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Blue Cross of Idaho Health Service, Inc., An Idaho Corporation v. Atlantic Mutual Insurance Company

January 19, 2011


The opinion of the court was delivered by: Honorable Candy W. Dale Chief United States Magistrate Judge




Before the Court are the above enumerated pending motions, all of which are ripe at this time. The Court conducted a hearing on November 10, 2010, on the Motion for Partial Summary Judgment (Dkt. 59) filed by Defendants Atlantic Mutual Insurance Company and Atlantic Specialty Insurance Company (collectively, "Atlantic"), Plaintiff Blue Cross of Idaho Health Service, Inc.'s ("Blue Cross") Rule 56(f) Motion in Opposition to Atlantic's Motion for Summary Judgment (Dkt. 81), and Atlantic's Motion to Bifurcate and Stay Discovery (Dkt. 87), as well as its Motion to Strike a portion of Blue Cross's response to Atlantic's Memorandum in Support of Summary Judgment (Dkt. 90). At the conclusion of the hearing, the Court took the matters under advisement. In addition, the Court requested further information from the parties regarding the sealing of several exhibits submitted in support of the motions, which the parties are in the process of supplementing. After careful consideration of the parties' arguments, their written submissions, affidavits, and relevant case law, the Court issues the following decisionpartially granting Atlantic's motion for summary judgment and denying the remainder of the motions.


The relationship between Blue Cross and Atlantic is one of insured and insurer. Blue Cross provides health insurance policies to the general public, and maintains a provider network of physicians for its insureds. In turn, Blue Cross procured several insurance policies covering its business operations from Atlantic Mutual and Atlantic Specialty spanning different time periods. From July 2004 to July 2005, Blue Cross was covered by an Atlantic Mutual commercial general liability ("CGL") policy for up to $1 million per occurrence and an Atlantic Mutual umbrella policy for up to $15 million in excess coverage. (Second Am. Compl. Exs. A, B, Dkt. 41).*fn2 Blue Cross was covered by similar Atlantic Specialty CGL and umbrella policies for the periods July 2005 to July 2006, and July 2006 to July 2007. (Second Am. Compl. Exs. C, D, Dkt. 41).*fn3 All three Policies are implicated in this matter, as Blue Cross claims coverage under the Policies for the sums it paid to resolve the lawsuit Verska, et. al. v. Blue Cross of Idaho, Inc., (the "Verska Lawsuit").*fn4

Two physicians, Verska and Jorgenson (the "Verska Plaintiffs"), filed the Verska Lawsuit against Blue Cross in or about April of 2008, alleging that Blue Cross tortiously interfered with their business relationships and caused them to lose business. The Verska Plaintiffs alleged Blue Cross improperly leaked purportedly damaging information about them and their medical practice to others. Blue Cross notified Atlantic about the lawsuit under the terms of the Atlantic Policies, and now claims Atlantic delayed providing Blue Cross with its coverage position until six months after Atlantic was notified.

Once Atlantic issued its coverage position, Atlantic denied having any defense obligation to Blue Cross under the bodily injury coverage, but acknowledged it might have a defense obligation under its advertising liability coverage. (Ans. ¶32, Dkt. 47.) Subject to a reservation of rights, Atlantic acknowledged a potential defense obligation for the Verska Lawsuit under the personal and advertising injury coverage, while reserving the right to deny any obligation to indemnify Blue Cross because the policies at issue contained exclusions for professional liability, for knowing violations of the rights of another, and for breach of contract. (Atlantic's Response at 2, Dkt. 49.)

Blue Cross alleges that, after Atlantic became involved in the Verska Lawsuit, Atlantic engaged in inappropriate conduct designed to frustrate the litigation, such as disputing Blue Cross's choice of counsel, and imposing litigation management guidelines allegedly not in the Policy, knowing trial was less than six months away. Atlantic admits that it consented to Blue Cross's chosen defense counsel to continue to defend the Verska Lawsuit and to Blue Cross's control of the defense, while it continued to reserve its rights under the Policies. (Ans. ¶ 36, Dkt. 47.)

Sixty days prior to trial, after mounting a vigorous defense, Blue Cross agreed to participate in mediation with the Verska Plaintiffs. Blue Cross purportedly informed Atlantic, and alleges that Atlantic refused to provide settlement authority or contribute to any settlement. Atlantic, on the other hand, admits that it knew of the mediation, denies that it was asked to contribute to the potential settlement, but admits that it agreed it would be detrimental for Atlantic to participate in the mediation. (Ans. ¶ 47, Dkt. 47.) Atlantic agreed to waive the "consent to settle" provision contained in the Policies. (Ans. ¶ 47, Dkt. 47.) The mediation was conducted on April 20, 2009, and Blue Cross reached a settlement with the Verska Plaintiffs.

From the Verska Lawsuit's inception to mediation, Blue Cross incurred approximately $1 million in defense costs, and sought reimbursement of those costs plus indemnification of the Settlement Amount from Atlantic. Atlantic refused to indemnify Blue Cross or pay its defense fees. (Ans. ¶¶ 50--51, Dkt. 47.) However, on July 22, 2009, pursuant to a reservation of rights, Atlantic paid Blue Cross "$600,000 representing the reasonable and necessary defense costs and expenses incurred by Blue Cross" in connection with the Verska Lawsuit, which was equivalent to 60% of Blue Cross's defense costs. (Ans. ¶ 52; Countercl. ¶ 19, Dkt. 47.) Blue Cross contends that Atlantic has wrongfully withheld payment for the additional defense costs and settlement sums under the Atlantic Policies, breached its agreements with Blue Cross, and engaged in bad faith.

Blue Cross filed this action against Atlantic*fn5 seeking a declaratory judgment that one or both defendants owe an indemnity obligation under the Policies for the settlement and the remaining attorney fees that Blue Cross paid to resolve the Verska Lawsuit. Blue Cross's Second Amended Complaint, filed on March 12, 2010, (Dkt. 41), adds claims for damages for breach of contract for failure to honor obligations and policy terms, for untimely payment of attorney fees and settlement amounts, and for bad faith.

Atlantic filed its Answer and Counterclaim on April 2, 2010, (Dkt. 47), denying that either defendant is liable for the sums Blue Cross claims Atlantic owes, and seeking its own declaratory judgment that Blue Cross forfeited any coverage that it might have had under any Atlantic Policy because Blue Cross failed to comply with the policy provisions concerning notice of suit. In addition, Atlantic requested reimbursement of the $600,000 it paid to Blue Cross for Blue Cross's defense costs under a reservation of rights and under a theory of unjust enrichment.

In response to the Counterclaim, Blue Cross filed a Motion to Dismiss (Dkt. 48) pursuant to Fed. R. Civ. P. 12(b)(6), seeking to dismiss Atlantic's counterclaim for declaratory judgment and reimbursement on the grounds that there is no insurer right of reimbursement under the terms of Atlantic's policies. The Court granted Blue Cross's Motion to Dismiss with respect to Atlantic's claim for reimbursement on August 23, 2010, (Dkt. 76), providing Atlantic leave to file an amended counterclaim that did not seek reimbursement. Atlantic filed its Amended Counterclaim on September 3, 2010. (Dkt. 84.)

Atlantic vehemently denies it delayed providing Blue Cross with its coverage position, and denies any improper conduct. Atlantic's two count Amended Counterclaim restates its claim for declaratory judgment on the grounds that Blue Cross forfeited coverage under the Policy by its late notice, failure to cure, and lack of excuse for its non-compliance. The second count of the Amended Counterclaim seeks a declaration that Blue Cross waived and/or is estopped from claiming coverage under the Policies by its failure to comply with the notice of suit provisions.

Atlantic's Motion for Partial Summary Judgment requests an order granting partial summary judgment on Atlantic's First, Sixth, Eighth, Thirteenth, Fourteenth, Fifteenth and Sixteenth Affirmative Defenses. (Atlantic's Mem. at 1, Dkt. 61.) Specifically, Atlantic's defenses assert that: (1) Blue Cross's failure to provide timely notice of the Verska Plaintiffs' claims or the Verska Lawsuit constituted a forfeiture of coverage; (2) Atlantic has no obligation to reimburse Blue Cross's pre-tender defense costs because Blue Cross voluntarily retained the firm Hawley Troxell Ennis & Hawley in 2008 without Atlantic's consent; (3) the Verska Claims did not constitute an occurrence under the policy because they were not caused by an accident, and therefore coverage was excluded; (4) the Policy excludes liability for personal and advertising injury arising out of Blue Cross's breach of its own contractual obligations under its provider agreements with the Verska Plaintiffs; (5) the Policy precludes an indemnity obligation because it excludes liability for bodily injury or personal and advertising injury due to Blue Cross's failure to render professional services; and (6) the Financial Institution Endorsement of both the CGL Policy and Umbrella Policy exclude coverage for provision of professional services. A finding in favor of Atlantic on its first affirmative defense also would constitute a finding in favor of Atlantic on Count I of its Amended Counterclaim seeking a declaration that Blue Cross forfeited coverage by its untimely notice.

Blue Cross responded to Atlantic's Motion for Partial Summary Judgment with both a response brief and a related motion under Fed. R. Civ. P. 56(f) seeking additional time for discovery. In its reply, Atlantic provided an additional affidavit with further exhibits for the Court's consideration. (Dkt. 89.) After considering Blue Cross's motion to file additional authority, the Court permitted the filing of Blue Cross's Notice of Supplemental Authority and Sur-Reply. (Dkt. 103, 109, 114, and 115.)

Atlantic added to the flurry of motions by filing a Motion to Strike, as well as a Motion to Bifurcate the issues and stay discovery with respect to Blue Cross's claim for bad faith. (Dkt. 90, 87.) The Court will discuss each of the motions in turn, beginning with the Rule 56(f) motion, the motion for partial summary judgment and the motion to strike considered together, and concluding with the motion to bifurcate.


1. Blue Cross's Rule 56(f) Motion

A. Rule 56(f) Standards*fn6

Rule 56(f) allows a party who, for legitimate reasons, cannot by affidavit or other means present facts essential to justify opposition to an opposing party's motion under Rule 56(e) to seek by motion an extension of the time for responding to the motion. The rule requires "(a) a timely application which (b) specifically identifies (c) relevant information, (d) where there is some basis for believing that the information sought actually exists." Sultana Resources, LLC v. Trio Gold Co., No. CV-06-625-BLW, 2007 WL 2993849, at *1 (D. Idaho Oct. 11, 2007) (quoting Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1129 (9th Cir. 2004)). The party submitting a Rule 56(f) motion bears the burden of showing sufficient facts establishing that the evidence sought exists and that the evidence would prevent summary judgment. Sultana, 2007 WL 2993849 at *1. "Mere hope that further evidence will develop prior to trial is insufficient." Id.

It is generally accepted in the Ninth Circuit that, where a summary judgment motion is filed early in the litigation and a party has not had a realistic opportunity to pursue discovery relating to its theory of the case, the court should freely grant a Rule 56(f) motion. Mangum v. Action Collection Serv., Inc., No. CV-05-507-BLW, 2006 WL 2224067, at *1 (D. Idaho Aug. 2, 2006). See also Burlington Northern & Santa Fe Ry. Co. v. The Assiniboine, 323 F.3d 767, 774 (9th Cir. 2003) (where no discovery has taken place "the party making a Rule 56(f) motion cannot be expected to frame its motion with great specificity as to the kind of discovery likely to turn up useful information, as the ground for such specificity has not yet been laid.") Nevertheless, a district court does not abuse its discretion by denying a Rule 56(f) motion where the proposed discovery would be futile. Mangum, 2006 WL 2224067 at *1.

B. Blue Cross Has Not Met Its Burden

(1) The discovery requested is not relevant or necessary

Blue cross seeks documents and discovery relating to the following categories:

(a) the drafting, underwriting, negotiation and placement of the Atlantic Policies, including the underwriting and placement file, underwriting presentations, coverage summaries, copies of policies and endorsements presented in the placement; (b) the meaning of the language of the Atlantic policies, including documents discussing the meaning of those terms, other CGL and Umbrella policy forms used by Atlantic/One Beacon, and the drafting history of those forms, and any sales and marketing of the Policies; (c) Atlantic's complete claim file for Verska; and (d) Atlantic's claims files for similar claims, and as to how its other insureds were treated under similar circumstances and policy language. (Blue Cross's Rule 56(f) Mot. at 4, Dkt. 81.) Blue Cross claims that obtaining such documents and deposition testimony will provide evidence of the following:

(a) the Parties' intent as to what claims would [sic] covered by the Policies; (b) the Parties' intent as to the meaning of terms/language in the Policies (including the meaning of the undefined term 'professional services' and the professional services and financial institutions endorsement), (c) Atlantic's handling or mishandling of this claim, the basis of its coverage position (if any), why it delayed providing its coverage position to BCI for nearly six months, the basis (if any) of the limitations that Atlantic asserted, and (d) Atlantic's handling of other similar claims, including Atlantic's prior application of the asserted professional services and breach of contract exclusions. (Blue Cross's Rule 56(f) Mot. at 4--5, Dkt. 81.)

While Blue Cross's requests might be relevant in a breach of contract case not involving an insurance contract, the existence of special rules of construction applicable to insurance contracts under Idaho law renders Blue Cross's requests irrelevant in this case. See Idaho Code § 41-1822*fn7 (requiring an insurance policy to be construed according to the entirety of its terms and conditions as set forth in the policy). Insurance contracts are adhesion contracts, not typically subject to negotiation between the parties. Howard v. Ore. Mut. Ins. Co., 46 P.3d 510, 513 (Idaho 2002). Consequently, the Court is instructed to interpret the provisions consistent with what a "reasonable person" in the insured's position would have understood the language to mean. Howard, 46 P.3d at 513. The determination as to the plain meaning of the words used in the policy is a question of law for the Court. Cascade Auto Glass, Inc. v. Idaho Farm Bureau Ins. Co., 115 P.3d 741, 754 (Idaho 2005) (cited in Axis Surplus Ins. Co. v. Lake CDA Development LLC, No. CV-07-505-E-BLW, 2008 WL 4238966 *2 (D. Idaho 2008)).

Neither party argued that the rules of construction applicable to interpretation of insurance contracts should not be applied in this case, despite the insured being an insurance company itself. Accordingly, the parties' intent as to the meaning of specific terms in the Policies, and the genesis of the policy language, is irrelevant to the Court's determination. The Court need not look beyond the four corners of the Policy itself to determine whether the terms are ambiguous as a matter of law. Similarly, how Atlantic may have interpreted its Policies in other cases is irrelevant, as the Court is instructed to examine the policy language and consider it in the context of a "reasonable person" in the insured's position. Thus, how Atlantic may have interpreted its Policies in other cases involving other insureds will not assist Blue Cross in proving its case against Atlantic. Therefore, the discovery requested in parts (a), (b), and (d) of Blue Cross's request, supra, is futile, as it will not lead to relevant information designed to overcome Atlantic's motion for summary judgment in this case.

This leaves one final category of discovery, encompassing Atlantic's "complete file" for the Verska Lawsuit, which Blue Cross contends will provide proof as to Atlantic's delay or mishandling of the claim in this case. The documents Blue Cross seeks in this category are the "coverage position letter" Atlantic sent to Blue Cross, documents indicating when Atlantic learned of either the Verska Claims or the Verska Lawsuit, and facts that demonstrate a lack of prejudice as it pertains to Atlantic's defense that coverage was forfeited due to late notice.

Concerning Atlantic's Verska file, Blue Cross is in the unique position of having participated in the Verska Lawsuit, giving Blue Cross access to the information it supplied to Atlantic, and vice versa. For example, Blue Cross disputes that Atlantic first received notice on August 7, 2008, of the Verska Lawsuit, claiming that Atlantic may have learned of the suit from Blue Cross's E&O insurer, Darwin. (Aff. of BCI at 3, Dkt. 81-1.) Blue Cross can certainly obtain that information from Darwin. The Court has not been provided with any evidence that Atlantic obstructed Blue Cross from asking Darwin to provide information related to Blue Cross's dispute with Atlantic. Moreover, Atlantic's position is that Blue Cross failed to notify Atlantic, contrary to the Policy language requiring its insured to provide notice. Consequently, whether Atlantic learned of the Verska Lawsuit from third parties, or a local newspaper for that matter, is irrelevant to Atlantic's position in this case.

Discovery also is not necessary to the extent Blue Cross itself possesses the documents it forwarded to Atlantic. For instance, Blue Cross is in a position to know the contents of and date it received the "coverage position letter" that Atlantic sent to Blue Cross. Surely, it possesses the original letter it received from Atlantic, which Blue Cross claims was received on and dated January 15, 2009. (Aff. of BCI at 2, Dkt. 81-1.) If Atlantic now claims that it provided a different letter on a different date, Blue Cross is entitled at this stage to introduce the letter Blue Cross claims it received instead. (See Id.) The Court can then determine whether the purported factual dispute is material such that summary judgment is precluded, and the issue can be brought before the jury.

Therefore, with respect to the aforementioned categories of information and documents, Blue Cross's Rule 56(f) Motion will be denied. As for documents that might prove a lack of prejudice resulting from the late notice, the Court considers that legal issue in the context of Atlantic's Motion for Summary Judgment in Section 2C below.

(2) Blue Cross's delays

Atlantic argued also that the lack of discovery in this case is solely attributable to Blue Cross's inaction, and therefore Atlantic should not be penalized from proceeding with its Motion for Summary Judgment. The Court finds it unnecessary to reach Atlantic's alternative argument, finding instead that the information sought is not likely to lead to relevant evidence to present in opposition to Defendants' Motion for Partial Summary Judgment.

2. Motion for Partial Summary Judgment

A. Summary Judgment Standards

Motions for summary judgment are governed by Fed. R. Civ. P. 56(c)(2), which provides, in pertinent part, that judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c)(2). A moving party may show that no genuine issue of material fact exists by demonstrating that "there is an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party meets the requirement of Rule 56 by either showing that no genuine issue of material fact remains or that there is an absence of evidence to support the non-moving party's case, the burden shifts to the party resisting the motion who "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). It is not enough for the [nonmoving] party to "rest on mere allegations or denials of his pleadings." Id. Genuine factual issues must exist that "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 250.

When determining whether a genuine issue of material fact exists, facts and inferences must be viewed most favorably to the non-moving party. To deny the motion, the court need only conclude that a result other than that proposed by the moving party is possibleunder the facts and applicable law. Aronsen v. Crown Zellerbach, 662 F.2d 584, 591 (9th Cir. 1981). The Ninth Circuit has emphasized that summary judgment may not be avoided merely because there is some purported factual ...

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