained a judgment of just over $2 million. After the waiver of the worker's compensation lien, the recoverable amount was $1, 739, 908.26, which West Bend paid. West Bend then went to the defendant here, Zurich, secondary insurer, to recover the amount over the policy limit of $1 million, claiming Zurich was next in line to pony up. Zurich refused, saying that West Bend ought to have settled the case within the million-dollar limit and that it was bad faith on its part not to have. [Dkt. #20, at 1-2].

         There is a discovery dispute, of course - “the bane of modern litigation.” Rossetto v. Pabst Brewing Co., Inc., 217 F.3d 539, 542 (7th Cir. 2000). West Bend asked for the documents in Zurich's Fleck case claim file and communications with attorney, John Moroney. Zurich was monitoring the progress of the case and retained the firm of Franco & Moroney for that purpose. Zurich, as is usually the case, made sweeping claims of attorney-client privilege and work product, and produced only heavily redacted documents. The claims were exaggerated, proving once again that excessive claims of privilege are all too commonplace in modern litigation and that they are indiscriminately and improperly used “on documents that do not truly qualify for protection.” Towne Place Condo. Ass'n v. Philadelphia Indem. Ins. Co., 284 F.Supp.3d 889 (N.D. Ill. 2018). See also Dietz & Watson, Inc. v. Liberty Mut. Ins. Co., 2015 WL 2069280, at *6 (E.D. Pa. 2015); Falin v. Condo. Ass'n of La Mer Estates, Inc., 2012 WL 760831, at *1 (S.D. Fla. 2012);Employer's Reinsurance Corp. v. Clarendon Nat. Ins. Co., 213 F.R.D. 422, 430 (D. Kan. 2003).

         West Bend has moved to compel production of clean documents and any withheld documents, arguing that “at issue” waiver applies. After an initial hearing on this dispute, Zurich had more than a moment of self-realization and “reconsidered many of the redactions made in its Privilege Log.” It then produced many previously withheld or redacted documents. And so, of the original 200 or so documents at issue [Dkt. # 20, at 12-38], only about 80 remain.

         Under Illinois law, an insurer has a duty to settle in good faith on behalf of its insured, which, arises from the covenant of good faith and fair dealing implied in an insurance contract. Iowa Physicians' Clinic Med. Found. v. Physicians Ins. Co. of Wisconsin, 547 F.3d 810, 812 (7th Cir. 2008). As the Seventh Circuit has explained, in the paradigmatic duty-to-settle case, there are three parties:

the injured third party; the insured, who is being sued; and the insurer, who controls the insured's defense. If the third party sues the insured for an amount above the policy limit and seeks a settlement at the upper limit of the policy, a conflict of interests arises. In this situation, the insurer may be tempted to decline the settlement offer, no matter how good the deal is for the insured, and go to trial. It makes no difference to the insurer's bottom line whether the case is settled or the jury awards astronomical damages; in either event it will pay out only the maximum on the policy. And if the case goes to trial, at least there's a shot that they will win and pay nothing. The insured, on the other hand, calculates the risks of trial differently because he will be stuck paying anything above the policy limit.

Id.

         As such, the insurer is in a heads-I-win-tails-you-lose position. See, e.g., Twin City Fire Ins. Co. v. Country Mut. Ins. Co., 23 F.3d 1175, 1179 (7th Cir. 1994). To even things up, and “combat the temptation to ignore an insured's interest . . . llinois courts have recognized that an insurer has a ‘duty to act in good faith in responding to settlement offers, ' and if that duty is breached the insurer is on the hook for the entire judgment, regardless of the policy limit.” Iowa Physicians', 547 F.3d at 812. Here, as West bend describes it, the temptation not to settle would have stemmed from Zurich being on the hook if the recovery amount exceeded West Bend's policy limit. And so, it is not a complete surprise that Zurich charged West Bend with bad faith in its counterclaim.

         But that doesn't mean Zurich has waived its attorney-client privilege. Black letter law on at-issue waiver is fairly clear:

To waive the attorney-client privilege by voluntarily injecting an issue in the case, a defendant must do more than merely deny a plaintiff's allegations. The holder must inject a new factual or legal issue into the case. Most often, this occurs through the use of an affirmative defense.

Lorenz v. Valley Forge Ins. Co., 815 F.2d 1095, 1098 (7th Cir. 1987). While Lorenz dealt with Indiana law, there is nothing in Illinois law to suggest the general principles are any different. The Illinois Supreme Court recognized that both the attorney-client privilege and the work-product privilege may be waived as to a communication put “at issue” by a party who is a holder of the privilege in Waste Management, Inc. v. Int'l Surplus Lines Ins. Co., 144 Ill.2d at 199-200, 579 N.E.2d 322 (1979). Since then, courts have applied the concept by asking whether the sought-after communications were actually placed ‘at issue' or whether they were simply relevant to the dispute. See, e.g., Edgewater Med. Ctr. v. Rogan, No. 04 C 3579, 2010 WL 2711448, at *9 (N.D. Ill. July 6, 2010); Western States Ins. Co. v. O'Hara, 357 Ill.App.3d 509, 520-21, 828 N.E.2d 842');">828 N.E.2d 842 (4th Dist. 2005); Shapo v. Tires 'N Tracks, Inc., 336 Ill.App.3d 387, 394, 752 N.E.2d 815 (1st Dist. 2002); Hayes v. Burlington No. and Santa Fe Railway Co., 323 Ill.App.3d 474, 752 N.E.2d 470 (2001); Chicago Meat Processors, Inc. v. Mid-Century Ins. Co., No. 95 C 4277, 1996 WL 172148, at *4 (N.D. Ill. Apr. 10, 1996). Most pertinent of such cases here is Western States, where the Illinois appellate court held that where an insurer put at issue whether it had settled a claim in good faith, the insured was entitled to discovery of the insurers' communications with the law firm that represented the insurer during the settlement process. 357 Ill.App.3d 509, 520-21, 828 N.E.2d 84.

         Taking West Bend at its word, we can't see how Zurich has waived its attorney-client privilege or work product protection. As West Bend puts it:

following the exhaustion of the West Bend Primary Policy, the Zurich Commercial General liability Policy was next in line to cover the Fleck judgment, but Zurich refused to pay any part of the Fleck judgment because it ...

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