Evidentiary issues in coverage and first-party bad faith cases.

• Author: Kornblum, Guy O.

Keeping alert to plaintiffs' strategy and tactics in presenting evidence is essential if defense counsel hope to reach a favorable resolution

Questions of the admissibility of evidence in actions against insurers involving coverage and bad faith are of extreme importance to defense counsel because they set the structure of the case and determine what is used by the trier of law and fact to reach conclusions as to both coverage and bad faith.

Coverage involves interpretation of the insurance policy - a contract. While special rules apply to its interpretation, those rules usually result in much narrower evidentiary rulings than in bad faith cases, which involve broader issues relating to the conduct of the insurer. While some courts will go outside the contract and hear parole evidence in determining issues relating to coverage,(1) it is more likely that evidence other than that relating to contract formation and policy issuance will be heard in the bad faith case.

From defense counsel's perspective, it is critical that plaintiffs' attempts to expand the evidentiary issues be anticipated so that proper objections and motions can be made to prevent the admission of evidence beyond the issues, or, should such evidence be admitted, to make an appellate record. This article presents an overview of a number of issues that arise frequently during coverage and first-party bad faith cases.

Strategy and Procedural Decisions

1. Bifurcation of Issues

   In considering evidentiary issues, two important aspects of these cases should be noted. First, the plaintiff's offers of evidence may be affected by how the case is tried. If the case is bifurcated so that any coverage issues are tried first before issues relating to the bad faith claim, the evidence in the first phase will be more likely circumscribed than in the second phase. Thus, the procedural structure of the case will affect not only what is admitted but when it is heard. Evidence relating to the conduct of the company is more likely to be heard in a second phase than the first.

   Second, as to more expanded categories of evidence on the bad faith issues, defense counsel more often than not will challenge the foundation for admissibility of this evidence, particularly as to subjects other than those directly involved in the claim at hand. While in the usual case the first phase will involve issues for the court, and a jury may not even be present, the evidence presented should be limited in order to ensure that the record focuses only on questions of coverage and is not cluttered with evidence relating to claims handling and issues relating to the company's claims conduct.

2. Raising Evidentiary Issues: Motion or

   Objection

   1. Issues Must Be Monitored

      Because first-party bad faith cases involve issues aside from the handling of a specific claim, the evidence the plaintiff offers must be monitored carefully. Defense counsel cannot afford to be bashful about protecting the record or cutting off attempts to widen the scope of the case with highly prejudicial evidence of questionable relevance.

      There are four approaches in these situations: (1) motions in limine in anticipation of an offer of challenged evidence; (2) requests for hearings out of the presence of the jury when it appears that the plaintiff's counsel is about to inquire into the evidence that is to be challenged (if granted, this forces the plaintiff's counsel to present foundational evidence or to make an offer of proof as to the foundational requirements for admissibility); (3) objections or motions to strike made at the time attempts are made to elicit this evidence; and (4) requests for instructions to limit the use of any admitted evidence.

   2. Foundational Hearings

      Hearings under Rule 402 of the Federal Rules of Evidence or its state counterparts to determine admissibility should be requested on important issues to determine if the foundational facts have been laid. In this manner, defense counsel can hear precisely what evidence the plaintiff is offering before it is presented to the jury and can register specific objections on the record in a more elaborate manner than if the jury were present, when objections need to be kept short.

      While this procedure takes time, it is more revealing than simply asking the plaintiff's counsel to make an offer of proof In a Rule 402 hearing, actual testimony is subject to cross-examination, which may expose weaknesses. In some cases, depositions might be used as a basis for this hearing, if it is clear that the witnesses involved will testify in the same manner and defense counsel is satisfied with the cross-examination conducted at the deposition.

   3. Rule 403 Limitations

      Under Federal Rule of Evidence 403, the court has the discretion to exclude relevant evidence whose "probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence."

      Defense counsel must carefully think out Rule 403 objections or motions so that arguments in their support demonstrate why the proffered evidence has little probative value compared to the undesirable result if admitted.

   4. Limiting Instructions

      Defense counsel should request limiting instructions whenever possible as to evidence that comes in on one particular aspect but which the jury cannot consider for proof on other issues. Granted, jurors may ignore limiting instructions, but if the judge gives a limiting instruction several times as to several different segments of evidence, the jury might get the message. In addition, sometimes counsel can use the limiting instruction in argument to mitigate the impact of damaging evidence subject to this instruction. Limiting instructions also can be helpful in post-trial motions and on appeal to persuade the court that certain evidence cannot be considered in support of any adverse judgment.

   5. Defining Evidentiary Issues

      In actions involving extra-contractual claims, the plaintiff's counsel may be given the opportunity to examine witnesses and introduce evidence regarding subject matter that goes beyond coverage, underwriting and claims handling issues. Evidence may be offered and the plaintiff's counsel may be permitted to inquire into claims practices, claims policies and the insurer's corporate structure, all of which ordinarily would be irrelevant. If the proof supports a punitive claim, inquiries also may be made into the financial structure of the company.(2)

      An aggressive plaintiff's counsel will use these issues to their maximum effect, arguing for the admission of evidence that generally would not be relevant in coverage or first-party bad faith cases. These expanded questions therefore require additional thought about how to handle them. Defense counsel needs a well-prepared and aggressive presentation in making motions and objections to prevent this broad intrusion into corporate matters. Counsel always should make the appropriate objections in order to preserve the issues for appeal.

      One way to prepare to meet the various proffers of evidence is to anticipate the plaintiff's attorney's precise evidentiary offer and prepare a mini-brief on the issues raised. If the issue is anticipated before trial, a motion in limine should be used. Defense counsel should remind the court of its discretionary authority under Rule 403 or its counterparts to limit evidence. The proffered evidence may raise peripheral or additional issues to which the defense must respond. Counsel should urge the court to bar the proffered evidence because of the additional time required for the defense to present further evidence countering that which the plaintiff has introduced.

      Evidence in Coverage Cases

      Actions involving a breach of an insurance policy's provisions focus on questions relating to (1) whether a contract of insurance was formed, (2) how it should be interpreted,(3) and (3) whether the contract's terms have been performed. The coverage issues may be tried at the same time as the other issues or before, as in a bifurcated trial. The evidence on coverage may be heard at the same time as the issues relating to the extra-contractual claims. If the coverage case is tried separately and before a judge, the evidence admitted should be limited to those issues relating to whether coverage exists. These are essentially the issues listed above.

      While the evidence likely will be restricted to the policy's terms if there is only a question of policy interpretation,(4) parole evidence will be admitted if there are issues as to how the policy was negotiated or formed, what policy was issued (if there is a disagreement as to that), what endorsements were attached or what provisions were included (if there was a choice), or what limits are applicable.

      For instance, in Darner Motor Sales Inc. v. Universal Underwriters Insurance Co.(5) the Supreme Court of Arizona ruled that the interpretation of a negotiated instrument is not limited to the words set forth in the document itself. Evidence of surrounding circumstances, including negotiations, prior understandings, the subsequent conduct of the parties and similar evidence is taken into consideration by the court to determine the intent of the parties with regard to the integration of the agreement. The court stated that once the trier of fact is able to decide what constitutes the "agreement," evidence may be used to interpret the meaning of the provisions contained in that agreement, even when the parties have bargained for and written the actual words found in the instrument.

      Evidence Relating to Claims

      Handling and Administration

1. Admissibility of Documents in Claims

   Files

   1. General Principles

      Claim files have been characterized as a "unique, contemporaneously prepared history of the company's handling of the claim" and a "`blow by blow' diary of the insurer's investigation and decision-making...