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A federal district court in California has rejected an insurer's efforts to strike significant portions of an insurance bad faith complaint on the basis of the litigation privilege, although it relied on the mediation privilege to strike limited parts of two paragraphs of the complaint.

The Case

After Gregory Harman was involved in an automobile accident, he demanded $674,525 from his insurer, Golden Eagle Insurance Company, under his automobile insurance policy's uninsured motorist coverage.

Asserting that Golden Eagle did not respond, Mr. Harman demanded arbitration.

Mr. Harman subsequently sued Golden Eagle for breach of contract and bad faith, seeking to rely on Golden Eagle's conduct at the mediation and arbitration that took place between the parties.

Relying on the mediation and litigation privileges, Golden Eagle moved to strike paragraphs 13-27, 29-37, 46(c), 46(g), and 46(l) from Mr. Harman's complaint. These paragraphs provided information regarding the discovery and mediation phases of the parties' history:

- Paragraphs 13-16 discussed specific discovery requested and noticed;

- Paragraphs 17-20 told the story of the mediation between Mr. Harman and Golden Eagle, which included what Golden Eagle and its agents and attorneys said, did, and offered;

- Paragraphs 21-22 discussed a statutory offer Golden Eagle made and alleged that Golden Eagle failed to respond to Mr. Harman's written demands;

- Paragraphs 23-27 described events that took place at the arbitration hearing;

- Paragraphs 29-37 discussed allegations related to Golden Eagle's handling of its expert and other witnesses, other evidence allegedly improperly introduced in arbitration, and Mr. Harman's other complaints with generally how Golden Eagle conducted the arbitration, such as during closing arguments; and

- Subsections (c), (g), and (l) under paragraph 46 alleged the ways Mr. Harman believed Golden Eagle had breached its duties.

Golden Eagle maintained that paragraphs 17-20 should be stricken for violating the mediation privilege, and that the balance of the paragraphs it challenged – 13-16, 21-27, 29-37, and 46(c), (g), and (l) – should be struck based on the litigation privilege.

Mr. Harman argued that these statements went to the heart of his claim for tortious breach of the implied covenant of good faith and fair dealing.

The District Court's Decision

The district court decided that the mediation privilege contained in California Evidence Code Section 1119 applied to a portion of the challenged paragraphs, but that the litigation privilege of Civil Code Section 47 did not apply at all.

In its decision, the district court explained that paragraph 17 depicted events leading up to the mediation in that it referred to the time Mr. Harman appeared at the mediation, who the mediator was, and what Golden Eagle had offered to Mr. Harman prior to the mediation. The district court ruled that Section 1119 was not applicable to paragraph 17 because it did not contain any disclosures of information gleamed from mediation.

The district court added that paragraph 18 failed to trigger Section 1119 because it did not include anything said, an admission, a writing, communication, negotiation, or settlement discussion. It only alleged who Golden Eagle's attorney was, timing issues, and the attorney's attempt to obtain authority to make an offer.

With respect to paragraphs 19 and 20, the district court found “an apparent conflict” between California's strict mediation privilege and the Federal Rules of Evidence. It reasoned that Federal Rule 501, which states that, in civil cases, “state law governs privilege regarding a claim or defense for which state law supplies the rule of decision,” seemed to require the application of Section 1119. The district court then observed that Federal Rule 408 allows evidence of settlement negotiations to be admitted, not to prove liability, but to refute a claim of undue delay or bad faith; that was “exactly [Mr.] Harman's case.”

The district court decided that Mr. Harman could not allege the exact dollar amounts offered in settlement, but could reference them in other descriptive ways. The district court concluded, therefore, that the allegations of what was said or communicated in mediation as stated in paragraph 20 fell within the Section 1119 privilege and had to be stricken. Accordingly, it granted Golden Eagle's motion to strike paragraphs 19 and 20, but denied its request to strike paragraphs 17 and 18.

Next, the district court turned to the litigation privilege, explaining that it “applies to any communication (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action.”

The district court stated, however, that the litigation privilege did not apply when an insured was “attempting to introduce evidence of the insurer's litigation conduct in bad faith insurance cases.”

The district court explained that “evidence of litigation misconduct to prove breach of the good faith covenant” could be introduced – not in an effort to impose liability “based squarely on a privileged communication” but where an insured was using “an underlying course of conduct” to “prove liability for breach of the covenant.'” According to the district court, the latter was “precisely” what Mr. Harman alleged.

In other words, the district court concluded, the litigation privilege did not bar the portions of Mr. Harman's complaint challenged by Golden Eagle because he offered the alleged misrepresentations “as evidence of the underlying course of conduct rather than as the actual source of the harm.”

The case is Harman v. Golden Eagle Ins. Co., No.: 17-cv-2328-AJB-MDD (S.D. Cal. April 16, 2018). Attorneys involved include: For Gregory Bruce Harman, Plaintiff: Todd Daryl Reeves, LEAD ATTORNEY, The Dunnion Law Firm, Monterey, CA. For Golden Eagle Insurance Corporation, Defendant: Norman N. Lau, LEAD ATTORNEY, Clyde & Co US LLP, San Francisco, CA.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.