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SANTA ANA, Calif. -- A California appellate ruling that insurers must provide claims handling history during pretrial discovery in a contract dispute is a significant victory for policyholders that could provide them with a potent weapon in coverage litigation with insurers.

The decision in Pfizer vs. The Superior Court of Orange County permits policyholders to uncover and take advantage of inconsistencies in insurers' claims handling. Previously, this type of pretrial discovery generally was allowed only in bad-faith cases.

The decision also could encourage insurers to become more consistent in their claims handling, policyholder attorneys say.

Insurer attorneys warn, however, that providing extensive claims handling histories in contract dispute cases could prove costly for insurers. In addition, they warn the ruling could open up policyholder records in other claims to wide scrutiny.

If upheld, the decision by the California Court of Appeal's 4th Appellate District is expected to be influential nationwide, because of California's leadership in insurance litigation, attorneys say.

An appeal of the decision was filed last week with the California Supreme Court.

According to the Oct. 29 decision, which was certified for publication Dec. 1, the case stems from lawsuits filed against New York-based Pfizer Inc. and its Shiley Inc. unit stemming from alleged defects in its Bjork-Shiley Convexo/

Concave artificial heart valve.

Litigation ensued between Pfizer and its insurers regarding the insurers' duty to defend and indemnify Pfizer in the underlying tort litigation, with the trigger of coverage an issue in dispute.

As part of the litigation, Pfizer had sought three categories of information from the insurers: the identities of other manufacturers of medical devices other than heart valves that had notified the insurers of potential or pending claims; the types of devices involved in those claims; and the event that had triggered potential coverage.

The insurers objected to providing this information and a lower court denied Pfizer's motion to compel discovery.

In overturning that decision and ruling in Pfizer's favor, the three-judge panel of the Court of Appeal concluded that contrary to the insurers' assertion, the information Pfizer sought is relevant because the occurrence clause in the comprehensive general liability policy is ambiguous.

The court also rejected the insurers' argument that Pfizer's request invaded the privacy of other policyholders. "This is a minimal intrusion into the privacy of corporate insureds," the appeals court held.

The appellate panel also rejected the insurers' claim that providing this information would be "extremely burdensome."

The insurers "are not required to physically sort through every file in each insurer's possession," the panel said. "While it still may necessitate review of numerous files involving many products, in this electronic age, much of this can be done via computer records."

The decision said that while Pfizer's request for information is now "overbroad," it can be limited to the same time period as its policies.

Between the time the appeal was filed and the appellate decision was published, all but The Home Insurance Co., which filed the appeal with the Supreme Court, had settled the litigation with Pfizer for an undisclosed amount.

The Home's appeal to the state Supreme Court argues in part that the appellate panel's finding that the occurrence clause is ambiguous misconstrues the Supreme Court's 1995 decision in Montrose Chemical Corp. vs. Admiral Insurance Corp. (BI, July 10, 1995). In that decision, the court held the occurrence clause was unambiguous, according to The Home's brief.

"The Court of Appeal's decision and this court's treatment of it could have a tremendous economic impact on coverage litigation," the insurer's brief adds.

The Pfizer decision is significant for policyholders, attorneys say.

"It's the first California case to state clearly that evidence of a carrier's interpretation of a policy provision in one case is relevant in another case where the provision is ambiguous," said policyholder attorney Barry Weinstein with Meredith, Weinstein & Numbers in San Francisco.

"In the past, this type of discovery was generally limited to bad faith cases," but this is a "pure" case involving a contract dispute without a bad faith claim, he said.

"A number of trial courts have been throwing up their hands not knowing what to do" on this issue because of confusing language in earlier opinions, said Pfizer attorney Martin D. Katz of Troop, Meisinger, Steuber & Pasich in Los Angeles, who has asked the appellate court to publish the decision.

"As a result, how well or how poorly one does in a case turns in part on the particular judge and this really goes a long way toward eliminating that as a factor, which it should," said Mr. Katz. "So from that standpoint it is an incredibly important opinion," he added.

"This could substantially expand coverage available for insureds under standard policies where the insurance carrier has argued in other jurisdictions or other cases that a particular policy provision provides coverage for a particular claim," said David Goodwin, a policyholder attorney with Heller Ehrman White & McAuliffe in San Francisco.

But insurer attorney R. Gaylord Smith, of Lewis D'Amato Brisbois & Bisgaard in San Diego, characterized the decision instead as one that "arms the policyholders with a new weapon to inflict great pain upon insurers in the discovery process" in ordinary breach of contract cases.

Other attorneys, however, say the decision will encourage insurer consistency in handling claims.

"It appears to impose a pretty substantial burden on insurance carriers to be first, extremely careful that responsible decision-makers are making well-reasoned and consistent coverage determinations and, secondly, I think the cost of responding to this type of decision is obviously going to create an additional incentive for carriers to settle coverage disputes," Mr. Weinstein said.

The decision ventures beyond what has been done before "because you're really using the insurance company's own method of handling the claim to establish they didn't know what it was doing in the first place," said Guy Kornblum, a policyholder attorney with Bailey & Kornblum in San Francisco.

If two different units of the same insurance company handle a claim differently, it is evidence that whatever contract language it was relying on was not carefully drafted and fraught "with all kinds of potential for misapplication," Mr. Kornblum said.

He noted that in large insurance companies that handle many claims there may be poor communication and technical skills in policy interpretation and application.

"I think it's going to force the insurance companies to really tighten up their programs and make sure everybody's doing it the same way," he said. "If they're wrong, at least they'll be consistently wrong."

The decision formally recognizes policyholders should be given the opportunity to satisfy themselves that insurers' treatment of their claim is consistent with the handling of other policyholders' claims, said David Mulliken, a policyholder attorney with Latham & Watkins in San Diego.

For years, he added, insurers have resisted efforts to provide this information. It has given them "a great luxury to respond on a piecemeal basis depending on the leverage that they feel they enjoy in each particular coverage dispute," said Mr. Mulliken.

However, one insurer attorney predicts the decision could have "unintended consequences" for policyholders.

"What insurers have historically done is to try and preserve the confidentiality of all their policyholders' information, not to protect any interest that the insurers have, but to be faithful to the macro interest of their own policyholders," said Barry R. Ostrager, an attorney with New York-based Simpson, Thacher & Bartlett, who had represented Travelers Property/Casualty Corp., one of the insurers that had settled in the litigation.

"It's not in the general interest of insurers or policyholders to have litigants in one case rummaging through the confidential records of other policyholders," said Mr. Ostrager, who said he believes the decision is inconsistent with prior case law in California.

Mr. Smith of Lewis D'Amato Brisbois & Bisgaard said he disagrees with the court's opinion that providing this information will not be burdensome for insurers.

Most insurers "are not geared to making these kinds of searches under existing computer programs," so it will be very expensive for them to deal with these kinds of discovery requests "which we would now expect to see with great frequency," he said.

"We deal with these types of requests in bad faith cases frequently and they are very onerous to comply with," Mr. Smith added.

Pfizer Inc. et al. vs. The Superior Court of Orange County; Aetna Casualty & Surety Co. et al., Real Parties in Interest, California Court of Appeal, 4th Appellate District, Division Three; No. G021411.