Sanctions for Failure to Disclose Insurance Coverage under Rule 26(a)(1) Not Waived If Not Raised in District Court — Rule 26(g)(3) Mandates Sanctions Sua Sponte for Breach of Disclosure Duty

Food Team Int’l, Ltd. v. Unilink, LLC, 2014 U.S. App. LEXIS 23732 (3d Cir. Dec. 17, 2014):

D. Rule 26 Sanctions

The parties dispute whether the District Court should have sanctioned Defendants and their counsel for their failure to disclose Unilink's insurance policy. Rule 26(a) provides that, except in certain situations that do not apply here, "a [*9]  party must . . . provide to the other parties: . . . any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment." Fed. R. Civ. P. 26(a)(1)(A)(iv). Defendants urge that Food Team waived this issue by not raising it in the District Court and that Food Team loses on the merits.

Rule 26(g) provides that, in the event of a Rule 26 violation, "the court, on motion or on its own, must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both." Fed. R. Civ. P. 26(g)(3) (emphasis added). This mandatory language means "[t]here is no requirement that the [parties] have asked for the imposition of sanctions," as district courts have the "duty . . . to determine whether to impose sanctions even if the [parties] had not invited [their] attention to the issue." City of Livonia Emps.' Ret. Sys. v. Boeing Co., 711 F.3d 754, 761 (7th Cir. 2013) (interpreting 15 U.S.C. § 78u-4(c), which also gives district courts an obligation to impose sanctions regardless of whether the parties raise the issue). The District Court's "failure to do so made the final judgment-an appealable order, of course-vulnerable to challenge." Id. at 761-62. Thus, the District Court had an independent [*10]  duty to consider sanctions, and Food Team's failure to request sanctions did not result in waiver.

As for the merits, Defendants should have disclosed the insurance policy.

Unilink's insurance company, Philadelphia Indemnity Insurance Company ("PIIC"), notified Unilink that it would provide coverage for the litigation. PIIC acknowledged that it "shall pay on behalf of the Individual Insured . . . for D&O Wrongful Acts, except to the extent the Private Company has indemnified the Individual Insured." (Defs. Opp. to Mot. To File Suppl. App., Ex. B, at 2.) "D&O Wrongful Acts" include claims for "breach of duty." (Id. at 3.) Count Six of Food Team's complaint asserted that Defendant-Officers breached their fiduciary duties, making this policy directly relevant. Thus, this policy should have been disclosed.5 However, we offer no opinion as to whether Defendants' failure to disclose the insurance policy was done without substantial justification, and we will remand for further consideration. See Grider v. Keystone Health Plan Cent., Inc., 580 F.3d 119, 140 (3d Cir. 2009).6

5      Further, the insurance policy covers "claims first made during the policy period," and does not require claims to have accrued during the policy period. (Defs. Opp. to Mot. To File Suppl. App., Ex. B, at 2 (emphasis added).)

6      Given that Food Team has shown that remand is appropriate, we will deny Defendants' motion for appellate sanctions for Food Team's decision to appeal this issue.

III. CONCLUSION

We will *** remand for consideration [*11]  of Rule 26 sanctions.

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