rePlanet Holdings, Inc. v. Federal Insurance Company ( 2019 )

1 2 3 4 5 6 7 8 9 10 UNITED STATES DISTRICT COURT 11 EASTERN DISTRICT OF CALIFORNIA 12 13 rePLANET HOLDINGS, INC., Case No. 1:19-cv-00133-LJO-EPG 14 Plaintiff, ORDER GRANTING IN PART AND DENYING 15 IN PART PLAINTIFF’S MOTION TO COMPEL v. 16 (ECF NO. 28) FEDERAL INSURANCE COMPANY, 17 Defendant. 18 19 Plaintiff rePlanet Holdings, Inc. (“Plaintiff”) brings this suit against Defendant Federal 20 Insurance Company (“Defendant”) alleging causes of action under California law for (1) breach 21 of contract, (2) breach of the covenant of good faith and fair dealing, and (3) fraud, stemming 22 from Defendant’s refusal to pay proceeds under a crime and fidelity insurance policy (“the 23 Policy”) that it issued to Plaintiff. 24 Pending before the Court is Plaintiff’s Motion to Compel in which Plaintiff seeks an order 25 compelling Defendant to answer interrogatories and requests for production. (ECF No. 28.) The 26 Court heard oral argument on the motion on September 27, 2019. Joshua Herr appeared 27 telephonically for Plaintiff. Kenneth Watnick appeared telephonically for Defendant. For the 28 reasons stated herein, and for those reasons stated on the record at oral argument, Plaintiff’s 1 Motion to Compel is granted in part and denied in part. 2 I. BACKGROUND 3 Plaintiff’s suit against Defendant stems from Defendant’s refusal to pay insurance 4 proceeds under a crime insurance policy that Defendant issued to Plaintiff. Plaintiff originally 5 alleged this failure to pay was a breach of contract, as well as a breach of the covenant of good 6 faith and fair dealing. Plaintiff filed suit in California state court on December 31, 2018, and 7 Defendant removed the action to this Court on February 2, 2019. (ECF No. 1.) 8 On May 1, 2019, Plaintiff filed a motion to amend the Complaint to add a fraud claim and 9 a factual allegation that Defendant systemically denies first-party claims under the Policy based 10 on its interpretation of the “direct loss” language in the Policy. (ECF No. 12.) Defendant opposed 11 the motion. (ECF No. 14.) 12 The Court granted the motion for leave to amend on July 25, 2019. (ECF No. 20.) The 13 Court determined that an insurer makes a tacit representation when issuing an insurance policy 14 that the policy provides some coverage, but, according to Plaintiff’s allegations, the Policy that 15 Defendant issued to Plaintiff was illusory and provided no coverage because of Defendant’s 16 interpretation of key language therein.1 17 On September 6, 2019, Plaintiff filed this motion to compel after an informal discovery 18 dispute conference on August 9, 2019. (ECF Nos. 24, 28.) The parties filed their joint statement 19 on September 20, 2019. (ECF No. 34.) Each side also filed declarations into the record in support 20 of their positions. (ECF Nos. 30, 31, and 33.) The Court held oral argument on the motion on 21 September 27, 2019. 22 II. LEGAL STANDARDS 23 Fed. R. Civ. P. 26(b)(1) defines the scope of permissible discovery as follows: 24 Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering 25 the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to information, the parties’ resources, the importance of the 26 discovery in resolving the issues, and whether the burden or expense of the proposed 27 28 1 A complete discussion of the parties’ arguments, as well as a recitation of the pertinent Policy language, can be 1 Thus, to be discoverable under Fed. R. Civ. P. 26(b)(1), the information sought must be 2 “(1) relevant to any party’s claim or defense” and (2) “proportional to the needs of the case.” To 3 be relevant, the discovery must pertain to a claim, issue or defense that is pleaded in the case. See 4 Moore v. Superway Logistics, Inc., 17-cv-1480, 2019 WL 2285392 at *6 (E.D. Cal. May 29, 5 2019) (“Plaintiffs have not met their burden of establishing that the requested discovery is 6 relevant to any claim or defense at issue in this case.”). 7 Under the second part of the Fed. R. Civ. P. 26(b)(1) test, to be discoverable, information 8 must be “proportional to the needs of the case.” The 2015 amendments added the proportionality 9 requirement for permissible discovery—relevancy alone is no longer enough. Centeno v. City of 10 Fresno, 16-cv-00653-DAD-SAB, 2016 WL 7491634 at *3 (E.D. Cal. Dec. 29, 2016) (“Under the 11 amended Rule 26, relevancy alone is no longer sufficient to obtain discovery, the discovery 12 requested must also be proportional to the needs of the case.”) (citation omitted). 13 Fed. R. Civ. P. 26(b)(2)(C) further restricts discovery. It requires the Court to limit the 14 frequency or extent of discovery if the Court determines that the discovery sought (1) “[is] 15 unreasonably cumulative or duplicative, or can be obtained from some other source that is more 16 convenient, less burdensome, or less expensive;” (2) “the party seeking discovery has had ample 17 opportunity to obtain the information by discovery in the action;” and (3) “the proposed discovery 18 is outside the scope of Rule 26(b)(1).” See Fed. R. Civ. P. 26(b)(2)(C). 19 III. ANALYSIS 20 A. Requests related to other claims made under similar insurance policies 21 The bulk of the parties’ discovery dispute concerns Defendant’s resolution of other claims 22 brought under crime and fidelity policies like that issued to Plaintiff, particularly instances where 23 Defendant denied such claims. The following contested interrogatories and requests for 24 production seek information regarding other claims2: 25 Special Interrogatory No. 5: “Identify the number of claims made under crime and fidelity 26 policies in California SIMILAR to the POLICY in the last five years in which YOU 27 2 Special interrogatories 4, 6, 8, and 10 are detailed in the parties’ joint statement, but were apparently resolved by 28 Defendant’s supplemental response to the special interrogatories which detailed the number of claims under the 1 Special Interrogatory No. 7: “Identify the number of claims made under ‘Forgery 2 Coverage’ provided in the POLICY in which YOU denied coverage.” 3 Special Interrogatory No. 9: “Identify the number of claims made under ‘Employee Theft Coverage’ policies in California SIMILAR to the ‘Employee Theft Coverage’ provided in 4 the POLICY in which YOU denied coverage.” 5 Special Interrogatory No. 11: “Identify the number of claims made under ‘Computer Fraud Coverage’ policies in California SIMILAR to the ‘Computer Fraud Coverage’ 6 provided in the POLICY in which YOU denied coverage.” 7 Request for Production No. 3: “A copy of any settlement agreements YOU entered into in the past five years on policies YOU issued in California for coverage under ‘Employee 8 Theft Coverage’ SIMILAR to the ‘Employee Theft Coverage’ provided in the POLICY.” 9 Request for Production No. 4: “A copy of any settlement agreements YOU entered into in the past five years on policies YOU issued in California for coverage under ‘Forgery 10 Coverage’ SIMILAR to the ‘Forgery Coverage’ provided in the POLICY.” 11 Request for Production No. 5: “A copy of any settlement agreements YOU entered into in the past five years on policies YOU issued in California for coverage under ‘Computer 12 Fraud Coverage’ SIMILAR to the ‘Computer Fraud Coverage’ provided in the POLICY.” 13 On September 11, 2019, Defendant served supplemental responses to the interrogatories, 14 which generally stated that “[Defendant] was placed on notice of 324 California claims involving 15 Employee Theft, Forgery, or Computer Fraud Claims under crime policies similar to the rePlanet 16 Policy, including 256 Employee Theft Claims, 21 Forgery Claims and 47 Computer Fraud 17 Claims. [Defendant] confirmed it paid 112 of these claims, including 93 Employee Theft Claims, 18 3 Forgery Claims, and 15 Computer Fraud Claims.” (ECF No. 34, p. 19-20.) Defendant contends 19 that this is a sufficient response to the contested interrogatories given the allegation that it 20 systemically denies crime insurance claims under policy provisions like that issued to Plaintiff. 21 Anything further, such as a detailed review of all claims in which claims were not paid, would 22 involve undue burden that outweighs any potential relevance the specifics of non-paid claims 23 would have. As for the requests for production seeking settlement agreements, again, Defendant 24 questions the relevance and proportionality of such requests, noting that “Plaintiff alleges, on 25 information and belief, that [Defendant] denies all or substantially all crime claims. Thus it is the 26 existence of paid claims, not the terms of any settlement agreement, which are arguably relevant 27 to [Plaintiff’s] allegations.” (ECF No. 34, p. 23.) 28 In response, Plaintiff contends that information concerning denials of other claims is 1 pertinent to its fraud allegations because it alleges that “[Defendant] uses the ‘direct loss’ 2 language in policies it issued with material terms identical or similar to those at issue in the Policy 3 to deny all or the vast majority of first-party claims made in California.” (Id. at p. 13). And, as to 4 settlement agreements, Plaintiff argues that Defendant’s “burdensome” objection is improper 5 because it is based on Defendant’s failure to keep its records in good order. See Pom Wonderful 6 LLC v. Coca-Cola Co., No. CV086237SJOFMOX, 2009 WL 10655335 at *3 (C.D. Cal. Nov. 30, 7 2009) ([“Defendant] cannot seek to preclude plaintiff from pursuing discovery based on a record- 8 keeping system that is plainly inadequate.”). 9 The Court will deny the motion to compel as to special interrogatories 5, 7, 9, and 11 10 because denials of other claims have little if any relevance to the fraud claim the Court allowed 11 Plaintiff to assert. As the Court understood the proposed claim, Plaintiff alleged that Defendant 12 fraudulently issued an illusory insurance policy that, due to its construction of the phrase “direct 13 loss,” could never supply coverage. The Court found such allegations, upon information and 14 belief, could state a fraud claim because an insurer makes a tacit representation upon issuing a 15 policy that the policy covers something—an illusory policy providing no coverage would 16 undermine that tacit representation. The Court did not, and does not, understand Plaintiff’s fraud 17 claim to be based on an improper pattern of denying some, or even most, claims made under 18 similar crime and insurance policies. The Court’s understanding that Plaintiff’s fraud claim was 19 premised upon a theory of an illusory insurance contract is bolstered by Plaintiff’s representations 20 at oral argument on the motion to amend, in which Plaintiff’s counsel argued as follows: 21 “This policy could never be interpreted to supply coverage…you’re an insurance company you go into the market place, you make a representation that there’s 22 coverage. The casino chips, tokens, and tickets are provided are covered but you read the policy and coverage in such a way that there could never be coverage, that’s 23 fraudulent.” … 24 “Here, we received from defendant after no investigation a policy denial based on 25 the way the policy was written that as written would imply that there is never coverage, never ever ever ever!”3 26 27 28 3 These quotations are taken from the Court recording of the May 31, 2019, hearing on Plaintiff’s Motion to Amend; 1 The Court determined that such allegations could state a fraud claim based on the tacit 2 representation an insurer makes when it issues a policy, that the policy covers something. The 3 Court found the allegations plausible and sufficient to state a claim, even though based on 4 information and belief. 5 With this background in mind, Defendant’s response to the interrogatories provides the 6 most relevant information, i.e. whether Defendant denies all claims under these policy provisions. 7 Specifically, Defendant’s response delineates exactly how many claims under the Employee 8 Theft, Computer Fraud, and Forgery provisions were paid. This response appears to negate 9 Plaintiff’s factual premise for the fraud claim to the extent that premise centers upon Defendant’s 10 issuance of an illusory insurance policy resulting in systemic denial of claims under the Employee 11 Theft, Computer Fraud, and Forgery provisions of the Policy. 12 Thus, additional information about claim denials would have little relevance, and 13 whatever relevance such information did have would be outweighed by the burden Defendant 14 would face in ascertaining what claims were in fact denied. Indeed, while Plaintiff claims any 15 burden to Defendant stems from the way in which it keeps its records, it cites no evidence of this; 16 instead, Defendant submitted a detailed declaration from its Vice President of Fidelity Claims 17 setting forth in detail the burden associated with analyzing the reasons for non-payment of the 18 212 California Claims for which there were no indemnity payments. (ECF No. 31, p. 2.) For these 19 reasons, the Court finds the motion to compel as to interrogatories 5, 7, 9, and 11 should be 20 denied. 21 Turning to requests for production 3, 4, and 5, the Court finds the sought information 22 mostly irrelevant to the theory that Defendant fraudulently issued an illusory insurance policy. As 23 Defendant notes, it is the existence of paid claims, not the terms of any settlement agreement, that 24 are arguably relevant to Plaintiff’s allegations. Finally, beyond the lack of relevance, the Court 25 agrees with Defendant that the cost of compliance is not proportional to the needs of the case, as 26 Defendant would have to review the 112 paid claims to determine which involved settlement 27 agreements. And to the extent the settlement agreement contained a description of the claim or 28 insured, Defendant would have to seek the affirmative consent of the insured and the third parties 1 before releasing such information. See Cal. Ins. Code § 791.13. Thus, the Court will also deny 2 Plaintiff’s motion to compel as to requests for production 3, 4, and 5. 3 At oral argument, Plaintiff’s counsel suggested that additional detail regarding when 4 proceeds were paid out under the pertinent policy provisions could be relevant. For example, if 5 Defendant initially denied all claims and only reversed course after litigation or a settlement 6 agreement, this would demonstrate that Defendant interprets the policy in such a way that it is 7 rendered illusory. The Court does believe Plaintiff is entitled to discovering whether Defendant 8 ever paid claims absent litigation. Specifically, the Court finds that determining whether at least 9 some claims were paid before litigation or a settlement of some kind would be beneficial and 10 relevant. 11 The Court thus orders the parties to meet and confer to determine how best to capture this 12 information.4 If the parties are unable to agree on supplemental discovery on this issue, they 13 should seek the Court’s assistance. 14 B. Requests for production related to claims handling and training manuals 15 Plaintiff’s Requests for Production 8 and 9 seek Defendant’s claims handling and training 16 materials, as follows: 17 Request for Production No. 8: “All training materials YOU provided to YOUR claims handling professionals, including employees and independent contractors, RELATED TO 18 the handling of claims made under crime and fidelity policies in California SIMILAR to the POLICY.” 19 Request for Production No. 9: “All claims handling manuals or related literature 20 RELATED TO the handling of claims made under crime and fidelity policies in California SIMILAR to the POLICY.” 21 22 Defendant produced the Financial Lines Fidelity Best Practices Guidelines and a 23 certification conforming that its claims examiner obtained her California Fair Claims Practices 24 Certification. Defendant’s Vice President of Fidelity Claims also submitted a declaration that 25 Defendant does not maintain training or claims manuals. Nevertheless, Plaintiff seeks a written 26 response in Defendant’s discovery responses confirming that the Financial Lines Fidelity Best 27 28 4 The Court at oral argument discussed a potential Request for Admission as to each policy provision that no claims 1 Practices Guideline is the only document that is responsive to request for production number 8. 2 The Court grants this portion of the motion to compel. The Court orders Defendant to 3 submit a supplemental response to request number 8 to indicate whether the Financial Lines 4 Fidelity Best Practices Guidelines is the only document that is responsive to the request. 5 C. Interrogatories concerning Defendant’s reasons for denying the claim 6 The parties initially disputed Defendant’s response to interrogatories 1 and 2, which 7 address why Defendant denied Plaintiff’s claim. However, Defendant pointed Plaintiff to 8 documents detailing the reasons it denied Plaintiff’s claim, and Plaintiff indicated at oral 9 argument that this response was sufficient. Accordingly, to the extent it relates to Plaintiff’s 10 interrogatories 1 and 2, Plaintiff’s Motion to Compel will be denied as moot. 11 D. Plaintiff’s request for sanctions 12 Plaintiff also seeks “over $7,500 in legal fees in connection with preparing its motion [to 13 compel] and this joint statement,” as well as the fees it incurred in attending and participating in 14 oral argument. (ECF No. 16-17.) Plaintiff argues such a sanction is justified because Defendant’s 15 conduct has “unreasonably and vexatiously” multiplied these proceedings. See 28 U.S.C. § 1927. 16 Plaintiff also points to Federal Rule of Civil Procedure 37(a)(5), which provides that if a motion 17 to compel is granted, “the court must…require the party or deponent whose conduct necessitated 18 the motion, the party or attorney advising that conduct, or both to pay the movant’s reasonable 19 expenses incurred in making the motion, including attorney’s fees” unless the moving party did 20 not attempt to obtain the disclosure without court action, the opposing party’s nondisclosure was 21 substantially justified, or such an order would be unjust. 22 The Court declines to award sanctions here. The Court does not find that Defendant 23 inappropriately multiplied these proceedings; indeed, many of its objections are justified. As for 24 Plaintiff’s request pursuant to Rule 37, where a motion to compel is granted in part and denied in 25 part, the Court has discretion whether or not to apportion expenses incurred in relation to the 26 motion. See Fed. R. Civ. P. 37(a)(4)(A). Here, the Court does not find sanctions are appropriate 27 under Rule 37 because Plaintiff’s Motion to Compel is largely denied. 28 \\\ 1 IV. CONCLUSION 2 For the reasons set forth herein IT IS HEREBY ORDERED that: 3 1. Plaintiff's Motion to Compel is DENIED AS MOOT to the extent it relates to Plaintiff s 4 interrogatories 1, 2, 4, 5, 6, 8, and 10; 5 2. Plaintiff's Motion to Compel is DENIED to the extent it relates to □□□□□□□□□□□ 6 interrogatories 5, 7,9, and 11; 7 3. Plaintiff's Motion to Compel is GRANTED to the extent it relates to Plaintiff's 8 request for production number 8, and Defendant is directed to supplement its response 9 consistent with this order; 10 4. Plaintiff's Motion to Compel is DENIED to the extent it seeks sanctions against 11 Defendant; and 12 5. The parties shall meet and confer regarding supplemental discovery related to whether 13 Defendant paid claims under crime insurance policies similar to the Policy issued to 14 Plaintiff without litigation, as described in this order. 15 16 IT IS SO ORDERED. 7! Dated: _ October 3, 2019 [sJ ee heey — 18 UNITED STATES MAGISTRATE JUDGE 19 20 21 22 23 24 25 26 27 28