March 12, 2007

In most states, communications made in the course of and relating to the subject matter of a mediation are protected as confidential and are not subject to disclosure in lawsuits.¹ However, what if an insurance carrier investigating a claim of coverage makes a request for copies of these kinds of materials? Is the insured justified in refusing to provide those materials? Or does such a refusal provide the insurer with a defense to coverage because it violates the cooperation clause of the policy? These questions were posed and answered, at least in part, in a recent decision of the Massachusetts Superior Court in the case of Modern Continental Construction Company, Inc. v. Zurich American Insurance Company, Suffolk Superior Court No. 03-3197-BLS1, decided April 19, 2006.

Modern Continental Construction Company, Inc. (Modern) was the contractor on a part of Boston’s “Big Dig” project involving the construction of the Fort Point Channel Tunnel. During construction, leaks occurred and caused collateral damage, which Modern incurred costs to repair. Modern asserted contract claims against the public owner relating to the leaks. Modern participated in a mediation of the claims against the public owner as part of the public owner’s dispute resolution procedures. In preparation for the mediation, Modern’s counsel retained engineers and other consultants, who prepared reports detailing their investigations, factual findings and opinions concerning the causes of the leaks. The mediation concluded with no recovery by Modern from the public owner for the losses relating to the leaks.

Modern was an additional insured on the public owner’s builder’s risk policy issued for the project by Zurich and another insurer. In addition to the claims against the public owner, Modern made a claim under the builder’s risk policy for the losses it sustained as a result of the leaks. The insurers hired an independent adjuster to investigate the losses. The adjuster sent Modern a series of written requests for information, including requests for the identity of any engineering consultants retained by the owner, the project manager or Modern, concerning the causes of the leaks, as well as any correspondence with those consultants. Modern’s counsel responded to the requests, furnishing all the requested information – except for the reports that were prepared at counsel’s request and that were submitted as part of the mediation process. Modern’s counsel specifically invoked the work-product doctrine and the settlement negotiations/mediation privileges. The insurers denied coverage on the grounds that Modern’s refusal to provide the mediation materials violated the provision of the policy that conditioned coverage on the insured’s full compliance with the terms and conditions of the policy, and on its not concealing any material facts or circumstances concerning the claim.

Modern brought suit to recover under the policy. In the course of discovery, the insurers posed written interrogatories and made further written requests for documents that encompassed the mediation materials. Again, Modern invoked the work-product and mediation privileges, but provided a 27-page set of answers and objections to the interrogatories and produced 10 boxes of documents.

A few months after receiving Modern’s response to the discovery requests in the litigation, the insurers made a freedom of information request to the Federal Highway Administration, which had participated in the mediation. In response, the Federal Highway Administration provided the insurers’ counsel with all documents in its possession relating to the project, and inadvertently included the confidential mediation materials. The insurers then filed a motion for summary judgment seeking a determination that Modern’s failure to provide the mediation materials violated the policy conditions as a matter of law, and that such violation gave the insurers a complete defense to the claim.

The Superior Court’s Rulings

The Superior Court judge who heard the motion for summary judgment addressed the various issues systematically and thoughtfully, and made the following rulings.

First, the court ruled that the protection of confidentiality that applies to settlement negotiations and offers to compromise apply equally to the materials gathered for and utilized in the mediation process. In addition, the parties to this particular mediation entered into a written agreement of confidentiality, which gave further protection to the written materials they exchanged in the mediation process. The court also ruled that the materials had the protection of the work-product doctrine. The court concluded its ruling on the first issue by holding that the mediation materials inadvertently produced to the insurers by the Federal Highway Administration, and withheld by Modern from the insurers’ adjuster, are protected by the various privileges and are not admissible in evidence in the litigation between Modern and the insurers.

Second, the court ruled that even though the mediation materials were privileged for purposes of the litigation, Modern’s refusal to furnish the mediation materials was not excused by the existence of that privilege. In making that ruling, the Superior Court relied on prior decisions of the Massachusetts Supreme Court, holding that when an insured enters voluntarily into a contract with a private insurance company, the insurer obligates itself to perform duties, some of which are contingent on the insured’s actions. In order for the insured to make a successful claim for coverage, it must keep its part of the bargain, even if doing so harms its other interests, in this case, the protection of privileged material. The court emphasized that entering into an insurance contract was a voluntary act.

Finally, even though the court ruled against Modern’s attempt to excuse its failure to produce the mediation materials, it did not rule in the insurers’ favor on its attempt to have the policy declared void as a matter of law with respect to this claim. Instead, the court held that the insurers had the burden of proving at trial that Modern’s withholding of the mediation materials actually concealed or misrepresented material facts. If the other information Modern furnished to the insurers in the course of responding to its requests contained the material facts and circumstances about the claim, the insurers would not be able to prove concealment. On the other hand, if the mediation materials contained material facts and circumstances that had not been furnished in Modern’s other submittals, there could be a determination at trial that Modern had, in fact, concealed material facts and circumstances and thus would be deprived of coverage.

In order to give the insurers the opportunity to meet their burden of proving concealment, the court allowed the insurers to retain the copies of the mediation materials that the Federal Highway Administration had inadvertently produced. As a result, the court denied Modern’s motion to compel return of the inadvertently produced documents. The court indicated it would allow the insurers to use those inadvertently produced materials at trial for the limited purpose of showing material facts or circumstances not otherwise provided by Modern, but that they would not be admissible for any other purpose, such as contesting the actual merits of coverage of the claims.

The implication of this decision is that, before invoking a privilege when responding to an insurer’s request for information, careful thought should be given to the effect of asserting such privilege on the availability of coverage. One should consider other options, such as furnishing the information subject to strict confidentiality restrictions or ensuring that the essential facts and circumstances are furnished in another form.

For more information, e-mail Deborah Griffin at [email protected] or call toll free, 1-888-688-8500.