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Bifurcation of Bad-Faith Claims
Recently, federal courts across the country have ruled on insurers' motions to bifurcate bad-faith litigation; i.e., motions to separate and stay discovery and/or the trial of the bad-faith claims from the insured's claim for coverage. The most recent rulings in cases where insureds opposed bifurcation are mixed, but the majority appear to favor insureds and deny the carriers' motions to bifurcate. For examples of cases denying bifurcation motions, see Wagner v. Allstate Ins. Co., 2016 U.S. Dist. LEXIS 6364 (Jan. 19, 2016); Bitpay, Inc. v. Mass. Bay Ins. Co., ___ F.Supp. 3d ___, 2016 WL 1105263 (March 17, 2016); Brown v. Allstate Prop. & Cas. Ins. Co., 2015 WL 6739143 (M.D. Ala. Nov. 3, 2015). For examples of cases granting bifurcation motions, see Kermeen v. State Farm Ins. Co., 2015 WL 4727646 (D. Neb. Aug. 10, 2015); Holloway v. Ohio Sec. Ins. Co., 2015 WL 6870141 (W.D. Ky. Nov. 4, 2015).
Bifurcation
The theory behind bifurcation is that typically, unless and until the court determines there is coverage for the claim at issue, the insured's bad-faith claim fails as a matter of law. Though, as recently pointed out by the Eastern District of Pennsylvania: “[c]ourts have extended the concept of 'bad faith' beyond an insured's denial of a claim in several limited areas.” Northwestern Mut. Life Ins. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005). For example, insurers that unreasonably delay the evaluation of their insured's claim, even if the insurer's ultimate assessment of the claim proves to be correct, may be found to have acted in bad faith. See e.g. Willow Inn, Inc. v. Pub. Serv. Mut. Ins., 399 F.3d 224, 235 (3d Cir. 2005) (citing Klinger v. State Farm Mut. Auto. Ins., 115 F.3d 230, 236 (3d Cir. 1997)) (“Pennsylvania's bad faith statute provides insurance claimants a means of redressing unreasonable delays by their insurers.”); see also O'Donnell ex rel. Mitro v. Allstate Ins , 1999 PA Super 161, ' 15, 734 A.2d 901 (“An action for bad faith may also extend to the insurer's investigative practices.”).
A court may bifurcate coverage and bad-faith claims for “convenience, to avoid prejudice, or to expedite and economize.” Fed. R. Civ. P. 42(b). Rule 42 “confers broad discretion upon the district court to bifurcate a trial, thereby deferring costly and possibly unnecessary proceedings.” Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1021 (9th Cir. 2004); United States ex rel. Bahrani v. ConAgra, Inc., 624 F.3d 1275, 1283 (10th Cir. 2010) (district courts possess broad discretion in deciding whether to bifurcate). In fact, “bifurcation of trials is permissible in federal court even when such procedure is contrary to state law.” Shugart v. Central Rural Elec. Co-op., 110 F.3d 1501, 1504 (10th Cir. 1997) (quoting Oulds v. Principal Mut. Life Ins. Co., 6 F.3d 1431, 1435 (10th Cir. 1993)). Though bifurcation “is not the usual course that should be followed ' .” See, e.g., Home Elevators v. Millar Elevator Svc. Co., 933 F.Supp. 1090, 1091 (N.D. Ga. 1996) quoting Kimberly-Clark Corp. v. James River Corp., 131 F.R.D. 607, 608 (N.D. Ga. 1989). Indeed, “bifurcation should be particularly compelling and prevail only in exceptional cases.” Crown Packaging Tech., Inc. v. Rexam Beverage Can Co., 498 F.Supp.2d 734, 736 (D. Del. 2007) quoting Kos Pharmaceuticals, Inc. v. Barr Labs, 218 F.R.D. 387, 390 (S.D.N.Y. 2003). Not surprisingly, the party seeking bifurcation (typically the insurer) has the burden of showing it is warranted. This often is a high hurdle based upon the intertwined nature of the evidence relevant to both the coverage and the bad faith claims. As a practical matter, information and documents pertaining to coverage also relate to bad faith. For example, the claim file likely will contain documents evidencing the carrier's coverage analysis and/or the reasons behind a denial, some of which may evidence bad faith. These documents include internal communications within the claims departments and with underwriters as well as communications with brokers and agents.
Bifurcation of Discovery
Additionally, even where bifurcation at trial is appropriate, bifurcation of discovery may not be:
Bifurcation of the trial does not necessarily require bifurcation of discovery. See Foseco, Inc. v. Consolidated Aluminum Corporation , 851 F.Supp. 369, 371 (E.D.Mo. 1991); White Chemical Corporation v. Walsh Chemical Corporation , 116 F.R.D. 580, 582 (W.D.N.C. 1987); Naxon Telesign v. GTE Information Systems , 89 F.R.D. 333, 341 (N.D.Ill. 1980). As with the bifurcation of trial, the decision to stay discovery is within the discretion of the trial court. Foseco , 851 F.Supp. at 371.
' With joint discovery, the plaintiffs will be better informed and therefore better prepared in the event of settlement negotiations or alternative dispute resolution. See Naxon , 89 F.R.D. at 341-342; Foseco , 851 F.Supp. at 371. Moreover, the court, by not staying discovery on bad faith claims, can avoid hearing discovery disputes over which documents pertain to the contract claim and which relate to the bad faith claims. See Walsh Chemical Corporation , 116 F.R.D. at 582. Also, joint discovery may expedite resolution of the entire matter by permitting the second trial, if it is necessary, to commence immediately after the first.
Cook v. United Serv. Auto Ass'n, 169 F.R.D. 359, 362 (D.Nev. 1996).
Obvious by-products of bifurcated discovery include duplicative depositions of claims and underwriting personnel, multiple sets of written discovery requests, and courts forced to resolve discovery disputes in a piecemeal fashion. Insurers argue these negatives are outweighed by the efficiency of first determining coverage, and if there is none, ending the matter expeditiously by avoiding unnecessary discovery regarding a meritless bad faith claim. This of course assumes there is no coverage and may lead to the procedural evisceration of the bad-faith claim.
One practical solution for insurers, if possible, is to file a dispositive motion as to coverage and ask that discovery be stayed pending resolution of the dispositive coverage motion. This avoids opposition from insureds regarding duplicative discovery and may be more readily agreed to by insureds.
Jessica F. Pardi is a partner in Morris, Manning & Martin, LLP's Insurance and Reinsurance Department.
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