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Wood v. Nautilus Insurance Co.

United States District Court, D. Nevada

October 7, 2019

ROBERT “SONNY” WOOD, an individual; ACCESS MEDICAL, LLC, a Delaware limited liability company, Plaintiffs,
v.
NAUTILUS INSURANCE COMPANY, an Arizona corporation; and DOES I through X, inclusive; and ROE CORPORATIONS I through X, inclusive, Defendants.

          ORDER

          MIRANDA M. DU, CHIEF UNITED STATES DISTRICT JUDGE.

         I. SUMMARY

         This is a dispute about insurance coverage. Before the Court are two motions: (1) Plaintiffs Access Medical, LLC and Robert “Sonny” Wood, II's (“Insureds”) objection (ECF No. 119) to an oral ruling by United States Magistrate Judge Carl W. Hoffman regarding discovery (ECF No. 116 (minutes of proceedings); ECF No. 118 (transcript of proceedings)) and (2) the Insureds' motion to dismiss (ECF No. 141) Defendant Nautilus Insurance Company's (“Nautilus”) cross claims.[1] The Court has reviewed the relevant responses (ECF Nos. 129, 155) and reply (ECF No. 160). For the following reasons, the Court overrules the Insureds' objection and grants the Insureds' motion to dismiss.

         II. BACKGROUND

         This action is intertwined with two other actions, one filed in California state court in 2011 (“Switzer Action”) and the other filed in this court in 2014 (“Coverage Action”). In the Switzer Action, a non-party named Ted Switzer alleged four claims for interference with prospective economic advantage against the Insureds. In the Coverage Action, Nautilus obtained a declaration that it was not required to defend or indemnify the Insureds in the Switzer Action. In the current action, the Insureds primarily contend that Nautilus was required to defend and indemnify them in the Switzer Action after all.

         The Switzer Action arose from a soured business relationship formed between Plaintiff Wood and a non-party, Ted Switzer. (See ECF No. 13-1 at 3.) Wood and Switzer founded Flournoy Management, LLC (“Flournoy”) to market and sell medical implants.[2] (Id.) When the relationship deteriorated, Switzer initiated the Switzer Action against Wood and Flournoy to compel access to Flournoy's books and records. (ECF No. 1-1 at 9-10.) In the course of the Switzer Action, Switzer filed a cross-complaint asserting inter alia four claims for interference with prospective economic advantage against the Insureds. (See ECF No. 13-1 at 3, 7.)

         Nautilus initiated the Coverage Action after the Insureds requested that Nautilus defend them in the Switzer Action. (ECF No. 1-1 at 12-13.) Nautilus sought a declaration in the Coverage Action that it did not owe a duty to defend or indemnify the Insureds. (Id. at 13.) The Insureds argued that Nautilus owed a duty to defend and indemnify because Switzer might advance a defamation claim based on certain factual allegations in his cross complaint. (ECF No. 13-1 at 7.) (The insurance policy essentially required Nautilus to defend the Insureds against defamation claims.[3]) Nautilus argued that the factual allegations in the cross complaint, coupled with the lack of any live defamation claims, were insufficient to trigger its duty to defend and indemnify. (See id.) The court agreed with Nautilus and declared that it did not owe a duty to defend or indemnify. (Id. at 12.)

         Despite that judgment, the Insureds filed suit against Nautilus alleging five claims: (1) declaratory relief (in the form of declarations that Nautilus owed a duty to defend and indemnify in the Switzer Action and that Nautilus was required to pay in full for the Insureds' independent counsel); (2) breach of contract; (3) breach of implied covenants; (4) promissory estoppel; and (5) violation of various provisions of NRS § 686A.310, which prohibits insurers from engaging in certain unfair claims settlement practices. (ECF No. 1-1.) Although the Insureds initially filed the lawsuit in Nevada state court, Nautilus removed to this Court. (ECF No. 1.) The Court dismissed the first three claims as issue precluded (ECF No. 36 at 10), and the Insureds filed a first amended complaint (“FAC”) (ECF No. 37). On reconsideration, the Court found that the first three claims were not in fact barred by issue preclusion. (ECF No. 72 at 7.) The Insureds then filed a second amended complaint (“SAC”) asserting the following claims: (1) breach of contract; (2) promissory estoppel; (3) tortious breach of the covenant of good faith and fair dealing; and (4) unfair claim practices. (ECF No. 73 at 18-28.)

         III. THE INSUREDS' OBJECTION (ECF NO. 119)

         A. Background

         In their First Set of Requests of Production, the Insureds sought Nautilus's claim file, underwriting file, training manuals, and compensation of its employees that related to the Switzer Action. (ECF No. 119 at 7.) Nautilus refused to produce the information based on attorney privilege, work product, and relevance grounds. (Id. at 7-8.)

         The Insureds then filed a motion to compel production of the documents. (ECF No. 97.) Judge Hoffman granted the motion in part and denied it in part. (ECF Nos. 116.) Judge Hoffman premised his decision on a conclusion that three pieces of new evidence ground the current litigation: (1) the deposition statement of Switzer; (2) an attempted jury instruction on defamation; and (3) a deposition statement by Switzer's wife. (See ECF No. 118 at 4.) Judge Hoffman thus granted the Insureds' motion as to the claims manual and training information as well as the claims file and the reinsurance file, though only to the extent that the latter two items related to the three pieces of new evidence. (Id. at 10, 21-22.) Judge Hoffman denied the Insureds' motion as to the underwriting file, compensation file and insurance file. (Id. at 21.)

         B. Legal Standard

         Magistrate judges are authorized to resolve pretrial matters subject to district court review under a “clearly erroneous or contrary to law” standard. 28 U.S.C. § 636(b)(1)(A); Fed.R.Civ.P. 72(a) (a “district judge . . . must consider timely objections and modify or set aside any part of the order that is clearly erroneous or is contrary to law”); see also LR IB 3-1(a) (“A district judge may reconsider any pretrial matter referred to a magistrate judge in a civil or criminal case under LB IB 1-3, when it has been shown the magistrate judge's order is clearly erroneous or contrary to law.”). A magistrate judge's order is “clearly erroneous” if the court has a “definite and firm conviction that a mistake has been committed.” See United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). “An order is contrary to law when it fails to apply or misapplies relevant statutes, case law, or rules of procedure.” Jadwin v. County of Kern, 767 F.Supp.2d 1069, 1110-11 (E.D. Cal. 2011) (quoting DeFazio v. Wallis, 459 F.Supp.2d 159, 163 (E.D.N.Y. 2006)). When reviewing the order, however, the magistrate judge “is afforded broad discretion, which will be overruled only if abused.” Co ...


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