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Selective Insurance Co. of America v. Smiley Body Shop, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

October 27, 2016

SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff,
v.
SMILEY BODY SHOP, INC., JEFFREY SMILEY, GREG CALLAHAN, Defendants. CINCINNATI INSURANCE COMPANY, Intervenor Plaintiff,
v.
SELECTIVE INSURANCE COMPANY OF AMERICA, SMILEY BODY SHOP, INC., JEFFREY SMILEY, GREG CALLAHAN, Intervenor Defendants.

          ORDER ON DISCOVERY MOTION

          MARK J. DINSMORE UNITED STATES MAGISTRATE JUDGE

         Pending before the Court is Jeffrey Smiley and Smiley Body Shop, Inc.'s (collectively, “Smiley”) Motion for a Protective Order or, in the Alternative, to Stay Discovery. [Dkt. 76.] For the following reasons, the Court DENIES Smiley's Motion.

         I. Background

         This matter arises out of an insurance dispute. The underlying state court lawsuit involves a tort action brought by Defendant Greg Callahan against Smiley after an automobile accident. While defending Smiley in the underlying tort case subject to a reservation of rights, Plaintiff Selective Insurance (“Selective”) brought suit in this Court seeking a declaration that it has no obligation to defend or indemnify Smiley under Smiley's insurance policy. Selective now seeks discovery of the statements Jeffrey Smiley has made to his insurance providers, which Smiley contends are subject to insurer-insured privilege. Smiley thus moves the Court for a protective order “prohibiting disclosure and excusing non-disclosure of information protected by the insurer-insured privilege” or, in the alternative, to stay discovery in this matter until the conclusion of the underlying tort action. [Dkt. 76 at 1.]

         II. Motion for Protective Order

         Smiley's Motion seeks a protective order, not to keep his statements to insurance providers out of Selective's hands, but to ensure that Callahan-the plaintiff in the underlying state court action-cannot use them in the tort case. In support, Smiley primarily relies upon the insurer-insured privilege recognized by the Indiana Supreme Court in Richey v. Chappell, 594 N.E.2d 443 (Ind. 1992). In response, Selective argues that the insurer-insured privilege does not apply to this case and that, even if it did apply, Smiley waived the right to assert it through their conduct. In reply, Smiley again argues that the privilege applies in this action as against Callahan. Smiley reiterates that any other conclusion would undermine its assertion of privilege in the underlying action.

         The Federal Rules of Civil Procedure limit discovery to nonprivileged materials that are relevant and proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1). In diversity cases such as this one, the Federal Rules of Evidence incorporate by reference the privilege laws of the state providing the underlying substantive law. Fed. R. Evid. 501. Based upon their submissions, the parties appear to agree that Indiana law applies.[1] Regardless, “[c]ourts do not worry about conflict of laws unless the parties disagree on which state's law applies.” Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991). As that is not the case here, the Court will apply Indiana privilege law in assessing Smiley's Motion. In so doing, the Court takes as axiomatic that evidentiary privileges are to be strictly and narrowly construed. Shanabarger v. State, 798 N.E.2d 210, 215 (Ind.Ct.App. 2003) (“Inasmuch as [a] privilege prevents the disclosure of relevant information and impedes the quest for truth, the privilege should be narrowly construed.”); see Mem'l Hosp. for McHenry Cty. v. Shadur, 664 F.2d 1058, 1061 (7th Cir. 1981) (“First, because evidentiary privileges operate to exclude relevant evidence and thereby block the judicial fact-finding function, they are not favored and, where recognized, must be narrowly construed.”); see also Valero Energy Corp. v. United States, 569 F.3d 626, 630 (7th Cir. 2009) (“This circumscribed reading of the tax practitioner-client privilege is in sync with our general take on privileges, which we construe narrowly because they are in derogation of the search for truth.”); Howard v. Dravet, 813 N.E.2d 1217, 1222 (Ind.Ct.App. 2004) (“The attorney-client privilege should be narrowly construed because the privilege may prevent the disclosure of relevant information.”).

         The Indiana Supreme Court recognized the insurer-insured privilege in Richey v. Chappell, 594 N.E.2d 443 (Ind. 1992). Richey was a personal injury case in which the plaintiff sought discovery of statements made by the defendant to his insurance provider. Both the defendant and insurance provider objected to the request. The court reasoned that the privilege was required to facilitate candid disclosure from insured to insurer and thereby aid the insurer in its defense of the insured in the underlying liability cases:

One of the primary duties placed upon insurers by the issuance of a liability insurance policy is the obligation to defend claims filed by third persons against the insured. In order to effectively defend the claim, the insured must be questioned about sensitive matters which may be embarrassing, incriminating, or detrimental to the insured. The failure to cooperate may invalidate coverage, and even an insured's constitutional right against self-incrimination may not override the insured's duty to cooperate with the insurance company. In connection with its obligation to defend claims, the insurance company retains an attorney, not usually of the insured's own choosing, to represent the insured. Statements from the insured are then used by the attorney to assist in the defense of the insured, just as statements given by plaintiffs to their own attorneys are used to assist in the prosecution. Uncertainty about whether the insured's statements are discoverable gives rise to a conflict about whether a statement should be given at all, and undermines what should be a cooperative relationship among the insured, insurer and attorney. An insured's relationship to the insurance company requires full disclosure by the insured without fear that the statement may be later obtained by the claimant.

Id. at 446. On this basis, the court “conclude[d] that in third-party actions such as this one”- videlicet, actions brought by non-insurer plaintiffs against an insured-“statements given by an insured to his insurance company are privileged and are not subject to discovery by the third party.” Id. at 445 (emphasis added).

         Unlike Richey, however, this matter is a “first-party” case brought by an insurer to determine its rights and liabilities vis-à-vis its insured. The Court finds that the Richey insurer-insured privilege does not extend to this first-party case and that the underlying tort plaintiff's status as party-defendant in this action does not change this conclusion. This is so notwithstanding the seemingly broader language in Richey identified by Smiley. As Smiley points out, Richey also states that “statements from the insured to the insurer concerning an occurrence which may be made the basis of a claim by a third party are protected from disclosure.” Id. at 447. But this language does not warrant the broad reading attributed to it by Smiley for several reasons.

         First, the Richey court recognized that discovery of insurer-insured materials in “first-party” claims stands on a different ground than discovery in a third-party action. The court in fact expressly approved of the Indiana Court of Appeals' decision to compel discovery of insurer-insured statements in Cigna-INA/Aetna v. Hagerman-Shambaugh, 473 N.E.2d 1033 (Ind.Ct.App. 1985), reasoning that the rationale in that case was “sound” because “Hagerman-Shambaugh was a first-party claim involving an action by the insured against its insurer over whether a particular loss was covered by the policy . . . .” Id. at 447. Hagerman-Shambaugh is much more closely aligned with this case than Richey, again with the caveat that the tort plaintiff was not party to that case. But the Richey court distinguished its case from Hagerman-Shambaugh on the basis of the type of claim in that case. This case is a “first-party claim” over whether a claim is “covered by the policy”; it is not “a claim brought by a third party against the insured.”

         Second, other jurisdictions recognizing the insurer-insured privilege also make the distinction between third-party and first-party actions. The Richey court, for example, specifically endorsed the Illinois Supreme Court's approach to the privilege as an extension of attorney-client privilege, quoting at length from that court's decision in People v. Ryan, 197 N.E.2d 15, 18 (Ill. 1964). The Illinois Supreme Court has elsewhere explained that insurer-insured “documents may enjoy privileged status as to party opponents in the underlying litigation, but they cannot be privileged from insurers who may bear the ultimate burden of payment. While the parties are now adverse concerning the issue of coverage, no such adversity exists as to the underlying litigation.” Waste Mgmt., Inc. v. Int'l Surplus Lines Ins. Co., 579 N.E.2d 322, 336 (Ill. 1991). The attorney-client privilege that may have applied in the underlying action had no applicability in the declaratory judgment action, suggesting that the insurer-insured privilege must likewise give way in this case. Again, Waste Management is not a perfect parallel to this case, as the underlying tort action had already settled in that case. But Waste Management-like Richey-distinguished the need for privilege in the underlying action from the absence of privilege in the declaratory judgment action on the basis of the type of claim.

         Finally, this Court is “loathe to fiddle around with state law, ” Insolia v. Philip Morris Inc., 216 F.3d 596, 607 (7th Cir. 2000), and has repeatedly been admonished to “choose the narrower interpretation” of state law and “avoid speculation about trends in diversity cases, ” Birchler v. Gehl Co., 88 F.3d 518, 521 (7th Cir. 1996). Particularly when this reluctance to unearth new realms of state law is coupled with the imperative that privileges be construed narrowly, the interests of furthering ...


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