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Burke v. Ability Insurance Co.

United States District Court, Eighth Circuit

May 31, 2013

TERRY BURKE as personal representative of the estate of Berniece Hermsen, and in his capacity as previous attorney in fact for Berniece Hermsen, Plaintiff,


KAREN E. SCHREIER, District Judge.

Plaintiff, Terry Burke, personal representative of the estate of Berniece Hermsen and in his capacity as previous attorney in fact for Hermsen, brought this claim against defendants alleging breach of contract, bad faith, fraud, and misrepresentation stemming from the scope of coverage of Hermsen's long-term care insurance policy. Docket 31. Burke moves to compel production of documents related to this litigation from both Ability Insurance Company (AIC) and Ability Resources Inc. (ARI) claiming that the requested discovery is relevant, narrowly tailored, and not subject to privilege. Dockets 68 & 73. Both AIC and ARI objected to a number of the requests for production and opposed Burke's motions to compel in a joint response. Dockets 91 & 96. The court grants the motion to compel in part and denies the motion in part.


Mutual Protective Insurance sold a policy of long-term care insurance to Hermsen, a South Dakota resident, in January of 2000. Docket 31 ¶ 5. Generally, Hermsen's policy required that nursing or long-term care benefits be given to an insured who meets the qualifications contained in the policy. Hermsen entered an assisted living facility on January 5, 2009. Docket 31 ¶ 19. She and her family[1] submitted a claim for benefits under her policy on January 13, 2009. Docket 31 ¶ 20. On February 27, 2009, Hermsen received a denial letter stating that she did not meet the eligibility requirements of her policy. Id.

Hermsen filed a second claim for benefits around July 30, 2009. Because Hermsen's condition had deteriorated since she entered the assisted living facility, her second request for benefits under her policy was approved. Nearly two years later, and after Hermsen died, counsel for Hermsen's estate contacted AIC and requested that AIC pay the unpaid benefits to Hermsen's estate for the period of time that Hermsen was not covered under the policy in 2009. AIC issued checks to the estate in an amount totaling $17, 050.93 for unpaid benefits from January 5, 2009, to August 2, 2009. Hermsen died on July 19, 2010. Docket 91 at 5.

Meanwhile, Hermsen's and many other insureds' long-term care insurance policies were acquired by Medico Life Insurance Company. Docket 31 ¶ 6. In September of 2007, Medico Life Insurance Company was acquired by ARI, and Medico became AIC. Docket 31 ¶¶ 6-7. While AIC is the entity that contracts with insureds to purchase insurance, AIC and its owner, ARI, have a number of related entities. Ability Resources Holdings, Inc. is the holding company for ARI. AIC contracts with Ability Reinsurance (Bermuda) Limited to act as a reinsurer of its risk, and AIC pays approximately 75 percent of its premium revenues to Ability Reinsurance (Bermuda) Limited as the payment for providing reinsurance. Docket 31 ¶ 9. Finally, Ability Reinsurance Holdings Limited is the holding company of Ability Reinsurance (Bermuda) Limited. Donald Charsky is the president and CEO of Ability Resources Holdings, the holding company above AIC and ARI.

On March 23, 2012, Burke brought this cause of action on behalf of Hermsen's estate against all five Ability entities alleging breach of contract, bad faith, fraud, and misrepresentation stemming from the scope of coverage of Hermsen's long-term care insurance policy. Docket 1. The three noncontracting defendants, Ability Resources Holdings, Inc., Ability Reinsurance Holdings Limited, and Ability Reinsurance (Bermuda) Limited, moved to dismiss themselves as parties to the action on July 23, 2012. Docket 40. The court denied the motion to dismiss. Docket 105 at 25.

On July 12, 2012, Burke issued 25 requests for production to both ARI and AIC. On August 20, 2012, AIC and ARI objected to those requests and did not provide any documents. AIC eventually agreed to comply with request for production number 1, which related to Hermsen's claim file. As to the other requests, defendants objected based on relevance, undue burden, and that the requests were overly broad or contained confidential or privileged material. Although they initially objected to many of the requests for production, AIC and ARI have since produced over 1, 100 documents totaling over 5, 500 pages throughout the pendency of the case.

The parties agree that they made efforts to meet and confer to resolve these discovery disputes as required by the local and civil rules. The parties could not reach a resolution. As a result, on November 21, 2012, Burke moved to compel AIC to comply with his discovery requests. Docket 68. On November 26, 2012, Burke moved to compel ARI to produce similar discovery. Docket 73. Defendants[2] filed a joint response in resistance to the motion to compel. Docket 91. The court will take up the remaining portions of the motion to compel.


The scope of discovery in a civil case is governed by Federal Rule of Civil Procedure 26, which provides:

Unless otherwise limited by a court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense-including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(c).

Fed. R. Civ. P. 26(b)(1). The court will limit the extent of discovery if it determines the discovery is unreasonably duplicative, cumulative, can be obtained from a more convenient source, or if the expense or burden of discovery outweighs its benefit. Fed.R.Civ.P. 26(b)(2)(C).

The scope of discovery under Rule 26(b) is extremely broad. See 8 Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 2007, 36-37 (1970) (hereinafter "Wright & Miller"). The reason for the broad scope of discovery is that "[m]utual knowledge of all the relevant facts gathered by both parties is essential to proper litigation. To that end, either party may compel the other to disgorge whatever facts he has in his possession." 8 Wright & Miller § 2007 at 39 (quoting Hickman v. Taylor, 329 U.S. 495, 507-08 (1947)). The federal rules distinguish between discoverability and admissibility of evidence. Fed.R.Civ.P. 26(b)(1), 32, and 33(a)(2). Therefore, the rules of evidence assume the task of keeping out incompetent, unreliable, or prejudicial evidence at trial. These considerations are not inherent barriers to discovery, however.

The advisory committee's note to the 2000 amendments to Rule 26(b)(1) offers guidance on how courts should define the scope of discovery in a particular case:

Under the amended provisions, if there is an objection that discovery goes beyond material relevant to the parties' claims or defenses, the court would become involved to determine whether the discovery is relevant to the claims or defenses and, if not, whether good cause exists for authorizing it so long as it is relevant to the subject matter of the action. The good-cause standard warranting broader discovery is meant to be flexible.
The Committee intends that the parties and the court focus on the actual claims and defenses involved in the action. The dividing line between information relevant to the claims and defenses and that relevant only to the subject matter of the action cannot be defined with precision. A variety of types of information not directly pertinent to the incident in suit could be relevant to the claims or defenses raised in a given action. For example, other incidents of the same type, or involving the same product, could be properly discoverable under the revised standard.... In each instance, the determination whether such information is discoverable because it is relevant to the claims or defenses depends on the circumstances of the pending action.
The rule change signals to the court that it has the authority to confine discovery to the claims and defenses asserted in the pleadings, and signals to the parties that they have no entitlement to discovery to develop new claims or defenses that are not already identified in the pleadings.... When judicial intervention is invoked, the actual scope of discovery should be determined according to the reasonable needs of the action. The court may permit broader discovery in a particular case depending on the circumstances of the case, the nature of the claims and defenses, and the scope of the discovery requested.

Fed. R. Civ. P. 26 advisory committee's note to 2000 Amendments, subdivision b.

The same advisory committee's note further clarifies that information is discoverable only if it is relevant to the claims or defenses of the case or, upon a showing of good cause, to the subject matter of the case. Id. "Relevancy is to be broadly construed for discovery issues and is not limited to the precise issues set out in the pleadings. Relevancy... encompass[es] any matter that could bear on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.'" E.E.O.C. v. Woodmen of the World Life Ins. Soc'y, Civ. No. 03-165, 2007 WL 1217919, at *1 (D. Neb. Mar. 15, 2007) (quoting Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)). The party seeking discovery must make a "threshold showing of relevance before production of information, which does not reasonably bear on the issues in the case, is required." Id. (citing Hofer v. Mack Trucks, Inc., 981 F.2d 377, 380 (8th Cir. 1993)). "Mere speculation that information might be useful will not suffice; litigants seeking to compel discovery must describe with a reasonable degree of specificity, the information they hope to obtain and its importance to their case." Id. (citing Cervantes v. Time, Inc., 464 F.2d 986, 994 (8th Cir. 1972)).

Once the requesting party has made a threshold showing of relevance, the burden shifts to the party resisting discovery to show specific facts demonstrating that the discovery is not relevant, or how it is overly broad, burdensome, or oppressive. Penford Corp. v. Nat'l Union Fire Ins. Co., 265 F.R.D. 430, 433 (N.D. Iowa 2009); St. Paul Reinsurance Co. v. Commercial Fin. Corp., 198 F.R.D. 508, 511 (N.D. Iowa 2000). The articulation of mere conclusory objections that something is "overly broad, burdensome, or oppressive, " is insufficient to carry the resisting party's burden-that party must make a specific showing of reasons why the relevant discovery should not be had. Cincinnati Ins. Co. v. Fine Home Managers, Inc., Civ. No. 09-234, 2010 WL 2990118, at *1 (E.D. Mo. July 27, 2010); see also Burns v. Imagine Films Entm't, Inc., 164 F.R.D. 589, 593 (W.D.N.Y. 1996).


I. Reserves

Burke made a number of requests for production that relate to the reserves set by Ability. The language in the first of those requests is as follows:

Request for Production Number 2: Any and all documents that show or relate to claim reserves with respect to Berniece Hermsen's claim, or the manner of assigning claim reserves with respect to Berniece Hermsen's claim. If records do not exist with respect to the particular claim, Defendants should provide records showing how reserves are set for claims in the aggregate.

Defendants objected to these requests as irrelevant, privileged, and confidential. Later defendants said that no documents exist pertaining to reserves for Hermsen's claim and they refused to provide documents relating to aggregate reserves because it was irrelevant.

"Reserves are an insurer's estimates of potential losses due to claims on its policies." Spirco Envt'l Inc. v. Am. Int'l Speciality Lines Ins. Co., Civ. No. 05-1437, 2006 WL 2521618, at *1 (E.D. Mo. Aug. 30, 2006) (citing J.C. Assocs. v. Fid. & Guar. Ins. Co., Civ. No. 01-2437, 2003 WL 1889015, at *1 (D.D.C. 2003)). Evidence related to reserves is generally relevant because "[t]he failure of an insurer to offer a reasonable amount to settle a claim, on a claim of bad faith breach of duty, might be evidenced by the insurer's setting aside a substantially greater amount of reserve for that claim." Id. (citation omitted).

The Eighth Circuit Court of Appeals has found that evidence of reserves or case estimate information may be admissible to the issue of whether an insured made settlement offers in good faith. Kirchoff v. American Cas. Co. of Reading, Pa., 997 F.2d 401, 405 (8th Cir. 1993). On the other hand, the Eighth Circuit has also stated that individual or specific case reserves may be protected by the work product privilege if they are prepared in anticipation of trial or for litigation. Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). This is because "[t]he individual case reserve figures reveal the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal claim. By their very nature they are prepared in anticipation of litigation and, consequently, they are protected from discovery as opinion work product." Id. (citing Hickman v. Taylor, 329 U.S. 495, 512 (1947)). Evidence pertaining to aggregate reserve information, however, is discoverable and generally not protected by the work product doctrine or the attorney-client privilege. Id. at 402-03.

Because defendants stated that individual reserves do not exist for Hermsen's claim, the court does not have to determine if the privilege applies to this type of document or whether it is discoverable. The court does conclude, however, that evidence related to reserves in the aggregate is relevant, discoverable, and not protected by privilege because evidence suggests that they were prepared in the ordinary course of business. See Lyon v. Bankers Life & Cas. Co., Civ. No. 09-5070, 2011 WL 124629, at *11 (D.S.D. Jan. 14, 2011) ("The aggregate reserve information in the risk management documents serves numerous business planning functions, but we cannot see how it enhances the defense of any particular lawsuit.' The requested documents are neither privileged nor protected.") (quoting Simon, 816 F.2d at 401). Moreover, any argument pertaining to privilege cannot properly be addressed by the court at this time because defendants have not submitted a privilege log on this topic.

Defendants argue that this type of evidence, and other evidence related to their financial condition, cannot be conducted at this stage of the litigation because SDCL 21-1-4.1 prevents discovery of evidence related to punitive damages from commencing unless the court finds by clear and convincing evidence following a hearing that there is a reasonable basis to believe the defendant engaged in willful, wanton, or malicious conduct. This court has previously held on numerous occasions, however, that SDCL 21-1-4.1 is a procedural statute that conflicts with the federal rules of evidence, which means that the statute is not applied by federal courts sitting in diversity. See Houwman v. Gaiser, Civ. No. 10-4125, 2011 WL 4345236, at *10 (D.S.D. Sept. 15, 2011) ("Therefore, the statute's requirement of a hearing before commencing discovery, as well as the statute's language, does not apply to this action in federal court."); Lillibridge v. Nautilus Ins. Co., Civ. No. 10-4105, 2013 WL 870439, at *7 (D.S.D. Mar. 7, 2013) ("Therefore, Lillibridge does not have to meet the heightened burden found in SDCL 21-1-4.1 to begin discovery on the issue of punitive damages, and Lillibridge may proceed with discovery without court order.").

Defendants also argue that their financial condition is not relevant to this case. The court disagrees. The South Dakota Supreme Court has held that "a defendant's net worth is a guideline for assessing the amount of punitive damages." Roth v. Farner-Bocken Co., 667 N.W.2d 651, 670 (S.D. 2003). The court has also stated that "defendant's financial resources are an appropriate yardstick for determining punitive damages." Id. Because Burke has alleged a claim of punitive damages and the exact business or financial relationships between all defendants is unclear, evidence of all defendants' financial condition, including aggregate reserves, is relevant to a material issue in this case and is discoverable. Thus, the motion to compel as to request for production number 2 is granted.

Burke's next requests for production are related to the prior issue of reserves and specifically pertain to an electronic media search. The specific requests are:

Request for Production Number 3: Any and all documents from any Electronic Storage Media computer used by or accessible to the following individuals, and which contain the term "reserve" or "reserves": (a) Donald Charsky; (b) Ray Nelson; (c) Dan Cathcart; (d) Imran Siddiqui; (e) Douglas Kaden. The scope of this request is January 2, 2009, to present, or whatever period of time the Electronic Storage Media will allow. This request includes but is not limited to word processing documents, e-mails, spreadsheet or accounting programs, PDF documents that allow optical character recognition, or any other type of digital data that is capable of electronic search.
Request for Production Number 20: Any and all e-mails to or from Ray Nelson, Donald Charsky, Donald Catchcart [sic], Michael Crow, Douglas Kaden, Imran Siddiqui, or Fred Yoshua, related to establishing reserves, setting reserves, or changes in reserves. The scope of this request is January 1, 2009, to present.

Like the court's conclusion for request for production number 2, the court also finds that the requested discovery for requests for production numbers 3 and 20 are relevant and are not privileged so far as they pertain to aggregate reserves. The burden now shifts to Ability to show that these requests are overly broad, burdensome, or oppressive.

Ability cannot carry this burden because it has done nothing more than state broad, boilerplate, or cursory objections. See Continental Ill. Nat'l Bank & Trust Co. of Chicago v. Caton, 136 F.R.D. 682, 684-85 (D. Kan. 1991) ("All discovery requests are a burden on the party who must respond thereto. Unless the task of producing or answering is unusual, undue or extraordinary, the general rules require the entity answering or producing the documents to bear that burden."). Defendants have not stated that they cannot conduct the searches, only that it would require review of numerous documents that are irrelevant to Hermsen's claim for benefits. Defendants failed to articulate how this discovery is extraordinary or unusual; thus, defendants have not carried their burden. See Kirschenman v. Auto-Owners Ins., 280 ...

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