Do Insurers Have Constitutional Rights?

In Williams v. Phillip Morris, the U.S. Supreme Court ruled that a defendant who is exposed to the possibility of a punitive damages award is entitled to the procedural due process right to present “every available defense.” Is there a way, then, for an insurer that is facing punitive damages in a bad-faith suit to invoke these due process protections? Are those rights raised and enforced enough? Let's examine some of these questions, as well as the possible use of Williams to defend insurers in bad-faith cases.

Defining Your Rights

In the Williams case, the U.S. Supreme Court overturned a large punitive damages award after taking up the issue of whether punitive damages could be imposed against a defendant in a civil case on the basis of evidence introduced in the case regarding harm to non-parties. The Court held that the introduction of such evidence was not constitutionally appropriate, as it imposed upon the defendant the burden of defending against a multitude of claims for which it was not prepared.

In overturning the punitive damages award, however, the Court further discussed the basic principle that, because punitive damages went beyond compensation and reached punishment, procedural due process protections were required. It further held that among such procedural due process protections afforded to a defendant was the right to present “every available defense.”

Because insurers are exposed to punitive damage awards in bad-faith cases, can a reasonable argument be made that insurers deserve similar rights to present “every available defense” in a bad-faith case, as well?

A bad-faith case between an insurer and an insured over an insurance policy in civil court might at first seem like no place for constitutional law. However, constitutional remedies go where they are needed, and a bad-faith case is no ordinary civil case. A defendant is exposed to more than mere contract or compensatory damages; it stands to be punished, via the imposition of a punitive damages award. Once the civil justice system assumes the role of imposing a penalty, the presiding court must take a heightened level of concern for the rights of the defendant, which stands to lose way more than a single policy limit.

Bad-faith actions are perhaps best considered “quasi-criminal” in nature, and there are clues that point in this direction. In Pennsylvania, for example, a bad-faith plaintiff does not enjoy the relatively low burden of proof of preponderance of the evidence. Rather, the bad-faith plaintiff must prove the defendant's bad-faith conduct by “clear and convincing evidence.” Of that burden, one Pennsylvania court commented that it developed for use to protect a defendant in civil cases that were quasi criminal, where both liberty and due-process considerations are at stake. The likelihood of punitive damages in a bad-faith case places into the realm of possibility that an insurer will be deprived of property via a civil judgment, even where the plaintiff is already made whole by other damages. Because such a property right is at risk, courts — most notably, the U.S. Supreme Court in Williams — have chosen to ensure that the party at the risk of such loss be given procedural due process rights to comport with the Constitution.

Procedural Due Process

What do such rights provide to a bad-faith defendant? The opportunities to assert procedural due process rights as a means of defending an insurer as set forth in the Williams case are manifold, although the canvas on which the specific contours of these rights are to be painted stands largely untouched.

This writer has, in several cases, faced litigation conduct claims advanced by insureds after reverse bad-faith and/or insurance fraud has been included in the insurer's Answer with Affirmative Defenses. When sufficiently pushed by one judge in a state court, bad-faith plaintiffs abandoned any claim that the averments in an insurer's answer could constitute bad-faith litigation conduct, perhaps as much for wanting to avoid the process of appeals on constitutional issues as apprehension about what the results of such appeals might be.

Perhaps in support of the adage, “Fools rush in where angels refuse to tread,” one bad-faith plaintiff in a federal proceeding filed and insisted on pursuing a motion to dismiss, and motion to amend her bad-faith complaint to assert bad-faith litigation conduct, after the insurer pled the insured's reverse bad faith in its answer. The result was a written opinion ruling that a bad-faith defendant's election of specific defenses or potentially even counter claims in its Answer with Affirmative Defenses does not constitute additional bad faith on the part of the insured. These rulings, while not yet invoking Williams directly, would seem largely consistent with the proposition set forth in Williams that a defendant faced with punitive damages is entitled to set forth any available defense.

Discovery is almost always hotly contested in a bad-faith case, and this is compounded currently by the fact that a right, like the attorney/client privilege, is often implicated. While, strictly speaking, the attorney/client privilege is not a defense to a bad-faith claim, it is a large and important defense that attempts to invade the insurer's closely held data and information. Litigation, therefore, about the right of an insurer to assert and use the attorney/client privilege protection may be an area where counsel for an insurer is well advised to raise the procedural due process aspect of the violation of this privilege. This is especially true when a trial court orders production of putatively privileged materials without first undertaking an in-camera merits review of the documents at issue. This failure to undertake a merits review of the documentation may be a due process violation unto itself.

Contract and Bad-Faith Claims

There may be additional due process protections that should be afforded during the joint litigation of claims against insurers, such as the joint litigation of underlying insurance and bad-faith claims in the same litigation.

In Gunn v. Automobile Insurance Company of Hartford, CT, the insured filed a UM/UIM claim and bad-faith claim against The Hartford, the defendant. The Hartford filed a motion for protective order to stay bad-faith discovery and, at the same time, a motion to sever and stay all proceedings relating to the bad-faith claim until the UIM claim was resolved. The insured opposed these, and the court held that, pursuant to the court's inherent authority to regulate the trial of a case under the applicable rules of civil procedure, the UIM-claim and bad-faith claim would not be tried together. The court also ruled that it could consider whether to sever and stay the bad-faith claim entirely if the bad-faith claims were not strictly limited to under-evaluation, inasmuch as situations other than under-evaluation claims would not so closely share evidence in common with medical and damages evidence, which would be introduced during the UIM proceeding.

The court in Gunn also upheld certain of the insurer's discovery objections and rights to potentially protect corporate policy and procedure. In fact, it went so far as to wonder aloud whether in such a case the bad-faith plaintiff should have the choice of jointly proceeding without corporate policy and practice discovery, or, if it wanted the corporate discovery badly enough, then suffer a ruling that the bad-faith case would have to be severed and stayed, pending completion of the UIM proceeding.

While Gunn is a trial court opinion, it is certainly significant. In addition, it is consistent with the philosophical approach articulated in Williams by the U.S. Supreme Court. Namely, that courts should take great care to afford due process rights to civil defendants exposed to punitive damage claims. They should also ensure that those defendants are not deprived of the chance of proffering any available defense to the punishment imposed by punitive damages.

While at this point the waters are uncharted, the appeal phase of a bad-faith proceeding seemingly presents a highly fertile area to obtain procedural due process protections. Two examples would be assertion of procedural due process as a means of obtaining permissive interlocutory appeals, as well as enforcement of the absolute right of interlocutory appeal from, for example, collateral discovery orders involving claims of attorney/client privilege.

The exact reaches of procedural due process protection afforded to insurers in bad-faith litigation have not been discussed often in case law since Williams. There are, however, multiple opportunities to raise this issue on behalf of insurers. Over time, this will provide the necessary guidance from the courts.

The opinions in this article are strictly those of the authors, and do not necessarily reflect the opinions of Dickie, McCamey & Chilcote, P.C., nor any of the firm's clients. The author wishes to thank Paralegal Susan Tyrone, who was instrumental in conducting the legal research associated with this article.