A significant win for policyholders in a discovery dispute over internal carrier records.  AIG and Coinstar/Redbox have been locked in coverage litigation in the Western District of Washington for some time over AIG’s obligation to defend Redbox in several class actions alleging that Redbox has violated privacy laws in its handling of consumer information.  Redbox lost a critical motion in February, when the court granted AIG summary judgment on the duty to defend some of those claims because of a broadly-worded statutory violation exclusion.

But another aspect of the dispute is the rates that AIG has been paying Redbox’s defense counsel.  It appears that Redbox chose counsel that it thought would do the best job, but that AIG has refused to pay those lawyers’ full rate, instead only agreeing to pay “panel” rates.  Redbox, apparently, is paying its lawyers the difference between what AIG will reimburse and the full rate, and that differential is now over $2 million.  These kinds of disputes are, unfortunately, quite common in high-stakes litigation where companies want to choose highly-qualified counsel for themselves.

In an effort to show that AIG acted in bad faith in setting its rates, Redbox demanded information on the rates that AIG has paid to defend insureds in other similar cases, and what rates AIG pays counsel in coverage cases where it has to defend itself.  AIG naturally refused (what else would you expect?) asserting that the information is not relevant, that it is proprietary, and that compiling the information would be unduly burdensome.  AIG also attempted to limit the disclosure to the rates that the specific AIG unit that provided insurance to Redbox (National Union) pays, rather than AIG as a whole.

The court rejected all of these arguments.  First, the court held that AIG had opened the door to discovery of rates paid by AIG and all of its subsidiaries by admitting that there is an AIG-wide committee that evaluates law-firm qualifications and sets panel rates.  Second, the court held that nothing in the policy permitted AIG to unilaterally or unreasonably set rates paid to defense counsel, invoking not only Washington law that circumscribes insurer control of defense counsel, but also the duty of good faith and fair dealing (the subject of a recent post on this blog).  Third, the court held that AIG had failed to put in competent evidence that disclosure of the rate information would assist its competitors, and that an existing protective order would be sufficient to shield the information from public disclosure.  Overall, the court showed little patience with the insurance companies’ bob-and-weave approach to disclosing critical information.

This decision is an important strike in the ongoing campaign by policyholder advocates to pull back the curtain on insurance company internal business practices that disadvantage insureds and allow insurers to profit.