Anastasi v. Fidelity National Title Insurance Company. , 137 Haw. 104 ( 2016 )

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Electronically Filed
Supreme Court
SCWC-30557
04-FEB-2016
09:16 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
LLOYD R. ANASTASI,
Petitioner and Respondent/Plaintiff-Appellant,
vs.
FIDELITY NATIONAL TITLE INSURANCE COMPANY,
Respondent and Petitioner/Defendant-Appellee.
SCWC-30557
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(ICA NO. 30557; CIV. NO. 08-1-0718)
FEBRUARY 4, 2016
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
OPINION OF THE COURT BY NAKAYAMA, J.
Both Plaintiff-Appellant Lloyd R. Anastasi (Anastasi)
and Defendant-Appellee Fidelity National Title Insurance Company
(Fidelity) have applied for a writ of certiorari from the
Intermediate Court of Appeals’s (ICA) February 6, 2015 Judgment
on Appeal filed pursuant to its December 30, 2014 Opinion. The
ICA vacated the judgment of the Circuit Court of the First
Circuit (circuit court), which was entered in favor of Fidelity
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on Anastasi’s bad faith claim.
Anastasi filed a bad faith and breach of contract claim
against Fidelity after Fidelity allegedly delayed in making
payments to Anastasi under a title insurance policy. Anastasi
had loaned $2.4 million to a third party in exchange for a
mortgage on a property that was supposedly owned by that third
party. Fidelity insured that the third party had good title, but
it was soon discovered that the warranty deed purporting to give
title to the third party was forged. When Anastasi was sued by
the true owners of the property, Fidelity immediately accepted
tender of the claim under a reservation of rights and retained an
attorney to represent Anastasi.
Anastasi argued that Fidelity committed bad faith
because Fidelity knew early on in the underlying litigation that
the deed was forged but continued to litigate the lawsuit.
Anastasi asserts that the lawsuit was used by Fidelity to delay
paying him under the policy. The circuit court granted summary
judgment in favor of Fidelity on this issue.
On appeal, Anastasi argued that there were genuine
issues of material fact as to whether Fidelity committed bad
faith. Anastasi also challenged a circuit court order that
allowed Fidelity to withhold certain documents that Anastasi
requested during discovery under attorney-client privilege and
work product doctrine. The ICA remanded the discovery order to
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the circuit court and vacated part of the circuit court’s order
granting summary judgment.
For the reasons stated below, we affirm in part and
vacate in part the February 6, 2015 judgment of the ICA filed
pursuant to its December 30, 2014 opinion and remand to the
circuit court for further proceedings consistent with this
opinion.
I. BACKGROUND
Anastasi made a loan to Alajos Nagy (Nagy) in the
amount of $2.4 million that was secured by a mortgage on a
property located in Mokulç#ia, O#ahu. In 2005, Anastasi had over
twenty years of experience in real estate transactions and made
loans to individuals as a business. Anastasi’s loans were equity
loans based on the value of properties. Anastasi stated in his
deposition that a business acquaintance of his, Paul Lee (Lee),
first brought the Nagy loan to his attention. Anastasi did not
know what Lee did on a day-to-day basis for work except that Lee
referred prospective borrowers to Anastasi. Michael Talisman
(Talisman) also brought the Nagy loan to Anastasi’s attention.
Anastasi stated that Lee did not tell him where he procured his
customers, and Anastasi could not recall any details about how
Nagy, Lee, and Talisman were connected.
In March 2005, Anastasi was in communication with Lee
and Talisman regarding a potential mortgage to Nagy that would be
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secured by the property. Anastasi testified that during that
month, he performed a due diligence investigation into the
property. Among documents that Anastasi reviewed as part of his
investigation was a document from the tax assessor’s office that
indicated that the property was owned by Paul Stickney
(Stickney). At that time, the property was owned by a trust, and
Stickney was the trustee and Gregory Rand (Rand) was the
beneficiary of the trust. Anastasi stated that it was his
understanding that Lee and Talisman and Rand and Stickney were
making arrangements between them and that Nagy would acquire
title to the property unencumbered and be the one signing the
loan documents. Anastasi was assured that he would also be
issued title insurance at that time. Anastasi also reviewed an
appraisal of the property done by Mark Justmann (Justmann) dated
March 15, 2005. Justmann valued the property at almost $7
million, but Anastasi believed the actual value of the property
was closer to $5 million.
A $2.4 million mortgage was executed by Nagy on
April 25, 2005. On June 1, 2005, a warranty deed was apparently
signed by Stickney and purported to deed the property from
Stickney to Nagy in exchange for $10 in consideration. The
warranty deed and the mortgage were recorded in the Bureau of
Conveyances on June 17, 2005. Also on June 17, 2005, Fidelity
issued Anastasi a title insurance policy (Policy) on the property
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in the amount of $2.4 million.
The Policy contained a section that stated the
following:
4. DEFENSE AND PROSECUTION OF ACTIONS; DUTY OF INSURED
CLAIMANT TO COOPERATE
(a) Upon written request by the insured and subject to
the options contained in Section 6 of these Conditions and
Stipulations, the Company, at its own cost and without
unreasonable delay, shall provide for the defense of an
insured in litigation in which any third party asserts a
claim adverse to the title or interest as insured, but only
as to those stated causes of action alleging a defect, lien
or encumbrance or other matter insured against by this
policy. The Company shall have the right to select counsel
of its choice (subject to the right of the insured to object
for reasonable cause) to represent the insured as to those
stated causes of action and shall not be liable for and will
not pay the fees of any other counsel. The Company will not
pay any fees, costs or expenses incurred by the insured in
the defense of those causes of action which allege matters
not insured against by this policy.
(b) The Company shall have the right, at its own cost,
to institute and prosecute any action or proceeding or to do
any other act which in its opinion may be necessary or
desirable to establish the title to the estate or interest
or the lien of the insured mortgage, as insured, or to
prevent or reduce loss or damage to the insured. The
Company may take any appropriate action under the terms of
this policy, whether or not it shall be liable hereunder,
and shall not thereby concede liability or waive any
provision of this policy. If the Company shall exercise its
rights under this paragraph, it shall do so diligently.
(c) Whenever the Company shall have brought an action
or interposed a defense as required or permitted by the
provisions of this policy, the Company may pursue any
litigation to final determination by a court of competent
jurisdiction and expressly reserves the right, in its sole
discretion, to appeal from any adverse judgment or order.
(d) In all cases where this policy permits or requires
the Company to prosecute or provide for the defense of any
action or proceeding, the insured shall secure to the
Company the right to so prosecute or provide defense in the
action or proceeding, and all appeals therein, and permit
the Company to use, at its option, the name of the insured
for this purpose. Whenever requested by the Company, the
insured, at the Company’s expense, shall give the Company
all reasonable aid (i) in any action or proceeding, securing
evidence, obtaining witnesses, prosecuting or defending the
action or proceeding, or effecting settlement, and (ii) in
any other lawful act which in the opinion of the Company may
be necessary or desirable to establish the title to the
estate or interest or the lien of the insured mortgage, as
insured. If the Company is prejudice by the failure of the
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insured to furnish the required cooperation, the Company’s
obligations to the insured under the policy shall terminate,
including any liability or obligation to defend, prosecute,
or continue any litigation, with regard to the matter or
matters requiring such cooperation.
A. Stickney Lawsuit
On November 23, 2005, Stickney and Rand filed their
First Amended Complaint to Quiet Title against Nagy and Anastasi,
alleging that Stickney’s signature had been forged on the June 1,
2005 warranty deed. Anastasi was served with the complaint on
January 5, 2006, and he tendered the claim to Fidelity.
Fidelity received notice of the claim on January 6, 2006.
Elizabeth McGinnity (McGinnity), Senior Vice-President
and Major Claims Counsel for Fidelity, reviewed Anastasi’s claim
and determined that Fidelity should provide a defense to Anastasi
under a reservation of rights. In a letter to Anastasi dated
January 23, 2006, McGinnity informed Anastasi that Fidelity
accepted his tender of defense and reserved all of its rights,
including its right to continue its investigation of the matter
and later deny coverage. McGinnity also informed Anastasi that
Fidelity had retained Jade Lynne Ching (Ching) of Alston Hunt
Floyd & Ing to represent him in the Stickney lawsuit.
Ching sent an introductory letter dated January 27,
2006 to Anastasi. Ching wrote that she would be acting as
counsel for Anastasi, and not Fidelity, even though her fees
would be paid by Fidelity. The letter also stated that because
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Ching was serving as Anastasi’s attorney, confidential
information provided to Ching by Anastasi would not be disclosed
to Fidelity without Anastasi’s consent. Ching wrote that it was
her practice to provide Fidelity with copies of correspondence,
pleadings, discovery responses, deposition transcripts, and
periodic status reports, including an assessment of the
likelihood of success of the defense of a claim. Ching further
wrote that
[i]t is anticipated that Fidelity will provide
recommendations and instructions to the law firm regarding
the steps and procedures to be taken in defending or
settling the Claim. I shall endeavor to keep you informed
of such instructions and obtain your consent where
appropriate to the procedures to be taken in defending or
settling the title dispute. In the event of any dispute
between you and Fidelity concerning the proper procedures to
be followed in defending or settling the title dispute, it
is necessary for you or your individual attorney to
negotiate the matter directly with Fidelity. This law firm
reserves the right to withdraw from your representation in
the event such dispute cannot be resolved by agreement
between you and Fidelity and the law firm receives
conflicting instructions from you and Fidelity concerning
the procedures to be followed in defending or settling the
Claim.
On February 13, 2006, McGinnity and Ching received a
letter from an attorney, Clifford Frieden (Frieden), who was
retained by Fidelity to provide coverage advice and investigate
the allegations made in the Stickney lawsuit. Frieden’s letter
stated that he compared Stickney’s signature to the signature of
the person who executed the warranty deed, and the two signatures
were very different. The driver’s license number and the
expiration date of the license recorded by the notary were also
different from Stickney’s actual driver’s license number and
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expiration date. Suspecting the potential involvement of
Talisman, Justmann, and Nagy in the falsely executed warranty
deed, Ching filed a cross-claim against Nagy and a third-party
complaint against Talisman and Justmann.
On October 6, 2006, the Stickney plaintiffs filed a
motion for summary judgment. Through Ching, Anastasi opposed the
motion, but on April 11, 2007, the circuit court granted the
plaintiffs’ motion for summary judgment.
On April 20, 2007, Ching filed a motion for
reconsideration on the grant of summary judgment on Anastasi’s
behalf. The circuit court denied the motion on October 23, 2007.
On November 19, 2007, Ching sent an email to McGinnity informing
her that the deadline to file an appeal was two days away and
that
[t]o protect Anastasi’s appeal rights, we suggest a notice
of appeal be filed; we can dismiss the appeal at any time.
Also, since the court denied Stickney’s fee request, there
is some utility in procuring an agreement from Stickney that
we will not pursue the appeal so long as he does not appeal
the court’s denial of his request for fees.
Attached to the email was a memorandum from Ching to McGinnity
that was labeled as confidential, work product, and attorney-
client communication (Ching-McGinnity Memorandum). In the
memorandum, Ching gave the following conclusion: “Though we would
likely succeed on appeal, it would be a pyrrhic victory since we
would not be able to establish the validity of the Warranty Deed.
For this reason, we do not recommend an appeal of the order
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granting summary judgment.” McGinnity sent the following
response to Ching: “Yes. File the notice. Thanks.” A notice of
appeal was filed by Ching on November 21, 2007.
The Stickney plaintiffs also filed a cross-appeal
challenging the circuit court’s denial of their attorneys’ fees.
On February 27, 2008, the attorney for the Stickney plaintiffs
sent an email to Ching stating that the plaintiffs would accept
Ching’s offer to settle for $10,000 and that both parties would
dismiss their appeals. The parties eventually filed a
stipulation for dismissal of all claims on August 14, 2008.
On February 28, 2008, Fidelity retained Harlin Young to
appraise the property as of the date of the loss in order to
determine the amount of loss in accordance with the Policy’s
terms. The appraisal was issued on April 30, 2008, and the value
of the property was determined to be $2,750,000.
B. Instant Action
On April 8, 2008, Anastasi filed the complaint in the
instant case against Fidelity, alleging breach of contract and
bad faith. On August 4, 2008, Fidelity paid Anastasi $2.4
million under the Policy.
On December 9, 2008, Anastasi filed a motion to compel
discovery of certain documents and responses to interrogatories
that Anastasi had requested and Fidelity had withheld or objected
to. Attached to the motion was a privilege log that Fidelity
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submitted on October 10, 2008. The privilege log listed numerous
documents that were not produced due to either attorney-client
privilege or work product privilege. The log provided
information on the number of pages in each document; the type of
document withheld; who the recipient of the document was, if
applicable; who the author of the document was; the date of the
document; the subject of the document; and the claimed privilege
for each document. McGinnity was listed as either the recipient
or the author on many of the documents listed in the privilege
log. Anastasi argued that McGinnity functioned as a claims
adjuster in this case, and although her confidential
communications with Frieden may be privileged, her internal work
was not privileged.
In McGinnity’s declaration, she stated that she was an
attorney and
[p]ursuant to my role as Major Claims Counsel, I
investigated, analyzed and rendered legal advice in
connection with the allegations made against the interests
of our insured (“the Claim”) in the Stickney lawsuit by
making an initial determination on whether the Claim was at
least potentially covered by the Policy, as well as
determining what other actions to take in response to the
Claim. The fact that an attorney was assigned to perform
these tasks was not an accident. Title insurance
indemnifies against loss caused by a multitude of potential
problems that affect the title or interest of an insured in
real property. Because of this fact and the unique and
complex problems endemic to title insurance claims, many
aspects relating to coverage under a title insurance policy
requires both the performance of a careful legal analysis of
the title insurance policy and the application of real
estate and insurance coverage law to the unique facts of
every case. As a result, it has become the standard in the
title insurance industry to hire claims attorneys as part of
a title company’s legal department.
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The circuit court1 held a hearing on Anastasi’s motion
to compel discovery on February 3, 2009, and issued an order on
March 17, 2009. The circuit court held that “the Declaration of
Elizabeth McGinnity establishes that she is an attorney employed
by Defendant and therefore, the attorney-client privilege and
work product privilege may be applicable to documents generated
and/or received by her.” The court ordered Fidelity to review
the withheld documents to determine if any additional documents
could be produced. The circuit court also ordered Fidelity to
produce any of the privileged documents it elected to continue to
withhold for an in camera review.
Fidelity submitted some documents to the circuit court
for in camera review. There were ten documents submitted in
total, all authored or received by McGinnity (McGinnity
documents). On November 5, 2009, the circuit court2 issued an
order stating that it had “reviewed in-camera the documents
claimed by [Fidelity] as privileged and ha[d] determined that
[Fidelity’s] assertion of attorney-client privilege and/or the
work product doctrine is proper and that all of the documents are
covered by the attorney-client privilege and/or the work product
doctrine.”
1
The Honorable Glenn J. Kim presided.
2
The Honorable Rom A. Trader signed the order.
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On March 19, 2010, Fidelity filed a motion for summary
judgment on Anastasi’s bad faith claim. In support of the
summary judgment motion, Fidelity included Ching’s deposition
where she testified to the following under oath:
Q: [W]ould it be a fair statement to say that it is
your view that you were defending Mr. Anastasi,
and you were determining the legal strategy that
should be used to defend him?
[Ching]: That’s correct.
Q: And by implication Fidelity was not directing
you in how to defend Mr. Anastasi. Would that
be correct?
[Ching]: That’s correct.
In opposition to the motion, Anastasi asserted that Fidelity
unreasonably delayed paying him under the Policy by directing
Ching to continue litigation and pursue an appeal even after
Fidelity learned the warranty deed was forged.
The circuit court granted Fidelity’s motion for summary
judgment on May 24, 2010. The circuit court made the following
findings:
1. The undisputed facts establish that during the course of
the underlying case, Paul Stickney et al. v. Nagy et al.,
Civil No. 05-1-2065-11 in the Circuit Court of the First
Circuit, State of Hawai#i (“Stickney Litigation”), Fidelity
immediately accepted Plaintiff Anastasi’s tender of the
defense of the claims asserted against him by Paul Stickney
and Gregory Rand (“Stickney Plaintiffs”) and fully and
timely investigated Plaintiff Anastasi’s claim.
2. In accordance with the Hawai#i Supreme Court’s holding
in Best Place, Inc. v. Penn American Ins. Co., 82 Hawai#i
120, 920 P.2d 334 (1996), Fidelity acted reasonably in its
interpretation of the terms and provisions of the title
insurance policy (the “Policy”) issued to Plaintiff Anastasi
when it chose to defend the claims asserted against him in
the Stickney Litigation; particularly since Fidelity had
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been told by attorney Jade Ching that she believed the claim
against Plaintiff Anastasi was defensible because, among
other things, the alleged forgery of the Warranty Deed at
issue in the Stickney Litigation might have been secured
with the complicity of the Stickney Plaintiffs as well as
other parties in the Stickney Litigation. Given these
undisputed facts, the Court finds that Fidelity was entitled
to exercise its legal and contractual rights under the
Policy to defend Plaintiff Anastasi against the claims
alleged against him in the Stickney Litigation and to pursue
that defense to a final determination.
3. While it is undisputed that the Stickney Plaintiffs’
motion for summary judgment was ruled adversely to Plaintiff
Anastasi and that a decision was made to file both a motion
for reconsideration of that ruling and an appeal when the
motion for reconsideration was denied, these facts do not
support a finding that Fidelity acted in bad faith in its
handling of Plaintiff Anastasi’s claim.
4. Plaintiff Anastasi has failed to adduce any evidence to
raise a genuine issue of material fact as to whether
Fidelity controlled and/or directed Plaintiff Anastasi’s
attorneys at Alston Hunt Floyd & Ing in their defense of
Plaintiff Anastasi in the Stickney Litigation. The
undisputed facts establish that Fidelity defended the
Stickney Litigation under a reservation of rights and that
in accordance with its obligations under Finley vs. Home
Insurance, 90 Hawai#i 25, 957 P.2d 1145 (1998), gave
Plaintiff Anastasi’s attorneys full rein to conduct the
defense of their client as they deemed appropriate.
5. Plaintiff Anastasi has not adduced any evidence to
support the conclusion that Fidelity directed Plaintiff
Anastasi’s attorneys to delay a resolution of the Stickney
Litigation for the purpose of allowing Fidelity to forestall
the payment of benefits to Plaintiff Anastasi under the
policy. Any delay in the resolution of the Stickney
Litigation was the natural byproduct of the defense strategy
employed by the Alston Hunt Floyd & Ing attorneys which, as
a matter of law, must be imputed to him.
6. Fidelity’s decision to pay for the work performed by two
appraisers, James Hallstrom and Stellmacher & Sadoyama, and
its decision to order an appraisal from Harlin Young to
determine the amount of the loss under the Policy were
consistent with and in accordance with a reasonable
interpretation of Fidelity’s rights under the Policy.
Pursuant to Hawai#i Rules of Civil Procedure Rule 54(b), the
circuit court entered judgment dismissing the bad faith claim on
May 24, 2010. Anastasi filed a timely notice of appeal on
June 8, 2010.
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B. ICA Proceedings
In his opening brief, Anastasi argued 1) that the
circuit court erred in finding that Fidelity’s actions were
reasonable as a matter of law, 2) that the circuit court erred in
ruling that the actions of Ching must be imputed to Anastasi as a
matter of law, 3) that the circuit court erred in holding that
the McGinnity documents were covered by attorney-client privilege
or the work product doctrine, 4) that the circuit court erred in
restricting discovery to other claims made in Hawai#i, and 5)
that the court erred in awarding costs to Fidelity.3
Anastasi argued that an issue of fact existed as to
whether Fidelity breached the duty of good faith it owed to him
because “Fidelity engaged in more than two years of fruitless
litigation in a feigned attempt to cure a deed that it knew was
forged.” Anastasi argued that there was evidence that showed
that Fidelity believed from May 2006 that the deed was forged and
that Fidelity used the litigation and appraisal clauses in the
Policy to delay payment to Anastasi until August 4, 2008.
Anastasi argued that there was also a question of fact as to
whether Fidelity engaged in undue delay in express breach of the
Policy, which required that Fidelity exercise its rights
“diligently.”
3
Because only the first and third issues remain before us on
appeal, only those issues will be discussed herein.
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Anastasi also argued that the circuit court erred in
finding that the McGinnity documents were privileged. Anastasi
asserted among other things that because McGinnity served in the
capacity of a claims adjuster and investigated Anastasi’s claim
in the ordinary course of business, attorney-client privilege and
work product doctrine should not apply.
In its answering brief, Fidelity argued that it could
not be held liable for bad faith because its actions were based
on a reasonable interpretation of the insurance contract, which
expressly allows defense of the claim, retention of an appraiser,
and deferral of payment until after the conclusion of litigation.
Furthermore, Fidelity asserted that even if these actions could
support a bad faith claim, Anastasi failed to adduce evidence
suggesting a genuine issue of material fact because
notwithstanding the forgery, Ching believed she could
successfully defend the claim against Anastasi. Fidelity also
argued that it needed Young’s appraisal because previous
appraisals had failed to determine the value of the property as
of the relevant date of loss, January 6, 2006 (when Anastasi
tendered the claim to Fidelity).
As for the discovery issue, Fidelity argued that the
circuit court did not abuse its discretion in holding that the
documents were privileged because Anastasi did not provide any
evidence to support his contention that McGinnity acted solely as
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an adjuster.
On December 30, 2014, the ICA issued an opinion.
Relevant to this appeal, the ICA held 1) that because McGinnity
acted in a dual capacity as in-house counsel and claims adjuster,
the circuit court abused its discretion in ruling that all of the
McGinnity documents were covered by attorney-client privilege
and/or work product doctrine, 2) that the circuit court erred in
determining that Fidelity acted reasonably as a matter of law,
and summary judgment should be vacated, and 3) that the circuit
court did not err in determining that Fidelity did not control or
direct Ching’s representation of Anastasi. Anastasi v. Fidelity
Nat. Title Ins. Co., 134 Hawai#i 400, 405, 341 P.3d 1200, 1205
(App. 2014).
Both Anastasi and Fidelity filed timely applications
for writ of certiorari, and this court accepted both applications
on May 22, 2015.
II. STANDARDS OF REVIEW
A. Discovery Rulings
The Hawai#i Rules of Civil Procedure (HRCP)reflect a basic
philosophy that a party to a civil action should be entitled
to the disclosure of all relevant information in the
possession of another person prior to trial, unless the
information is privileged. However, the extent to which
discovery is permitted under Rule 26 is subject to
considerable latitude and the discretion of the trial court.
Thus, the exercise of such discretion will not be disturbed
in the absence of a clear abuse of discretion that results
in substantial prejudice to a party. Accordingly, the
applicable standard of review on a trial court's ruling on a
motion to compel discovery, brought pursuant to HRCP Rule
26, is abuse of discretion.
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Hac v. Univ. of Hawai#i, 102 Hawai#i 92, 100-01, 73 P.3d 46, 54-55
(2003) (internal quotation marks, citations, brackets, and
ellipsis omitted).
B. Summary Judgment
The standard of review for the grant or denial of a motion
for summary judgment is well-settled. “Unlike other
appellate matters, in reviewing summary judgment decisions
an appellate court steps into the shoes of the trial court
and applies the same legal standard as the trial court
applied.” Beamer v. Nishiki, 66 Haw. 572, 577, 670 P.2d
1264, 1270 (1983). “[The appellate] court reviews a circuit
court’s grant or denial of summary judgment de novo.”
Bremer v. Weeks, 104 Hawai#i 43, 51, 85 P.3d 150, 158 (2004)
(quoting Hawai#i Cmty. Fed. Credit Union v. Keka, 94 Hawai#i
213, 221, 11 P.3d 1, 9 (2000)).
[S]ummary judgment is appropriate if the
pleadings, depositions, answers to
interrogatories, and admissions on file,
together, with the affidavits, if any,
show that there is no genuine issue as to
any material fact and that the moving
party is entitled to judgment as a matter
of law. A fact is material if proof of
that fact would have the effect of
establishing or refuting one of the
essential elements of a cause of action or
defense asserted by the parties. The
evidence must be viewed in the light most
favorable to the non-moving party. In
other words, we must view all of the
evidence and the inferences drawn
therefrom, in the light most favorable to
the party opposing the motion.
Omerod v. Heirs of Kaheananui, 116 Hawai#i 239, 254-55, 172 P.3d
983, 998-99 (2007) (citations omitted) (emphasis added).
Blaisdell v. Dep’t of Public Safety, 119 Hawai#i 275, 282, 196
P.3d 277, 284 (2008).
III. DISCUSSION
A. The Discovery Dispute: Work Product Doctrine
The main issue at the center of the discovery dispute
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is whether attorney-client privilege and work product doctrine
protect communications produced by an in-house attorney like
McGinnity who performed duties both as an attorney and a claims
adjuster for Fidelity. Neither party has challenged the ICA’s
opinion as to attorney-client privilege, but Fidelity challenges
the ICA’s reference to a presumption from Harper v. Auto-Owners
Insurance Co., 138 F.R.D. 655, 663 (S.D. Ind. 1991), regarding
the applicability of the work product doctrine. We find
Fidelity’s arguments to be persuasive, and the ICA erred to the
extent that it endorsed or adopted the Harper presumption as part
of our case law.
As noted by the ICA, even though HRCP Rule 26(b)(4)
generally prohibits the discovery of documents prepared in
anticipation of litigation or for trial, “[t]he difficulty of
this issue is determining at what point work produced by an
insurer’s in-house counsel acting in a dual role becomes ‘work
prepared in anticipation of litigation.’” Anastasi, 124 Hawai#i
at 425, 341 P.3d at 1225. The ICA held:
Instead, “[i]t is well established that documents
prepared in the ordinary course of business are not
protected by the work-product doctrine because they would
have been created regardless of the litigation.” Health v.
F/V ZOLOTOI, 221 F.R.D. 545, 549-50 (W.D. Wash. 2004);
Thomas Organ Co. v. Jadranska Slobodna Plovidba, 54 F.R.D.
367, 371 (N.D. Ill. 1972) (“[W]e conclude that any document
which was prepared in the ordinary course of business and
not in anticipation of trial or litigation is routinely
discoverable without any showing of need under Rule 26(b)(1)
and is not protected by Rule 26(b)(3) notwithstanding that
it contains mental impressions, conclusions, opinions and
legal theories.”). “It is presumed that a document or thing
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prepared before a final decision was reached on an insured’s
claim, and which constitutes part of the factual inquiry
into or evaluation of that claim, was prepared in the
ordinary and routine course of the insurer’s business of
claim determination and is not work product.” Harper v.
Auto-Owners Ins. Co., 138 F.R.D. 655, 663 (S.D. Ind. 1991).
“[M]aterials prepared as part of claims investigation are
generally not considered work product due to the industry’s
need to investigate claims. . . . Documents created during
those processes are part of the ordinary course of business
of insurance companies.” Moe v. Sys. Transp., Inc., 270
F.R.D. 613, 624-25 (D. Mont. 2010) (block quote format and
citation omitted); see Thomas Organ, 54 F.R.D. at 374 (“If
every time a party prepared a document in the ordinary
course of business to guide claim handling, this document
was deemed to be prepared in anticipation of litigation, it
is difficult to see what would be discoverable.”).
In circumstances where a document serves a
dual purpose, that is, where it was not prepared
exclusively for litigation, then the “because
of” test is used. Dual purpose documents are
deemed prepared because of litigation if “in
light of the nature of the document and the
factual situation in the particular case, the
document can be fairly said to have been
prepared or obtained because of the prospect of
litigation.” In applying the “because of”
standard, courts must consider the totality of
the circumstances and determine whether the
“‘document was created because of anticipated
litigation, and would not have been created in
substantially similar form but for the prospect
of litigation.’”
United States v. Richey, 632 F.3d 559, 567-68 (9th Cir.
2011) (citations omitted).
Id. (emphasis added).
Turning to the facts of this case, the ICA held that
based on its review of the McGinnity documents, “it is not
evident that Fidelity has carried its burden of establishing that
the work-product doctrine applies to preclude discovery[.]” Id.
Although McGinnity testified that at the time the claim was
tendered to Fidelity she anticipated that a coverage dispute
might ensue between Fidelity and Anastasi, the ICA held that
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there was no evidence on the record that documents were created
because of anticipated litigation and would not have been created
in substantially similar form but for the prospect of litigation.
Id. at 425-26, 341 P.3d at 1225-26. After briefly addressing
each document, the ICA noted that there was “nothing in the
record to suggest that the circuit court considered whether the
withheld documents were produced ‘because of’ anticipated
litigation and would not have been created in a substantially
similar form but for the prospect of litigation.” Id. at 426,
341 P.3d at 1226.
Fidelity did not challenge the ICA’s adoption or
application of the “because of” test. Fidelity challenged only
the ICA’s reference to Harper emphasized above and argued that
“[b]y imposing a presumption that materials prepared by an
insurer before a final decision on an insured’s claim are not
work product, the ICA narrowed work product protections for
insurers for reasons not consistent with this Court’s case law.”
The Hawai#i work product doctrine is set forth in HRCP
Rule 26:
(b) Discovery Scope and Limits. Unless otherwise limited by
order of the court in accordance with these rules, the scope
of discovery is as follows:
. . . .
(4) Trial Preparation: Materials. A party may
obtain discovery of documents, electronically
stored information, and tangible things
otherwise discoverable under subdivision (b)(1)
of this rule and prepared in anticipation of
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litigation or for trial by or for another party
or by or for that other party’s representative
(including the other party’s attorney,
consultant, surety, indemnitor, insurer, or
agent) only upon a showing that the party
seeking discovery has substantial need of the
materials in the preparation of the party’s case
and that the party is unable without undue
hardship to obtain the substantial equivalent of
the materials by other means. In ordering
discovery of such materials when the required
showing has been made, the court shall protect
against disclosure of the mental impressions,
conclusions, opinions, or legal theories of an
attorney or other representative of a party
concerning the litigation.
HRCP Rule 26(b)(4) (effective 2004-2014) (emphasis added). Thus,
the relevant inquiry for determining whether a document can be
protected by work product doctrine is whether the document was
prepared in anticipation of litigation or trial.
Most courts have recognized that an insurance carrier’s
investigation of a claim is generally performed in the ordinary
course of business and not protected by work product doctrine.
Christopher C. Frost et al., Shhh! Why the Attorney-Client
Privilege and Work Product Doctrine May Not Protect
Communications with Coverage Counsel 19 n.74 (2014). Therefore,
when an attorney is performing both the role of claims adjuster
and counsel, courts must determine whether work product created
by such an attorney was made in anticipation of litigation. The
main test adopted and employed by the ICA to answer this question
was the “because of” test from United States v. Richey, 632 F.3d
559, 567-68 (9th Cir. 2011).
Under the “because of” test, courts are instructed to
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consider whether given the totality of the circumstances it can
be fairly said that a document was prepared or obtained because
of the prospect of litigation. This test aligns with the scope
of the privilege as circumscribed in HRCP Rule 26 because the
statutory privilege protects only materials prepared in
anticipation of litigation or for trial.
However, the Harper presumption does not fit squarely
with the privilege as laid out in HRCP Rule 26, because it
focuses not on whether material was prepared in anticipation of
litigation or for trial, but on whether material was prepared
before or after a formal determination has been made on a claim.
Nowhere in the rule is there reference to when a document is
prepared. Instead, the rule clearly focuses on the purpose of
the prepared material and not on when it is prepared. See Ass’n
of Apartment Owners of Waikoloa Beach Villas v. Sunstone
Waikoloa, LLC, 130 Hawai#i 152, 161, 307 P.3d 132, 141 (2013)
(“It is apparent that the opinion letter is ‘prepared in
anticipation of litigation’ because under the terms of the
declaration the opinion letter is a prerequisite for litigation.
Thus, the opinion letter is covered by the work-product
privilege.”); Save Sunset Beach Coal. v. City & Cnty. of
Honolulu, 102 Hawai#i 465, 484, 78 P.3d 1, 20 (2003) (“Although
Obayashi repeatedly states that the memorandum contains ‘legal
analysis, legal impressions and legal conclusions’ there is no
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indication that it was prepared in anticipation of litigation.
We must conclude then that the work-product privilege is
inapplicable.”).
Moreover, HRCP Rule 26(b)(4) does not create a
presumption. A presumption is defined as a “rebuttable
assumption of fact . . . that the law requires to be made . . .
.” Hawai#i Rules of Evidence (HRE) Rule 301(1) (emphasis
added). However, there is no statute or case in Hawai#i that
requires that the trier of fact assume in insurance claims cases
that materials prepared before a final determination on the
insured’s claim are not work product and that materials prepared
after a final determination are work product. The ICA erred to
the extent that it endorsed or adopted the Harper presumption
that was not required by our law.
But because the circuit court must still address
whether the documents meet the “because of” test, we affirm the
ICA’s judgment insofar as it remanded the issue to the circuit
court for further proceedings.
B. Summary Judgment on Bad Faith Claim
1. Enhanced Standard of Good Faith
In Finley v. Home Insurance Co., this court adopted an
enhanced standard of good faith for insurers who defend insureds
under a reservation of rights. 90 Hawai#i 25, 36, 975 P.2d 1145,
1156 (1998). This standard states that
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an insurance company must fulfill an enhanced obligation to
its insured as part of its duty of good faith. Failure to
satisfy this enhanced obligation may result in liability of
the company, or retained defense counsel, or both.
This enhanced obligation is fulfilled by meeting specific
criteria. First, the company must thoroughly investigate
the cause of the insured’s accident and the nature and
severity of the plaintiff’s injuries. Second, it must
retain competent defense counsel for the insured. Both
retained defense counsel and the insurer must understand
that only the insured is the client . . . . Finally, an
insurance company must refrain from engaging in any action
which would demonstrate a greater concern for the insurer’s
monetary interest than for the insured’s financial risk.
Id. at 36-37, 975 P.2d at 1156-57 (quoting Tank v. State Farm
Fire & Cas. Co., 715 P.2d 1133, 1137 (1986)) (internal quotation
marks omitted).
The ICA held that the grant of summary judgment in
favor of Fidelity on Anastasi’s bad faith claim should be vacated
because the circuit court erred in holding that Fidelity acted
reasonably as a matter of law. Anastasi, 134 Hawai#i at 429, 341
P.3d at 1229. The ICA held that viewing the evidence in the
light most favorable to Anastasi (the non-moving party), there
was evidence that Fidelity knew within four months of receiving
the claim that the warranty deed was forged and Fidelity did not
address how proving fraud or forgery in the Stickney lawsuit
would have affected coverage under the Policy, it could not be
said that, as a matter of law, Fidelity’s actions following its
knowledge that the deed was forged were reasonable. Id.
Although the Policy may have allowed Fidelity to withhold payment
until after the resolution of the Stickney lawsuit, the ICA wrote
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that the relevant question “under Best Place is whether, given
the information Fidelity had, the timing when it had the
information, and when it reasonably resolved the issues presented
by Anastasi’s claim, was there an unreasonable delay in paying
Anastasi.” Id. The ICA also held that there was a genuine issue
of material fact as to whether Fidelity demonstrated a greater
concern for its monetary interest than for the insured’s
financial risk in violation of the enhanced standard of good
faith. Id.
Fidelity challenged the ICA’s judgment, arguing 1) that
Fidelity should be allowed to rely on provisions of the Policy
that allow it to pursue litigation to final judgment before
having to determine and pay losses, and 2) that the enhanced
standard of good faith should not apply to title insurers because
“Fidelity and Anastasi’s interests were unified in the underlying
action,” and Anastasi was not at risk of greater personal
liability.
Fidelity’s arguments are not persuasive. First,
Fidelity provides no support for its argument that it should not
be found to have acted unreasonably or in bad faith because it
was exercising its rights under the Policy. Bad faith implies
unfair dealing, and insurance companies should not be allowed to
hide behind policy clauses in order to delay payments. If
insurance companies were held to be acting reasonably as a matter
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of law any time they filed or defended lawsuits under a
contractual right to pursue litigation, frivolous lawsuits could
be used to unfairly delay payments to insureds for years.
Insurance companies must act reasonably even when exercising
contractual rights. See Best Place, Inc. v. Penn Am. Ins. Co.,
82 Hawai#i 120, 122, 920 P.2d 334, 346 (1996) (“Without the
threat of a tort action, insurance companies have little
incentive to promptly pay proceeds rightfully due to their
insureds, as they stand to lose very little by delaying
payment.”). On remand, Fidelity will have the opportunity to
present evidence as to why its actions were reasonable or in good
faith, but based on the record before us, we decline to hold that
Fidelity acted in good faith as a matter of law when it exercised
its contractual rights.
Secondly, this court declines to exclude title
insurance companies from the enhanced standard of good faith when
claims are defended under a reservation of rights. Fidelity’s
and Anastasi’s interests may have been aligned in the Stickney
lawsuit, but their interests were not identical. As this court
has noted,
When an insurer provides an unconditional defense for its
insured, the insured and the carrier share the same goal -–
minimizing or eliminating liability in the third party
action –- and no conflict of interest inhibits the ability
of one lawyer to represent both the insurer and its insured.
But where the carrier questions the availability of coverage
and provides a defense in the third party action subject to
a reservation of rights, a conflict exists –- because the
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insured’s goal is coverage, which flies in the face of the
insurer’s desire to avoid its duty to indemnify.
Finley, 90 Hawai#i at 30, 975 P.2d at 1150 (quotation marks and
citation omitted). When any insurer, including a title insurer,
defends an insured under a reservation of rights, the insurer
maintains the right to evaluate and disclaim coverage.
Therefore, there is inherently a potential for conflict between
the insurer and the insured in such a situation, and there is
nothing distinctive about title insurance that would eliminate
such potential. In fact, the record in this case shows that
Fidelity suspected that Talisman, Justmann, and Nagy may have
been involved in falsely executing the warranty deed. Thus,
Fidelity may have had an interest in delaying or prolonging
resolution of the Stickney lawsuit in order to investigate their
potentially nefarious involvement in the matter, which would have
diverged from Anastasi’s interest in prompt payment under the
Policy.
We do not express any opinion as to whether Fidelity’s
actions constituted bad faith. However, we find that there is a
genuine issue of material fact as to whether Fidelity met the
enhanced standard of good faith. Thus, we affirm the ICA’s
judgment on this issue.
2. Whether Fidelity Induced Ching to Violate HRPC
After holding that summary judgment on Anastasi’s bad
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faith claim was not appropriate, the ICA affirmed the circuit
court’s finding that “Anastasi failed to show any genuine issue
of material fact that Ching breached her ethical duties to him or
that Fidelity induced any such breaches.” Anastasi, 134 Hawai#i
at 431, 341 P.3d at 1231. The ICA held that the four pieces of
evidence relied on by Anastasi to argue that Fidelity improperly
controlled Ching’s actions in the Stickney lawsuit did not
suggest that Ching was actually constrained in exercising her
professional judgment. Id. at 430-31, 341 P.3d at 1230-31. The
four pieces of evidence were a statement from Fidelity’s claims
handbook, the introductory letter Ching sent to Anastasi, the
Ching-McGinnity Memorandum, and the emails between Ching and
McGinnity wherein McGinnity directed Ching to file the notice of
appeal.
Anastasi argues that the ICA gravely erred by failing
to hold Fidelity to an enhanced standard of good faith in
analyzing Fidelity’s interactions with Ching and by viewing the
evidence regarding Ching’s inducement by Fidelity unfavorably to
Anastasi, the non-moving party. This court has held that “where
an insurer is required to provide a defense for its insured, it
would be a breach of the duty of good faith to induce retained
counsel to provide a defense which did not meet the professional
standard set forth by the [Hawai#i Rules of Professional
Conduct].” Finley, 90 Hawai#i at 36, 975 P.2d at 1156. And HRPC
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requires that attorneys who accept payment for a defense of the
insured
(1) consult with the client as to the “means by which the
objectives [of the representation] are to be pursued”; (2)
not allow the insurer to interfere with the attorney’s
“independence of professional judgment or with the client-
lawyer relationship”; and (3) not allow the insurer “to
direct or regulate the lawyer’s professional judgment in
rendering such legal services.”
Id. at 33, 975 P.2d at 1153 (quoting HRPC Rules 1.2; 1.8(f);
5.4(c)).
Viewing the evidence in the light most favorable to
Anastasi, the evidence is sufficient to raise a genuine question
as to whether Ching allowed Fidelity to direct or regulate her
professional judgment. Fidelity’s Claims Handbook expressly
states, “If the outcome of a suit is unfavorable to the insured,
the insurer may determine, in its sole discretion, whether or not
to appeal. . . . The insurer will generally insist upon the right
to select counsel of its own choosing because it is in control of
the litigation.” Ching also stated in her letter to Anastasi
that it was “anticipated that Fidelity will provide
recommendations and instructions to the law firm regarding the
steps and procedures to be taken in defending or settling the
Claim.” The Ching-McGinnity Memorandum and the emails between
Ching and McGinnity could also support a conclusion that Ching
was deferring to McGinnity on the issue of whether to file an
appeal.
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The ICA referred to Ching’s deposition where she stated
that she did not allow Fidelity to direct her in how to defend
Anastasi. Anastasi, 134 Hawai#i at 430, 341 P.3d at 1230. And
while it may ultimately be determined that Ching did not breach
her duties, the evidence put forth by Anastasi is sufficient to
raise a question of fact. Therefore, the ICA erred in holding
that Anastasi failed to show any genuine issue of material fact
that Fidelity induced Ching to breach her ethical duties to
Anastasi. The ICA’s judgment in this regard is vacated and
remanded to the circuit court for further proceedings.
IV. CONCLUSION
For the reasons stated above, we affirm in part and
vacate in part the ICA’s February 6, 2015 judgment on appeal, and
accordingly vacate the circuit court’s judgment and remand to the
circuit court for further proceedings consistent with this
opinion.
Philip J. Leas, John P. /s/ Mark E. Recktenwald
Duchemin and Trisha H.S.T.
Akagi for petitioner and /s/ Paula A. Nakayama
respondent Lloyd R. Anastasi
/s/ Sabrina S. McKenna
Edmund K. Saffery, Thomas
Benedict and Dawn T. Sugihara /s/ Richard W. Pollack
for respondent and petitioner
Fidelity National Title /s/ Michael D. Wilson
Insurance Company
Wayne Nasser and
Benjamin M. Creps for
amicus curiae Hawaii Land
Title Association
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