July/August, 2007
Appeals court says insurance claims manuals not covered by trade secret protection
by Andrew Bergh

Assuming it becomes law in November, the Insurance Fair Practice Act will substantially enhance the claims and remedies of Washington State insureds who are victimized by their insurers’ bad faith conduct. A recent Court of Appeals case – Woo v. Fireman’s Fund Ins. Co., 137 Wn. App. 480 (2007) – should likewise assist insureds in bad faith litigation, as insurance companies’ claims manuals should no longer be subject to draconian protective orders that treat them like top-secret documents.

In Woo, a dentist played an embarrassing practical joke on an employee while she was under anesthesia during a dental procedure. The employee later sued, alleging both intentional and negligence-based torts. Although the dentist had a comprehensive policy (including professional negligence, business liability and employment practices liability coverages), his insurer refused to defend him against any of the claims. After settling with his employee, the dentist then sued his insurer, Fireman’s Fund, for bad faith and violations of the Consumer Protection Act.

In the course of discovery, the dentist sought the production of the insurer’s claims manuals. Fireman’s Fund agreed to produce them as long as they were subject to a stringent protective order. Following an impasse, the trial court sided with the insurer, ruling that its claims manuals were trade secrets that should be designated as “confidential.” Under the terms of the ensuing protective order, any confidential documents attached to pleadings had to be filed under seal, and also had to be destroyed or returned to Fireman’s Fund once the litigation ended.

After mediation went nowhere, the matter went to trial in April 2003. The trial court rejected the insurer’s argument that its claims manuals were irrelevant, denied its motion in limine, and later admitted four exhibits containing excerpts from the manuals. Fireman’s Fund didn’t try to seal or otherwise protect the exhibits when they were admitted and used at trial.

Following a two-week trial, a King County jury overwhelmingly sided with the dentist on his bad faith and CPA claims. In September 2003, the trial court entered judgment, inclusive of attorney fees, for approximately $1.7 million. Fireman’s Fund appealed – successfully – to the Court of Appeals, which reversed the judgment in 2005. (The curious can find the opinion at 128 Wn. App. 95. The case is still in limbo, however, as our high court granted the dentist’s petition for review and should be issuing its opinion in the upcoming weeks or months.)

While the underlying appeal was pending, the parties began debating whether the trial exhibits were still “confidential” and subject to the protective order. The situation escalated when Fireman’s Fund learned that one of the dentist’s lawyers intended to disseminate the claims manuals as part of a seminar presentation on bad faith claims.

At this point, the parties returned to the trial court.

First of all, the dentist filed a preemptive motion seeking to clarify that the exhibits were public in nature. Over Fireman’s Fund’s objection, the trial court agreed that the effect of using the claims manuals at trial was to make them “fully open for public access and use.” Consequently, said the trial court, Fireman’s Fund had to move under GR 15 for an order sealing the trial exhibits.

Which, par for the course in this particularly contentious lawsuit, was precisely what happened. The dentist lost this round, however, as the trial court – again ruling that the claims manuals were trade secrets – granted the insurer’s motion and sealed the exhibits in August 2005.

Against this convoluted background, it was the dentist’s turn to appeal – hardly an attractive option, given the earlier opinion by Division One that reversed the $1.7 million judgment. But lo and behold, in March of this year, the Court of Appeals ruled unanimously that the trial court had abused its discretion by sealing the exhibits used at trial.

At the outset, Division One noted that under our state constitution – article I, section 10, to be exact – “[j]ustice in all cases shall be administered openly.” This provision, the court next observed, was recently interpreted in two decisions by the Washington Supreme Court, Rufer v. Abbott Labs., 154 Wn.2d 530 (2005) and Dreiling v. Jain, 151 Wn.2d 900 (2004), which established the following precedents and guidelines:

• Since documents filed with the court in anticipation of a court decision become “part of the court’s decision-making process,” they fall within the purview of article I, section 10.

• Such documents are presumptively open to the public unless the advocate of sealing presents “a compelling interest which overrides the public’s right to the open administration of justice.”

• For each document a party seeks to protect, there must be a showing that specific prejudice or harm will result if no protective order is granted. Unsubstantiated allegations don’t satisfy the rule, and where possible, the requesting party must support its request by affidavits and concrete examples.

• Entire documents shouldn’t be protected where mere redaction of sensitive items will satisfy the need for secrecy.

• To support meaningful review, the trial court must make particularized findings.

Division One then turned to the essentially dispositive issue: whether Fireman’s Fund’s claims manuals were trade secrets. If so, the insurer could likely present a “compelling interest” under Rufer that would override the public’s interest in open government. But if not, the trial court “lacked a tenable basis” for sealing the exhibits – and abused its discretion by doing so.

Although our court rule relating to protective orders (CR 26(c)) specifically references “trade secret,” the definition of a trade secret is actually statutory in Washington:

“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process that:
(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

See RCW 19.108.010(4).

In its effort to prove the claims manuals were trade secrets, Fireman’s Fund had submitted to the trial court declarations from three claims directors. The witnesses said, among other things, that the manuals “took several thousand people hours to produce and have evolved over several years”; that there would be “a serious loss of our property interest” if they were made public; that the manuals contained “claims handling philosophies and strategies believed to be unique to Fireman’s Fund”; and that allowing a competitor to gain access to the materials “would result in economic value to the competitor and place it in a competitive disadvantage.”

To cut to the chase, the Court of Appeals ultimately ruled that Fireman’s Fund had failed to show that its claims manuals satisfied the statutory definition. Given its lengthy analysis of this issue, I will only highlight the more salient points:

• The claims directors’ declarations were too conclusory to prove the claims manuals had compiled information in “an innovative way.” They also provided “no concrete examples” to show how the strategies or philosophies of Fireman’s Fund’s claims handling procedures “differ[ed] materially” from those of its competitors.

• The fact that the claims manuals went into “many pages of detail on the fine points of handling claims” didn’t make them novel. To the contrary, they “simply set out good claims practices and philosophies that would be obvious” to other insurers.

• By itself, the insured’s interest in unsealing the claims manuals didn’t prove the information had “economic value in the insurance trade.” Since the manuals could be used for “impeachment purposes in [bad faith] litigation,” their value was not to competitors but instead “to those who work in the justice system.”

• By waiting almost two years to obtain the sealing order, Fireman’s Fund had failed to make reasonable efforts to maintain the secrecy of its materials.

So does Woo v. Fireman’s Fund Ins. Co. stand for the proposition that an insurer’s claims manual can never be a trade secret? Not at all, as Division One said that is a “fact-specific inquiry” to be made on a case-by-case basis. But as Fireman’s Fund recently discovered, it is no simple task to meet either the statutory definition of trade secret or the “compelling interest” test under Rufer. (Bear in mind, however, that Rufer technically only applies to documents filed with the court.)

My understanding is that Fireman’s Fund filed a petition for review, with no action yet taken by our high court. In the meantime, however, Woo v. Fireman’s Fund Ins. Co. remains perfectly good law. Accordingly, if you’re currently handling a bad faith lawsuit and the insurer says it won’t produce its claims manuals without a protective order, politely tell the insurer to file its motion and/or take a hike – though not necessarily in that order.

Andrew Bergh, WSTLA EAGLE member, former prosecutor and insurance defense attorney, now limits his practice to plaintiff's personal injury cases, including professional liability and insurance bad faith.