COVIL CORPORATION v. USF&G COMPANY

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

COVIL CORPORATION, by and through )

its duly appointed receiver, )

Peter D. Protopapas, )

)

Plaintiff, )

)

v. ) 1:18cv932

)

United States Fidelity and )

Guaranty Co., )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

This case comes before the Court on “United States Fidelity

and Guaranty Company’s Motion to Compel Disclosure of Settlement

Agreements” (Docket Entry 399) (the “Motion”). For the reasons

that follow, the Court will grant the Motion in part, such that

Covil Corporation (“Covil”) must produce limited portions of its

settlement agreement with Zurich American Insurance Company

(“Zurich”).

BACKGROUND

As the Court (per United States District Judge Catherine C.

Eagles) previously explained:

For many years, Covil, a South Carolina corporation, sold

and distributed insulation products, including products

that contained asbestos. There are several personal

injury suits against Covil in North and South Carolina

relating to the distribution and/or installation of

asbestos-containing products. At least two courts — this

[C]ourt and a South Carolina state court — have entered

judgments against Covil.

Covil was dissolved in 1993. It appears undisputed that

Covil has no officers, directors, or employees capable of

taking the actions required to obtain counsel or file or

defend any lawsuit and that, until recently, three of

Covil’s insurers — Zurich, Sentry Casualty Company

[(“Sentry”)], and United States Fidelity and Guaranty

Company [(“USF&G”)] — controlled Covil’s defense in any

underlying asbestos litigation.

In October 2018, after a five-day trial in this Court, a

jury awarded $32,700,000 [(the “Finch Judgment”)]

to . . . Ann Finch, executor of the estate of Franklin

Finch, in a wrongful death suit against Covil [(the

“Finch Action”)]. The jury found that Mr. Finch

developed mesothelioma as a result of exposure to

asbestos-containing insulation Covil sold to his

employer.

Soon thereafter, in one of the lawsuits against Covil in

South Carolina state court, the plaintiffs moved for

appointment of a receiver. On November 2, 2018, the

state court [(the “Receiver Court”]) appointed a receiver

[(the “Receiver”)] to administer Covil’s assets.

Four days later, on November 6, 2018, Zurich brought the

instant lawsuit in this Court against Covil, other

insurers who may provide coverage to Covil, the Finch

estate, and several North Carolina citizens who are

claimants against Covil or the personal representatives

of claimants in asbestos suits in North Carolina federal

courts. [(Docket Entry 1 (the “Complaint”).)] The

[C]omplaint, as well as several counterclaims and cross[-

]claims filed by insurers, seeks declarations limiting

and apportioning among the insurers their obligations, if

any, to cover Covil’s defense costs and indemnify Covil

for the Finch [J]udgment and potential future judgments

relating to its sale of asbestos.

Zurich Am. Ins. Co. v. Covil Corp., No. 1:18-CV-932, 2019 WL

3205676, at *2 (M.D.N.C. July 16, 2019) (unpublished) (internal

citations, footnote, and italics omitted). As relevant here,

Sentry, USF&G, and TIG Insurance Company (“TIG”) (another entity

named as a defendant by Zurich) filed cross-claims against Covil.

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(See Docket Entry 10, ¶¶ 90–113; Docket Entry 12, ¶¶ 73–99; Docket

Entry 19 at 14–15, ¶¶ 35–43.)

In answering the Complaint and the foregoing cross-claims,

Covil asserted counterclaims against Zurich and cross-claims

against Sentry, USF&G, TIG, and Hartford Accident and Indemnity

Company (“Hartford”), “each of [which] issued general liability

policies to Covil” (Docket Entry 155, ¶ 109). (Id., ¶¶ 99–176.)

More specifically, Covil alleged:

1) that Sentry, Zurich, and USF&G engaged in unfair and

deceptive practices by failing to act reasonably and in good faith

in connection with the Finch Action, in violation of North Carolina

General Statute Section 75-1.1 (id., ¶¶ 126–32);

2) that Zurich and USF&G breached their legal duties as

insurers (id., ¶¶ 134–35) and demonstrated “bad faith

by . . . [, a]mong other things, . . . failing or refusing to

resolve the Finch [Action] within their policy limits; by failing

to attempt in good faith to effectuate a prompt, fair, and

equitable settlement of the Finch [Action], even though liability

had become reasonably clear; by allowing Covil to receive an

adverse verdict of $32,700,000 in the Finch [Action]; by compelling

their insured to engage in litigation to recover amounts due under

the policies by failing to make any reasonable offers; by failing

to protect the interests of Covil and its claimants and creditors”

(id., ¶ 139 (italics omitted));

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3) that the foregoing breach by Zurich and USF&G subjects them

to punitive damages (id., ¶¶ 142–50); and

4) that “Sentry, Zurich, and USF&G . . . breached their

contracts of insurance by, among other things[,] (i) failing to

resolve the Finch [Action] within policy limits; (ii) failing or

refusing to pay in full the Finch [Judgment]; (iii) failing

properly to treat claims as operations claims not subject to an

aggregate limit of liability; and (iv) failing to protect the

interests and rights of the claimants against Covil” (id., ¶ 158

(italics omitted)).

Covil further sought declaratory relief against Zurich,

Sentry, USF&G, TIG, and Hartford and lodged a third-party demand

against Penn National Insurance Company, all of which concerns the

policy periods and limits of coverage issued by the foregoing

insurers. (See id., ¶¶ 162–76.) Finally, Covil requested a

declaratory judgment stating that (i) “any judgment obtained

against Covil in a Covil asbestos suit be limited to all sums that

may be collected from . . . Zurich, Sentry, USF&G, TIG, and

Hartford, individually or collectively” (id., ¶ 179),

(ii) “punitive or exemplary damages are not awardable against the

Receiver or the Receiver acting on behalf of Covil pursuant to

South Carolina Code § 15-65-10” (id.), and (iii) “any judgment

obtained against Covil that is or may be subject to an aggregate

limit of any insurance policy or policies issued to Covil must

4

fairly and equitably take into account such other judgments that

may be outstanding at the time of such judgment” (id.).

The following week, Sentry filed a stipulation (Docket Entry

157) (“the Stipulation”) between Sentry and Covil clarifying that

(i) Sentry lacked a “dut[y] to defend and to indemnify Covil in the

[Finch] Action[]” (Docket Entry 155, ¶ 67; see also Docket Entry

157, ¶ 2), (ii) Sentry bore no liability for the Finch Judgment

(Docket Entry 157, ¶ 3), (iii) Covil’s unfair and deceptive

practices claim, as to Sentry, “does not include any conduct in

connection with the Finch [A]ction” (id., ¶ 4 (italics omitted)),

(iv) Covil’s breach-of-contract claim “is dismissed as to Sentry

only and with prejudice” (id., ¶ 5), and (v) Covil sought no

declaratory relief as to Sentry’s obligation to pay the Finch

Judgment (id., ¶ 6).

Thereafter, Covil entered into settlement agreements

(collectively, the “Settlement Agreements”) with all of the

entities against whom Covil had lodged cross-claims except for

USF&G. (See Docket Entries 260 (indicating settlement between

Covil and TIG), 261 (same, as to Hartford), 270 (same, as to

Sentry), 375 (same, as to Zurich (the “Zurich Settlement”)).) The

Court (per Judge Eagles) granted the motions to dismiss that the

parties filed in connection with the foregoing settlements.

(Docket Entries 264, 265, 272, 377.)1 During that same period, the

1 On each occasion, the Court dismissed the claims without

(continued...)

5

Court ruled on several motions for summary judgment (Docket Entries

206, 209, 211, 214), which presented, inter alia, the issue of “how

to allocate a loss occurring over time and over multiple insurance

policy periods and uninsured periods between and among the

insurance companies and the insured” (Docket Entry 334 at 20). The

Court awarded partial summary judgment to Zurich and USF&G on that

issue, denied the same to Covil, and dismissed all other

declaratory-judgment claims (over which the Court declined to

exercise subject-matter jurisdiction). (Id. at 28–29.) Finally,

at various times since the filing of the Complaint, some parties

have filed stipulations indicating the dismissal of certain claims.

(Docket Entries 47, 147, 300.) At bottom, after a lengthy and

somewhat complicated procedural history, only Covil’s (non-

declaratory) cross-claims against USF&G remain for consideration.

(See Docket Entry 361 (describing narrowed claims and granting

motion to reliagn Covil as plaintiff).)

The instant dispute arose when USF&G attempted to obtain from

Covil copies of the Settlement Agreements. (See Docket Entry 399;

see also Docket Entry 400 (supporting memorandum).) During

discovery, USF&G requested that Covil “[i]dentify any and all

payments [the Receiver] ha[d] received in [his] capacity as

appointed Receiver for Covil, including without limitation,

1(...continued)

prejudice. The parties later requested dismissal with prejudice

(Docket Entries 307, 316, 365, 383), which the Court likewise

granted (Docket Entries 327, 328, 370, 386).

6

payments relating to[] (a) this Action and (b) any Underlying

Action.” (Docket Entry 400-1, ¶ 8.) Covil (i) objected “to the

extent that [such interrogatory] assumes facts not in evidence and

seeks information not reasonably calculated to lead to the

discovery of admissible evidence” (id.), and (ii) responded that

“[t]he Receiver has not received any payments in his capacity as

Receiver to date” (id.).

In addition, USF&G asked that Covil produce “[a]ny and all

contracts [the Receiver] ha[d] entered into as Receiver for Covil”

(Docket Entry 400-2, ¶ 10) and “[a]ny and all Documents relating to

any and all payments [the Receiver] ha[d] received in [his]

capacity as appointed Receiver for Covil or in any way relating to

this Action and any Underlying Action” (id., ¶ 18). In response to

the former, Covil objected to the request as harassing, challenged

the relevance of the information sought, and asserted both

attorney-client privilege and work-product protection. (Id.,

¶ 10.) As to the latter request, after objecting based on

relevance, ambiguity, and breadth, Covil reiterated that “[t]he

Receiver ha[d] not received any payments in his capacity as

Receiver to date.” (Id., ¶ 18.)

Covil tendered the foregoing responses in January 2020 (Docket

Entry 400-1 at 12; Docket Entry 400-2 at 16); the settlements

occurred between March 2020 (Docket Entries 249-1 (Hartford), 249-2

(TIG), 269 (Sentry)) and January 2021 (Docket Entry 374-1

7

(Zurich)). Covil never supplemented its discovery responses to

reflect the settlements. (See Docket Entry 400 at 4.)

When the parties exchanged emails in April 2021 concerning

USF&G’s request that Covil produce the Settlement Agreements (see

Docket Entries 400-3, 400-4), Covil refused, noting that (i) the

Receiver Court had sealed the Settlement Agreements, (ii) the

Settlement Agreements remained confidential, (iii) TIG, Hartford,

and Sentry bore no responsibility for the Finch Judgment (such that

the agreements with those entities lack relevance to the remaining

claims), and (iv) USF&G had delayed in seeking to obtain the Zurich

Settlement in the Receiver Court. (See Docket Entry 400-4 at 2.)

The parties failed to resolve their dispute by means of a

telephonic “meet and confer” conference on April 21, 2021. (Docket

Entry 400 at 18.) Accordingly, USF&G has sought an order

compelling “[Covil] to produce the [S]ettlement

[A]greements . . . subject to the terms of the protective order

entered in this action” (id. at 15; see also Docket Entry 203

(referenced protective order)). Covil opposed the Motion (Docket

Entry 405), and USF&G replied (Docket Entry 407).

DISCUSSION

I. Relevant Standards

A. The Scope and Conduct of Discovery

“The purpose of discovery is to provide a mechanism for making

relevant information available to the litigants.” Fed. R. Civ. P.

8

26 advisory committee’s notes, 1983 Amendment. Under Federal Rule

of Civil Procedure Rule 26 (“Rule 26”),

[p]arties may obtain discovery regarding any

nonprivileged matter that is relevant to any party’s

claim or defense and proportional to the needs of the

case, considering the importance of the issues at stake

in the action, the amount in controversy, the parties’

relative access to relevant information, the parties’

resources, the importance of the discovery in resolving

the issues, and whether the burden or expense of the

proposed discovery outweighs its likely benefit.

Fed. R. Civ. P. 26(b)(1). “The parties and the [C]ourt have a

collective responsibility to consider the proportionality of all

discovery and consider it in resolving discovery disputes.” Fed.

R. Civ. P. 26 advisory committee’s notes, 2015 Amendment; see also

id. (explaining that Rule 26 imposes an “obligation o[n] the

parties to consider the[ proportionality] factors in making

discovery requests, responses, or objections”). In turn, relevancy

“essentially involves a determination of how substantively the

information requested bears on the issues to be tried.” Mills v.

East Gulf Coal Preparation Co., 259 F.R.D. 118, 131 (S.D.W. Va.

2009) (internal quotation marks omitted). “Information within this

scope of discovery need not be admissible in evidence to be

discoverable.” Fed. R. Civ. P. 26(b)(1).

Nevertheless, “the simple fact that requested information is

discoverable . . . does not mean that discovery must be had. On

its own initiative or in response to a motion for protective order

under Rule 26(c), a district court may limit [discovery] . . . .”

Nicholas v. Wyndham Int’l, Inc., 373 F.3d 537, 543 (4th Cir. 2004);

9

see also Fed. R. Civ. P. 26(c)(1) (“The court may, for good cause,

issue an order to protect a party or person from annoyance,

embarrassment, oppression, or undue burden or expense . . . .”).

Moreover,

the [C]ourt must limit the frequency or extent of

discovery otherwise allowed by the[ Federal Rules of

Civil Procedure (the “Rules”)] or by local rule if it

determines that:

(i) the discovery sought is unreasonably cumulative

or duplicative, or can be obtained from some other

source that is more convenient, less burdensome, or

less expensive;

(ii) the party seeking discovery has had ample

opportunity to obtain the information by discovery

in the action; or

(iii) the proposed discovery is outside the scope

permitted by Rule 26(b)(1).

Fed. R. Civ. P. 26(b)(2)(C). “District courts enjoy nearly

unfettered discretion to control the timing and scope of

discovery.” Hinkle v. City of Clarksburg, 81 F.3d 416, 426 (4th

Cir. 1996); accord Cook v. Howard, 484 F. App’x 805, 812 (4th Cir.

2012) (observing that “[d]istrict courts are afforded broad

discretion with respect to discovery”).

“The Rules provide a number of discovery devices, including

[interrogatories and] requests for production of documents . . . .”

Kinetic Concepts, Inc. v. ConvaTec Inc., 268 F.R.D. 226, 240

(M.D.N.C. 2010). Federal Rule of Civil Procedure 33 (“Rule 33”)

requires that a litigant answer each interrogatory “separately and

fully in writing under oath,” Fed. R. Civ. P. 33(b)(3), and

“state[] with specificity,” Fed. R. Civ. P. 33(b)(4), any grounds

for objection. In turn, Federal Rule of Civil Procedure 34 (“Rule

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34”) requires that a litigant’s response to a request for

production of documents “must either . . . permit[ inspection] as

requested or state with specificity the grounds for objecting to

the request, including the reasons.” Fed. R. Civ. P. 34(b)(2)(B).

B. The Duty to Supplement

Rule 26 imposes a continuing obligation on litigants, such

that

[a] party . . . who has responded to an

interrogatory[ or] request for production . . . must

supplement or correct its . . . response . . . in a

timely manner if the party learns that in some material

respect the . . . response is incomplete or incorrect,

and if the additional or corrective information has not

otherwise been made known to the other parties during the

discovery process or in writing . . . .

Fed. R. Civ. P. 26(e)(1)(A). Alternatively, courts may order

supplementation. Fed. R. Civ. P. 26(e)(1)(B). The duty to

supplement continues beyond the close of discovery. See

Volumetrics Med. Imaging, LLC v. Toshiba Am. Med. Sys., Inc., No.

1:05CV955, 2011 WL 2470460, at *2 n.3 (M.D.N.C. June 20, 2011)

(unpublished); accord Medline Indus. v. C.R. Bard, Inc., No.

17C7216, 2021 WL 809734, at *3–4 (N.D. Ill. Mar. 3, 2021)

(unpublished); Weare v. Bennett Bros. Yachts, No. 7:17-CV-155, 2019

WL 12267845, at *4 (E.D.N.C. June 12, 2019) (unpublished); Star

Direct Telecom, Inc. v. Global Crossing Bandwidth, Inc., 272 F.R.D.

350, 358 (W.D.N.Y. 2011). “Excluding documents created after the

close of discovery from the duty to supplement would encourage

parties to wait until after discovery has closed to create

11

documents containing potentially damaging information.” Iweala v.

Operational Techs. Servs., Inc., Civ. Action No. 04-02067, 2010 WL

11583114, at *2 (D.D.C. Apr. 13, 2010) (unpublished).

If a party fails to supplement as required, “the party is not

allowed to use that information . . . to supply evidence on a

motion, at a hearing, or at a trial, unless the failure was

substantially justified or is harmless.” Fed. R. Civ. P. 37(c)(1).

“[T]he automatic sanction of exclusion provides a strong inducement

for disclosure of material that the disclosing party would expect

to use as evidence.” Southern States Rack & Fixture, Inc. v.

Sherwin-Williams Co., 318 F.3d 592, 595 n.2 (4th Cir. 2003)

(internal quotation marks omitted). However, as discussed in more

detail in the following subsection, certain circumstances may call

for remedies other than exclusion. See Star Direct Telecom, 272

F.R.D. at 358 (noting that Rule 26(e) provides for court-ordered

supplementation and rejecting argument that exclusion represents

sole remedy for Rule 26(e) violation); see also Fed. R. Civ. P. 37

advisory committee’s notes, 1993 Amendment, Subdivision (c)

(“Preclusion of evidence is not an effective incentive to compel

disclosure of information that, being supportive of the position of

the opposing party, might advantageously be concealed by the

disclosing party.”).

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C. Motions to Compel

Although Rule 26 allocates “primary responsibility for

conducting discovery” to litigants, Fed. R. Civ. P. 26 advisory

committee’s notes, 1983 Amendment, Subdivision (g), it likewise

“acknowledges the reality that [the discovery process] cannot

always operate on a self-regulating basis,” Fed. R. Civ. P. 26

advisory committee’s notes, 1983 Amendment, Subdivision (b). “The

Rules thus afford a number of mechanisms for litigants to seek

judicial intervention in discovery disputes, including authorizing

‘[a] party seeking discovery [to] move for an order compelling an

answer, designation, production, or inspection.’” Kinetic

Concepts, 268 F.R.D. at 243 (quoting Fed. R. Civ. P. 37(a)(3)(B)).

Rule 37 allows such a motion when “a party fails to answer an

interrogatory submitted under Rule 33,” Fed. R. Civ. P.

37(a)(3)(B)(iii), or when “a party fails to produce

documents . . . as requested under Rule 34,” Fed. R. Civ. P.

37(a)(3)(B)(iv). The party opposing discovery generally bears the

burden on a motion to compel. Kinetic Concepts, 268 F.R.D. at

243-44 (collecting cases).

Furthermore, as mentioned above, Rule 37 provides multiple

avenues of relief for a Rule 26(e) violation, some of which a

litigant must seek by motion. In that regard, Rule 37 authorizes

sanctions “[i]n addition to or instead of [exclusion],” Fed. R.

Civ. P. 37(c)(1), which “apply when a party fails to disclose

13

evidence helpful to an opposing party,” Southern States, 318 F.3d

at 595 n.2; see also 7 Moore’s Federal Practice, Civil

§ 37.60[2][b] (explaining that alternative sanctions “provide

courts with effective means to discipline parties who might be

tempted not to disclose evidence that would be helpful to their

opponents”). In that regard, Rule 37 expressly empowers a court to

fashion “other appropriate sanctions,” Fed. R. Civ. P. 37(c)(1)(C),

to include

(i) directing that the matters embraced in the order or

other designated facts be taken as established for

purposes of the action, as the prevailing party claims;

(ii) prohibiting the disobedient party from supporting or

opposing designated claims or defenses, or from

introducing designated matters in evidence;

(iii) striking pleadings in whole or in part;

(iv) staying further proceedings until the order is

obeyed;

(v) dismissing the action or proceeding in whole or in

part; [and]

(vi) rendering a default judgment against the disobedient

party . . . .

Fed. R. Civ. P. 37(b)(2)(A)(i)–(vi); see also Fed. R. Civ. P.

37(c)(1)(C) (approving of “any of the orders listed in Rule

37(b)(2)(A)(i)—(vi)”)). The Court may award such relief “on motion

and after giving an opportunity to be heard.” Fed. R. Civ. P.

37(c)(1).

II. Analysis

A. Timeliness

USF&G has argued that Covil must produce the Settlement

Agreements in accordance with Rule 26(e). (Docket Entry 400 at

14

5-6.) In response, Covil has contended that the Motion merits

denial because USF&G failed to move for relief before the discovery

deadline. (Docket Entry 405 at 3-4 (noting closure of discovery on

August 10, 2020).) In reply, USF&G has maintained that (i) a

litigant properly may file a motion to compel after the close of

discovery (Docket Entry 407 at 3-4), (ii) USF&G’s requests during

discovery encompassed the Settlement Agreements (id. at 3),

(iii) Covil possesses an ongoing obligation to supplement its

discovery responses (id.), and (iv) USF&G acted prudently in

seeking other means of disclosure before filing the Motion (id. at

5-6).

Although a party generally must file a motion to compel before

the close of discovery, see RDLG, LLC v. RPM Group, LLC, No.

1:10cv204, 2012 WL 3202851, at *1 (W.D.N.C. Aug. 6, 2012)

(unpublished), that rule merits less rigid application in the

context of motions asserting Rule 26(e) violations, see generally

Lane v. Lucent Techs., Inc., No. 1:04CV789, 2007 WL 2079879, at *3

(M.D.N.C. July 13, 2007) (unpublished) (“[Rule 37] allows a court

to establish a reasonable time for a party to file [a] motion [to

compel].”). Indeed, “Rule 26 imposes no requirement, express or

implied, that a motion to compel precede a court’s imposition of a

sanction .. . for failure to supplement ... .” Alldread v. City

of Grenada, 988 F.2d 1425, 1436 (5th Cir. 1993). Other courts have

granted relief for Rule 26(e) violations even when parties first

raised the issue after the close of discovery. See, e.g., Star

15

Direct Telecom, 272 F.R.D. at 358–59 (deeming motion to compel

supplementation “not untimely because the duty to supplement

continues even following the close of discovery” and ordering

supplementation); Iweala, 2010 WL 11583114, at *1, 3 (ordering

supplementation upon consideration of motion to compel filed more

than four years after close of discovery).

Here, because the Motion relates to Rule 26(e)

supplementation, an obligation that continues after the close of

discovery, such deadline does not render the Motion untimely.

Although USF&G became aware of three of the four Settlement

Agreements (all but Zurich’s) during the discovery period (see

Docket Entries 260, 261, 270 (Covil’s motions to dismiss from March

2020 indicating settlement with TIG, Hartford, and Sentry,

respectively)), Covil bore the obligation to supplement its

discovery responses even absent a motion by USF&G, Wright v. Touhy,

No. 97C742, 2003 WL 22439864, at *4 (N.D. Ill. Oct. 28, 2003)

(unpublished) (“The duty to supplement . . . lingers on without

subsequent solicitation.”). As concerns the Zurich Settlement,

which occurred in January 2021 (several months after the close of

discovery), Covil has failed to show that USF&G delayed in seeking

relief (see Docket Entry 405 at 4); moreover, USF&G has proffered

reasonable explanations for waiting until April 2021 to file the

Motion (see Docket Entry 407 at 5–6). Accordingly, under the

circumstances, the Court deems the Motion timely.

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B. Relevance

In seeking to obtain the Settlement Agreements, USF&G has

asserted its entitlement “to set off any damages by the amounts of

any previous settlements between [Covil] and other responsible

parties.” (Docket Entry 400 at 6.) In light of its corresponding

burden “to show that [Covil] has received settlement consideration

from another responsible party” (id. at 7), USF&G has maintained

that “Covil cannot prevent USF&G from presenting such evidence by

withholding this information prior to trial” (id.). Per USF&G, the

four Settlement Agreements remain relevant to “the issue [of]

whether Covil received compensation in exchange for a release that

covered claims relating to the Finch [J]udgment” (id. at 13

(italics omitted); see also Docket Entry 407 at 8–9).

Additionally, USF&G has invoked the North Carolina rule foreclosing

duplicative recoveries and noted that disclosure would increase the

likelihood of settlement. (Docket Entry 400 at 8–9.) Conversely,

Covil has resisted disclosure, arguing that the Settlement

Agreements with TIG, Hartford, and Sentry bear no relevance

“because they do not allocate funds to disputes arising out of

Zurich’s or USF&G’s conduct in [the Finch Action]” (Docket Entry

405 at 1).

“Discovery under the [] Rules . . . is broad in scope and

freely permitted.” Carefirst of Md., Inc. v. Carefirst Pregnancy

Ctrs., Inc., 334 F.3d 390, 402 (4th Cir. 2003); see also OptoLum,

17

Inc. v. Cree, Inc., No. 1:17CV687, 2018 WL 6834608, at *4 (M.D.N.C.

Dec. 28, 2018) (unpublished) (“[N]otwithstanding the limitations

[of Rule 26(b)(1) and (b)(2)(C)], ‘discovery under the Federal

Rules of Civil Procedure is broad in scope and freely permitted.’”)

(internal brackets omitted) (quoting Carefirst, 334 F.3d at 402).

In the context of motions to compel, courts have allowed non-

settling parties to obtain settlement agreements between other

litigants when such agreements relate to the issue of damages and

the potential for a setoff. See, e.g., Barclay v. Gressit, No.

2:12–cv–156, 2013 WL 3819937, at *3 (D. Me. July 24, 2013)

(unpublished) (“Courts have readily discerned the relevance to a

non-settling joint tortfeasor of information regarding a settlement

agreement between a plaintiff and a settling joint tortfeasor when,

pursuant to applicable state law, the non-settling defendant is

entitled to a setoff of the settlement amount from any verdict in

favor of the plaintiff . . . .”).

Here, whether the Settlement Agreements qualify as relevant

depends (at least in part) on the substantive law giving rise to

“any party’s claim or defense,” Fed. R. Civ. P. 26(b)(1). See

Barclay, 2013 WL 3819937, at *3 (referencing, in assessing

relevance, “applicable state law” (emphasis added)). However,

neither USF&G nor Covil has confronted the choice-of-law issue (at

least in connection with the Motion). (See Docket Entry 400 at 6–8

& n.5 (relying on North Carolina law without discussion of choice-

of-law principles); Docket Entry 405 at 5–7 (focusing solely on

18

scope of Settlement Agreements); see also Docket Entry 405 at 4-6

(invoking North Carolina law as to (statutory) “deceptive trade

practices” claim without mentioning law applicable to bad-faith and

breach-of-contract claims).) Given the lack of guidance from the

parties and their apparent agreement that North Carolina law

governs (at least some of) Covil’s claims and USF&G’s defenses, the

Court assumes, at this stage, that North Carolina substantive law

applies.’

Under North Carolina law, Covil bears the burden to prove its

damages in order to recover in connection with any of its remaining

claims against USF&G. See Walker v. Branch Banking & Tr. Co., 133

2 “A federal court exercising diversity jurisdiction must

apply the choice[-Jof[-]law rules of the state in which it sits.”

Perini/Tompkins Joint Venture v. Ace Am. Ins. Co., 738 F.3d 95, 100

(4th Cir. 2013). When initiating the original declaratory-judgment

action, Zurich invoked this Court’s diversity jurisdiction (Docket

Entry 1, @ 12), and Covil has alleged that complete diversity

exists between itself and USF&G (see Docket Entry 155, TI 99, 102).

As far as Covil’s bad-faith claim, “North Carolina recognizes bad

faith refusal to settle an insurance claim as a tort .. . [and]

uses the law of the situs test to determine the choice of law for

tort claims.” Martinez v. National Union Fire Ins. Co., 911 F.

Supp. 2d 331, 336 (E.D.N.C. 2012). Regarding Covil’s contractual

claim, “[u]nder North Carolina’s choice-of-law rules, a contract is

governed by the law of the place where the contract was made.”

Sager v. Standard Ins. Co., No. 5:08-CV-628, 2011 WL 13253913, at

*5 (E.D.N.C. Aug. 26, 2011) (unpublished) (internal quotation marks

omitted). Based on the Motion and associated briefing, the Court

discerns no basis to apply the substantive law of a jurisdiction

other than North Carolina. Even if another state’s law governed

one or more of Covil’s claims, that circumstance matters only if

some difference exists between that jurisdiction’s law and North

Carolina law which would affect the outcome of the Motion, see

Perini/Tompkins Joint Venture, 738 F.3d at 101. The possibility of

some other law governing and such law altering the outcome appears

unlikely.

19

N.C. App. 580, 585, 515 S.E.2d 727, 730 (1999) (discussing

plaintiff’s burden to prove damages caused in context of unfair and

deceptive trade practices claim); State Props., LLC v. Ray, 155

N.C. App. 65, 76, 574 S.E.2d 180, 188 (2002) (“The party seeking

damages bears the burden of proving them in a manner that allows

the fact-finder to calculate the amount of damages to a reasonable

certainty.”). Furthermore, “North Carolina recognizes the common

law principle of ‘one recovery’ for each injury, even where the

legislature has authorized damages that are punitive in character.”

Ferris v. Haymore, 967 F.2d 946, 958 (4th Cir. 1992) (internal

citation omitted) (citing N.C. Gen. Stat. § 1B-4). In particular,

[w]hen a release or a covenant not to sue or not to

enforce judgment is given in good faith to one of two or

more persons liable in tort for the same injury . . . [,]

it reduces the claim against the others to the extent of

any amount stipulated by the release or the covenant, or

in the amount of the consideration paid for it, whichever

is the greater . . . .

N.C. Gen. Stat. § 1B-4. “Nonsettling tortfeasors, however, are

entitled to a setoff only for damages that are awarded for the same

injury for which the settling defendants compensated the

plaintiff.” Zivitz v. Greenberg, 279 F.3d 536, 539 (7th Cir. 2002)

(interpreting materially identical provision of Illinois law).

Although the foregoing statute applies only to tort claims, similar

concepts prevent double recovery in North Carolina contract

actions. See Duke Univ. v. St. Paul Mercury Ins. Co., 95 N.C. App.

663, 681, 384 S.E.2d 36, 47 (1989).

20

To determine whether one (or more) of the Settlement

Agreements potentially concerns Covil’s damages and the

availability of a setoff, the Court considers the nature and scope

of Covil’s claims as well as the (purported) reach of the

Settlement Agreements. As mentioned previously, as to Zurich and

USF&G, Covil alleged, inter alia, “unfair and deceptive acts or

practices in violation of [North Carolina General Statute Section]

75-1.1” (Docket Entry 155, {9% 127; see also id., IT 126-32) and

asserted claims for bad faith (id., 133-41), punitive damages

(id. FI 142-50), and breach of contract (id. (7 151-61). As to

TIG, Hartford, and Sentry,°* Covil sought only declaratory relief

(see Docket Entry 155, 162-76), which the Court (per Judge

Eagles) denied at summary judgment (see Docket Entry 334 at 29).

In other words, TIG, Hartford, and Sentry never bore potential

liability for the only claims that remain for consideration, those

relating to the Finch Action. (See Docket Entry 361 at 1

(identifying primary issue, after summary judgment, as “[Zurich’s

and USF&G’s] conduct in handling the Finch negotiations and trial”

(italics omitted) ); see also Docket Entry 405 at 2

(“[Covil] . . . never sued TIG or Hartford for bad faith.”).)

Although USF&G has maintained that “[Covil] sued [TIG, Hartford,

and Sentry] in this action, and each had potential liability to

Covil when they settled” (Docket Entry 400 at 11), such argument

3 As discussed, the Stipulation clarifies (and narrows) the

claims that Covil lodged against Sentry. (See Docket Entry 157.)

21

ignores the fact that Covil excluded those insurers from the claims

that USF&G faces and as to which USF&G wishes to explore a

potential setoff (see id. at 11–14). The (limited) relief Covil

sought against TIG, Hartford, and Sentry undermines USF&G’s attempt

to connect the Settlement Agreements with those entities to the

distinct, Finch-related claims pending against USF&G.

Moreover, consistent with the scope of its counter- and cross-

claims, Covil has insisted that “[t]he Sentry, TIG and Hartford

[S]ettlement [A]greements do not assign any portion of settlement

funds to the Finch lawsuit because those carriers do not bear the

burden of the Finch lawsuit.” (Docket Entry 405 at 5 (italics

omitted).) Instead, Covil has stated that such

“[S]ettlement[ Agreements] resolve the broad disputes . . . as to

the general responsibilities arising from the insurance policies

issued by [Sentry, TIG, and Hartford] to Covil” (id. at 5–6). In

that regard, such settlements resulted in the creation of a

qualified settlement fund (“QSF”). (Id. at 6.) The order from the

Receiver Court approving those settlements explains that TIG,

Hartford, and Sentry bought back the insurance policies they had

issued to Covil and that the proceeds from those sales will fund

asbestos-related suits involving Covil. (Docket Entry 405-1 at 11

(“As part of the Settlement Agreements, Hartford, TIG, and Sentry

have offered to buy back any policies that it or its predecessors

may have sold to Covil Corporation or Covil Corporation’s

predecessors. Doing so will allow the insurance assets to be

22

liquidated for use in the administration of the Receivership, and

by the QSF for the defense of asbestos bodily injury suits and

payment of asbestos bodily injury claims.”).)4 As a result, the

Court deems the TIG, Hartford, and Sentry Settlement Agreements

irrelevant to the claims pending against USF&G (and the potential

for a setoff in connection with those claims).

In contrast to its position with respect to the TIG, Hartford,

and Sentry Settlement Agreements, Covil has acknowledged that the

Zurich Settlement “account[s] for . . . claims related to any

alleged bad faith on the part of Zurich related to the underlying

Finch verdict” (Docket Entry 405 at 3 (italics omitted)). Covil’s

sole challenge to the relevance of the Zurich Settlement depends on

an agreement between USF&G and Zurich in the Finch Action. (See

id. at 7.) More specifically, Covil has relied on an email

communication documenting a cost-sharing agreement between Zurich

and USF&G in the Finch Action, under which USF&G assumed 88.89% of

the indemnity obligation. (Id. (discussing Docket Entry 405-6 at

4 Although USF&G has expressed its desire to “verify” such

assertions via disclosure of the Settlement Agreements (Docket

Entry 407 at 8), neither a litigant’s “hunch,” nor the mere

“potential” that some undisclosed relevant evidence exists “is

[]sufficient to pull the requests within the realm of appropriate

proportionality per Rule 26(b)(1),” Griggs v. Vanguard Grp., Inc.,

No. CIV-17-1187, 2019 WL 2524837, at *4 (W.D. Okla. June 18, 2019)

(unpublished). See also Anthony v. United States, 667 F.2d 870,

880 (10th Cir. 1981) (“A defendant may not use discovery as a

fishing expedition.”).

23

2).)5 However, Covil has provided no support for the notion that

such agreement conclusively determines the extent to which the

Zurich Settlement limits Covil’s potential recovery from USF&G.

(See id.) Accordingly, insofar as USF&G may advocate for a

different setoff calculation, the amount of the Zurich Settlement

possesses relevance.

However, USF&G has failed to show that other parts of the

Zurich Settlement bear on any pertinent issue in this action. Even

absent an objection by Covil on such grounds, the Court,

independently, “must limit the . . . extent of discovery otherwise

allowed by these [R]ules . . . if it determines that . . . the

proposed discovery is outside the scope permitted by Rule

26(b)(1),” Fed. R. Civ. P. 26(b)(2)(C)(iii). See Lawson v. Spirit

AeroSystems, Inc., No. 18-1100, 2020 WL 1813395, at *6 (D. Kan.

Apr. 9, 2020) (unpublished) (holding that Rule 26(b)(2)(C) imposes

“independent ongoing obligation” on courts). Upon exercise of its

discretion in that regard, the Court discerns no basis to compel

disclosure of the entire Zurich Settlement; USF&G remains entitled

to discover only the amount of settlement and any provisions

bearing on allocation of the settlement amount to the Finch

5 Although the email communication appears to originate from

an employee of “Travelers” (Docket Entry 405-6 at 2), USF&G’s

corporate disclosure statement identifies The Travelers Companies,

Inc., as a parent corporation (see Docket Entry 24 at 1).

24

Action.6 Given the conclusion as to the irrelevance of the other

Settlement Agreements, the rest of this Memorandum Opinion will

consider the parties’ remaining arguments as to the Zurich

Settlement only.

C. Timing of Disclosure

USF&G has contended that Covil must produce the Zurich

Settlement before trial, as USF&G must “present such evidence at

trial, prior to judgment.” (Docket Entry 400 at 7.) According to

Covil, the Motion remains premature under North Carolina law

because “set-offs do not become relevant unless and until there is

a verdict against USF&G” (Docket Entry 405 at 1). In reply, USF&G

has acknowledged that some courts have delayed disclosure until

after a verdict on liability but has characterized pretrial

disclosure as the preferable rule (favored by the majority of

courts), noting that such practice promotes settlement and

conserves judicial resources. (See Docket Entry 407 at 6–8.)

“Under Rule 26(b), it is relevance[,] not admissibility[,]

that drives the inquiry as to whether the information is

discoverable.” Innovative Therapies, Inc. v. Meents, 302 F.R.D.

364, 377 (D. Md. 2014) (internal quotation marks omitted).

6 The self-executing sanction of exclusion will apply to any

information not disclosed by Covil, in the event that Covil later

attempts to use such information to reduce the setoff amount. See

Fed. R. Civ. P. 37(c)(1). For example, if USF&G argues that the

entire amount paid under the Zurich Settlement qualifies for

setoff, Covil could not point in rebuttal to any portion of the

Zurich Settlement it failed to disclose to USF&G, unless it could

satisfy an exception to Rule 37(c)(1)’s exclusion provision.

25

“Generally speaking, discovery as to damages is proper,” Federal

Deposit Ins. Corp. v. Credit Suisse Sec. (USA) LLC, No.

2:12-CV-784, 2016 WL 1047380, at *6 (M.D. Ala. Mar. 10, 2016)

(unpublished) (internal quotation marks omitted), notwithstanding

the fact that, “in many cases the issue of liability is tried

separately from the issue of damages,” 8 Charles Alan Wright, et

al., Federal Practice & Procedure § 2008.4 (3d ed. Apr. 2021

update). When “the issue of damages is truly separate from the

question of liability,” id., parties may seek to delay “discovery

pertaining to damages . . . until after liability has been

established,” id. Applying the foregoing principles, most courts

have allowed access to settlement agreements and other information

bearing on damages during the regular course of discovery. see

Wilshire v. WFOI, LLC, No. 4:13-cv-3614, 2015 WL 1643456, at *3

(D.S.C. Apr. 14, 2015) (unpublished) (collecting cases); see also

Federal Deposit Ins. Corp., 2016 WL 1047380, at *6; Barclay, 2013

WL 3819937, at *4; but see Beuster v. Equifax Info. Servs., Civ.

Action No. 2005-2816, 2006 WL 8456998, at *3 (D. Md. Sept. 1, 2006)

(unpublished) (denying as premature motion to compel settlement

agreement).

Here, Covil has not indicated that the Court (per Judge

Fagles) previously approved a bifurcated discovery plan. (See

Docket Entry 405 at 4-5; see also Docket Entries 109 (scheduling

order), 129 (modification of scheduling order), 139 (modification

of scheduling order), 145 (modification of scheduling order), 284

26

(modification of scheduling order), 321 (modification of scheduling

order).)7 Instead, Covil has represented that North Carolina law

renders USF&G’s request premature, since a setoff becomes relevant

only after a verdict establishing liability. (See id.) However,

the notion that resolution of liability issues must precede

resolution of damages issues holds true in virtually all cases and

generally poses no obstacle to discovery on the latter issues (in

the absence of bifurcation). See 8 Charles Alan Wright, et al.,

Federal Practice & Procedure § 2008.4 (3d ed. Apr. 2021 update).

Because “[t]here has been no bifurcation of trial on liability and

damages in this case,” Barclay, 2013 WL 3819937, at *4, the Court

declines to delay compelled production of information bearing on

Covil’s damages and the potential setoff.

D. Confidentiality

In response to Covil’s (pre-Motion) position that the Receiver

Court’s seal of the Zurich Settlement and the confidentiality

provisions contained therein justify Covil’s nondisclosure (Docket

Entry 400-4 at 2), USF&G has insisted that the protective order

(Docket Entry 203) in this action adequately mitigates any such

concerns. (Docket Entry 400 at 10–11; see also Docket Entry 407 at

10–12.) Nonetheless, Covil has maintained that the Receiver Court

deemed the Zurich Settlement “confidential and placed [it] under

seal” (Docket Entry 405 at 1) and further indicated that Zurich has

7 In fact, the Court (per Judge Eagles) denied bifurcation as

to other aspects of the case. (See Docket Entry 203.)

27

“object[ed] to any disclosure of the[ Zurich Settlement] to USF&G”

(id. at 7). Moreover, Covil has represented that “the Receiver[]

Court adjudicates any matters relating to the confidential

[S]ettlement [A]greements, meaning Covil cannot disclose the

[Zurich S]ettlement [] without the Receiver[] Court’s approval.”

(Id. at 8.) Replying to those contentions, USF&G has argued that

(i) Covil previously envisioned potential disclosure of the Zurich

Settlement (Docket Entry 407 at 10 (discussing Covil’s position in

its motion to seal before the Receiver Court)), (ii) the Receiver

Court’s continuing jurisdiction over the QSF does not deprive this

Court of authority to manage discovery in this action (id. at

10–11), and (iii) no settlement privilege protects the Zurich

Settlement from disclosure (id. at 11).

Turning first to Covil’s refusal to produce the Zurich

Settlement in light of its confidential nature, “courts within the

Fourth Circuit have generally declined to recognize a federal

settlement privilege,” Townsend v. Nestle Healthcare Nutrition,

Corp., No. 3:15-cv-6824, 2016 WL 1629363, at *5 (S.D.W. Va. Apr.

22, 2016) (unpublished) (collecting cases). Accordingly,

settlement agreements remain discoverable to the extent they

possess relevance under Rule 26(b). Levick v. Maimonides Med.

Ctr., No. 08CV03814, 2011 WL 1673782, at *2 (E.D.N.Y. May 3, 2011)

(unpublished). For that reason, “confidentiality provisions

inserted by parties into private settlement agreements do not

immunize those agreements from discovery.” Rocky Aspen Mgmt. 204

28

LLC v. Hanford Holdings LLC, 394 F. Supp. 3d 461, 464 (S.D.N.Y.

2019). Here, the Court has deemed (part of) the Zurich Settlement

relevant (for discovery purposes). Covil has offered no reason why

the supposed confidentiality provision exempts that document from

otherwise applicable discovery rules. (See Docket Entry 405 at

7–9.)

To the extent Covil has suggested that the Receiver Court’s

order approving (and sealing) the Zurich Settlement prohibits Covil

from any disclosure of the same, the text of the order does not

support that position. Sealing orders differ from gag orders. See

In re Sealing & Non-Disclosure, 562 F. Supp. 2d 876, 880 (S.D. Tex.

May 30, 2008) (“Judicial gag orders impinge upon freedom of speech

and press under the First Amendment, and must pass muster under

well-established constitutional case law. On the other hand,

sealed judicial orders conflict with the common law tradition of

public access to judicial proceedings, and are typically evaluated

under more flexible common law rules.”). Importantly, “the evident

purpose of [a sealing] order is to limit public access to th[e]

records [subject to the seal], rather than to provide a shield to

a litigant to frustrate otherwise relevant discovery.” Romano v.

SLS Residential, Inc., 298 F.R.D. 103, 110 (S.D.N.Y. 2014); see

also In re Murphy-Brown, LLC, 907 F.3d 788, 796 (4th Cir. 2018)

(observing that “gag orders in civil cases are quite rare”).

Here, the Receiver Court granted a motion by Covil, the QSF,

and Zurich to maintain the Zurich Settlement under seal, after

29

concluding that “sealing the [Zurich S]ettlement [] is proper and

necessary under Rule 41.1(c) of the South Carolina Rules of Civil

Procedure.” (Docket Entry 405-2 at 5.) The Receiver Court noted

the lack of public interest in the specific terms of the Zurich

Settlement and the potential harm that premature disclosure could

cause. (Id. at 5–6.) In approving the Zurich Settlement, the

Receiver Court referenced its “discretion to dispose of the

Receivership’s assets and direct disposition of those assets” and

declared its “continuing jurisdiction over the QSF and all of its

assets.” (Id. at 7.) However, the Receiver Court never forbid

Covil from revealing the terms of the Zurich Settlement and

expressed no position on whether (or under what circumstances)

disclosure could occur. (See id. at 2–10.)

In other words, the Receiver Court issued a sealing order, not

a gag order. Covil’s apparent willingness to produce the Zurich

Settlement for in camera review (Docket Entry 405 at 9) undercuts

its contention that the Receiver Court forbade disclosure in any

form. “As [a] part[y] to this case, [Covil is] obliged to produce

documents that are responsive to [USF&G’s] discovery requests,

regardless of [its] agreement with [Zurich], acceded to by the

[Receiver C]ourt, to protect such information with a[ sealing

order].” DAC Surgical Partners, P.A. v. United Healthcare Servs.,

Civ. Action No. H-11-1355, 2013 U.S. Dist. LEXIS 186292, at *8

(S.D. Tex. Dec. 16, 2013) (unpublished). Although the Zurich

Settlement evidently required the approval of the Receiver Court

30

and thus differs in some respects from purely private settlement

agreements, such judicial involvement derives from Covil’s status

as a dissolved corporation in receivership and does not entitle the

Zurich Settlement to absolute protection from production in

litigation.8 Allowing for limited disclosure under the

circumstances protects Covil’s and Zurich’s privacy interests (to

the extent possible) and affords respect for the Receiver Court’s

order while continuing to enforce Covil’s discovery obligations

under the Rules.

CONCLUSION

Although USF&G filed the Motion after the close of discovery,

the Motion qualifies as timely because the relief sought therein

concerns Covil’s ongoing obligation to supplement under Rule 26(e).

In light of the scope of Covil’s claims and breadth of the

Settlement Agreements, only the Zurich Settlement qualifies as

discoverable. However, given the independent judicial duty to

enforce the limitations of Rule 26(b)(1), the Court will order

Covil to disclose only the amount of the Zurich Settlement and any

provisions pertaining to apportionment of some or all of that

amount to the Finch Action. Although the setoff issue fully ripens

after a verdict establishing liability, the Court declines to delay

supplementation any further, particularly in light of the (non-

8 The Receiver Court asserted control over Covil’s assets (to

include Covil’s insurance policies) and invoked its authority to

supervise the Receiver’s liquidation of such assets. (See Docket

Entry 405-3 at 9 & n.1.

31

bifurcated) discovery plan. Lastly, neither the confidential

nature of the Zurich Agreement nor the Receiver Court’s order

approving of and sealing that document warrants non-disclosure

under the circumstances.

IT IS THEREFORE ORDERED that the Motion (Docket Entry 399) is

GRANTED IN PART, such that, on or before June 25, 2021, Covil must

serve a supplemental interrogatory response identifying payments

received in the Zurich Settlement and must produce to USF&G any and

all provisions of the Zurich Settlement which reveal the amount of

settlement funds due Covil, as well as any provisions of the Zurich

Settlement which concern any allocation of settlement funds to the

Finch Action (including any provisions that Covil contends support

allocation of any portion of such funds to matters other than the

Finch Action).

This the 17th day of June, 2021.

/s/ L. Patrick Auld

L. Patrick Auld

United States Magistrate Judge

32