Opinion
C.A. No: 99C-09-055-JOH
Submitted: August 8, 2000
Decided: November 1, 2000
Defendants' Exceptions to the Special Discovery Master's Report of July 18, 2000 on Unisys Corporation s Motion for to Compel — AFFIRMED in part, DENIED in part
John E. James, Esq., Richard L. Horwitz, Esq., and William R. Denny, Esq., of Potter, Anderson Corroon LLP, attorneys for Unisys Corporation
Francis J. Murphy, Esq., and John S. Spadaro, Esq., of Murphy, Spadaro Landon, attorneys for Royal Indemnity Company and Sun Insurance Office of America, Inc.
David E. Brand, Esq., of Prickett, Jones Elliott, attorney for defendant Allendale Mutual Insurance Company
Daniel V. Folt, Esq., of Cozen and O'Connor, attorney for defendant Insurance Company of North America
MEMORANDUM OPINION
The four defendants in this insurance coverage action have filed exceptions to the July 18, 2000 decision of the Special Discovery Master[SDM]. He ordered them to produce certain documents which would involve matters extrinsic to the insurance contract provisions at issue in this case, as well as certain other non-extrinsic materials.
While the defendants present different reasons why they should not produce such extrinsic evidence, they share a fundamental argument. They contend that there must first be a determination by the Court that those insurance provisions are ambiguous before they should be compelled to produce extrinsic materials in discovery. This Court has made no such determination nor is there anything in the pending exceptions or any pending motion that puts this Court in the position to make that determination.
Normally, the discovery of evidence process is broader than what evidence may be admissible at trial. Generally, as long as what is being sought tends to lead to the discovery of admissible evidence, that broader latitude is respected. The issue of first impression presented in this case, therefore, is whether the discovery evidence extrinsic to contract language should be permitted prior to or only after this Court determines the contract provision to be ambiguous.
The Court holds that none of the defendants have to produce extrinsic evidence prior to this Court determining that the contract provisions at issue are ambiguous. The exceptions as to extrinsic evidence, therefore, will be upheld, but denied as to the non-extrinsic materials.
FACTUAL BACKGROUND
Plaintiff Unisys Corporation is a worldwide supplier of computer services and hardware. The defendants are insurers who issued property insurance to Unisys at various times from 1988 to present. Unisys filed the original complaint seeking declaratory relief to determine coverage obligations from the property insurance policies with the defendants. Its coverage claims arise from problems caused by the "Y2K" problem, which is described in detail in its document "The Year 2000 Problem White Paper." That paper explains that some computer systems "accept only two digit years." The year 2000 will cause the numbers "00" to be entered into the year field and "such a system will result in at best an error message and at worst corrupted data." Unisysis seeking to recover the business expenses it incurred from 1992 to the present in preparing for the Y2K problem, including the costs of tests and replacing systems. Also, it seeks reimbursement for the expenses for preparing the products it sells to be Y2K ready.
Defendant RSA's response to exceptions, Exhibit C.
Id at. 1.
Id.
On March 27, 2000, Unisys moved to compel responses to interrogatories and document requests from defendants Royal Indemnity Company, Sun Insurance Office of America [collectively RSA], Allendale Mutual Insurance and Insurance Co. of North America [INA]. The SDM rendered his decision on July 18, 2000, where he ruled in favor of Unisys on the issue of discovery of extrinsic evidence with regard to contract interpretation and several other matters. RSA and INA have filed exceptions to the SDM's decision.
Specifically, Unisys sought:
1. Drafting history (as to RSA and INA).
2. Underwriting documents (as to Allendale and INA).
3. Claims handling documents (as to Allendale and RSA).
4. Affirmative defenses (as to RSA, Allendale and INA).
5. Regulatory filings (as to RSA, Allendale and INA).
6. Board meeting minutes (as to RSA and INA).
7. Identical policy provisions (as to RSA).
8. Policy language positions (as to RSA, Allendale and INA).
The SDM viewed the issue before him as whether discovery of this extrinsic evidence can occur prior to this Court declaring the insurance provisions to be ambiguous. The threshold issue, as the SDM saw it, was whether this material was relevant to the issues in this case. He found it so as a possible aid to contract interpretation and intent of the parties. He next viewed the issue of admissibility to be premature and that the sought-after material also could be admissible.
In reaching his decision, the SDM said, "[w]hile ambiguity leads to admissibility, relevancy leads to discoverability unless admissibility is precluded." The only test he imposed on Unisys was relevancy and he found it had passed that test.
SDM decision, July 18, 2000, at 6.
The SDM also ordered the defendants to answer Unisys' interrogatories about their defenses. He found what Unisys was seeking was not "contention discovery. The SDM upheld, however, RSA's objection to the production of identical policy provisions (No. 7 on list above). Since Unisys did not take exception to that portion of the SDM's decision, it will not be reviewed here.
Id. at 7.
PARTIES' CONTENTIONS
As noted earlier, the defendants have one common primary dispute with the SDM's decision. It is that extrinsic evidence is not admissible to use to interpret unambiguous contract terms. That being fundamental contract law, until an ambiguity is first found to exist, they should not have to produce the extrinsic evidence Unisys seeks. This is the argument advanced by RSA and Allendale.
INA, on the other hand, advances several additional arguments. It also complains that Unisys and the SDM ignore its separate arguments that Unisys must first amend its complaint to indicate the alleged ambiguous provisions in INA's (and, presumably, all the other) policies. It further asserts it need not answer Unisys' interrogatories to provide a factual basis for the defenses INA raised. Finally, it says it should not have to produce board minutes covering discussions which occurred after the execution of any of the policies with Unisys.
Unisys responds by contending that several policy terms are ambiguous including: latent, error in machine programming, machine instructions, faulty workmanship, material, construction or design, indirect or remote loss or damages, temporary, protection, preservation, peril, reasonable and necessary. Unisys provides three primary reasons for not barring discovery until there is a finding of ambiguity. First, the extrinsic evidence does not have tube admissible to be discoverable. The standard for discovery is "if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Second, even if the contract terms are determined to be unambiguous, the evidence may be admissible for other purposes such as to show custom and practice, historical context or to assist the trier of fact. Third, discovery should not be denied because the defendant's claims have placed their intent and purpose at issue and, therefore, discovery of this evidence is deserved.
The list is taken from the SDM's decision and is not a complete list. A complete discussion on the terms that Unisys argues are ambiguous may be found in Unisys' brief dated March 27, 2000 at 5.
Superior Court Civil Rule 26(b)(1).
STANDARD OF REVIEW
Review of the SDM's decision, both factual and legal, is de novo and on the record.
Order of Reference ¶ 7, DiGiacobe v. Sestak, Del.Supr., 743 A.2d 180 (1999).
DISCUSSION A
The Court will examine first the argument which all four defendants share that they need not produce extrinsic materials until ambiguity is found. That analysis starts with this Court's rule on discovery which states, in pertinent part:
Discovery scope and limits. Unless otherwise limited by order of the Court in accordance with these rules, the scope of discovery is as follows: (1) In general. Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.
Superior Court Civil Rule 26(b).
This rule requires only that for evidence to be discoverable it must be relevant to the subject matter. Relevant evidence is any "evidence having any tendency to make the existence of any fact that is of consequent to the determination of the action more probable or less probable than it would be without the evidence." The fact that the evidence may or may not be admissible does not bar discovery, according to the plain language of the rule. The law in Delaware is stated in Hoeschst Celanese Corp. v. National Union Fire Ins. Co. The court held that information inadmissible at trial is still discoverable, if it appears reasonably calculated to lead to the discovery of admissible evidence. This is the analytical approach taken by the SDM. This bright line rule, however, may no longer be as bright in cases involving contracts and extrinsic evidence.
Del.Super., 623 A.2d 1099 (1991).
That statement derives from the cases upon which all defendants rely, which are ABB Flakt v. National Union Fire Ins. Co. of Pittsburgh, Eon Labs Manufacturing, Inc. v. Reliance Ins. Co., Eagle Indus., Inc. v. DeVilbis Health Care, Inc. and Sequa Corp. v. Aetna Cas. Sur. Co. They contend these cases support the principle that discovery of extrinsic evidence for purposes of contract construction can only be had where ambiguity is first found in the language of the contract. Sequa does stand for the proposition that extrinsic evidence is not admissible as an aid to interpreting unambiguous contract provisions. But, this general statement of the law is not determinative of the issue in this case relating to discovery. Eagle Industries reiterates that principle of contract interpretation but does so in a case where it said the Court of Chancery should have permitted extrinsic evidence to help interpret ambiguous contract language.
Del.Supr., 731 A.2d 811 (1999).
Del.Supr., 756 A.2d 889 (2000).
Del.Supr., 702 A.2d 1228 (1997).
Del.Supr., C.A. No. 89C-AP-1, Herlihy, J. (August 7, 1992).
The other two cases are far more helpful in deciding the issue in this case. While a coverage case also, the procedural posture in Flakt was different than here. The defendant insurers moved for summary judgment in this Court arguing that the insurance contract provisions at issue were unambiguous. This Court stayed all discovery until the motions were decided. It determined that the provisions at issue were not ambiguous and all discovery ceased.
Flakt, 731 A.2d at 814.
Id.
Flakt, the insured, first challenged on appeal this Court's stay of discovery pending resolution of the summary judgment motions. The Supreme Court found that the issue of coverage could be determined on the limited record, and since it upheld the decision that there was no ambiguity and no coverage, there was no abuse of discretion in staying discovery. The Supreme Court added:
Id. at 815.
We take the occasion, however, to emphasize that discovery on the issue of contractual intent is usually appropriate whenever the provisions in controversy are reasonably or fairly susceptible of different interpretations and meanings.
Id.
This statement was underscored in Eon Labs Manuf., Inc. v. Reliance Ins. Co. That was also, as here, a coverage case. There, too, the insurers moved for summary judgment on the basis that their policies did not cover the acts for which the insured sought coverage. The linchpin of the insurers' motions was the unambiguity of their policies. Discovery was stayed pending resolution of the motions. The Supreme Court upheld this Court's award of summary judgment, determined that the policies were unambiguous and did not provide coverage.
Elon, 756 A.2d at 893.
Id at 894.
As to the issue of staying discovery pending resolution of the summary judgment motions, the Supreme Court states:
Eon claims that it should have been permitted discovery. But it is well established that when a contract is unambiguous, extrinsic evidence to vary the terms of the contract is inadmissible, and discovery attempts to that end are not permitted.
Id. citing see Flakt, 731 A.2d at 815; Eagle Indus., 702 A.2d at 1232, applied in Letter Op. at 4 n. 12-13.
In keeping with Rule 26, this Court, as a general practice, is very "liberal" or tolerant of broad discovery requests. A concept which the SDM quite understandably followed in reaching his decision. But, the Flakt and Eon cases make it clear that the Supreme Court endorses limitations imposed by this Court in certain contract cases, especially insurance coverage cases.
In this case, therefore, until this Court determines that the policy provisions at issue are reasonably or fairly susceptible of different interpretations or meanings, there will be no discovery allowed of the extrinsic evidence Unisys seeks. Unlike Flakt and Eon, however, this Court does not have before it a summary judgment motion or any other vehicle to procedurally set up a means to make that determination. That will be left to the parties.
B
INA argues, on the other hand, that Unisys should provide that procedural vehicle. It contends that Unisys should amend its complaint to allege the ambiguous provisions. INA says it made this argument before the SDM but he did not address it.
The Court cannot adopt INA's argument as the means to the end. First, INA cites no authority for this proposition. The Court has found none either. There is nothing in this Court's civil rules placing such a requirement on Unisys or any plaintiff in a contract dispute. While, therefore, the SDM may have not addressed this argument, he would have been correct in rejecting it out of hand.
C
INA, but not the other defendants, contends it need not answer Unisys's interrogatories seeking factual background to the defenses it raised in its answer (Unisys' request No. 4). One suspects the other defendants did not take exception to this part of the SDM's order because it is a routine interrogatory which should almost, without dispute, be answered. But, INA raises a novel reason for being unresponsive to this interrogatory. It contends that its defenses were plead with so much specificity it need not apply more. Alone, it claims, its defenses are so complete they constitute answers to Unisys' interrogatories.
INA brief at 10.
INA alone undercuts this dubious argument in its brief in this Court when it states, "INA spent a great deal of time and expense preparing extremely detailed and fact-driven affirmative defenses, rather than just reciting the usual cursory banter too often seen in modern litigation [emphasis added]. If its defenses are fact-driven as it boasts, those facts should be put in the form of sworn answers to interrogatories. Further, if there were a motion for summary judgment, INA could not rely upon pleadings to show there was or was not a genuine issue of material fact. Therefore, INA's reason for resisting answering Unisys' interrogatories as to defenses raised lacks merit. The decision of the SDM ordering answers to Unisys' interrogatory on INA's defenses is upheld and INA's exceptions to it are DENIED.
Id. at 12.
Superior Court Civil Rule 56(a); Chrysler Corp. v. New Castle Co., Del.Supr., 464 A.2d 75, 85 (1983).
D
INA's final argument is that it should not have to produce minutes of board meetings where policy provisions at issue here were discussed but after the execution of its policies with Unisys. The other defendants joined in taking exception to this request of Unisys which the SDM had ordered. But, their argument is founded on the extrinsic evidence rule discussed earlier. INA's argument, on the other hand, is premised on the date it provided insurance to Unisys. It represents that coverage was from 1988-1992 and that should be the only operative time frame and no minutes after 1992 should have to be produced.
The Court need not reach INA's argument. It views supplying such minutes, whether from INA or any other insurer, to be in the nature of extrinsic evidence. It is, therefore, not yet (if ever) discoverable for the reasons discussed earlier. In light of the SDM's overall ruling and his reasoning, the Court sees no fault in his not explicitly addressing INA's "discrete" argument.
Supra at 6-10.
E
In conclusion, none of the defendants need respond to discovery requests 1, 2, 3, 5, 6 and 8. All defendants will respond to request 4.
CONCLUSION
For the reasons stated herein, the exceptions taken to the Special Discovery Master's decision of July 18, 2000 are AFFIRMED in part and DENIED in part.