Insurance lawyers face a dilemma in that we sometimes can be called as witnesses in bad-faith trials. As a result, policyholder counsel like me need to consider whether we should be the person who interacts with the insurance company’s representatives, for we risk being disqualified from serving as trial counsel for our clients.
The potential for disqualification of the policyholder’s lawyer stems in part from the fact that settlement discussions with the insurance company are admissible in bad-faith cases. Many lawyers and claims handlers seem surprised that settlement discussions to resolve an insurance claim constitute evidence in bad-faith cases and point to the settlement “privilege” as a shield.
But like the heffalump and the griffin, the settlement privilege is the stuff of myth: in the absence of an actual confidentiality contract between the parties that specifies that all communications for settlement are inadmissible for any purpose and in any proceeding, e.g., Tower Action Holdings, LLC v. LA County Waterworks Dist., 129 Cal. Rptr. 2d 640, 647 (Cal. App. 2002), communications during the course of settlement discussions are admissible for any purpose other than proving liability on the claim itself. See Federal Rule of Evidence 408. Indeed, Rule 408 states expressly that settlement-related discussions are admissible for “another purpose.”
Evidence of the insurer’s conduct during negotiation of a settlement of the insured’s (or a third-party’s) claim may be admitted at trial for purposes other than proving the insurer’s liability to pay under the contract. E.g., Crackel v. Allstate Ins. Co., 92 P.3d 882, 893 (Ariz. App. 2004); see also ESPN Inc. v. Office of Comm’r of Baseball, 76 F. Supp. 2d 383, 412-13 (S.D.N.Y. 1999); American Re-Insurance Co v. United States Fid. & Cas. Co., (N.Y. App. Div. June 2, 2005).
Insurers’ settlement communications and conduct are relevant evidence. Insurers must negotiate with their insureds in good faith, neither providing “lowball” offers nor “hoping the insured will settle for less,” Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 280 (Ariz. 2000), nor failing “in good faith to effectuate prompt, fair and equitable settlements of claims” nor failing to provide “reasonable explanation of the basis . . . for the offer of a compromise settlement” nor compelling insureds to “institute litigation” where they recover substantially more than what the insurer has offered. E.g., Unfair Claims Settlement Practices Act, A.R.S. sec. 20-461(A)(6), (A)(7), (A)(14). A policyholder’s means of proof that its insurer violated these various obligations during the process of adjusting the claim is to offer evidence of how the insurer sought to negotiate the claim. Evidence during settlement or during the claim-adjustment process, therefore, is admissible to prove undue delay or bad intent or for impeachment of the insurer’s witnesses. E.g., Southwest Nurseries LLC v. Florists Mut. Ins. Inc., 266 F. Supp. 2d 1263 (D. Colo. 2003); Bower v. Stein Eriksen Lodge Owners Ass’n Inc., 201 F. Supp. 2d 1134, 1139 (D. Utah 2002) (while denying admission of the particular evidence, ruling that “[e]vidence of a party’s bad faith may fall under ‘another purpose’ [under Rule 408].”). All this evidence goes to the insurer’s independent obligations to conduct itself in good faith, rather than its liability for the claim itself (which is the purpose for which Rule 408 limits the admission of evidence). (Fed. R. Evid. 105 allows for a party to ask the court to provide a limiting instruction to the jury making this clear.)
While policyholders may welcome that this type of evidence can be admitted in the litigation against the insurance company, the next question is what is that evidence and who are the witnesses? The reality is that the policyholder’s lawyer may be the person who on behalf of the policyholder witnessed the insurer’s course of conduct during settlement negotiations. If this is so, then there is risk that the lawyer will be disqualified from representing the policyholder in the insurance litigation for he or she may be a percipient witness at trial of the insurance bad-faith claim.
This is the question that was presented in a recent case, Carta v. Lumbermen’s Mut. Cas. Co., __ F. Supp. 2d __, 2006 WL 595496 (D. Mass. March 13, 2006). In general, a lawyer representing a party at trial is not allowed to be a witness because it can prejudice the other side and confuse the jury.
Nevertheless, motions to disqualify policyholder counsel in such circumstances are highly disfavored for the obvious reason that they can be offered not for reasons of fairness and the appearance of neutrality of court proceedings but rather for tactical advantage and harassment. “Thus, it is clear that disqualification should be allowed only when ‘absolutely necessary.’” Carta, 2006 WL 595496 at *4.
In Carta, the court described the anticipated scope of testimony of the plaintiff’s lawyers:
The proposed testimony of the plaintiff’s lawyers is certainly relevant and material – indeed, her two attorneys are the only people who will be able to testify on the plaintiff’s behalf about the settlement negotiations with the defendants, the correspondence that went back and forth between the parties, the meetings that were had between the plaintiff’s counsel and defense counsel and the strategic decisions made during the settlement process. Even the plaintiff herself likely would not be able to testify about such matters since they were undertaken by the attorneys themselves, not by the plaintiff, and they involve technical legal nuances that the plaintiff herself probably would not understand.
Id. at *5. The Carta court furthermore rejected (in my view, too quickly) the lawyers’ argument that proof of the bad-faith case would come solely from the mouths and pens of the insurer’s witnesses – so the policyholder’s representatives’ testimony would be unnecessary.
Where as in Carta the policyholder is willing to hamstring its own case by limiting the scope of proof that may be offered, the court should be more chary in disqualifying counsel and should defer pulling the trigger until absolutely necessary (that is, defer until it is certain there is actual prejudice to the insurance company rather than merely a prospect of prejudice). Courts should also be leery of permitting the insurance company’s witnesses to prevaricate necessitating rebuttal through the testimony of the policyholder’s attorney.
An adequate remedy in most circumstances is simply to prevent the policyholder’s counsel from testifying at the trial, even if that limits the scope of proof of the bad-faith claim. What Carta also teaches – along with the admissibility of settlement discussions – is that the policyholder (or its counsel) should be mindful in structuring the interactions with its insurer to make sure that it has the witnesses it wants at trial. (The policyholder should be mindful also that all its dealings with the insurance company – including its settlement correspondence – are trial exhibits.)
Dealing with insurance companies in the resolution of complex and contentious claims requires, as in chess, that one see the whole board, which includes understanding the risk that the policyholder’s selected counsel might later be the target of a motion to disqualify as a key witness to the insurance company’s bad-faith tactics.