The federal district court for the district of Hawaii granted the insurer's motion to bifurcate the trial of coverage issues from issues regarding the insurer's alleged bad faith. Allied World Nat'l Assur. Co. v. Counterclaim NHC, Inc., 2024 U.S. Dist. LEXIS 174961 (D. Haw. Sept. 26, 2024).
Insured MNS, Ltd. was named as a defendant in a class action suit brought in the Western District of Washington by Kona coffee growers. The lawsuit was styled Bruce Corker, et al. v. Costco Wholesale Corp., et al., Civil No. 19-00290. MNS was sued under the Lanham Act for selling and advertising coffee products that were allegedly falsely labelled as "Kona" coffee, i.e., coffee originating from the Kona District of the Big Island of Hawaii.
MNS tendered notice of the Corker suit to its primary insurer, Mitsui Sumitomo Insurance USA Inc., as well as to its excess insurer, Allied World. Mitsui took the position that it owed $1 million to MNS under the policy's "Personal and Advertising Injury" coverage. Allied World felt its policy did not provide coverage under the "Personal and Advertising Injury" provisions and filed suit in Hawaii seeking a declaratory judgment that it had no duty to defend or indemnify MNS.
MNS and the Corker plaintiffs participated in mediation in February 2023. Mitsui sent its primary claim adjuster to the mediation. Allied World refused to send an adjuster and only sent its outside coverage counsel. The mediation resulted in a settlement of $12 million and MNS sough indemnification of $11 million from Allied World. Allied World denied coverage and filed an amended complaint in the coverage case. MNS filed a counterclaim alleging that Allied World (1) breached its contractual duty to indemnify MNS and (2) acted in bad faith when dealing with MNS leading up to, during and after the Corker mediation. MNS argued that Allied World's amended complaint raised a new reason for denying coverage that was contrary to the policy language. Moreover, MNS alleged that Allied World acted in bad faith at the Corker mediation because it failed to meaningfully participate by only sending its outside coverage counsel instead of an adjuster, and because Allied World represented that it would only contribute a "modest amount towards settlement.' MNS sought a jury trial for compensatory and punitive damages for its breach of contract and bad faith claims.
Allied World moved to bifurcate the bad faith claim. The court weighed the factors in determining a request for bifurcation and found that they supported bifurcation of the bad faith claim and a stay of discovery on that claim.
The first factor was whether the issues were significantly different from one another. This factor favored bifurcation. While both the coverage and bad faith claims involved the same underlying insurance agreement, they had different legal elements and standards of proof. The breach of contract claims would focus on the same legal issue: whether Allied World had a duty to indemnify MNS. By contrast, the claim of breach of good faith and fair dealing involved determining whether Allied World acted reasonably in the interpretation of the contract and, because MNS sought punitive damages, whether Allied World acted "wantonly or oppressively" in its dealings with MNS. Because these two legal issues were distinct, a jury would benefit from a bifurcation of trial.
The second factor for bifurcation - whether issues were to be tried before a jury or the court, also weighed in favor of bifurcation. MNS requested a jury trial for both the breach of contract and the bad faith issues. Allied World persuasively argued that there were not likely to be genuine disputes of material fact as to the breach of contract claim. If this proved correct, bifurcation of and a stay of discovery on MNS's bad faith counterclaim would allow the court to separate the mostly legal question of whether Allied World owed coverage from the mostly factual question of whether Allied World acred in bad faith. Therefore, the second factor weighed in favor of bifurcation and a stay of discovery because the bad faith claim was likely to require a jury's resolution.
The third factor, the posture of discovery, also supported bifurcation. As Allied World noted, bifurcating and staying discovery on the bad faith claim would avoid contentious discovery disputes related to the bad faith claims until after the substantial coverage issue was resolved.
The fourth factor was whether there was overlapping evidence. This also weighed in favor of bifurcation. Bifurcation would promote efficiency in discovery and trial because there was not a significant overlap in the evidence that had to be presented. The coverage issues could likely be resolved on a limited evidentiary record, whereas the vast majority of evidence that MNS sought to uncover in discovery related principally to its bad faith claims.
The fifth factor - whether the party opposing bifurcation would be prejudiced - did not weigh against bifurcation because MNS would not be meaningfully prejudiced by the bifurcation of discovery and trial.
Taken together, these factors showed that bifurcation served judicial economy. Resolution of the coverage issue would turn on a careful parsing of the specific terms in corporate insurance policies. Resolution of the bad faith claim would involve a greater focus on the credibility of witnesses and an understanding of the communications between the parties. Therefore, the motion was granted.