A Pennsylvania federal district court, evaluating the recent amendments to the Federal Rules of Civil Procedure regarding proportionality in discovery, has held that an insured that seeks to discover extrinsic evidence regarding interpretation of an insurance policy must: (1) point to specific language in the policy itself that is genuinely ambiguous (or that extrinsic evidence is likely to render ambiguous); and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense. Westfield Ins. Co. v. Icon Legacy Custom Modular Homes, 2017 WL 2021514 (M.D. Pa. May 12, 2017).

An insurer filed a declaratory judgment action against an insured homebuilder.  The parties became involved in a discovery dispute regarding the insured’s right to discover extrinsic evidence purportedly related to the interpretation of the insurance policy at issue.  The court ultimately ruled that the insured was not entitled to discovery of extrinsic evidence because the insured’s “bald assertions of ambiguity” regarding policy language did not justify the discovery sought.

In ruling on the parties’ discovery dispute, the court noted the “apparent chicken-or-egg problem that coverage cases present: extrinsic evidence may be used to demystify facially ambiguous language, but in the first place, a determination of ambiguity may depend upon or permit consideration of that very same extrinsic evidence.”  In constructing “a reasonable solution to this somewhat perplexing dilemma,” the court held that the insured was required to: “(1) point to specific language in the agreement itself that is genuinely ambiguous or that extrinsic evidence is likely to render genuinely ambiguous; and (2) show that the requested extrinsic evidence is also likely to resolve the ambiguity without imposing unreasonable expense.”  In crafting that standard, the court analyzed case law and discussed the 2015 amendments to Federal Rule of Civil Procedure 26(b)(1), which focuses on “proportionality” in discovery.  Here, finding that the insured could not satisfy this standard, the court refused to order the insurer to provide the requested discovery.