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City of Orem v. Essex Insurance Co.

United States District Court, D. Utah

January 24, 2018

CITY OF OREM and JAMES LAURET, Plaintiffs,
v.
EVANSTON INSURANCE COMPANY, Defendant.

          MEMORANDUM DECISION AND ORDER SUSTAINING IN PART AND OVERRULING IN PART DEFENDANT'S PARTIAL OBJECTION

          Jill N. Parrish United States District Court Judge

         I. BACKGROUND

         This is an insurance case. In 2014, the City of Orem sponsored a Summerfest Parade (the “Parade”). During the Parade, an explosion injured two children, Nylie and Liam Tanaka. They sued the City and the chairman of the Parade (collectively, “Plaintiffs”). The City had purchased a general commercial liability insurance policy (the “Policy”) for the Parade. The Policy was issued by Essex Insurance Company, which later merged and was succeeded by Evanston Insurance Company (collectively, “Evanston”). The Plaintiffs tendered the Tanaka lawsuit to Evanston. But after investigating the incident and seeking independent legal advice, Evanston determined that it did not have a duty to defend or indemnify Plaintiffs. As such, Plaintiffs paid for their own defense and eventually settled the lawsuit.

         During the pendency of the Tanaka lawsuit, Plaintiffs filed the above-captioned case in state court. They seek a declaration (1) that the Policy provides coverage and (2) that Evanston had a contractual duty to defend them. They also allege breach of contract and breach of the implied covenant of good faith and fair dealing. Further, they claim they are entitled to “the amount of any costs or expenses defending the [lawsuit], any amount paid in settlement . . ., and any other amounts this court deems just.” Evanston removed the case to federal court on May 20, 2016.

         On June 20, 2017, Plaintiffs filed a short-form motion to compel. First, Plaintiffs sought to compel Evanston to produce the claims guidelines, policies, procedures, and manuals relating to the handling of claims such as the Tanaka's claims against the City. Second, Plaintiffs sought to compel Evanston to produce its underwriting guidelines and policies. This matter was referred to Magistrate Judge Paul M. Warner.

         On July 3, 2017, Judge Warner issued a Memorandum Decision and Order (the “Production Order”). It compelled Evanston to produce the following two categories of documents: (1) claims manual or similar documents applicable to the subject claim; and (2) underwriting materials that were utilized to underwrite the Policy. Specifically, the Production Order provides:

(1) If a claims manual existed during the creation and administration of the City's policy, it is relevant to Plaintiffs' claims and discoverable. Accordingly, the court orders Evanston to produce any claims manual that would have assisted Evanston's claims adjusters in evaluating the City's claim for coverage. This order should be construed broadly. A claims manual may include any company policy or procedure that would have assisted a claims adjuster in addressing the City's claim.
(2) With respect to Evanston's underwriting materials, the court agrees with Evanston that Plaintiffs are only entitled to the underwriting information utilized to underwrite the City's policy. As it is written, Plaintiffs' request is overly broad and is not proportional to the needs of the case. Therefore, Evanston is ordered to produce any underwriting policies, procedures, and guidelines utilized by Evanston in underwriting the City's policy.

         The court will refer to the first category as the “Claims Manual Category” and the second as the “Underwriting Material Category.”

         Evanston did not produce documents falling into either category. Consequently, Plaintiffs contended that Evanston violated the Production Order and that the court should impose sanctions on Evanston pursuant to Federal Rule of Civil Procedure 37(b)(2). Evanston argued that, despite failing to produce any documents, it had fully complied with the Production Order because (1) a claims manual did not exist at the time the claim at issue was evaluated and (2) “any underwriting guidelines in place were not utilized in the underwriting of the policy at issue.” Plaintiffs' request for sanctions was also referred to Judge Warner.

         On November 7, 2017, Judge Warner issued a Memorandum Decision and Order (the “Sanctions Order”). First, Judge Warner held that Evanston's failure to produce anything related to the Claims Manual Policy category “violate[d] both the letter and the spirit of the [Production] Order.” Consequently, Judge Warner ordered Evanston to produce “whatever document, policy, procedure, or guideline that was relied upon by the claims adjuster in making the decision regarding the City's claim, in compliance with the [Production] Order.” But Judge Warner also gave Evanston the opportunity if it “continue[d] to insist that no such documents, policies, procedures, or guidelines exist, ” to “produce to Plaintiffs a declaration or affidavit confirming the same, and explaining in detail exactly how the decision regarding the City's claim was made.”

         Despite giving Evanston the opportunity to verify its position (i.e., that no claims manuals or similar documents existed), Judge Warner imposed sanctions on Evanston. Specifically, Judge Warner ordered that Plaintiffs be allowed to take a Rule 30(b)(6) deposition of a managerial employee of Evanston most knowledgeable regarding the claims manual, construed to include company policies and procedures regarding claims. Moreover, Judge Warner ordered that Evanston pay Plaintiffs the reasonable attorneys' fees and expenses associated with the deposition.

         Second, as to the Underwriting Material Category, Judge Warner held that Evanston violated the Production Order when it failed to produce a Letter of Authority, which “sets forth the maximum premium and maximum coverage for an underwriter.” According to Judge Warner, the Letter of Authority defined the limits of discretion given to the underwriters to quote businesses and thus it was utilized by Evanston in underwriting the City's policy. Judge Warner also held that Evanston violated the Production Order when it failed to produce certain underwriting guidelines. Consequently, Judge Warner ordered Evanston to produce the Letter of Authority and the underwriting guidelines. Judge Warner, based on his determination that Evanston violated the Production Order, awarded Plaintiffs reasonable attorneys' fees related to Evanston's refusal to produce documents related to the Production Order.

         In response to the Sanctions Order, Evanston produced an affidavit from David Ashley, a Senior Claims Director for Markel Services, Inc.[1] Markel is the claims service manager for Evanston. In the affidavit, Mr. Ashley states that “[i]n 2014 and 2015, [Markel] did not have (in either electronic form or hard-copy) a written claims manual, policies, procedures, guidelines, or other document that [the claims adjuster] could have consulted for the Tanaka Loss that would be ...


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