Brown v. Superior Court in & for Maricopa Cy.

Majority - Feldman, Justice

Yes, an insurer's claims file, including portions prepared in anticipation of litigation and those containing mental impressions, conclusions, or legal theories, is discoverable by an insured alleging bad faith in the handling of a claim, subject to certain conditions. The court began by acknowledging the broad discretion of a trial court in discovery matters but clarified that such discretion must be based on a correct application of law. Regarding relevancy, the court generally deferred to the trial court's in camera inspection for property damage claims, though it noted that such information could potentially lead to admissible evidence in a bad-faith action. However, the relevancy of the loss of earnings claim file was undisputed for a bad-faith action. To determine when materials are 'prepared in anticipation of litigation' under Rule 26(b)(3), the court rejected both the 'direction of counsel' and 'absolute after occurrence' approaches as too broad or too narrow. Instead, it adopted a multi-factor test to balance the protection of the adversarial process with the need for broad discovery. Applying this test, the court found that materials in the loss of earnings claims file compiled before August 21, 1981, were not prepared in anticipation of litigation. This was because investigating claims is Continental's ordinary business, and a fire loss claim does not, by itself, automatically lead to an anticipation of litigation by the insured. Thus, the trial court abused its discretion in denying production of pre-August 21, 1981 materials. Conversely, for materials compiled after August 21, 1981, the court found that litigation was 'quite probable.' This was supported by Continental's denial of the claim, the assertion of policy voidance due to alleged misrepresentations, Brown's complaint to the Director of Insurance, the IRS lien, and Continental hiring counsel. Therefore, these post-August 21, 1981 materials were prepared in anticipation of litigation and were subject to qualified immunity, requiring a showing of 'substantial need' and inability to obtain the 'substantial equivalent.' The court then determined that Brown had demonstrated 'substantial need' for the post-August 21, 1981 materials. In a bad-faith action, the insurer's claims file provides a 'unique, contemporaneously prepared history' of how the company processed and considered the claim and why it rejected it, which is central to proving bad faith. The court found the need for this information 'overwhelming' and that its 'substantial equivalent' could not be obtained through other means of discovery. Finally, the court addressed the protection for 'mental impressions, conclusions, opinions, and legal theories.' While Rule 26(b)(3) generally provides strong protection for such materials, this protection is not absolute when these mental impressions are 'directly at issue' in the case. In a bad-faith action, the insurer's reasons, theories, and mental impressions for denying a claim are central to determining whether it acted in good or bad faith. Therefore, the trial court abused its discretion by refusing to permit discovery of these materials pertaining to the loss of earnings claim. The court also clarified that the accountant-client privilege (A.R.S. § 32-749) does not apply to reports and correspondence from accountants hired by the insurer to investigate the affairs of a non-client (like Brown), as the privilege is meant to protect communications concerning the client’s financial affairs.