Sanctions are an extreme remedy; frequently sought, but seldom granted. Such was the case in Hunton Andrews Kurth LLP’s action on behalf of hotel and casino, Treasure Island, LLC (“Treasure Island”), against Affiliated FM Insurance Company (“AFM”) in federal court in Nevada, where AFM “hid” documents which refute the insurer’s defense on the central disputed issue in Treasure Island’s case—and many more actions seeking insurance coverage for losses arising from the COVID-19 pandemic. A copy of the sanctions order can be found here.
The crux of AFM’s defense against Treasure Island’s claim—and many others like it—is that the presence of SARS-CoV-2/COVID-19 on insured property does not cause “physical loss or damage” as required to trigger coverage under the policy. For many months over the course of discovery, AFM failed and refused to produce a portion of its claims manual in which the instructive definition of a loss peril code (“Loss Code 60”) appears. Loss Code 60 signifies claims involving communicable disease, and this was the loss code assigned to Treasure Island’s claim. Yet, despite three motions to compel production of the loss code information and other related information and an order requiring AFM to produce the relevant portions of its claims manual, AFM refused to do so, representing to Treasure Island and the court that any withheld materials had “no relevance to [the] action” and that they were not even “arguably relevant to [the] litigation.”
AFM’s subterfuge was revealed when AFM’s sister company, Factory Mutual Insurance Company (“FM”), was ordered—in another COVID-19 insurance coverage action also being handled by Hunton—to produce, among other things, all relevant portions of its claim manual. FM’s production included the instructive definition of Loss Code 60, which states that the Code applies to claims involving “Physical loss or damage which results from the actual presence of a communicable disease and the associated business interruption as defined in the policy.” Hunton presented the definition to the Treasure Island court and requested the imposition of sanctions given AFM’s egregious misconduct and its outright misrepresentations to the court. In a feeble defense of its conduct, AFM tried to re-cast its deception as a mere dispute over the relevance of Loss Code 60.
The federal magistrate judge in Nevada—the same judge to whom AFM had misrepresented the relevance of Loss Code 60—was unconvinced by AFM’s excuses. The court found that AFM “hid discoverable information from [Treasure Island],” after concluding that description of Loss Code 60 “contains language directly responsive to Treasure Island’s claim.” Thus, the court issued an order imposing sanctions on AFM and admonishing AFM’s “unilateral relevance determination” as “contrary to clearly established law.” In the court’s words, AFM’s representations amounted to “calculated ambiguity” that “inappropriately impeded the discovery process.”
Most importantly, the court recognized the material significance of Loss Code 60 in undermining AFM’s defense, explaining: “[Treasure Island’s] claim… is premised on the theory that COVID-19 caused physical loss or damage to its property. The content of Loss Code 60 links the concepts of ‘[p]hysical loss or damage’ and ‘the actual presence of communicable disease’ to ‘the associated business interruption as defined in the policy’…. [AFM] cannot withhold easily producible information relevant to [Treasure Island’s] claim no matter how certain [AFM] is of a favorable outcome.”
The consequence of AFM’s misconduct is significant. Not only did the court order AFM to pay Treasure Island’s attorneys’ fees and costs for bringing the sanctions motion, but AFM is also now barred from arguing in the litigation that physical loss or damage cannot be caused by a communicable disease, or that there are no circumstances where physical loss or damage can arise from a communicable disease. The order should serve as a reminder to all litigants that discovery must be approached with transparency and completeness in mind. Parties cannot allow biases to guide determinations of relevance, and counsel must be vigilant to ensure compliance in all instances.