Insurers must comply with broad discovery requests, judge rules.

A federal trial court in Pennsylvania has ordered four insurance companies--accused of bad faith in refusing to pay an insured's disability claim--to turn over scores of documents that could show a nationwide "pattern and practice" of rejecting valid claims to increase profits. (Saldi v. Paul Revere Life Ins. Co., No. CIV.A. 99-6563, 2004 WL 1858403 (E.D. Pa. Aug. 13, 2004).)

In a 51-page opinion, District Court Judge R. Barclay Surrick granted plaintiff Thomas Saldi access to documents including "profitability analyses," training materials, claims-management studies, and personnel files. Saldi is seeking proof that the defendants adopted a nationwide plan that encouraged employees to deny claims under certain disability policies because those policies had proven unprofitable.

Saldi's lawyer, Alan Casper of Philadelphia, hailed the ruling as a significant victory for plaintiffs who allege bad faith handling of their insurance claims. It is the first published opinion to conclude that the U.S. Supreme Court's 2003 decision in State Farm Mutual Automobile insurance Co. v. Campbell does not limit plaintiffs' discovery in bad-faith litigation to documents related only to their own cases, he said.

"The [Saldi] court discusses why certain types of internal documents are discoverable," Casper said, which "provides a road map" for courts handling similar cases.

The defendants, UnumProvident Corp. and its corporate predecessors--Paul Revere Life Insurance Co.; the Provident Cos., Inc.; and Provident Life and Accident Insurance Co. of America--argued that the Supreme Court prohibited broad-based discovery in bad-faith cases when it struck down a $145 million punitive damages award against an insurance company in State Farm. The Court found that the award was improper because it was meant to punish the defendant for "unsavory" business conduct outside the plaintiff's home state rather than for specific harm to the plaintiff. There must be a "nexus" between the tortious conduct and the harm suffered, the Court said. (123 S. Ct. 1513 (2003).)

In Saldi, the defendants argued that given the State Farm holding, the plaintiff should be limited to discovery of documents that pertained to the specific facts of his case.

But Surrick disagreed, denying most of the defendants' requests for protective orders.

"We disagree with the defendants' assertion that the case law broadly limits discovery in all ... such cases. Rather, we conclude that courts have consistently held that when a bad-faith policy or practice of an insurance company is applied to the specific plaintiff, the plaintiff is entitled to discover and ultimately present evidence of that policy or practice at trial in order to prove that the insurer intentionally injured the plaintiff and to show the insurer's reprehensibility and recidivism in order to assist the jury in calculating appropriate punitive damages," Surrick wrote.

In 1990, while working as the general manager of a commercial rose grower, Saldi bought an "own occupation" long-term disability, policy from Paul Revere Life Insurance Co. Later diagnosed with multiple sclerosis, he stopped working in 1996 because of the illness.

The same year, Saldi applied for long-term disability benefits, claiming he was totally disabled in his own occupation. Paul Revere approved the claim and began making payments. Seventeen months later, the insurer's successor company, UnumProvident, terminated his benefits.

Saldi's bad-faith claim centers on the type of policy he purchased--a non-cancelable, guaranteed renewable, own-occupation disability policy. Saldi charges that from the late 1980s to the mid-1990s, insurance companies competed fiercely to sell these "poorly underwritten and underpriced" policies. In later years, he alleges, the companies discovered that claims made under these policies were depleting the companies' cash reserves, so the companies sought to terminate benefits to keep payouts within their budget.

"Years ago, this company set out on a business plan to deny as many claims as they could for whatever spurious reasons they could come up with, just to increase their profit margins and their bottom line," said Frank Winkles, a Tampa lawyer who has represented plaintiffs in similar cases against UnumProvident. (See D. Frank Winkles & Claude H. Tison Jr., When the Specialist Can't Specialize Anymore, TRIAL, Dec. 2003, at 42.)

UnumProvident denies these allegations. In a press release responding to media reports that criticized the company's claims-handling practices, including allegations that it offered employees financial incentives to deny valid claims, CEO Tom Watjen said, "Nothing could be further from the truth. Any business involves expectations of performance, and ours is no exception. However, to suggest that the natural stresses of our business involve pressure of any kind to close claims inappropriately is absolutely false."

In the past few years, the company has been hit with several large punitive damages awards in bad-faith cases, said Winkles. "If you look at all these cases, it shows a pattern of activity to defraud policyholders."

Saldi's lawyer, Casper, said he used documents from those cases to show the court that his client was not on a "fishing expedition." Rather than simply ask the defendants to produce any unprotected internal documents, he sent the defendants copies of documents that had been used in other cases, with requests for admission.

"We asked them to admit that [the documents] were created as part of a business record and that they had been created within the scope of employment," he said. "It's hard to persuade a court that you shouldn't have to authenticate your own documents."

The strategy worked. "For any evidence of the defendants' actions outside of the instant case to be relevant and potentially admissible in the instant case, there must be some nexus or connection between those actions and the instant case," Surrick wrote. "The plaintiff has submitted a number of documents obtained in similar litigation that provide a proffer of evidence of the defendants' bad-faith actions.... The evidence proffered by the plaintiff provides support for the instant allegation of a pattern and practice of bad faith and supports further investigation into the defendants' internal business practices and policies."

Winkles expressed doubt that the documents will ever be turned over. "If the materials are produced, and I think that is a big 'if,' it's going to allow great disclosure [of] the books and records and inner workings of UnumProvident. I think it's such a devastating opinion against the company, and so significant, that they may settle the case and not produce the documents."

There was no talk of settlement, Casper said at press time, and although the deadline to appeal the judge's order had passed, the defendants still had not produced any documents.

"The latest game is to call me after hours and advise me that they are working on it and hope to have the stuff for me soon," he said. "More than 40 days have passed, and they still haven't produced a single page."