discovery in first-party cases: better watch your step

Discovery in First-Party Cases:Better Watch Your Step!

Christopher W. MartinMartin, Disiere & Jefferson, L.L.P.

808 Travis, Suite 1800Houston, Texas 77002

(713) 632-1701(713) 222-0101 (Fax)[email protected]

9th Annual Ultimate Insurance SeminarState Bar of Texas

March 2000© 2000

C

CHRISTOPHER W. MARTIN

Martin, Disiere & Jefferson, L.L.P.808 Travis, Suite 1800Houston, Texas 77002

Telephone: 713/632-1700Fax: 713/222-0101

E-Mail: [email protected]

PRACTICE AREA Mr. Martin is one of the most widely recognized insurance lawyers in Texas. He handlesfirst-party insurance lawsuits and appeals in state and federal courts across Texas. He alsoserves as a mediator in multi-party coverage disputes among insurers or between apolicyholder and its insurers. He also represents insurers in disputes involving the TexasDepartment of Insurance and the Texas Attorney General's office.

Mr. Martin specializes in handling lawsuits, claims, administrative actions, and coveragedisputes arising out of multiple lines of insurance including general liability, property andcasualty, life and health, excess and umbrella, surplus lines, and workers compensation. Hehas extensive experience in environmental insurance coverage litigation arising out of privateand governmental claims against generators, producers, transporters, or owners of sitescontaminated with environmental pollutants. Mr. Martin is licensed to appear before TheFifth Circuit Court of Appeals, all U.S. District Courts in Texas, and all Texas state courts.

EXPERIENCE Mr. Martin has served as the Adjunct Professor of Insurance Law at the University ofHouston Law Center for the past five years. He is one of the most requested speakers atstate and national CLE seminars for attorneys and insurance professionals. He regularlyspeaks for the American Bar Association, Defense Research Institute, State Bar of Texas,University of Texas, University of Houston, and South Texas College of Law.

Mr. Martin is a prolific writer. He is the author of the only legal treatise in existencediscussing the private action provisions of the Texas Insurance Code: The Lawyer's Guideto Texas Insurance Code, Article 21.21. This legal treatise, published by Lexis LegalPublishers and now in its Third Edition, discusses the most litigated statute in Texas insurancelaw and focuses on: who may sue and be sued under the Insurance Code; available relief;possible defenses; class action lawsuits; and a host of similar issues.

Mr. Martin is also the editor of The Journal of Texas Insurance Law, a quarterlypublication of the State Bar of Texas. He is also in the process of completing a new treatisefor West Publishing which will be part of its Texas Litigation Guide series. The book,scheduled for publication in late 2000, will be entitled Texas Insurance Litigation and isbeing co-authored with Mark Kincaid of Austin.

Mr. Martin is Board Certified in Consumer Law, the specialization covering Insurance Law,by the Texas Board of Legal Specialization. He is also in the process of completing hisCPCU certification from the American Institute for Chartered Property and CasualtyUnderwriters.

Mr. Martin received his Juris Doctorate from Baylor University School of Law. He receiveda Bachelors of Arts degree in Political Science from Baylor University.

PROFESSIONAL

AFFILIATIONS

American Society of Chartered Property and Casualty Underwriters: candidate (2000);Texas Association of Life and Health Insurers, Houston Claims Association; The InsuranceAlliance of America; Defense Research Institute; Texas Association of Defense Counsel;State Bar of Texas (Insurance, Consumer Law and Litigation Sections); and Houston BarAssociation

PUBLICATIONS AND PRESENTATIONS

C Treatises:THE LAWYERS GUIDE TO TEXAS INSURANCE CODE ARTICLE 21.21 (Lexis LegalPublishing 3rd Ed., 1998): This legal treatise examines the individuals and entities who can bringprivate suits under the Code, those who may be sued for Code violations, available causes of action,class action relief, damages, defenses, and recommended jury charges.

TEXAS INSURANCE LITIGATION (West Publishing (Anticipated) 2000). This three-volumelegal treatise, which examines all aspects of insurance law and litigation in Texas, is in production foran anticipated publication in the winter of 2000.

C Editor:The Journal of Texas Insurance Law. This quarterly publication of the State Bar of TexasInsurance Law Section summarizes recent appellate decisions in the field of Texas insurance law andprovides a forum for Texas attorneys to publish articles in various substantiative insurance fields. Mr.Martin is the Editor-in-Chief.

C Periodicals:* "Independent Counsel: When Can the Insured Pick the Lawyer?” TEXAS LAWYER,

February 28, 2000.* "Web Sites of Interest to Texas Consumer Law Practitioners," JOURNAL OF TEXAS

CONSUMER LAW, Summer 1999.* "Insurance Litigation after Maryland v. Head," JOURNAL OF TEXAS CONSUMER LAW,

Fall 1997.* "Insurance Litigation After Allstate v. Watson: An Interim Analysis," CAVEAT VENDOR

(State Bar of Texas), June 1996.* "Polasek and Simmons: Texas Bad Faith at the Crossroads," TEXAS BAD FAITH

BULLETIN (The Rutter Group), January 1994.* THE INSURANCE RECORD (Record Publishing Company, Dallas); contributing author of

"Legal Update" feature, July 1993-present.* "The Bad Faith Implications of Texas Insurance Reform Bill," TEXAS BAD FAITH

BULLETIN (The Rutter Group), January 1992.

C CLE Publications:* “Discovery in First-Party Cases: Better Watch Your Step,” 9th Annual Ultimate Insurance

Seminar, State Bar of Texas, March 2000* “The Occurrence Clause: When is a Liability Insurer Responsible?” University of Houston

Advance Insurance Seminar, March 2000* “Article 21.55 Annotated,” Texas Insurance Law Symposia, South Texas College of Law,

November 1999* “Privilege and Confidentiality Issues in Insurance Litigation,” 4th Annual U.T. Insurance Law

Conference, October 1999* “Top Ten Insurance Coverage Problems for 1999,” University of Houston Handling

Insurance and Tort Claims, August-September 1999* "Coverage Under the Texas Auto Policy," Texas Insurance Law Seminar, Lorman Education

Services, August 1999* "Recent Developments in Homeowner's Insurance," Texas Insurance Law Seminar, Lorman

Education Services, August 1999* "Lost in the Tilley Triangle: Steering Clear of Conflicts of Interest," Texas Insurance Law

Seminar, Lorman Education Services, August 1999

* “Hot Liability Coverage Issues,” Everything You Need to Know About Insurance Law,Houston Bar Association, May 1999

* “Coverage Under the Texas Auto Policy,” Auto Injury Conference, South Texas College ofLaw, April-May 1999

* “Bad Faith Litigation: Third-Party Claims after Maryland v. Head, University of HoustonAdvanced Insurance Seminar, March 1999

* "Coverage for Long-Tail Claims," University of Texas Insurance Law Institute, September1998

* "Texas Top Ten Coverage Issues," University of Houston Insurance and Tort ClaimsSeminar, September 1998

* "Settlements Under Reservation of Rights Letters," University of Texas Marine Admiralty LawConference, September 1998

* "Independent Counsel Issues," South Texas Insurance Law Symposium, Update, July 1998* "Coverage Under Texas Personal Auto Policy," South Texas College of Law; June 1998* "Allocation of Defense Costs -- Insurance Coverage for Defective Construction II," American

Bar Association, June 1998* "Liability Coverage -- Everything You Need to Know About Insurance Law," Houston Bar

Seminar, May 1998* "Bad Faith Litigation: Third-Party Claims Update" University of Houston Advanced Insurance

Seminar, March 1998* "Hot Texas Coverage Issues--Insurance Law for Agents, Adjusters and Insurers," University

of Houston, December 1997* "Status of Bad Faith Law," University of Texas Insurance Law Institute, October 1997* "Independent Counsel Issues," South Texas Insurance Law Symposium , September 1997* "Independent Counsel," Insurance Law For Adjusters and Attorneys Who Represent Insurers;

University of Houston, November and December 1996* "Anatomy of An Insurance Policy,"The Rutter Group Insurance Seminar, May 1996* "The Ethical Implications of Texas Insurance Litigation," Professional Education Services, Inc.

("PESI") Advanced Bad Faith Insurance Seminar, October 1995* "Reservations of Rights in Texas: Why, Why Not, When and How," University of Houston

Law Foundation Advanced Insurance Seminar, April 1995; March 1996; March 1997* "The Status of Texas Insurance Litigation: Life After Watson, Lyons, Dominguez, & Moriel,"

South Texas College of Law Advanced Civil Trial Law Seminar, March 1995* "Texas Insurance Coverage Litigation," University of Houston Law Foundation Personal

Injury and Advanced Insurance Law Seminar, October 1994* "A Defendant's Perspective: Texas Insurance Coverage Questions," University of Houston

Law Foundation Insurance Law Seminar, May 1994* "1993 Bad Faith Case Law Update," South Texas College of Law Advanced Insurance Bad

Faith Seminar, October 1993* "Texas' 1991 Insurance Reform Bill," Texas Claims Managers Association Annual Claims

Seminar; San Antonio, Texas, September 1991.* "The Insurance Implications of the Americans with Disabilities Act," Market Profiles CLE

Seminar, Houston, Texas, September 1991.

C Expert Testimony:* Alderette v. Twin City Fire Ins. Co.; C.A. No. H-96-02893; in the United States District Court

for the Southern District, Houston Division (Written Opinion, 04/97)* Baylor College of Medicine v. Trygg Hanna; Arbitration, Harris County, Texas (Written

Opinion, 09/97)* Cronin v. Acceptance Ins. Co.; C.A. No. H-97-2221; in the U.S. District Court for the

Southern District, Houston Division (Written Opinion, 12/97)* Ellison v Southern Farm Bureau; Cause No. 98-20968; in the 113th Judicial District Court of

Harris County, Texas (Deposition, 07/99)* Rodriguez v Sciano, Tinsman and Houser; Cause No. 98-CI-02894; in the 166th Judicial

District Court of Bexar County, Texas (Deposition, 10/98)

* Underwriters at Interest v United Services Automobile Association; Cause No. 93-27963; inthe 129th Judicial District Court of Harris County, Texas (Deposition, 05/96)

* Union Central Life Ins. Co. v. Ooteghem; C.A. No. H-96-0840; in the United States DistrictCourt for the Southern District, Houston Division (Deposition, 10/96)

Discovery in First-Party Cases: Better Watch Your Step! C-i

Table of Contents

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. First Party Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1A. The Discoverability of the Claim File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. Overbroad/Unduly Burdensome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43. Attorney-Client Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

a. Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5b. Elements of the Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

(i) A "Communication" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(ii) Which is "Confidential" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(iii) Between an "Attorney" and "Client" . . . . . . . . . . . . . . . . . . . . . . . . . 6(iv) "Made for the Purpose of Facilitating Rendition of Professional

Legal Services to the Client" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9c. Documents Recording Confidential Communications . . . . . . . . . . . . . . . . 9d. Exceptions to the Attorney-Client Privilege Under Rule 503(d)

of the Texas Rules of Civil Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9(i) Furtherance of Crime or Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9(ii) Joint Clients (as between Each Other) . . . . . . . . . . . . . . . . . . . . . . . 10

e. Duration of the Attorney-Client Privilege . . . . . . . . . . . . . . . . . . . . . . . . . 10f. Waiver of the Attorney-Client Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . 10

(i) "Offensive" Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(ii) Who May Waive the Privilege? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4. The Work Product Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11a. TRCP 192 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11b. Anticipated Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

(i) Objective Overt Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13(ii) Subjective Good Faith Belief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

c. Work Product Exempt From Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . 14(i) Core Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(ii) Non-Core Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15(iii) Witness Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

5. Primary-Excess Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166. The Discoverability of a Claims File Involving Expert Witness Issues . . . . . . 16

a. Claim Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16b. Dual Capacity Witnesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

7. The Discoverability of the Claims File When the Adjuster is Designatedan Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

(i) Rule 192.3(c)(3): Facts Known by an Expert . . . . . . . . . . . . . . . . . 17(ii) Rule 192.3(e)(6): Documents and Tangible Things . . . . . . . . . . . . . 17

B. The Discoverability of Corporate Documents and the Trade Secret Privilege . . . . . 171. Definition of Trade Secret . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172. Applicability in First-Party Insurance Cases . . . . . . . . . . . . . . . . . . . . . . . . . . 183. Protecting Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

C. The Discoverability of Expert Bias . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19D. The Discoverability of Reserve Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1. Breach of Contract Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202. Extra-Contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

E. The Discoverability of Reinsurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 211. Breach of Contract Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

C-ii Ultimate Insurance Seminar

2. Extra-Contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21F. The Discovery of Other Claims and Other Lawsuits Against the Insurer . . . . . . . . 22

1. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23a. Breach of Contract Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23b. Extra-Contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

(i) Pattern and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24(ii) Knowledge of Particular Facts or Relevant Legal Standards . . . . . . 26

c. Relevance for Punitive Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272. Limitations on Discovery Regarding Other Claims and Other Suits . . . . . . . . 27

a. Burden/Oppression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28b. Overbreadth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

(i) Limit to Similar Factual Circumstances . . . . . . . . . . . . . . . . . . . . . . 28(ii) Limit to Specific Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29(iii) Limit to Acts Occurring in the Jurisdiction Where Action is Pending 29

c. Privacy Rights of Non-Party Insureds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293. Trial Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294. The Offensive Use of "Other Claims" by the Insurer to Refute Specific

Bad Faith Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30G. The Discoverability of Drafting History and Other Extrinsic Evidence . . . . . . . . . . 31H. The Discoverability of Personal Information About the Insured by the Insurer . . . . 33

1. Permissible Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33a. Arson or Other Consumer Fraud Cases . . . . . . . . . . . . . . . . . . . . . . . . . . 33b. Damage Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

(i) Economic Damage Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33(ii) Physical and Mental Anguish Damages . . . . . . . . . . . . . . . . . . . . . . 34

2. Limitations on an Insurer's Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34I. The Discoverability of Fee Bills Due to Legal Audits . . . . . . . . . . . . . . . . . . . . . . . 34

III. Third-Party Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35A. Statements by Insureds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IV. Procedural Considerations -- Properly Preserving Privileges and Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

A. Written Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36B. Initial Response to Written Discovery that Seeks Privileged Materials . . . . . . . . . . 36

1. Withhold Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362. The Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363. What a Party Asserting Privileges Should Not Do . . . . . . . . . . . . . . . . . . . . . . 36

a. Object . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36b. Move for Protective Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

4. Comparison to Former Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37C. The Requesting Party May Demand a Privilege Log . . . . . . . . . . . . . . . . . . . . . . . . 37

1. Request for Privilege Log . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372. 15 Days to Respond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373. The Privilege Log . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

a. Contents of the Log . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37b. Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

D. The Hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381. Who . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382. Need for Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383. Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

a. Affidavits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38b. In Camera Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Discovery in First-Party Cases: Better Watch Your Step! C-iii

c. Ex Parte Affidavits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38E. The Ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1. Court Sustains Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382. Court Overrules Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

F. Later Found or Generated Documents or Information . . . . . . . . . . . . . . . . . . . . . . . 39

V. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Discovery in First-Party Cases: Better Watch Your Step! C-1

The opinions expressed herein are my own and do not represent the views of any party whom I1

represent or any client of Martin, Disiere & Jefferson, L.L.P.

Discovery in First-Party Cases:Better Watch Your Step!1

I. IntroductionAlthough discovery activities constitute the

majority of time and resources expended ininsurance lawsuits, virtually no written materialsexist comprehensively examining the permissiblescope of discovery or the privilege/confidentialityissues common in this type of litigation under Texaslaw. Other than a handful of generic CLE articlesfocusing on changes in the Texas discovery rules orthe common law evolution of scope andprivilege/confidentiality issues, litigants who wish tolearn more about the permissible scope of discoveryin Texas insurance lawsuits are hard pressed to findany meaningful reference materials. For Texaspractitioners and litigants who handle or are involvedin insurance lawsuits, I hope this paper fills ananalytical void in this substantive field.

The dearth of available reference materials toinsurance practitioners in the field of discovery is Regardless of the substantive dispute, first partysurprising because insurance cases have generated cases frequently generate significant discoverymany of the common law developments in this area. disputes over the discoverability of variousDiscovery disputes in insurance lawsuits have categories of information and documentation. Thebecome the norm rather than the exception over the greatest discovery fights historically have centeredpast decade resulting in the expenditure of countless around the claim file maintained by the insurer.hours and millions of dollars chasing information and Other fights have broken out over reserve anddocumentation as well as attempting to shield such reinsurance information, "other claims" and "otheritems. Although the problems created by the time lawsuits" against the insurer, and discovery of otherand expense involved in modern discovery disputes information maintained by the insurer not directlyin insurance cases are best left to Texas' appellate related to the claim in question. Discovery disputescourts, I hope this paper serves as a useful are also common when the insurer seeks discoveryreference for identifying some of the substantive of sensitive information regarding the policyholder.discovery issues inherent in insurance litigation. This paper will analyze each of these discovery

This paper will focus on substantive discovery disputes in detail.issues arising out of both first part and third-partyinsurance lawsuits in Texas. The phrase "first party"is intended to encompass all matters brought directlyby a policyholder (or their beneficiary) against aninsurer and includes claims for property loss underauto or homeowner's policies, life and healthinsurance, and demands for defense and indemnitybenefits by an insured to their liability insurer. Incontrast, "third-party" claims are those brought by athird-party claimant against an insured defendantwhen the defense and settlement of the claim is

handled by the insured's liability carrier. Both thesetypes of claims have and will continue to generateenormous discovery battles.

Due to space limitations, this paper will notcontain any detailed analysis of the proceduralmechanisms or procedural limitations through whichdiscovery is conducted or privileges are protected.Specifically, this paper will not provide any detailedreview of the significant changes in Texas discoverywhich has governed Texas lawsuits since January1999. To the extent issues unique to Texasinsurance lawsuits create special proceduralconsiderations, those will be discussed; however, fora more detailed review of the procedural limitationson discovery the reader should refer to the plethoraof other materials generated by dozens of CLEproviders during the past few years.

II. First Party Litigation

A. The Discoverability of the Claim FileDuring the litigation of a first-party property

insurance coverage case, the insurer's claim file isfrequently considered the "crown jewel" of discoveryby many plaintiff's counsel, particularly, in thosecases where bad faith is alleged against the insurer.Over the objections of defense counsel, who mayargue much of the claim file documents areirrelevant, or that the request is overly broad and notlikely to lead to admissible evidence, courts will

C-2 Ultimate Insurance Seminar

frequently require the insurer to produce various statements. If the only claim in a first party lawsuitportions of the claims file including those non- is a claim for breach of contract, counsel for theprivileged documents which describe facts insurer is justified in objecting to the materials uniquediscovered and activity undertaken during the to the claims handling process. The latter categoryinsurer's claims investigation, as well as the of documents regarding the accident and theproduction of non-privileged documents which may insured's damages are generally going to beoutline the basis and reasoning for the insurer's discoverable. See, generally, Thomas v. Touchy,coverage defense. 1992 WL347945 (Tex. App.—Houston [1 Dist.]

1. RelevanceIt is axiomatic that the concept of "relevance"

during the discovery stage of a lawsuit is broaderthan when the term is used for purposes ofadmission of evidence at trial. Thus, discoverypresupposes a range of relevance which includes,not only what is admissible at trial, but also thatwhich leads to items admissible at trial. TEX. R.CIV. P. 192.3 (West 1999). Moreover, relevancy isdetermined by reference to the issues, becausegenerally, something is relevant if it tends to prove ordisprove an issue in controversy.

The determination of relevance necessarilydepends on the matters in controversy. As such, itis necessary to distinguish between breach ofcontract claims and extra contractual claims whendiscussing the relevance of an insurer's claims file.

• Breach of Contract ClaimsIn a first party lawsuit where the only cause of

action is for breach of contract, the insurer's entireclaim file will generally not be discoverable. Itemsin the claim file, however, may be discoverable tothe extent they pertain in some way to thecontractual liability or contractual damage issues.Because the claim file documents identify the scopeof the insurer's investigation, the duration of theinsurer's investigation, and the focus of the insurer'sinvestigation, the entire claim file will almost neverbe likely to lead to the discovery of relevantevidence regarding the liability and damage issues incontroversy in a breach of contract claim. Forexample, in an underinsured motorist case theadjuster's log notes, claims chronology, internalreporting documentation, and other documentsunique to the claims investigation process generallywill have absolutely nothing to do with whether ornot the uninsured driver was negligent, whether theinsured was contributorilynegligent, or the amount ofthe insured's damages. Other materials in the claimfile, however, may be directly relevant to the liabilityand damage issues including the police report,medical records and medical bills, the report of anaccident reconstruction expert, an IME, or witness

st

1992, no writ) (not published) (the entire claims fileis not discoverable when only cause of actionasserted seeks policy benefits for breach ofcontract).

If the breach of contract claim arises out of acoverage dispute, the manner in which the insureddefends the case may open up more of the claimsfile to discovery. If the insurer denies a claim undera liability policy because of its interpretation of apolicy provision, materials in the claims filediscussing the interpretation of the applicable policyprovision in question are arguably relevant. Forexample, if a homeowner sought defense andindemnity benefits from his homeowner's liabilitycarrier because the insured homeowner had beensued for making alleged misrepresentations inoperating a mail order business out of his garage,discovery would generally be permissible in anysubsequent first party lawsuit by the homeowneragainst his liability insurer as to materials in theclaims file discussing or interpreting the "businesspursuits" exclusion made the basis of the denial. Inother words, if the liability insurer denies the claimbecause of its interpretation of the "businesspursuits" exclusion, documents in the claims file maybe likely to lead to the discovery of admissibleevidence even though such items are inherentlyunique to the claims process. Internalmemorandums discussing the inherent ambiguity ofthe "business pursuits" exclusion or a note from theadjuster to a superintendent commenting that theunderlying pleadings are so vague as to make itimpossible to determine whether or not defensebenefits are owed are arguably relevant to theinsurer's coverage defense on this exclusion. To theextent the insurer discusses the meaning of thecontractual provision in question in the claims file,such materials may be relevant to the ongoingcoverage dispute. See, generally, Thomason v.Touchy, supra at *3 (discovery permitted as to theinsurer's own internal documents discussing itscoverage contentions).


• Extra-Contractual ClaimsThe pleading of one or more extra-contractual

causes of action (e.g. breach of the duty of goodfaith and fair dealing, violations of Article 21.21 ofthe Insurance Code, etc.) changes the focus of thealleged liability and damages and, consequently,changes the scope of relevant discovery. While theclaims file in its entirety may not be discoverable ina breach of contract claim, the addition of extra-contractual allegations challenging the insurer'sclaims investigation frequently make all or a majorityof the claims file discoverable. Texas courtsgenerally agree "discovery relating to the filing andinvestigation of the insurance claim and materialsrelating to the insurance company's decision to eitherpay or not pay the claim, and information relating tothe claim" is generally not discoverable in a breachof contract claim but is discoverable in a "bad faith"claim. See, generally, Motors Ins. Corp. v.Fashing, 747 S.W.2d 13 (Tex. App.—El Paso 1988,no writ).

Originally, the Texas Supreme Court decided todeal with this discrepancy in the scope of permissiblediscovery in first party cases by prohibiting discoveryregarding the entire claims file until the contractclaims were completely resolved. In MarylandAmerican Gen. Ins. Co. v. Blackmon, 639 S.W.2d455 (Tex. 1992) the Texas Supreme Courtconsidered a discovery dispute in a first party fidelitycase where the insured sought to obtain the insurer'scomplete claims file on the basis it had assertedextra-contractual claims against the insurer inaddition to a breach of contract claim. The Courtheld:

Regardless of the other reasons which mightjustify the use of this information [contained inthe claims file], it would be impossible to limitthe prejudicial effect of disclosure on MarylandAmerican's right to defend the contract causeof action. Moreover, if a plaintiff attempting toprove the validity of a claim against an insurercould obtain the insurer's investigative filesmerely by alleging the insurer acted in bad faith,all insurance claims would contain suchallegations. We hold that Maryland Americanis entitled to assert the privilege so long as itsliability on the bond remains undetermined.

Id. at 458.The inherent tension between evidence relevant

to a contract case and evidence relevant to an extra-contractual case quickly gave rise to a proliferation

of efforts by insurers seeking a severance orseparate trials separating the breach of contractclaims from the extra-contractual claims. Basedupon the aforementioned language in Blackmon,insurers seeking a severance or separate trials havealso regularly sought the abatement of any discoveryregarding extra-contractual claims. See State FarmMut. Auto. Ins. Co. v. Wilborn, 835 S.W.2d 260(Tex. App.—Houston [14 Dist.] 1992, orig.th

proceeding); U.S. Fire Ins. Co. v. Millard,847 S.W.2d 668 (Tex. App.—Houston [1 Dist.]st

1993, orig. proceeding). Courts quickly realized theseverance of contract claims from extra-contractualclaims resulted in insurance disputes which lingeredfor many years. After spending several yearsconducting discovery and eventually trying thecontract case, many trial courts were still facingseveral more years of discovery in preparation forthe trial of the bad faith suit. As such, in recentyears, there has been a growing trend in both stateand federal courts to grant a severance or separatetrials, but to allow discovery on all causes of actionto proceed simultaneously. Bays v. State FarmMut. Auto. Ins. Co., 1999 WL 68648 (N.D. Tex.,Feb. 4, 1999) (not published) (abatement "wouldunduly prolong litigation in the event State Farm wasfound to breach the insurance contract and theprotection that State Farm should be accorded canadequately be conferred by conducting separatetrials").

Policyholders seeking to avoid the abatement oftheir discovery efforts regarding the insurer's claimsfiles usually rely on the judicial insight provided bythe El Paso Court of Appeals in Texas Farmers Ins.Co. v. Cooper, 916 S.W.2d 698 (Tex. App.—ElPaso 1996, orig. proceeding). Justice Larsenexplained:

[I]f discovery in the extra-contractual case isstayed until the uninsured motorist claim is final,years may pass. Witnesses may die ordisappear, files may be lost, and memories willundoubtedly fade. Rather than minimizing pre-trial efforts, abatement may require thediscovery be conducted twice, as the carriermay successfully argue it initially prepared fortrial only on [the insured's] contractual claim,not his extra-contractual causes. Moreover, itis possible that the entire lawsuit, contractualand extra-contractual, is subject to dispositionbefore trial. Numerous pre-trial rulings mayeffect both contractual and extra-contractualclaims. Thus, refusing to abate may enhance

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rather than diminish judicial efficiency Before going to war on the severance andduring pre-trial proceedings. abatement issue, counsel for an insurer should

Id. at 702. See, also, Progressive County Mut. if they are given the relief desired. Counsel forIns. Co. v. Parks, 856 S.W.2d 776, 780 (Tex. some insurers have found themselves in theApp.—El Paso 1993, orig. proceeding). unenviable position of trying a bad faith case without

Insurers attempting to abate discovery as to the the ability to tell the jury anything the insurer did inextra-contractual causes of action traditionally assert the handling of the claim to benefit the insured (i.e.,two arguments to justify abatement. First, if the prior settlement offers, etc.) because the claimsresolution of the contract claim in favor of the handling issues had been severed and abated. In thisinsurer will eliminate all of the extra-contractual author's experience, most trial courts will not abatecauses of action, conducting discovery on the extra- the discovery of the extra contractual causes ofcontractual claims is a monumental waste of time action in the absence of extreme prejudice to theand money. The Houston Court of Appeals has insurer or the inevitable waiver of privileges by theexplained: "Abatement of the bad faith claims must insurer in defending itself. As such, counsel for annecessarily accompany severance of those claims insurer may be better off obtaining the client'sfrom the contract claim. Without abatement, the consent to produce all non-privileged portions of theparties will be put to the effort and expense of claims file, and not seeking a severance andconducting discovery and preparing for trial claims abatement, when a first-party lawsuit assertsthat may be disposed of in a previous trial." U.S. contractual and extra contractual causes of action.Fire v. Millard, supra, 847 S.W.2d at 673. Second, Obviously, this advice is not applicable to every first-if discovery on the extra-contractual claims would party case, but for the majority of first-partyrequire the disclosure of information or insurance lawsuits, the insurance company'sdocumentation protected by the attorney/client or resources are better directed to fighting discoverywork product privileges, abatement should be efforts related to matters that transcend the claimmandatory. See, generally, Bays v. State Farm, (and claim file) in question.supra, 1999 WL 68648 at *2 (recognizing necessityof abatement if discovery would result in the forcedwaiver of the attorney client privilege and workproduct privilege in order to adequately defend thebad faith claims, but denying to do so due to theinsurer's failure to prove the existence of anyprivileges).

The decision to sever contractual claims fromextra contractual claims (or the decision to grantseparate trials) will inevitably depend upon thenature of the causes of action being asserted and theinsurance company's ability to defend the extracontractual claims without admitting liability on thecontract, unduly prejudicing its defense of thecontract claim, or waiving privileged information ordocuments in order to defend itself. Counsel forinsurers have frequently discovered that their effortsto obtain a severance or separate trial offeredminimal returns due to the trial court's unwillingnessto simultaneously abate discovery regarding theextra contractual claims. While severance andseparate trials may raise prejudice and privilegeissues which give the trial court minimal discretion,abatement efforts will almost always rest exclusivelywithin the discretion of the trial court and will rarelybe subject to a mandamus.

seriously consider how they intend to try the lawsuit

2. Overbroad/Unduly BurdensomeAlthough counsel for some insurers continue to

object to the production of the claim file incontroversy in a first-party insurance suit on thebasis of breadth or burdensomeness, I believe this isa terrible objection. Although I can envision ahandful of claims where the claim file itself probablytakes up a small warehouse (e.g., the claim files forthe decade-long Lone Star Steel litigation inDangerfield), such voluminous claim files areextremely rare. In my experience, 99% of allinsurance claim files do not involve enough reams ofpaper to be considered overbroad or undulyburdensome as a matter of law. In my experience,most claim files range in size from several dozenpages to (at worst) several thousand pages.Overbroad and burdensome this is not. Counsel foran insurer would be wise to assert this objection toa discovery request for an individual claims file foronly the most exceptional claim involving a trulymonstrous file.




3. Attorney-Client Privilege2

The claims file which ultimately gives rise tolitigation frequently contains information protected bythe attorney-client privilege. This usually consists ofinformation and documentation in two forms:(1) communications from outside counsel to arepresentative of the insurer, and/or(2) communications from in-house counsel toanother employee of the insurer. An objection toany discovery effort seeking a claim file containingsuch communications is appropriate on the basis ofthe attorney-client privilege. The nature of thelitigation, however, may limit the applicability of thisprivilege.

a. GenerallyThe attorney-client privilege is governed by the (1981). Accordingly, the privilege does not

rules set forth in Texas Rule of Civil encompass such matters as the terms and conditionsEvidence 503(b), which provides: of the attorney's employment, the purpose for which

A client has a privilege to refuse to disclose and trappings of the relationship between the parties.to prevent any other person from disclosing Borden v. Valdez, 773 S.W.2d 718, 720-21 (Tex.confidential communications made for the App.—Corpus Christi 1989, orig. proceeding);purpose of facilitating the rendition of Duval County Ranch Co. v. Alamo Lumber Co.,professional legal services to the client: 663 S.W.2d 627, 634 (Tex. App.—Amarillo 1983,(A) between himself or his representative and writ ref'd n.r.e.).his lawyer or his lawyer's representative;(B) between his lawyer and the lawyer'srepresentative; (C) by him or his representativeof a lawyer representing another party in apending action and concerning a matter ofcommon interest therein; (D) betweenrepresentatives of the client or between theclient and a representative of the client; or(E) among lawyers and their representativesrepresenting the same client.

The purpose of the privilege is to promoteunrestrained communication and contact between anattorney and client on matters in which the attorney'sprofessional advice or service is sought, without fearthe communication will be disclosed. RepublicIns. Co. v. Davis, 856 S.W.2d 158, 160 (Tex. 1993);West v. Solito, 563 S.W.2d 240, 245 (Tex. 1978);

Cigna Corp. v. Spears, 838 S.W.2d 561, 566 (Tex.App.—San Antonio 1992, orig. proceeding).

b. Elements of the Privilege

(i) A "Communication"The underlying facts contained within

communication between the attorney and the clientare not privileged. Similar to the attorney work-product doctrine, the attorney-client privilege appliesonly to the communication itself. It does not protectfacts which are communicated and such facts maybe freely discovered. Mortgage America Corp. v.Am. Nat'l Bank of Austin, 651 S.W.2d 851, 858(Tex. App.—Austin 1983, writ ref'd n.r.e.). See,also, Upjohn Co. v. United States, 449 U.S. 383

the attorney was engaged, or any other external

(ii) Which is "Confidential"Not all communications made by an insurer to

an attorney are privileged. To be privileged, thecommunication must pass between the client and hisor her attorney in confidence. Dept. of MentalHealth v. Davis, 775 S.W.2d 467, 472-73 (Tex.App.—Austin 1989, orig. proceeding); Hayes v.Pennock, 192 S.W.2d 169, 173 (Tex. Civ.App.—Beaumont 1946, writ ref'd n.r.e.). Onlythose communications which are considered"confidential" are privileged.

Evidence Rule 503(a)(6) states:

A communication is "confidential" if notintended to be disclosed to third persons otherthan those to whom disclosure is made infurtherance of the rendition of professionallegal services to the client or those reasonablynecessary for the transmission of thecommunication.

The guiding principle in determining whether ornot an attorney-client relationship exists is the intentof the client. In determining intent, the key questionis whether the client reasonably understood thecommunication to be confidential. Kevlik v.

I wish to acknowledge the insight provided2

by George Hanks, Jr. and Tammy Warle ofWickliff & Hall in Houston regarding the generalattorney-client issues discussed in this section whichare more fully discussed in their paper Privileges inClaims Investigations and Insurance Litigation.







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Goldstein, 724 F.2d 844 (1 Cir. 1984); see, also, attorney-client privilege in this context when hest

United States v. Schwimmer, 892 F.2d 237, 244 (2d explained:Cir. 1989), cert. denied, 112 S.Ct. 55 (1991) (allclaims of privilege arising out of the attorney-client A party – whether a plaintiff, a defendant, orrelationship require a showing the client reasonably an insurance company – may retain legalunderstood that the communication was given in counsel, ask that his claim be investigated, andconfidence). be assured that the results of counsel’s inquiries

An insurer’s retention of a lawyer to assist in will be privileged. . .. The sole rationale of thethe investigation of a claim may result in the Court of Appeals is simply anti-insurer anddiscovery of information and communications which overlooks the fact that attorneys in all mannerare no longer protected by the attorney-client of situations routinely investigate their client’sprivilege. Under a recent decision from the claims, hire investigators to do the same, andTexarkana Court of Appeals, if an insurer hires an report the results to the clients. The rule theattorney to take an Examination Under Oath of the Court of Appeals has adopted affects not onlyinsured, the communication between the lawyer and every lawyer retained to take an EUO, butthe insurer, as well as the EUO itself, will probably every plaintiffs’ lawyer who investigates anot be protected by the attorney-client privilege. In client’s claim, and every attorney retained toin re Texas Farmers Ins. Exchange, 990 S.W.2d investigate the internal affairs of a corporation337 (Tex. App.—Texarkana 1999, orig. proceeding), or other group, as in Upjohn. The Court’sthe insurer hired outside counsel to take an EUO of holding that the attorney-client privilege “wouldthe insured following a fire loss claim. In the not apply to . . . communications [from ansubsequent bad faith suit, the insured sought the attorney to a client] concerning bare facts” isEUO and all communications between the lawyer startling in the breadth of its incursion into theand Farmers. In holding the EUO and the lawyer's protection of the attorney-client privilege. Thiscommunications about the EUO were discoverable, case is deserving of the Court’s plenarythe Texarkana Court of Appeals explained: intention. It affects not only every attorney

[A]lthough the attorney-client privilege would investigates a client’s claim.apply to communications between Scott [thelawyer] and Farmers concerning legal strategy, Id. at 366.assessments, and conclusions, the privilege Justice Hecht is correct. There may bedoes not operate as a blanket privilege covering circumstances when an attorney’s investigationall of the communications between the two. If reveals facts which should be discoverable by anwe were to so hold, insurance companies could opponent, even though those facts were acquired assimply hire attorneys as investigators at the a part of the attorney’s legal representation of hisbeginning of a claim investigation and claim client. The Texarkana Court of Appeals’ decision,privilege as to all the information gathered. however, presents a significant incursion into theThis is not the intent of the privilege. . . . . We attorney-client privilege and could damage anyfind that the evidence shows that Scott was lawyer retained by any client to investigate a claim.acting as an investigator for Farmers and not as In the context of investigations conducted byan attorney. Such communications made in insurers, the test should probably narrowed into athat capacity are not privileged. subjective inquiry regarding the purpose of the

Id. at 341. Insurers frequently hire lawyers to assist withThis landmark decision from the Texarkana a claim investigation that has nothing to do with the

Court of Appeals resulted in a further mandamus development of legal strategy or the rendering ofaction to the Texas Supreme Court. The Texas legal advice. As in the instance of the attorneySupreme Court refused to hear the case. Justice asked to take an EUO, insurers frequently askHecht and Justice Owen issued a written dissent outside counsel to assist with a factual investigation,from the denial of the petition for mandamus. In In retain and coordinate an expert's review of there Texas Farmers Ins. Exch., 43 Tex. S.Ct. J. 365 claim, or supervise the handling of the claim by an(Tex., Jan. 27, 2000). Justice Hecht explained the adjuster. For some insurers, such investigative andtremendous ramifications of the failure to protect the claims handling work by in-house counsel is

hired to take an EUO, but every attorney who

insurer’s investigation.

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extremely common. For several large P&C Id. (citations omitted). As of March 1, 1998, wheninsurers,particular types of claims involvingpotential new Rule 503 went into effect, the attorney-clientlarge losses (e.g., environmental contamination privilege now extends beyond the control group toclaims, toxic tort claims, etc.) are handled any other person acting in the scope of employmentexclusively by lawyers working as "analysts" who for the client who makes or receives a confidentialhandle every aspect of the investigation of a claim. communication for the purpose of effectuating legalAfter the Farmers’ case, insurers may have a representation for the client. See TEX. R. EVID. 503difficult time cloaking communications from a lawyer (a)(2). This new rule is based upon the Model Coderetained in this capacity with the attorney-client of Evidence. See UNIF. R. EVID. 502, U.L.A. 518-privilege. 20 (1994); Supreme Court Justices Rose Spector

(iii) Between an "Attorney" and "Client"An insurance company's need to obtain advice

from an attorney usually leads it to consult witheither in-house counsel or outside counsel. An in-house attorney acting as an attorney in giving adviceto the insurance company creates an attorney-clientrelationship sufficient to create the privilege. See,generally, Group Hospital Service Inc. v.Dellana, 701 S.W.2d 75 (Tex. App.—Austin 1985,orig. proceeding) (communication between staffattorney and staff physician for insurer regarding theclaim in question was protected by the attorney-client privilege). To the extent an insurer hiresoutside counsel to give legal advice on some aspectof the claim, it is impermissible in a subsequent suitarising out of the denied claim to seek the "entirefile" of outside counsel. National Union Fire Ins.Co. v. Valdez, 863 S.W.2d 458 (Tex. 1993). As willbe discussed in more detail below, however, if theinsurer "offensivelyuses" the communications whichare otherwise privileged, the attorney-client privilegemay be eviscerated in certain circumstances and theinsured may be able to obtain the files of outsidecounsel. Lewis v. Wittig, 877 S.W.2d 52 (Tex.App.—Houston [14 Dist.] 1994, orig. proceeding).th

If an employee of an insurance company hasthe authority to retain counsel to assist with somepart of a claim, the employee of the insurer is nowgenerally considered to be a "client." The 0upremeCourt of Texas amended Rule 503 last year tobroaden its application. Before the change in Rule503, the attorney-client privilege only extended to thecontrol group of a corporation, or to those corporaterepresentatives who could act on the legal advicerendered or who had authority to obtain legalrepresentation. See National Tank Co. v.Brotherton, 851 S.W.2d 193, 197 (Tex. 1993). Asthe Brotherton court explained:

[c]ourts applying this [control group] testgenerally protect only statements made by theupper echelon of corporate management....

and Gregg Abbott, Statement Regarding Attorney-Client Privileged, 60 Tex. B.J. 1129 (1998). Theadoption of this rule is a move toward the federalrule which follows a strict "subject matter" testextending the attorney-client privilege down thecorporate ladder to those who have relevantinformation regarding the legal issues in question.See Upjohn Co. v. United States, 499 U.S. 383(1981).

The new rule clearly broadens the scope of theattorney-client privilege and could have a dramaticeffect on investigations conducted by in-housecounsel. Under the old control group test, in-housecounsel had to be careful when conducting aninvestigation in anticipation of litigation with lowerechelon employees, who were protected by the partycommunication or witness statement privileges, butnot by the attorney-client privilege. This was animportant distinction because if the opposing partycould make a showing of substantial need and unduehardship, the information obtained by the attorneywas discoverable. TEX. R. CIV. P. 192.5(2). Underthe new rule, however, these communications withlower level employees will, in fact, be covered by theattorney-client privilege as long as they are for thepurpose of effectuating legal representation for theclient. It also appears from the wording of the rulethat such communications need not be in anticipationof litigation for the attorney-client privilege to apply.

At this time, it is unclear to what extent TexasCourts will adopt federal case law to interpret thisbroadened privilege. In federal courts, the SeventhCircuit Court of Appeals has proposed that under thestrict subject matter test, the attorney-client privilegebe allowed if: (1) the employee makes thecommunication at the direction of his or hersuperiors in the corporation; and (2) the subjectmatter of the communication concerns theperformance by the employee of the duties of his orher employment. Harper & Row Publishers, Inc.v. Decker, 423 F.2d 487, 488 (7 Cir. 1970), aff'dth

mem. by an equally divided court, 400 U.S. 348,reh'g denied, 401 U.S. 950 (1971). This test










disregards corporate rank and focuses on an penmanship arises out of a series of cases in otheremployee's duties and responsibilities. jurisdictions, legal commentaries, and a tentative

The test enunciated in Decker was modified in draft of the Restatement (Third) of the LawDiversified Indus., Inc. v. Meredith, 572 F.2d 596, Governing Lawyers all of which endorsed a view598 (8 Cir. 1977), in which the court held the that defense counsel hired by a liability insurer hasth

attorney-client privilege applies when the following only one client: the insured defendant. If such arequirements are satisfied: rule were ever adopted by any Texas court, the

(1) the communication was made for the purposes insurer could be seriously threatened due to theof securing legal advice; insurer's loss of "client" status.

(2) the employee making the communication did so Professor Silver (and his academic sidekick,at the direction of his or her corporate superior; Michael Quinn) persuasively argue in several articles

(3) the supervisor made the request so the that Texas law expressly recognizes that a defensecorporation could secure legal advice; lawyer has two clients: the liability carrier and the

(4) the subject matter of the communication is insured. Citing a handful of Texas cases includingwithin the scope of the employee's corporate the landmark decision in Employers Casualty Co. v.duties; and Tilley, Silver and Quinn have vigorously attacked

(5) the communication is not disseminated beyond every argument and theory advanced in support ofthose persons who, because of the corporate the "one client" argument. While it is tempting tostructure, need to know its contents. ignore the dire warnings of Silver and Quinn as an

Accordingly, whether or not the privilege exists litigating insurance cases in Texas, practitioners andunder Texas or Federal law will be determined on a litigants should be extremely sensitive to any effortscase-by-case approach under these guidelines. which seek to characterize or define the tripartiteUpjohn Co., 449 U.S. at 449. relationship.

** Potential Problems with Tilley Counsel **Before leaving the minefield encompassing the

attorney-client privilege, it is worth noting thepotential discovery implications of an academicdebate which has been raging for the past four yearsamong a handful of legal scholars over therelationship between a liability insurer, its insured andthe defense counsel appointed by the liability insurerto defend the insured. This intense debate hasarisen out of inquiries about the professionalresponsibilities owed by defense counsel when aliability insurer hires counsel, pays counsel, and(sometimes) "controls" counsel in the handling of athird-party lawsuit against an insured. In Texas, thisacademic debate has been publicized by ProfessorCharles Silver of the University of Texas School ofLaw. His numerous publications on this subjecteasily fill a large notebook. Silver's prolific3

communications between counsel and the liability

4

academic debate far removed from the realities of

Texas practitioners, for example, should beaware of a handful of Texas cases which havealready misconstrued the "two client" implications ofTilley. In Bradt v. West, 892 S.W.2d 56 (Tex.App.—Houston [1 Dist.] 1994, writ den'd.), thest

Houston Court of Appeals stated in dicta:

There is no attorney-client relationship betweenan insurer and an attorney hired by the insurerjust to provide a defense to one of the insurer'sinsureds. Even though such an attorney istypically selected by the insurer, paid by theinsurer, and periodically reports to the insurerabout the progress of the case against theinsured, the facts do not mean that the insureris the client. In the context of insurance, theclient is the insured. It is the insured whom theattorney owes his allegiance in such cases, andthe insured's interests that he represents.

See, Silver, "The Professional Insurance Defense Lawyers", 5 Coverage 13

Responsibilities of Insurance Defense Lawyers", 45 (Nov./Dec. 1995); Silver and Quinn, "TexasDuke Law Journal 255 (1995); Silver, "Does Professional Responsibility Laws AffectingInsurance Defense Counsel Represent the Company Insurance Lawyers," Fifth Annual Ultimateor the Insured?", 72 Texas Law Review 1583 Insurance Seminar (SBOT 1996).(1994); Silver and Quinn, "Wrong Turns on theThree-Way Street: Dispelling Nonsense about 496 S.W.2d 552 (Tex. 1973).4






Id. at 77 (emphasis added). The Bradt decisionfrom the Houston Court of Appeals is blatantlywrong due to its inconsistency with Tilley and theother Texas cases which have followed Tilley.Although this decision was not discussing adiscovery issue, the ease with which Texas courtscan misconstrue Tilley is frightening. Counselshould be aware of cases like Bradt because of thepotential to completely undermine the attorney-clientrelationship between a liability insurer and outsidecounsel retained to defend an insured.

Silver and Quinn are correct: Texas is a "twoclient" state. Tilley, and every case to follow it,have recognized the unqualified duty of loyalty owedby defense counsel to the insured, but they havedone so without abandoning the reality that defensecounsel is hired and paid by the insurer. Bradt andthe efforts in other jurisdictions to only recognize theattorney-client relationship between defense counseland the insured could create a discovery nightmare.Under a "one client" rule, all communicationsbetween defense counsel and the insurer could bediscoverable. Counsel's fee bills could bediscoverable as well. The mere risk of suchdiscovery would chill every communication betweenthe insurer and counsel. The full resources of theinsurer available to defend the insured would belessened. The insurer's ability to adequatelyevaluate settlement issues would be jeopardized. Assuch, although the tripartite relationship as it nowexists in Texas does limit the discovery which can beobtained from a liability insurer and counsel, suchlimitations are necessary if the rights of insureddefendants and liability insurers are to be adequatelyprotected.

(iv) "Made for the Purpose of FacilitatingRendition of Professional Legal Servicesto the Client"The communication must be made by the client

to a lawyer in her legal capacity for the purpose ofsecuring legal advice, and the communication mustrelate to the purpose for which the advice is sought.Duval County Ranch Co., 663 S.W.2d at 634. Thepolicy has been to restrict the application of theattorney-client privilege to communications betweenattorney and client, because the privilege tends toprevent full disclosure of the truth. Hurley v.McMillan, 268 S.W.2d 229, 232 (Tex. Civ.App.—Galveston 1954, writ ref'd n.r.e.).

c. Documents Recording ConfidentialCommunicationsThe privilege protects the substance of the

communications. United States v. White, 617 F.2d1131, 1135 (5 Cir. 1980). Thus, documents that areth

not themselves confidential communications, but thatrecord them, are protected. United States v. Davis,636 F.2d 1028, 1040-41 (5 Cir.), cert. denied, 454th

U.S. 862 (1981); United States v. Miller, 660 F.2d563, 567 (5 Cir. 1981); accord Dunn v. Stateth

Farm Fire & Casualty Co., 927 F.2d 869, 875 (5th

Cir. 1991) (holding documents protected by attorney-client privilege). Once it is established that adocumentcontainsaconfidential communication, theattorney-client privilege extends to the entiredocument, and not merely to specific portionsrelating to legal advice, opinions or mental analysis.Pittsburgh Corning Corp. v. Caldwell, 861 S.W.2d423 (Tex. App.—Houston [14 Dist.) 1993, orig.th

proceeding).

d. Exceptions to the Attorney-ClientPrivilege Under Rule 503(d) of the TexasRules of Civil EvidenceWhile the attorney-client privilege affords a

significant measure of protection to certaincommunications, the privilege has strict boundaries.Under Rule 503 five situations are identified whenthe privilege will not apply. Two of these potentiallyimpact first party insurance litigation.

(i) Furtherance of Crime or FraudObviously, the courts will not recognize a

privilege for a communication made to promotenefarious ends. The party who asserts theexception, however, must establish a prima facieviolation and the court must find some relationshipbetween the communication in question and theprima facie violation. Freeman, 820 S.W.2d at861-62. See, also, Volcanic GardensMgmt. Co. v. Paxson, 847 S.W.2d 343, 347 (Tex.App.—El Paso 1993, orig. proceeding). A mereallegation in a pleading is not sufficient: the allegedmust have occurred at or during the time thedocument was prepared AND the document musthave been prepared in order to perpetrate the fraud.Cigna Corp., 838 S.W.2d at 569 (emphasis added).

This author is aware of a handful of lawsuitswhere counsel for the insured has sued a liabilityinsurer under several extra-contractual causes ofaction including common law bad faith and fraud.These lawyers have argued the suspected fraud bythe liability insurer in mishandling the insured's claim














with the assistance of counsel justifies piercing the "joint client" exception to the attorney-client privilegeattorney-client privilege to evaluate the suspected arguably makes such communications discoverablefraud. To date, this aggressive interpretation of this in a subsequent first priority insurance lawsuit by theexception to the privilege has yet to be litigated in the insured (or his assignee) against the insurer. It isinsurance context by a Texas court. Based upon the unclear whether the attorney-client privilege isstandard set forth in Freeman and Volcanic assignable to a third party along with a post-Gardens, supra, the mere allegation of fraud by an judgment bad faith claim.insured is insufficient to pierce the privilege and theinsured must establish prima facie fraud to get atthe privileged communications. This rule frequentlyfrustrates insureds who argue they cannot prove thefraud without first looking at the privilegeddocuments. The sanctity of the privilege, however,prevents such "fishing expeditions for fraud." If apolicyholder has independent evidence of fraud andcan establish a prima facie case, a Texas court hasauthority to pierce the privilege. Otherwise, theprivilege stands.

(ii) Joint Clients (as between Each Other)Texas Rule of Evidence 503(d)(5) says there is

no attorney-client privilege "as to a communicationrelevant to a matter of common interest between oramong two or more clients if the communication wasmade by any of them to a lawyer retained orconsulted in common, when offered in an actionbetween or among any of the clients."

This exception to the attorney-client privilegerule has the potential to be used by an aggressivecounsel for a policyholder suing a liability insurer.As previously discussed, Texas is arguably a "twoclient" state following the Texas Supreme Court'spronouncements in Tilley. In any subsequentlitigation between an insured and the liability insurer(e.g., a subsequent Stowers suit), anycommunication between defense counsel and theliability insurer is arguably not privileged because,under Texas law, the liability insurer and the insuredwere joint clients of defense counsel and thecommunication is being sought in subsequentlitigation among the clients.

The scenario is easy to envision: the liabilityinsurer fails to settle the claim within limits for itsinsured and, at trial, the plaintiff receives a judgmentagainst the insured defendant in excess of policylimits. If the insured assigns his Stowers claim tothe plaintiff to allows the plaintiff to pursue theliability insurer, the confidential communicationsbetween defense counsel and his clients arguablybecomes discoverable. Defense counsel routinelymemorializes confidential communications to eitherthe insured or the liability insurer (includingassessments of liability and damage issues), and the

e. Duration of the Attorney-Client PrivilegeOnce established, the attorney-client privilege

is perpetual. The privilege does not terminate withthe resolution of the controversy that created theneed for legal services and can be invoked insubsequent litigation. Maryland Am. Gen.Ins. Co. v. Blackmon, 639 S.W.2d 455, 458 (Tex.1982); Bearden v. Boone, 693 S.W.2d 25, 27 (Tex.App.—Amarillo 1985, orig. proceeding).

f. Waiver of the Attorney-Client Privilege

(i) "Offensive" WaiverThe attorney-client privilege can be waived by

seeking to use it "offensively." Republic Ins. Co. v.Davis, 856 S.W.2d 158 (Tex. 1993); Ginsberg v.Fifth Court of Appeals, 686 S.W.2d 105, 107 (Tex.1985); Dossey v. Salazar, 808 S.W.2d 146,147(Tex. App.—Houston [14 Dist.] 1991, orig.th

proceeding) ("[a] plaintiff cannot use one hand toseek affirmative relief in court and with the otherlower an iron curtain of silence against otherwisepertinent and proper questions which may have abearing upon his right to maintain his action."Ginsberg, supra, 686 S.W.2d at 108); Dewitt andRearick, Inc. v. Ferguson, 699 S.W.2d 692 (Tex.App.—El Paso 1985, orig. proceeding).

Because privileges represent society's desire toprotect certain relationships, however, the TexasSupreme Court has held an offensive waiver shouldbe found if the following factors are met:

First, before a waiver may be found, the partyasserting the privilege must seek affirmativerelief. Second, the privileged informationsought must be such that, if believed by the factfinder, in all probability would be outcomedeterminative of the cause of action asserted.Mere relevance is insufficient. A contradictionin position without more is insufficient. Theconfidential communications must go to thevery heart of the affirmative relief sought.Third, disclosure of the confidentialcommunication must be the only means bywhich the aggrieved party may obtain the









evidence. If any one of theserequirements is lacking, the trial courtmust uphold the privilege.

Republic Ins. Co. v. Davis, 856 S.W.2d 158 (Tex.1993).

In first-party insurance litigation this is not acommon issue, but when the insured is representedby counsel in handling the claim giving rise to thefirst-party lawsuit, it can easily implicate theoffensive use doctrine. For example, if a businessauto insurer refuses to defend or indemnify a third-party liability claim against its insured believing thata valid coverage defense exists, the insured willpresumably retain its own counsel to defend thethird-party lawsuit. After the insured defends andultimately settles the underlying lawsuit, a lawsuit isbrought by the insured against the liability insureralleging bad faith, common law bad faith andArticle 21.21 violations due to the insurer's failure toinvestigate timely and the insurer's denial of thepolicy benefits. If the insured asserts it had to settlethe claim against it because of acts or omissions bythe insurer in the investigation of the claim which putthe insured in a disadvantageous position causing itto pay more money in settlement than it otherwisewould have had to pay, communication from thedefense attorney to the insured defendant regardingthe insured's liability and damage exposure (andsetting forth the reasons for settlement) arguablywould be discoverable under the "offensive use" testin Republic v. Davis. In this hypothetical, theinsured asserting the privilege is clearly seekingaffirmative relief from the liability insurer. Ifdefense counsel articulated reasons to settle whichwere inconsistent with the claims being advanced bythe insured in the subsequent bad faith lawsuit, theinformation would certainly be outcomedeterminative of the claims asserted. Because thisinformation only existed between defense counseland the insured defendant, disclosure of theconfidential information is the only means by whichthe insurer could obtain the evidence in question.

When offensive use of the privilege isestablished, the party asserting the privilege mustelect either to waive the privilege or risk sanctionsfrom the court. Public Safety Officers Ass'n v.Denton, 897 S.W.2d 757, 763 (Tex. 1995); Bristol-Myers, 921 S.W.2d at 921 n.6. Dismissal of thecase is not always the appropriate sanction and thecourt must decide whether less burdensomeremedies would not be effective in preventingunfairness to a party. Id. at 763-64.

(ii) Who May Waive the Privilege?The attorney-client privilege belongs to the

client. It may be waived solely by him or his attorneyacting on his behalf. A client therefore may waivethe attorney-client privilege by, for example,disclosing to federal investigators or the media,results of an internal investigation of allegedkickbacks and bribes from suppliers and contractors.Axelson, Inc. v. McIlhany, 798 S.W.2d 550 (Tex.1990).

Evidence Rule 503(d)(5) excepts from theattorney-client privilege any communications amongjoint clients and their lawyers, when thecommunication is offered in an action between theformer joint clients. As between the joint clients andthird parties, the privilege will apply. Any waivermust be mutual for joint statements; however, eachjoint client is free to waive the privilege as to his ownstatements.

4. The Work Product Exemption5

Often, an insurer's objection to the productionof the claims file is based upon an assertion of thework-product privilege. As a general rule, the work-product privilege protects investigative materials andother documents prepared "in anticipation oflitigation" and it provides a broader protection thanthe attorney-client privilege.

For example, in a first-party property insurancesuit, it is often argued by the insured's counsel thatthe date of denial reflects the date when theinsurer's anticipation of litigation began, and allclaims file documents generated prior to that dateshould be discoverable. Although many courtsconsider the initial phase of the insurer's claimsinvestigation (i.e., the period prior to denial) asroutine, or in the ordinary course of the insurer'sbusiness, the insurer has the ability to prove acontrary time as to when litigation was firstanticipated.

a. TRCP 192Texas Rule of Civil Procedure 192 contains the

privileges generally referred to as the "investigative"privileges: the work product exemption and theconsulting expert privileges. Under the new

I wish to acknowledge the additional5

insight provided by G. Hanks and T. Warle,Privileges and Claims Investigations andInsurance Litigation, with respect to the proceduralnuances raised by the 1999 changes to TRCP 192.





discovery rules, work product also includes the unusual situation (such as an insured's articulation of"party communication" privilege of former Rule an intent to sue the insurer regardless of what the166b. Each of these privileges is different, but all insurer does or a "consumer fraud" claim such as anserve to protect information and materials a party arson claim), most insurers will not anticipateobtains in preparation for litigation or trial. The work litigation until the end of the claims investigationproduct privilege, now defined in the discovery rules, process, the time of denial at or shortly before denialapplies to: of the claim. Obviously, there are situations when

(1) material prepared or mental impressions circumstances insurers have been unwilling todeveloped in anticipation of litigation or for trial definitively state they anticipated litigation whileby or for a party's attorneys, consultants, handling the first-party claim to a sufficient degreesureties, indemnitors, insurers, employees, or to cloak the entire claim file with an investigativeagents; or privilege.

(2) a communication made in anticipation of The work product privilege can be verylitigation or for trial between a party and the effective in protecting sensitive information fromparty's representation or among a parties' disclosure. It can only be invoked if the materials atrepresentatives, including the party's attorneys, issue were prepared "in anticipation of theconsultants, sureties, indemnitors, insurers, prosecution or defense of the claims made in theemployees or agents. pending litigation" or "in anticipation of litigation or

Communications between attorneys and their Am., Inc., 782 S.W.2d at 286. Clearly, the filing oftestifying experts are not exempt from discovery as a lawsuit satisfies the "in anticipation" requirement ofwork product. In addition, if the facts show the Rule 192.5. Certain administrative proceedings,investigation conducted was a routine investigation however, may not satisfy the criteria of filedof an insurance claim, the privilege does not apply. litigation. For example, filing a notice of claim forFlores v. Fourth Court of Appeals, 777 S.W.2d 38, workers' compensation benefits with the Texas41 (Tex. 1989). Workers' Compensation Commission (formerly the

As discussed below, the rule also segregates Industrial Accident Board) does not commence"core" work production from other types of work litigation. Flores, 777 S.W.2d at 40. The Court inproduct. "Core" work product—the work product of Flores expressly held that the term "litigation" refersan attorney or an attorney's representative only to court proceedings. The Court in Flores,containing the attorney or the attorney's however, then distinguished administrative agenciesrepresentative's mental impressions, opinions, that determine contested cases within the meaningconclusions, or legal theories—is not discoverable. of the Texas Administrative Procedure and TexasOther work product is discoverable upon a showing Register Act, TEX. REV. CIV. STAT. ANN. art. 6252-of substantial need and upon showing substantially 13a, § 3(l) (Vernon 1989) from those that do not.equivalent material cannot be obtained without undue Central to the Court's distinction was the fact thathardship. appeals from the Industrial Accident Board were

b. Anticipated LitigationTexas courts have been very reluctant to

prevent the disclosure of claim files in first-partyinsurance litigation in Texas because the insurer'swork on the claim is usually not completed "inanticipation of litigation." Insurers walk a very thinline in advocating this privilege withoutsimultaneously subjecting themselves to extra-contractual liability. Under Texas law, an insurancecompany has a common law and statutory duty topay a claim when its liability becomes "reasonablyclear." If its liability is unclear, it does not owe theclaim; however, if its liability is unclear, it will usuallynot anticipate litigation against itself. Absent an

this may not be true, but in the majority of

preparation for trial." Boring & Tunneling Co. of

entitled to de novo review, where a new record atthe trial court level can be made. Parties appealing6

from administrative agencies whose decisions arereviewed under the substantial evidence standardcannot remake the record at the trial court level andcontest issues of fact found by the agency.Accordingly, under the rationale employed by

However, based on the change in the6

Workers' Compensation statute, investigations madeto prepare for hearings before the Workers'Compensation Commission may be protected. SeeTEX. LAB. CODE ANN. § 410.255 (Vernon Supp.1994).




Flores, the privilege still would seem to apply if a that arson claims frequently result in lawsuits by thematter is filed in a state administrative agency where insured against the insurer did not cloak arsona party is entitled to review under the substantial investigation by insurer with investigative privilege);evidence standard. American Home Assurance Co. v. Cooper, 786

To maintain the investigative privilege and work S.W.2d 769 (Tex. App.—El Paso 1990, orig.product exemption for information obtained prior to proceeding) (insurer's retention of outside counsel tothe actual commencement of litigation, a party must assist in the evaluation of legal issues raised by theshow "good cause" existed to believe a suit would be claim did not constitute "in anticipation of litigation");filed. The good cause requirement employs a two- Aiken v. Texas Farm Bureau Mut. Ins. Co., 151prong analysis: F.R.D. 621 (E.D. Tex. 1993) (audio tapes taken

The first prong requires an objective protected by work product privilege when they wereexamination of the facts surrounding the prepared prior to denial of claim).document at issue. Consideration should be Claim materials prepared after the denial of agiven to outward manifestations which indicate claim, however, are generally regarded as privilegedlitigation is imminent. The second prong utilizes under the work product exemption. Most courtsa subjective approach. Did the party opposing seem to implicitly agree an insurer can anticipatediscovery have a good-faith belief that litigation litigation almost as a matter of law after it denies awould ensue? There cannot be a good cause to claim. While this is certainly not true in every claim,believe a suit will be filed unless elements of the vast majority of Texas cases to consider theboth prongs are present. Looking at the totality question have held claim materials prepared after theof the circumstances surrounding the denial of a claim are protected and non-discoverable.investigation, the trial court must then determine In re Texas Farmers Ins. Exch., 990 S.W.2d 337if the investigation was done in anticipation of (Tex. App.—Texarkana 1999, orig. proceeding)litigation. (work product exemption applied to discovery of

Flores, 777 S.W.2d at 40-41 (emphasis added). Maryland American General Ins. Co. v.Most Texas courts which have evaluated the Blackmon, 639 S.W.2d 455 (Tex. 1982) (claim file

work product privilege in the context of a first-party protected by work product privilege in subsequentinsurance claim have concluded the work product bad faith claim); Allstate County Mut. Ins. Co. v.privilege does not protect the entire claims file. Culver, 1996 WL 350532 (Tex. App.—Houston [1Eddington v. Touchy, 793 S.W.2d 335 (Tex. Dist.] 1996, orig. proceeding) (not published)App.—Houston [1 Dist.] 1990) (liability insurer's (documents and files generated after denial of thest

claims file, which was not discoverable in the claim were not discoverable). The date the insuredinsured's action for personal injuries, was not receives notice, not date on which decision wasprivileged in later action brought by the insured made, is generally considered the date which triggersalleging the insurer's misrepresentations and fraud); the insurer's anticipation of litigation and cloaks allService Lloyds Ins. Co. v. Clark, 714 S.W.2d 437 subsequent investigation and documentation with(Tex. App.—Austin 1986, orig. proceeding) (claims privilege. Jackson v. Downey, 817 S.W.2d 858file not protected by work product privilege in first- (Tex. App.—Houston [1 Dist.] 1991, orig.party bad faith lawsuit); Estate of Gilbert v. Black, proceeding). To the extent the claims adjuster is722 S.W.2d 548 (Tex. App.—Austin 1987, orig. ever deposed on the extent of the investigation afterproceeding) (insurer's internal communications the denial of the claim, this privilege also applies towhich were generated prior to date of denial were the witness' ability to refuse to answer if the witnessdiscoverable); Eckerman v. Williams, 740 S.W.2d anticipated litigation after the denial of the claim.23 (Tex. App.—Austin 1987, orig. proceeding) ("any See, generally, International Surplus Lines Ins.party communications made prior to the date of Co. v. Wallace, 843 S.W.2d 773 (Tex.formal notice of denial are not privileged under [the App.—Texarkana 1992, orig. proceeding).investigative privilege rule] because thecommunications were not made subsequent to theoccurrence upon which the claim was based");Allstate Texas Lloyds v. Johnson, 784 S.W.2d 555(Tex. App.—Waco 1989, orig. proceeding) (fact

during initial investigation of insurance claim not

documents created after denial of the claim);

st

st

(i) Objective Overt FactsA demand letter sent by the injured party's

attorney to an insurance company seven monthsafter the incident giving rise to the cause of action















has been held to constitute sufficient outward not file suit until another five months after the denial,manifestation indicating imminent litigation. was held to be insufficient outward manifestation ofPowers v. Palacios, 794 S.W.2d 493,494-95 (Tex. imminent litigation. Allstate Tex. Lloyds v. Johnson,App.—Corpus Christi 1990), rev'd on other 784 S.W.2d 100, 103 (Tex. App.—Waco 1989, orig.grounds, 813 S.W.2d 489 (Tex. 1991). Similarly, proceeding). Past experience, without objective andcontact with an opposing attorney consisting of particularized facts to substantiate a good-faithsettlement offers, a demand letter and a threat of belief, will not establish good cause. Boring &litigation if settlement is not reached by a certain Tunneling Co., 782 S.W.2d at 287 (citing Phelpstime has been deemed a sufficient outward Dodge Refining Corp., 733 S.W.2d at 361-62).manifestation of imminent litigation. Cf. ChildWorld, 780 S.W.2d at 956. Affidavits of the personcreating the document, which are made at the timeof creation and which state that the work was donein anticipation of litigation may also may be sufficientmanifestation of imminent litigation. Enter.Prods. Co. v. Sanderson, 759 S.W.2d 174, 176-77(Tex. App.—Beaumont 1988, orig. proceeding). Ademand by the injured for damages, the hiring of anattorney or private investigator, as well as thecommencement of an investigation concerning anaccident, also are outward manifestations ofimminent litigation. Phelps Dodge Ref Corp. v.Marsh, 733 S.W.2d 359, 360-61 (Tex. App.—ElPaso 1987, orig. proceeding).

The mere fact an accident or other type of losshas occurred usually will not be a sufficient outwardmanifestation of litigation to retain the privilege.Stringer v. Eleventh Court of Appeals, 720 S.W.2d801, 802 (Tex. 1986); Enter. Prod, 759 S.W.2d at178; Foster v. Heard, 757 S.W.2d 464, 465 (Tex.App.—Houston [1 Dist.] 1988, orig. proceeding).st

It is important to note, however, the Court inNational Tank disapproved Stringer to the extentit holds that circumstances surrounding an accidentcan never be sufficient to trigger the privilege.National Tank Co., 851 S.W.2d at 204. The Courtstated that "if a reasonable person would concludefrom the severity of the accident and the othercircumstances surrounding it that there was asubstantial chance that litigation would ensue, thenthe objective prong of Flores is satisfied." Id.

Notwithstanding, the hiring of an attorney bythe injured party is not in anticipation of litigation inthe absence of a threat of suit or other objectivemanifestation that suit is imminent. Star-Telegram,Inc. v. Schattman, 784 S.W.2d 109, 110-111 (Tex.App.—Fort Worth 1990, orig. proceeding); Morrisv. Texas Employers 1ns. Assoc., 759 S.W.2d 14,15(Tex. App.—Corpus Christi 1988, writ denied).Likewise, an adjustor's affidavit summarilyconcluding that litigation was likely within sixteendays of a fire, when the insurance company did notdeny coverage for four months and the insured did

(ii) Subjective Good Faith BeliefIn asserting a subjective good faith belief that

litigation will be filed, even an artfully wordedaffidavit prepared in response to a motion to compelwill not necessarily support a privilege. CherokeeSteel Fabricators, Inc. v. Khoury, 733 S.W.2d 563(Tex. App.—Tyler 1987), vacated, 742 S.W.2d 275(Tex. 1987). For this reason, it is more important tofocus attention on the actual facts supporting thelikelihood of litigation in the particular case at hand,rather than simply trying to avoid the mistakesrevealed in appellate decisions.

The common denominator for success appearsto be a demonstration, by factual allegations, that theinvestigation undertaken by the insurer was notroutine. The failure to establish this point can befatal to the privilege assertion. For example, anaffidavit containing statements by the attorney thathe had "formed an opinion that there was asignificant potential for litigation" and that he hadonly ordered investigations of the type conductedwhen he was "convinced that litigation ultimately[would] be filed" has been deemed insufficient.Texas Dept of Mental Health v. Davis, 775S.W.2d 467, 472 (Tex. App.—Austin, 1989, orig.proceeding [leave denied]). In Davis, the Courtfound the attorney's affidavit suggested he routinelyrequested investigations when such accidentsoccurred. Id. The recitation of specific actions, andnot the mere explanation that a case was notconducted according to the usual custom ofinvestigation, is necessary to sustain a finding ofsubjective good faith belief in litigation. Boring &Tunneling Co. of Am., Inc., 782 S.W.2d at 286.

Consistent with the ruling in Davis, Texascourts have held materials prepared in the normalcourse of business are not privileged, even if theparticular injury or investigation always results in alawsuit. It is insufficient to merely show that incertain types of cases a lawsuit is always filed.Brown & Root USA, Inc. v. Moore, 731 S.W.2d137,140 (Tex. App.—Houston [14 Dist.] 1987,th

orig. proceeding); see, also, Henry P. Roberts Inv.,





















Inc. v. Kelton, 881 S.W.2d 952, 956 (Tex. also include statements from the insured. Under theApp.—Tyler 1994, orig. proceeding) (an handful of case the decided since January 1999, aninvestigation should be considered primarily insurer’s ability to protect witness statements fromconducted to prepare for litigation only when the insured apparently depend upon whether or notcircumstances other than the uncertainties of the the witness statement was taken by a lawyer (ininvestigation itself make settlement before filing of which case they should be privileged) or whethersuit unlikely, i.e., when the insurer already is certain they were taken by the insurer or the insurer’sthat regardless of the findings it probably will deny investigator (in which case they will probably not bethe claim and the claimant will file suit). protected).

Likewise, the judgment of an experienced If the insurer or its investigator takes a witness’attorney is evidence of a good-faith belief of statement of any individual including the insured, thelitigation. Wiley v. Williams, 769 S.W.2d at 718. witness statement will probably be discoverableThe court in Wiley said its decision should not be under the new rules. The Houston Court of Appealsread to mean that all accident reports are exempt if addressed this issue under the new rule when itthey are compiled after an attorney is hired or if they decided In re Team Transport, 996 S.W.2d 256are compiled under an attorney's supervision. The (Tex. App.—Houston [14 Dist.] 1999, orig.peculiar facts of the case and the defendant's rapid proceeding). In this case, a letter to a liability insureraction in hiring an attorney were jointly responsible summarizing the facts of an accident giving rise tofor the successful claim of privilege. Wiley v. the insurance claim in question was characterized byWilliams, 769 S.W.2d at 718 n.4. both the trial court and the appellate court as a

c. Work Product Exempt From Discovery

(i) Core ProductCore work product is defined as the work

product of an attorney or attorneys representativewhich contains the attorney's mental impressions,opinions, conclusions, or legal theories. Under Rule192.5(b)(1), core work product is not discoverable.

(ii) Non-Core ProductAny other work product is discoverable upon a

showing the party seeking discovery has substantialneed of the materials in the preparation of the party'scase, and the party is unable to obtain the substantialequivalent of the material without undue hardship.If a court orders disclosure of "non-core" workproduct, the court must, to the extent possible,protect against disclosure of "core work product.TEX. R. CIV. PROC. 192.5(4). However, it is not aviolation of the Rules if a court orders non-corework product to be produced and such productionincidentally discloses by inference "core" workproduct.

(iii) Witness StatementsUnder Rule 192.5(c)(1), "witness statements"

are not work product, even if made or prepared inanticipation of litigation or trial. This rule, effectiveJanuary 1, 1999, is a substantial change in Texasdiscovery law which will apply in insurance cases.Liability insurers take “witness statements” in almostevery insurance claim. These witness statements

th

"witness statement." The trial court and theappellate court found the statement was generatedin anticipation of litigation. Under the new rule,however, witness statements are not protected bythe work product exemption "even if made orprepared in anticipation of litigation or trial." As such,the witness statement was discoverable.

Similarly, in In re Jimenez, 4 S.W.3d 894 (Tex.App.— Houston [1st Dist.] 1999, orig. proceeding),the claims adjuster took a statement from the insuredafter an auto accident. In the subsequent tort suit bythe injured plaintiff against the insured, the plaintiffsought “any witness statements” described under thenew rules. The insured defendant withheld hisstatement to the liability insurer. The First Court ofAppeals held the statement to the adjuster was a“witness statement” under the new rules anddiscoverable.

If the witness statement of the insured is takenby counsel hired by the liability insurer, however, thewitness statement should still be privileged.Although the new rules make almost all witnessstatements discoverable, the comments to the newrules expressly state that the discoverability ofwitness statements does not automatically trump anyother privilege. Comment nine to the witnessstatement rule instructs that this broad rule appliesonly to non-privileged statements. The commentstates:

The elimination of the “witness statement”exemption does not render all witnessstatements automatically discoverable but





subjects them to the same rules only way to cloak such communications is under theconcerning the scope of discovery and work product exemption of TRCP 192. If theprivileges applicable to other documents or primary insurer can show its communications to thetangible things. excess meet all of the common law and statutory

TEX. R. CIV. P. 192.3(h), cmt. 9. The Fort Worth exemption, theprimary/excesscommunicationswillCourt of Appeals recently interpreted this comment be protected. As such, primary/excessas protecting a witness statement of an insured communications made during the initial handling of ataken by counsel retained by the liability insurer. In claim will generally not be protected from discovery.re Fontenot, 2000 WL 121790 (Tex. App.— Fort Communications made after the primary insurerWorth, Jan. 26, 2000) (slip copy). In this case, the anticipated litigation generally will be protected.insured gave a statement to the lawyer his liabilityinsurer retained to defend him. The Fort WorthCourt of Appeals held the insured’s communicationsto his lawyer were privileged under the attorney-client privilege even though such communicationtechnically constituted a witness statement. TheFort Worth Court explained:

To adopt Jones’ broad interpretation of thewitness-statement rule would make all witnessstatements discoverable and would effectivelyabrogate the attorney-client privilege. Theattorney-client privilege is one of the oldestprivileges recognized by the common law andwe believe that if the Texas Supreme Courthad intended to eliminate the attorney-clientprivilege as it applies to witness statements, itwould have expressly done so.

Id. at 3. As such, if the witness statement is takenby counsel, the witness statement should beprotected. Otherwise, the witness statement isprobably discoverable under the broad witnessstatement rule contained in TRCP 192.

5. Primary-Excess CommunicationsClaims file documents generated in connection

with primary and excess insurance companycommunications are also the subject of discoveryefforts in many first party cases. Thus, it is commonfor a primary insurer to communicate with an excesscarrier regarding the status of a suit or regarding theinvestigation of a claim filed by their mutual insured.When a first-party suit is filed by an insured againstthe primary insurer, the insurers will likely havestrong desire for their communications to beconsidered privileged and non-discoverable,particularly those communications which take placeafter suit is filed.

Texas law has never recognized any privilegeor justification for withholding discovery unique tothe primary insurer-excess insurer relationship. The

requirements which justify invoking the work product

6. The Discoverability of a Claims FileInvolving Expert Witness IssuesIn evaluating potential claims, claims personnel

often require the assistance of experts, especiallywith respect to causation or damage assessments.If properly obtained, these preliminary opinions maybe protected from discovery in litigation through theuse of the consulting expert privilege. Pursuant tothis privilege, the identity, mental impressions andopinions of a consulting expert are protected fromdiscovery only if: (1) the expert will not testify as anexpert at trial; (2) expert's opinions or impressionshave not been reviewed by a testifying expert; and(3) the expert has been retained in anticipation oflitigation or preparation for trial. TEX. R. CIV. P.192.3(e); Allen v. Humphreys, 559 S.W.2d 798, 803(Tex. 1977), overruled on other grounds,Walker v. Packer, 827 S.W.2d 833, 842 (Tex.1992).

a. Claim ExpertsThe third prong of the expert witness privilege

is the one which prevents most experts hired bymost insurance companies in the process ofinvestigating a claim from being privileged. If ahomeowners' insurer, for example, receives a claimfor physical damage to property and hires anengineer to determine the cause of the loss, theengineer has been retained to help evaluate the claimrather than retained "in anticipation of litigation."Similarly, if an auto insurer retains an accidentreconstructionist to evaluate the manner in which theauto accident allegedly occurred, the insurer willhave difficulty establishing its retention of the expertwas in anticipation of litigation. As in the instance ofthe work product exemption, specific factors mustbe present to give the claims personnel a belieflitigation against the insurer (or against the insurer bya third-party claimant) is imminent and inevitable.Absence such factors, information anddocumentation from the expert will not be privileged.




b. Dual Capacity WitnessesThe information known by one who is both an

expert and an active participant in the eventsmaterial to a lawsuit is discoverable. Thisinformation, including factual knowledge andopinions, is not shielded merely by changing theindividual's designation from "person with knowledgeof relevant facts" to "consulting-only expert."Axelson, 798 S.W.2d at 554. In Axelson theSupreme Court specifically limited the scope of thediscovery to those experts who gain factualinformation by virtue of their involvement in theincident and not through their consultation.

The court's decision in Axelson suggests thatan employee who is employed in an area whichbecomes the subject of litigation will rarely qualify asa consulting-only expert because the employmentrelationship was not created in anticipation oflitigation. On the other hand, an employee who isnot employed in an area that becomes the subject oflitigation, but is reassigned specifically to assist theemployer in an investigation in anticipation oflitigation arising out of the incident or in preparationfor trial, may qualify as a "consulting-only expert."Axelson, 798 S.W.2d at 555.

7. The Discoverability of the Claims FileWhen the Adjuster is Designated anExpertA privilege is not waived merely by appointing

an employee/party as an expert. Rather, there mustbe a showing that such information relates to or First-party insurance litigation inevitably leadsforms the basis of the expert's testimony or was to a request for claims handling guidelines,prepared in anticipation of litigation. Thus, a underwriting requirements and other policies andparty/expert's communications, facts, or reports procedures memorialized by the insurer for thewere not prepared in anticipation of litigation or issuance of the policy or the handling of the claim.which are not relied upon by the expert are not To the extent the insurer deviated from its owndiscoverable simply because the employee or party internal guidelines in handling a particular claimhas been designated as an expert. certainly may lead to the discovery of admissible

(i) Rule 192.3(c)(3): Facts Known by anExpertThe mere designation of a party-employee as a

potential expert does not automatically waive theparty communication or attorney-client privilege.Rather, the privilege is only waived as to informationor documents relied upon by an expert in forming thebasis of his testimony. See D.N.S. v. Schattman,937 S.W.2d 151 (Tex. App.—Fort Worth, orig.proceeding); Aetna Cas. & Sur. Co. v. Blackman,810 S.W.2d 438 (Tex. App.—Corpus Christi 1991,orig. proceeding). Under Rule 192.3(e)(3), a partymay discover an expert's mental impressions and

opinions and facts known to an expert that "relate toor form the basis of the mental impressions andopinions" formed or made in connection with thecase. TEX. R. CIV. PROC. 192.3(e)(3) (VernonSupp. 1999). Texas Courts have interpreted thisprovision to mean that such information isdiscoverable only if it relates to or forms the basis ofthe expert's mental impressions or opinions in thecase. Schattman, 937 S.W.2d at 157; Blackman,810 S.W.2d at 440. Courts are reluctant to narrowthis privilege because narrowing would lead to asituation where a party or employee would almostnever be designated as a testifying expert,emasculate privileges, violate the prohibition againstfishing expeditions in discovery, and have a chillingeffect on the attorney-client relationship and theinsurer-insured relationship.

(ii) Rule 192.3(e)(6): Documents andTangible ThingsUnder Rule 192.3(e)(6), a party may discover

documents or tangible things provided to, or preparedby or for an expert in anticipation of an expert'stestimony. At least one Texas court has held that areport prepared by an employee-expert is notdiscoverable absent a showing that such report wasprepared in anticipation of litigation. See Schattman,937 S.W.2d at 157.

B. The Discoverability of CorporateDocuments and the Trade Secret Privilege

evidence. Insurance companies, for obviousreasons, are loathe to voluntarily release the verydocuments that give rise to its competitive edge inthe marketplace—its own policies, procedures andguidelines for how to conduct business. As such,requests for an insurer's policies, procedures andguidelines inevitably lead to a claim by the insurerthat the production of those items seek the discoveryof confidential information. Because there is nogeneric privilege for "confidential businessinformation," most insurers try to squeeze theprivilege into the "trade secret" exemption fromdiscovery.









Texas Rule of Civil Evidence 507 establishes a (4) the amount of effort or money expended inqualified privilege allowing a person to refuse to developing the information; and (5) the ease ordisclose and to prevent others from disclosing trade difficulty with which the information could besecrets, provided the exercise of the privilege will properly acquired or duplicated by others. Exponot tend to conceal fraud or otherwise work Chemical Co. v. Brooks, 572 S.W.2d 8, 11 (Tex.injustice. When the privilege is asserted, the judge Civ. App.—Houston [1 Dist.] 1978), rev'd onmust weigh the competing interests involved, other grounds, 576 S.W.2d 369 (Tex. 1979). Ofincluding the need for discovery against the these factors, the most important is whether thedesirability of preserving the secrecy of the material owner took appropriate steps to protect thein question. Enron Oil & Gas Co. v. Flores, 810 confidentiality of the information. Rugen v.S.W.2d 408, 411 (Tex. App.—San Antonio 1991, Interactive Business Systems, 864 S.W.2d 548,552orig. proceeding). If the proprietary interest of the (Tex. App.—Dallas 1993, no writ); Americanparty asserting the privilege can be preserved by Precision Vibrator Co. v. National Airmeans of a protective order, it is an abuse of Vibrator Co., 764 S.W.2d 274,276 (Tex.discretion to deny discovery. Jampole v. Touchy, App.—Houston [1 Dist.] 1988, no writ). In673 S.W.2d 567, 574-575 (Tex. 1984) (orig. American Precision Vibrator Co., the court heldproceeding). Moreover, any protective order must be that before information can be deemed a trade"carefully tailored" to avoid undue restrictions. See, secret, "there must be a substantial element ofe.g., Garcia v. Peeples, 734 S.W.2d 343, 348 (Tex. secrecy." In that case the plaintiffs' customer lists,1987) (orig. proceeding) (court abused discretion in as well as blue prints and drawings of the vibratorsentering "blanket" protective order that prevented it manufactured, qualified as trade secrets, evenplaintiff from exchanging information with other though some of the information may have beensimilarly situated litigants). ascertainable by independent investigation due to the

1. Definition of Trade SecretTexas Rule of Civil Evidence 507 does not

define the term "trade secret." Texas courts haveadopted the definition set forth in the Restatement ofTorts, section 757, cmt. b. (1939) as follows:

A trade secret may consist of any formula,pattern, device or compilation of informationwhich is used in one's business, and whichgives him an opportunity to obtain an advantageover competitors who do not know or use it. Itmay be a formula for a chemical compound, aprocess of manufacturing, treating orpreserving materials, a pattern for a machine orother device, or a list of customers.

Hyde Corp. v. Huffines, 158 Tex. 566, 586, 314S.W.2d 763, 776 (Tex. 1958); Avera v. ClarkMoulding Co., 791 S.W.2d 144,145 (Tex.App.—Dallas 1990, no writ).

Because the definition of a trade secret isimprecise, courts will look at several factors todetermine whether information requested indiscovery is a trade secret. The factors include:(1) the extent to which the information is known inthe industry; (2) the extent to which it is known byemployees and others involved in the owner'sbusiness; (3) the extent to which measures weretaken to guard the secrecy of the information;

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plaintiffs' efforts to carefully restrict access to theinformation. American Precision, 764 S.W.2d 274,176-277.

2. Applicability in First-Party InsuranceCasesVery little case law exists in Texas to provide

insurers with any guidance on protecting confidentialinternal policies, procedures and guidelines asconfidential business trade secrets. Insurerspresented with discovery requests of this nature willneed to establish through affidavits the nature of thedocuments, the reasons why the disclosure of thedocumentation would damage the insurer, and theinsurer's efforts to maintain the confidentiality ofthese documents.

Even if these steps are properly completed andthe trial court finds the materials to be confidentialtrade secrets, most courts attempt to balance theinsured's need for materials relating to the claim withthe insurer's confidentiality needs by forcing theparties to enter into a strict protective order. Mostcourts have discovered a protective order limiting theinsured's ability to disclose the confidentialinformation to anyone outside the litigation allows theinsured to conduct meaningful discovery whileprotecting the insurer from undue harm. Theprotective order, for the reasons which follow, mustcomply with Rule 76a of the Texas Rules of CivilProcedure.














3. Protecting Confidential InformationTexas courts seem to inherently favor

protective orders as an appropriate means ofpreventinganyharm following an insurer's disclosureof confidential policies, procedures and guidelines.See, generally, Aranda v. O'Neill, 1988 WL117191 (Tex. App.—Houston [1 Dist.] 1998, orig.st

proceeding) (not published). If not drafted properly,however, the protective order will be void as amatter of law under the provisions of TEX. R. CIV.PROC. 76a.

Pursuant to Rule 76a of the Texas Rules ofCivil Procedure, all court records, including unfileddiscovery materials, are presumptively open to thepublic. Upjohn Co. v. Freeman, 906 S.W.2d 92, 97(Tex. App.—Dallas 1996, no writ). Even in thosesituations in which no applicable privilege would Most discovery pertaining to an expert retainedprotect discovery documents from disclosure to an by an insurer during the handling of the underlyingopposing party, it may still be possible to restrict claim relates to information and materials designedpublic access to the documents by means of an to evaluate the credentials of the expert or probe anyorder concluding that a specific, serious and potential bias or prejudice possessed by the expertsubstantial interest of the disclosing party favors hired by the insurer. In first-party insurancesealing the records and that such interest outweighs litigation, policyholders frequently seek all reportsany probable adverse effect that sealing will have ever issued by the expert to the insurer.upon public health and safety. TEX. R. CIV. P. 76a Policyholders also frequently seek to ascertain how(1). One such interest that has been recognized as much money has been paid to a particular expertsufficient to justify an order sealing records is a over a period of time. Superficially, these inquiries"trade secret" interest. Upjohn, 906 S.W.2d 92, 96- seem reasonable to determine an expert's bias and97. For purposes of obtaining an order sealing prejudice; unfortunately, allegations of bias anddiscovery documents, a trade secret is defined as prejudice are asserted in virtually every case where"any formula, pattern, device or compilation of an insurer retains an expert to assess some aspectinformation which is used in one's business and by the insured of the claim in question. No materwhich gives one an opportunity to obtain an who the insurer selects, the selection is probablyadvantage over competitors who do not know or use going to be challenged by the insured as improperit." Id. at 96. Applying this definition in the Upjohn because the expert is allegedly biased or prejudiced.case, the Dallas Court of Appeals found Upjohn had Rather than object to these inquiries on theestablished a protectable interest with respect to its basis of the expert privilege, most insurers handleso called "protocol" reports, documenting the results discovery requests of this nature regarding claimof its clinical trials of the drug Halcion. Conversely, experts based on the impossibility of obtaining thethe court found the other categories of documents requested information. Most insurers maintainproduced by Upjohn, consisting of internal claims files on the claims submitted. This author hasmemoranda, adverse reaction reports and never seen an insurer maintain files which arecorrespondence with third parties, did not qualify for segregated by claim experts. In other words, if aprotection as trade secrets and refused to issue a claim expert did an investigation or rendered asealing order limiting access as to those documents. report, the expert's information or documentation willId. at 100. be in a particular claims file rather than in a file

A protective order will run afoul of Rule 76a if designated for that particular expert. To find everyit sets its own rules on the procedure for submitting report issued by the expert will usually require theconfidential documents to the trial court in a motion insurer to review all of its prior claims to see if aor a trial exhibit. If the protective order limits the particular claim might contain the report of theuse in court of documents produced under the particular expert. For a large insurer, such a taskprotective order, the order must comply with would be so labor intensive it would either takeRule 76a. several years to complete or it would require the

Rule 76a outlines an onerous procedure withwhich a party seeking a sealing order must strictlycomply. Among other things, the movant must filea written notice, post the notice in a public place atleast 14 days before a hearing is set, file a verifiedcopy of the posted notice with both the clerk of thecourt in which the case is pending and the Clerk ofthe Texas Supreme Court, and present evidence atthe hearing by which the court may conclude thatthe movant's interest in sealing the documentsoutweighs the presumed public interest in opennessand that no less restrictive alternative will protect itsinterest in restricting access to the information inquestion. TEX. R. CIV. P. 76a (1), (3) and (4).

C. The Discoverability of Expert Bias




virtual closure of the company to search all such businesses, they frequently lack the manpower toclaim files. It is far less burdensome to get the have one or two people take several days, weeks orreports from the expert rather than from the insurer. months to search all of the expert's files to compile

Old case law from the Texas Supreme Court all reports ever generated from a particularimplies that discovery should not be permitted on insurance company. If a request for the expert tocollateral evidence ultimately attempting to show locate all files ever generated from a particularbias or prejudice. In Russell v. Young, 452 S.W.2d insurer would require the expert to spend excessive434 (Tex. 1970), the Texas Supreme Court amounts of time and money locating such files, theevaluated the litigant's attempt to discover all the expert (and the insurer) would have an appropriatefinancial records of a potential expert witness who objection to the request based upon the burdenis not a party to the lawsuit. The documents created by the discovery request.requested did not relate directly to the subject matter To prove burdensomeness, the insurer mustof the suit, but instead consisted of the financial specifically articulate what would be necessary inrecords of the expert identifying his accounts order to obtain the requested information from itsreceivable for a one year period of time. The items claims files. Affidavit testimony is necessary in thiswere sought to impeach the expert by showing bias context to establish the method by which the insureror prejudice. The Texas Supreme Court held these keeps its files, identify the number of files initems were not discoverable and directed the trial question, approximate the amount of time it wouldcourt to vacate its order allowing the requested take one individual to review one claim file to searchdiscovery. for the requested information, identify the cost of

The Supreme Court revisited this issue eight having one employee review claims files for suchyears ago in Walker v. Packer, 827 S.W.2d 833 information, and finally extrapolate the amount of(Tex. 1992). In Walker an expert witness testified total man hours required (and the correspondingall of his expert witness fees were deposited into a cost) to review all of the relevant claim files. If thisspecific fund. Thereafter, the plaintiff sought is not done properly, the insurer could be required todocuments concerning the existence and operation engage in the daunting task of reviewing all of itsof the alleged fund. The Supreme Court found this claim files over the past several years on a statewidespecific request to be distinguishable from Russell v basis. See, generally, State Farm Mut. Auto. Ins.Young and permitted discovery into this area. Co. v. Engelke, 824 S.W.2d 747 (Tex.

To the extent counsel for a policyholder seeks App.—Houston [1 Dist.] 1992, orig. proceeding).to obtain from the expert what it cannot obtain from A good example of an appropriate burdensomethe insurer (e.g., all of the expert's reports ever objection can be found in Morris v. Texasprepared for the insurer), privacy issues may Employer's Ins. Assoc., 759 S.W.2d 14 (Tex.preclude the expert's ability to produce reports App.—Corpus Christi 1988, writ den'd.). Thepertaining to the insureds not involved in the litigation plaintiff in this case sought to identify the number ofgiving rise to the discovery request. For example, if people seen by a medical doctor on behalf of thean engineer routinely does causation and damage insurer over the course of several years, and theevaluations for an insurer and he receives a amount of money paid to the doctor for servicessubpoena requiring him to produce all reports ever rendered. In summarizing the appropriate evidencegenerated for the particular insurer, privacy to sustain the insurer's claim of burdensomeness, theconcerns for third parties will be raised. If the expert Corpus Christi Court summarized:produces all of his other reports, the privacy rights ofthe other insureds will be compromised. The expert [The insurer's] claim supervisor testified that hedoes not have the ability to voluntarily disclose such would have to review each of appellee's files,confidential information without consent of the other tens of thousands to comply with the request, ainsureds. At a minimum, the expert should be task he says was "to the point of beingallowed to redact all information specific to the impossible." Appellant's attorney proposed anidentity of the other insureds. alternative method to accomplish the task, one

Independently, expert witnesses frequently equally burdensome. . . we cannot say the trialhave the same physical problems attempting to court abused its discretion in sustaining thecomply with broad "fishing expeditions" as do objection.insurers. Because most experts hired by insurers toassist with claim investigations are relatively small

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Id. at 15. It is up to the insurer to prove howdifficult it would be to conduct a file-by-file searchof its own records. If a policyholder seeks the samething from an independent expert, the insurer maywish to have its counsel assist the expert in lodgingappropriate objections.

D. The Discoverability of ReserveInformationPolicyholders in first-party insurance litigation

frequently seek to ascertain the "reserves" set by theinsurer on a particular claim file. Statutes governingthe insurance industry frequently require the insurerto maintain certain cash reserves in order to payclaims. See, generally, TEX. INS. CODE art. 21.39(West 1999) ("[E]very insurer shall maintainreserves in an amount estimated in the aggregate toprovide for the payment of all losses or claimsincurred on or prior to the date of statement [to TDI]which are unpaid as of such date and for which suchinsurer may be liable . . . ").While a claim is being investigated and prior to thetime the insurer is capable of completely evaluatingthe economic cost of the claim, reserves are set ata fairly low to moderate level. The reserves areusually set at a low to moderate level purely out ofbusiness concerns and sound accounting principlescommon in the insurance industry. Counsel forpolicyholders frequently like to obtain suchinformation to argue that it demonstrates theinsurer's mis-evaluation of a claim or the insurer'scallous attitude toward the insured's loss. Thediscoverabilityof such information should generallyturn on the nature of the claim.

1. Breach of Contract ClaimsAn insurer's reserve information will rarely, if designated amount (e.g., $10,000,000). The various

ever, be relevant to a breach of contract claim. As types of reinsurance and the methods by whichwith most claims handling documents, the reserve reinsurance can operate obviously exceed the scopethe insurer puts on file is completely irrelevant to of this paper.answer the question of whether there was acompensable loss and whether it was fully paid bythe insurer. The fact the insurer set a reserve of $1or $1,000,000 on a particular claim will be totallyirrelevant if the insured's only cause of action is forbreach of contract. No Texas court has everrequired the production of reserve information (atleast in a published opinion) in a lawsuit only alleginga breach of contract.

2. Extra-Contractual ClaimsReserve information may be likely to lead to the

discovery of admissible evidence if the policyholderis asserting extra contractual claims based upon theinsurer's handling of the claim. Not all extracontractual claims will justify such an inquiry intoreserve information. For example, misrepresentationclaims and other non-claims handling allegationswould not justify inquiry into reserve information.Allegations by a policyholder that the insurer mis-investigated, mis-evaluated or otherwise mishandledthe claim may justify discovery into this area. Atleast one Texas court has held reserve informationis not protected by the work-product privilege. StateFarm v. Englke, supra, 824 S.W.2d at 747.

E. The Discoverability of ReinsuranceInformationBecause they are in the business of spreading

risk, insurance companies frequently purchaseinsurance themselves in order to transfer the risksthey are assuming on certain insureds or classes ofinsureds to another insurer. This second line ofinsurance can be set up in many different ways, butit usually provides a level of catastrophic protectionfor the insurer seeking to reinsure its losses. Thereinsurer only maintains a contractual relationshipwith the insurer by way of a reinsurance "treaty."The policyholder's only relationship is with itsinsurer—the reinsurer maintains no relationship ofany kind to the policyholder. In fact, mostreinsurance treaties are designed only to triggerwhen an insurer's aggregate claim losses exceed acertain threshold. In other words, the reinsurer inmost instances agrees to reimburse the insurer forpart of the money it pays on claims which exceed a

1. Breach of Contract ClaimsIt is difficult to see how the discovery of

reinsurance information could ever be reasonablycalculated to lead to the discovery of admissibleevidence in a breach of contract case. Theexistence of a reinsurance treaty can never haveany bearing on whether or not a particularpolicyholder suffered a compensable loss or whetherthe insurer failed to pay the loss. As with reserves,reinsurance information will generally have nobearing whatsoever on contractual liability anddamage questions.



2. Extra-Contractual ClaimsCreative lawyers have previously argued the

existence of reinsurance is relevant to assess theinsurer's "state of mind" in handling a claim. Someplaintiffs' lawyers have argued reinsuranceinformation is discoverable because it candemonstrate the insurer's direct exposure, or lack ofexposure, in paying a particular claim. In otherwords, some have argued it is extremely relevant todetermine whether or not any portion of a particularclaim will be "passed off" by an insurer onto anotherinsuring entity.

Independently, first-party claims in federal courtmay be a more favorable form to obtain reinsuranceinformation. Federal Rule of Civil Procedure26(a)(1)(B) provides:

A party shall, without awaiting discoveryrequests, provide to other parties: . . . forinspection and copying as under Rule 34 anyinsurance agreement under which any personcarrying on an insurance business may be liableto satisfy part or all of a judgment which maybe entered in the action or to indemnify orreimburse for payments made to satisfy thejudgment.

Judge Fitzwater was called upon to interpret thefederal disclosure rule in a first-party coverage casein Missouri Pacific Railroad Co. v. AetnaCasualty & Surety Co., 1995 WL 861147 (N.D.Tex. 1995). In analyzing this issue, Judge Fitzwaterheld:

When an insurer "cedes" a portion of its risk toa reinsurer, the reinsurer agrees to indemnify orreimburse the insurer according to thecontractual terms. The court agrees with theMagistrate Judge's holding that the rulemandates disclosure of reinsurance policiesbecause "by definition, such policies wouldrender a reinsurer liable for all or part of anadverse judgment entered against the primaryinsurer which obtained the reinsurance policy."

It should be noted that the production of anyreinsurance agreements should be limited by aprotective order due to the extremely confidentialnature of most reinsurance agreements and theeconomic consequences it could have on an insurerif its reinsurance status was publicly known.Missouri Pacific Railroad Co. v. Aetna Casualty& Surety Co., 1995 WL 861146 (N.D. Tex. 1995)

("although confidentiality with regard to the identityof reinsurers and the terms of reinsurance policiesmay be appropriate, plaintiff is entitled to reviewpolicies of reinsurance, if they exist").

The Fifth Circuit evaluated the relevance ofreinsurance in reviewing an insurance company'sbad faith in American Fidelity & Cas. Co. v. TheGreyhound Corp., 258 F.2d 709 (5 Cir. 1958).th

Greyhound was insured by American Fidelity &Casualty Company against liability in the operation ofmotor vehicles. On appeal, American argued thetrial court erred by admitting evidence that Americanwas reinsured by Employers ReinsuranceCorporation and under this reinsurance agreementAmerican recouped $30,000 of its ultimate paymentof $40,000. The Fifth Circuit disagreed withAmerican:

We think the jury could conclude that thereason defendant did not settle ... was because,under no circumstances, would it ever be liablefor more than $5,000.00, and it would prefer totake a gamble on getting a favorable verdictrather than to make a settlement within thelimits of the policy. If this was its reason fornot accepting [plaintiff's] offers, then it was anintentional disregard of the duty it owed the[insured] and of course defendant did not act ingood faith. The policyholder was not interestedin what the reinsurer would do. It had a right tolook to the defendant who had issued the policyto protect its interest.

Id. at 712.While American argued its reinsurance had no

place among the facts of the case because its claimsadjuster and its local attorney had no knowledge ofthe reinsurance, the Fifth Circuit was persuaded bythe fact American's home office and claims officeknew there was reinsurance. This case, of course,demonstrates the inherent tension in which aprecedent is placed in responding to the interests ofits policyholder and in its obligation of utmost goodfaith owed to its reinsurers. Obviously, the FifthCircuit, in reaching its decision, did not ascribe anyimportance to the obligation which American owedits reinsurers when it stated: "The policyholder wasnot interested in what the reinsurer would do. It hada right to look to the defendant who had issued thepolicy to protect its interest." Id. at 712.

The presence of the federal disclosurerequirements created a fairly sharp contrast betweenthe state and federal discovery systems until January



of 1999. While the aforementioned MoPac case claim at issue and into a trial of the institutionalwas viewed by many as an anomaly in Texas practices of the insurer. In so doing, the plaintiffsinsurance litigation under the federal rules, recent hope to paint a broad-based picture of wrongdoingchanges to the Texas discovery system may have and thereby increase both the likelihood and size ofeliminated any material differences. As of January any punitive damage award. These "try-the-1999, TEX. R. CIV. P. 194 sets forth a litigant's company" suits take many forms, but they all have atrequirement to disclose certain information upon the least one thing in common: a primary focus to obtainrequest of another party. Rule 194.2(g) requires the in discovery, and later introduce at trial, as muchdisclosure of "any indemnity and insuring agreements negative and inflammatory evidence as possible ofdescribed in Rule 192.3(f)." Not surprisingly, Rule the company's handling of other claims and its192.3(f) is substantially similar to the federal involvement in other lawsuits. The result is todiscovery rule. It provides: greatly increase the scope, expense, and in some

Except as otherwise provided by law, a party trial.may obtain discovery of the existence and Although the discovery and evidentiary issuescontents of any indemnity or insurance implicated by this litigation strategy arise in a varietyagreement under which any person may be of ways, three examples will illustrate the problems:liable to satisfy part or all of a judgmentrendered in the action or to indemnify or • An insured or its assignee sues an insurer forreimburse for payments made to satisfy the breach of contract and "bad faith" (eitherjudgment. Information concerning the common law or statutory) based on theindemnity or insurance agreement is not by insurer's allegedly wrongful refusal to defendreason of disclosure admissible in evidence at the insured in a tort action brought against it.trial. The insured's complaint seeks general, special,

TEX. R. CIV. P. 192.3(f) (West 1999). To date there discovery, the insured propounds interrogatoriesare no Texas cases interpreting this provision in the to the insurer requesting the names andreinsurance context. addresses of all other insureds who have made

F. The Discovery of Other Claims and Other7

Lawsuits Against the Insurer8

With increasing frequency, plaintiffs ininsurance claim litigation are seeking to expand thescope of their lawsuits beyond the specifics of the

cases risks associated with pre-trial discovery and

and punitive damages. During the course of

similar claims to the insurer in the past 10years. It also serves a request for production ofdocuments seeking the claim files for all theclaims identified in response to theinterrogatories.

• In the same lawsuit, the insured servesinterrogatories asking for specific and detailedinformation about every lawsuit in which theinsurer has been sued for bad faith (includingcase name, venue, attorneys, and disposition)and asks for similar information about everyverdict or judgment rendered against theCompany. The interrogatories are againaccompanied by a document request, this timeseeking copies of all complaints, verdicts, andjudgments rendered against the insurer duringthe same 10-year period.

• Again in the same lawsuit, but now at trial, theplaintiff seeks to introduce documentaryevidence of other claims or other lawsuitsagainst the insurer throughout the UnitedStates. In addition to the documentaryevidence, the plaintiff plans to adduce evidencedirectly through the testimony of one or more

I use the term "other claims" broadly to7

include anything related to the claims of non-partyinsureds, including the identity of those insureds,statistical information about certain types of claimsor losses, production of claim files, etc. I use theterm "other suits" equally broadly, to include otherlawsuits filed against the insurer, including thenumber and identity of such suits, production ofpleadings, verdicts, settlements, judgments, etc.

I wish to acknowledge the insight and8

analysis provided by Michael Traynor of CooleyGodward L.L.P. in San Francisco who has foughtcountless "other claim" wars in California and whosecomments were instrumental in completing thissection of the paper.


former policyholders, who plan to discuss their In Independent Petrochemical Corp. v. Aetnaalleged mistreatment at the hands of the insurer. Casualty & Surety Co., 117 F.R.D. 283 (D.D.C.

1. Scope

a. Breach of Contract ClaimsIn light of the general prohibition against

extrinsic evidence in contract actions, courtsgenerally do not allow collateral evidence of otherclaims to prove the insured is entitled to coverage.One significant exception to this rule is when theevidence is sought as a means of explaining orclarifying the meaning of an ambiguous contractterm or to establish the parties' intent. As to theselimited purposes, policyholders occasionally seekevidence of the insurer's handling of other claimsand other lawsuits.

Numerous horror stories exist in California. Forexample, in Carey-Canada v. California UnionIns. Co., 118 F.R.D. 242 (D.D.C. 1986), anasbestos coverage action, the insured requestedproduction of "(1) all policies sold by defendants thatcontain an asbestos-related exclusion (2) all claimsand underwriters files concerning such policies aswell as (3) relevant deposition transcripts andexhibits marked at deposition or at trial in theCalifornia Coordination actions." Id. at 244 n.5. Theinsured contended that the documents sought to bediscovered were relevant to its contention that theterm "asbestosis" was ambiguous. The district courtorderedproduction, although it limited the productionto insurance policies and claim and underwriting files"relating to the policies the carriers sold to non-partyinsureds that contained an asbestosis or asbestos-related exclusion and which were written or referredto by the underwriters of the policies at issue in theinstant case prior to the issuance of the policiesbefore the court." Id. at 245.

In so holding, the court noted that informationabout non-party insureds arguably bore on the intentof the underwriter at the time the agreements wereentered into. The carriers' relevancy objection, thecourt stated, "overlook[ed] the significance ofindustry usage in the interpretation of insurancecontracts," id. at 244, and that "evidence of usage isadmissible to explain a clause in a contract ofinsurance ... where ambiguous words are employed. . . ." Id. (quoting 13 Appleman, Insurance Lawand Practice § 7388 (1976)); cf. Sunstream JetExpress, Inc. v. International Air Serv. Co., 734F.2d 1258, 1269 n.8 (7 Cir. 1984) (re admission ofth

parol evidence, including industry custom, to explainnegotiations under Illinois law)).

1986), the district court ordered the carriers toanswer interrogatories regarding their dealings withother policyholders in part based on the plaintiffs'argument that such discovery could "lead toevidence of how the carriers have interpreted theprovisions in the insurance policies at issue such asthe 'pollution exclusion' and the 'expected andintended' language" and could thus shed light on thecarriers' intent at the time they entered into thecontract. Id. at 287. Although the courtacknowledged a serious question as to whether theevidence would ultimately be admissible at trial, it"concluded that it would be inappropriate to precludediscovery at this time" on the assumption that itmight not be. Id. at 288 n.3.

b. Extra-Contractual ClaimsThere is a substantial body of law addressing

the discovery of information concerning the claimsof non-party insureds as that discovery relates tocauses of action for common law bad faith, violationof state unfair trade practices acts, consumerprotection statutes, fraud, and the like. Thereappears to be a great deal of inconsistency in thecourts' approaches to this discovery, both among andwithin jurisdictions. Many of the opinions discuss thediscovery question in light of the general rulesgoverning the admissibility of "extrinsic acts"evidence.

In Texas, an important starting point isRule 404(b) of the Texas Rules of Evidence whichprovides:

(b) Other crimes, wrongs, or acts.Evidence of other crimes, wrongs, or acts is notadmissible to prove the character of a person inorder to show action in conformity therewith. Itmay, however, be admissible for otherpurposes, such as proof of motive, opportunity,intent, preparation, plan, knowledge, identity, orabsence of mistake or accident . . . .

T.R.E. 404(b) (West 1999).Insurers have a strong argument under TRE

404(b) regarding the likelihood that discovery of"other claims" and "other suits" will not lead to thediscovery of admissible evidence. If prior bad actsare not admissible, discovery about such acts shouldnot be permitted.

Policyholders usually argue the secondsentence of TRE 404(b) justifies discovery of "otherclaims" and "other suits" because they need to




search for evidence of "motive, opportunity, intent," [P]laintiff may establish a claim by showingand evil desires. This argument is suspect because either that the acts that harmed him werethe list of "purposes" in the second sentence of knowingly committed or were engaged in with404(b) are not factors, elements, or issues in any such frequency as to indicate a generalextra-contractual cause of action assertable against business practice. While proof of a knowingan insurer in Texas. Breach of the Duty of Good violation will make plaintiffs job that muchFaith and Fair Dealing, Breach of Contract, and easier, in cases where a knowing violation isArticle 21.21 claims do not implicate, discuss, or difficult to establish, knowledge can be provedinvolve the insurer's "motive," "opportunity," or circumstantially.... Discovery aimed at"plan." determining the frequency of alleged unfair

Over the past few years, these general settlement practices is therefore likely toarguments under 404(b) have been refined by produce evidence directly relevant to thelitigants in Texas and other states. Because so few action.Texas cases exist on this subject, tracking thedevelopments of some of these arguments is possible Id.by looking at the case law from other jurisdictions. In the 1980s, several Texas courts began to

(i) Pattern and PracticeThe most frequent justification by an insured for

conducting discovery of the "other claims" and "othersuits" against an insurer is to establish the insurer'sdenial of the particular claim in question was asystematic "pattern and practice" of the insurer,rather than an isolated mistake or error. Theargument has worked in several jurisdictions,including Texas.

California was one of the first states to allow aninsured to obtain extrinsic acts evidence of this sort.In Colonial Life Ins. Co. v. Superior Court, 31Cal. 3d 785, 183 Cal. Rptr. 810 (1982), the estate ofa deceased third-party claimant brought an actionagainst an insurer and its independent adjusting firmunder California's version of the unfair claimsettlement practices act, Cal. Ins. Code § 790.03,which at that time provided for a private right ofaction. On a motion to compel discovery, the trial9

court ordered production of the names andaddresses of other policyholders (about 35) whoseclaims were negotiated by the claim adjuster towhom the late policyholder's claim was assigned. Onreview to the California Supreme Court, the insurerargued that the discovery of other insureds "wouldnot yield relevant, admissible evidence." Id. at 790.Characterizing this argument as "patently meritless,"id., the court affirmed the discovery order, applyingreasoning typical of other courts facing the samequestion:

agree. In Aztec Life Ins. Co. of Texas v. Dellana,667 S.W.2d 911 (Tex. App.—Austin 1984, no writ),the court held the production of other claim files waswarranted because "those files may well containinformation relevant to Jennings' claim that Aztecwas engaged in a course of dealing that was unfairor deceptive in the business of insurance." Id. at915. Although the insured could show a statutoryviolation "by proof of the single transaction in whichthe company denied his claim for benefits," id., thatdid not preclude discovery: "[T]his Court knows ofno bar to the admission of evidence, if such exists,that Aztec had consistently denied claims upon thebasis of the exclusion without reasonableinvestigation. . . . [A] showing that Aztecconsistently follows such a claims practice could berelevant as tending to show that the company hadpurposely denied Jennings' claim without reasonableinvestigation." Id. Discovery of the insurer's otherclaim files was therefor allowed.

While "pattern and practice" arguments mayhave been justified in years past under Texasjurisprudence, the current scope of permissible extracontractual claims in Texas first-party insurancelitigation makes the discovery of such informationhighly suspect. In Texas, "pattern and practice"evidence is arguably not relevant to assess liability ordamages under a claim for breach of the duty ofgood faith and fair dealing. Today, the duty of goodfaith and fair dealing is breached if an insurer delaysor denies payment of a claim when its liability on thatclaim has become reasonably clear. Universe LifeIns. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997).Because the insurance company's liability forcommon law bad faith is directly limited to whetherits liability in that particular claim has becomereasonably clear, inquiry into what the insurance

Thereafter, the California Supreme Court9

held there is no such private right of action.Moradi-Shalal v. Fireman's Fund Ins. Cos., 46Cal. 3d 287, 250 Cal. Rptr. 116 (1988).

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company did in other claims is irrelevant and not Texas Insurance Code or the rules and regulationsreasonably calculated to lead to the discovery of any of the State Board if Insurance (now TDI) whichadmissible evidence. Just as Texas law prohibits required a showing of the insurer's "pattern andestablishing that a driver negligently ran a red light practice" to recover in a civil lawsuit.by showing the driver negligently ran another red In addition to the deletion of the "frequency"light on another day at another intersection, it is requirement from Board Order 41454 in 1992, theequally impermissible to try to establish an insurer's 1995 amendments to Article 21.21 no longer makeliability on a particular denied claim was "reasonably any Board Order actionably by a private litigant.clear" because its liability was reasonably clear on Today, an insured can only sue an insurer for thoseanother denied claim, decided on another day for acts or omissions specifically set forth inanother insured. As to the common law duty of Article 21.21 (or the DTPA), and none of thegood faith and fair dealing, discovery of the insurer's provisions of Article 21.21 predicate liability on an"other claims" and "other lawsuits" is not reasonably insurer's general business practices of its "patternlikely to lead to the discovery of admissible evidence. and practice." Today, Article 21.21 only regulates

Although "pattern and practice" evidence used an insurer's conduct in handling a specific claim or into be discoverable and admissible in causes of actionunder Article 21.21 of the Insurance Code, changesto the Insurance Code over the last decade nowmake such information and documentation irrelevantand unnecessary. Prior to the 1995 amendments tothe Texas Insurance Code, § 16(a) of Article 21.21allowed a litigant to sue for damages caused by aninsurer's commission of an act or practice declaredto be unlawful or unfair by the rules and regulationsof the Texas Department of Insurance. In 1995,10

the Texas Legislature deleted the language in§ 16(a) authorizing the bringing of a claim basedupon conduct defined as unfair or deceptive in"board orders" of the Department of Insurance.Under old Board Order 41454 (codified in Title 28 ofthe Texas Administrative Code at § 21.201-.205) astatutory bad faith claim required the introduction ofthe insurer's pattern and practice of improperconduct before the insurer's conduct could be heldunfair or deceptive.

Prior to 1992, recovery under Board Order41454 necessitated that the policyholder prove theprohibited conduct was committed by the insurerwith "such frequency as to indicate a generalbusiness practice." In 1992, however, the StateBoard of Insurance (now known as TDI) amendedBoard Order 41454 to delete the frequencyrequirement. See State Board of Insurance BoardOrder 59804 (July 29, 1992). This deleted provisionof this old Board Order was the only place in the

dealing with a specific insured. Because ashowing of frequency is no longer required torecover under this Board Order, and becausethe board orders no longer serve as apermissible predicate to an Article 21.21 causeof action, an insurer defending a first-party suitunder Article 21.21 has legitimate grounds toresist any efforts by a policyholder attemptingto discover or introduce the insurer'spreviously denied claims, lawsuits orcomplaints because such information anddocumentation are merely evidence of "priorbad acts" and admissible under Texas Rule ofEvidence 404(b).

Texas practitioners should be aware, however,of a number of old decisions allowing the discoveryand/or admissibility of an insurer's "pattern andpractices" predicated upon the old Board Orders.For example, in Chitsey v. National Lloyds Ins.Co., 738 S.W.2d 641 (Tex. 1987) the TexasSupreme Court recognized that "frequency" underthe old board order could be established through theintroduction of evidence of other claims improperlydenied by the insurer. This holding, as well as allother cases discussing Board Order 41454 areantiquated and can no longer serve as the basis of adiscovery effort seeking to force an insurer toproduce its other claims, lawsuits or complaints.

(ii) Knowledge of Particular Facts or RelevantLegal StandardsAnother purpose for which courts have allowed

discovery of information relating to other claims is todemonstrate the carrier's knowledge of particularfacts or awareness of a relevant legal standard. NoTexas cases have discussed this argument, but it hasbeen developed in other jurisdictions. For example,in Ex parte State Farm Mut. Auto. Ins. Co., 452

For a more detailed discussion of the10

historical development of this cause of action and thediscovery efforts related to it, see my book: TheLawyer's Guide to Texas Insurance Code Article21.21 § 4.03 (Lexis Law Publishing [3 Edition]rd

1998).



So.2d 861 (Ala. 1984), the insured sued State Farmfor fraud and bad faith for allegedly misrepresentingthat the uninsured motorist benefits in two StateFarm policies could not be "stacked." The complaintalso alleged that State Farm was involved in a"fraudulent scheme, plan or device to defraud itspolicyholders, not only in Alabama, but in manystates of the United States," by retaining an "anti-stacking" provision in its policies without notifying theinsureds that additional coverage was available. Id.at 862. The insured propounded the followinginterrogatory:

Please set forth name and address of eachState Farm automobile liability insurance policyholder who has had since January 1971 [an 11-year period] (1) two or more policies providinguninsured motorist coverage and (b) beeninvolved in a motor vehicle accident with anuninsured motorist and (c) been paid by you . .. the total sum of $10,000.00 in full settlementof any claim which such policy holder had foruninsured motorist benefits."

Id. The trial court ordered State Farm to respond,overruling its objections that the interrogatory wasoverly broad and unduly burdensome. Onmandamus, the Alabama Supreme Court affirmedmost of the order, although it limited discovery to thenames and addresses to those policyholders living inAlabama. Relying on Ex parte Allstate Ins. Co.,401 So.2d 749 (Ala. 1981), where identicalinformation was held discoverable, the court statedthat "[e]vidence of similar misrepresentations madeto others by the defendant is admissible in a fraudaction" and the information sought could therefore"very easily lead to admissible evidence." Ex parteState Farm, 452 So.2d at 863. Where, as here, theessence of the alleged fraudulent scheme was thecarrier's attempt to conceal the true state of the lawfrom its policyholders, evidence "of similarfraudulent acts" against other policyholders were"admissible to prove the alleged fraudulent scheme."Id. This argument faces the same hurdle in Texasas did the "pattern and practice" argument.Common law and statutory bad faith claims in Texasare claim-specific or insured-specific inquiries andthe insurer's decisions in other claims are notadmissible to resolve the liability issues raised byanother individual insured.

c. Relevance for Punitive DamagesMost of the case law in other jurisdictions

allowing the discovery of evidence of other claimsjustifies such discovery because of punitivedamages. In some states, punitive damages cannotbe imposed against an insurer unless the insured canprove the conduct was part of a "general businesspractice." In Texas, however, punitive damages (innon-wrongful death cases) are limited to theegregious conduct of the defendant in two limitedand specific situations. Under the 1995 amendmentsto the Texas Civil Practice & Remedies Code, apunitive damage award requires a finding thedefendant committed a specific wrongful act or aspecific omission: (1) fraudulently or (2) withmalice. TEX. CIV. PRAC. & REM. CODE,Section 41.003 (Vernon Supp. 1997). Texas'punitive damage statute now requires "a specificintent by a defendant to cause substantial injury tothe claimant" before a punitive damage finding canbe predicated upon malice. Id. at § 41.001(7).Similarly, common law principles focus the fraudinquiry on the defendant's conduct against theindividual (or entity) in question. See, generally,Dennis v. Dial Finance & Thrift Co., 401 S.W.2d803 (Tex. 1966); Horton v. Robinson, 776 S.W.260(Tex. App.—El Paso 1989, no writ). Independently,the only statutory factors a Texas jury can considerin awarding exemplary damages are now limited tothose specific factors relating to the individualplaintiff and the individual defendant including: thenature of the wrong; the character of the conductinvolved; the degree of culpability of the wrongdoer;the situation and sensibilities of the partiesconcerned; and the extent to which the conductoffends a public sense of justice and propriety. SeePattern Jury Charge 7.6A (1996); TEX. CIV. PRAC.& REM. CODE, Section 41.011(a).

A policyholder seeking to conduct discovery inTexas of an insurer's "other claims" or "otherlawsuits" frequently rely upon old punitive damagecase law to justify discovery of the desiredinformation and documentation. Several Texascourts have held a jury evaluating a punitive damageclaim can consider "the frequency of the wrongfulconduct." See, generally, Castro v. Sebesta, 808S.W.2d 189 (Tex. App.—Houston [1 Dist.] 1991,st

no writ); State Farm Mut. Auto. Ins. Co. v.Zubiate, 808 S.W.2d 590, 604 (Tex. App.—El Paso1991, writ den'd).

Counsel for an insurer has a strong argumentregarding the inapplicability of the Texas punitivedamage cases predicated upon "the frequency of the

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wrongful conduct" because of the drastic legal In assessing the burden of obtainingchanges regarding punitive damages after information, courts appear to be increasingly mindfulSeptember 1995. Cases which arose prior to the of the availability of technology. For example, in1995 amendments to the Texas Civil Practice & State Farm v. Englke, supra, 824 S.W.2d at 747,Remedies Code allowed a punitive damage award the insured asked State Farm to identify everyupon a finding the defendant committed the act or person who had made a complaint regarding theomission in question with (1) gross negligence, (2) failure to pay a claim within the prior five years asmalice, (3) intent to injure the plaintiff, or (4) intent well as any subsequent communications with TDIto defraud the plaintiff. These claims allowed a regarding such complaints. The Houston [1 Dist.]plaintiff to conduct discovery upon and introduce Court of Appeals found this request permissibleevidence regarding the defendant's motive, because a State Farm representative had speculatedopportunity, or "plan." These inquiries were (and State Farm's computer system might be capable ofare) expressly permissible under Rule 404(b) of the being programmed to produce the informationTexas Rules of Evidence. A strong argument may sought. Based upon the apparent belief State Farm'sbe made by an insurer that fraud and malice findings computer system could produce the requirednow serve as the only basis to award punitive information, the trial court and the appellate courtdamages against an insurer in Texas and these permitted discovery into State Farm's othernarrow inquiries do not permit evidence of "other complaints. (This case also emphasizes theclaims" or "other lawsuits." importance of adequately preparing corporate11

2. Limitations on Discovery Regarding OtherClaims and Other SuitsWhen a policyholder sends an insurer discovery

requests seeking other suits, lawsuits or complaints,insurers possess an arsenal of potential proceduralarguments to thwart or significantly limit the desireddiscovery.

a. Burden/OppressionUnder Federal Rule 26 and Texas

Rule 192.4(b), discovery of otherwise relevantevidence may be limited or denied where "theburden or expense of the proposed discoveryoutweighs its likely benefit, taking into account theneeds of the case, the amount in controversy, theparties' resources, the importance of the issues atstake in the litigation, and the importance of theproposed discovery in resolving the issues." Applyingthis analysis, many courts have limited the discoveryof evidence of other claims because requiring theinsurer to produce all of the information requestedwould be unduly burdensome in light of the potentialbenefit to the insured.

st

witnesses to give depositions. An insurer can finditself in a very difficult position if an employeeincorrectly speculates about the ease of obtainingother complaints, claims or suits through the insurer'scomputers when, in fact, the computers lack theability to retrieve the requested data.)

Some Texas courts have been extremelysensitive to the economic burden and physicaloppression on an insurer who cannot obtaindiscovery information or documentation withoutconducting a file-by-file search. For example, inScrivner v. Casseb, 754 S.W.2d 354 (Tex.App.—San Antonio 1988, orig. proceeding), the SanAntonio Court of Appeals sustained the insurer'sobjection to the policyholder's request to producenumerous lawsuits filed against it in preceding years.The San Antonio Court held the plaintiff could"readily derive or ascertain the same informationfrom public records and the district or county clerk'soffices." Similarly, in Lunsman v. Spector, 761S.W.2d 112 (Tex. App.—San Antonio 1988, orig.proceeding), the San Antonio Court ruled thepolicyholders were entitled to know the identity ofsimilar claims against the insurer but found it undulyburdensome for the insurer to produce copies of therequested documents.

The affidavit proof necessary to establish theburden/oppression created by discovery effortsregarding other claims, lawsuits or complaints mustbe appropriately drafted. In Humphreys v.Caldwell, 888 S.W.2d 469 (Tex. 1994), the TexasSupreme Court refused to grant mandamus relief ona discovery request to State Farm asking it toidentify all lawsuits in Texas involving similar claims

Obviously, in wrongful death actions,11

gross negligence may still serve as the basis of thepunitive damage award. TEX. CIV. PRAC. & REM.CODE, Section 41.003. However, virtually everyfirst-party insurance case will be limited to a fraud ormalice finding as the only predicate for a punitivedamage award.







which had been filed against State Farm in the The manner in which most larger insurers keeppreceding five years. The Texas Supreme Court claim files and lawsuit files frequently makes itfound State Farm's discovery affidavit did not difficult (if not impossible) to identify any "similar"positively and unqualifiedly represent the facts as factual circumstances" without conducting a file-by-disclosed in the affidavit to be true and within the file search. Although most property insurers willaffiant's personal knowledge." Because the have a numerical designation differentiating betweenaffidavits were legally invalid, the Texas Supreme a homeowner claim and a commercial propertyCourt refused to grant mandamus relief thus leaving claim, or differentiating between a bodily injury claimState Farm in a very unenviable (and costly) position and a property damage claim, most insurers do notregarding the production of prior lawsuits against the code claims in a manner that enables them tocompany. identify any particular type of claim with the push of

Discovery requests which require a file-by-file a computer button. For logistical and economicsearch of voluminous files are unduly burdensome. reasons, most insurers do not code files to identifyThe lack of computer capability was at the center of with the push of a button all prior foundation claims,the court's refusal to compel discovery of broad- arson claims, hail claims, or other types of specificranging discovery requests in State Farm Mut. property claims. The same is generally true withAuto. Ins. Co. v. Stephens, 425 S.E.2d 577 (W. Va. respect to liability claims and every other type of1992). In response to a request for detailed insurance claim known. As such, an insurer askedinformation on claims asserted against it, State Farm to answer an overly broad question regarding allfiled an affidavit stating it had no index or computer prior claims or lawsuits involving "similar factualprogram to locate the information without a manual circumstances" will still require most insurers tosearch of all files and estimating it would take 2.9 conduct a file-by-file search of all of their priormillion hours and cost $40 million to obtain the claims or lawsuits. As previously discussed, therequested information. Id. at 581 & n.2. Although overbreadth of the request also leads to an undulythis case arose out of West Virginia, it provides a burdensome obligation on the insurer.good example of the amount of detail necessary foran insurer to establish a discovery request would beunduly burdensome or oppressive.

b. OverbreadthOne of the factors contributing to the burden range defining the scope of the evidence. The

involved in responding to discovery requests seeking length of time the insured wishes to go back in timeextrinsic acts evidence is the expansive scope of the directly determines the breadth of the inquiry. Toinformation requested. As a general rule, a court the extent any court were to permit the discovery ofcalled upon to rule on a request which is overbroad evidence of this nature, it should be limited to datesbut otherwise proper will seek to limit the request immediately prior to or after the occurrence maderather than to refuse to compel any response at all. the basis of the lawsuit in question.The courts have adopted a variety of approaches toensuring the requested discovery is confined to itsproper scope.

(i) Limit to Similar Factual CircumstancesPolicyholders seeking to discover evidence of

other claims frequently try to make the requestsseem more reasonable by agreeing to limit them tosimilar factual circumstances. For example, in a badfaith case arising out of a homeowner's foundationclaim, some insureds have sought to conductdiscovery on other foundation claims or otherfoundation lawsuits previously filed against theinsurer. The breadth of the inquiry is frequently adispositive factor in resolving these discoverydisputes.

(ii) Limit to Specific DatesTo the extent an insured is going to ask an

insurer for evidence of other claims, counsel for theinsured would be wise to specifically limit the date

(iii) Limit to Acts Occurring in the JurisdictionWhere Action is PendingIn BMW of North America, Inc. v. Gore, 116

S.Ct. 15 89, 1597-98, 134 L. Ed. 2d 809 (1996), theUnited States Supreme Court held that, underprinciples of state sovereignty and comity, a courtmay not assess punitive damages based on adefendant's misconduct occurring outside thejurisdiction in which the action is tried. The Courtexplained that, whether through legislatively-authorized fines or judicially-imposed punitivedamages, a state "does not have the power to punishBMW for conduct that was lawful where it occurredand that had no impact on [that state] or itsresidents." Id. at 1597.

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In State Farm v. Engelke, supra, 824 S.W.2d denied. In defending the other claims, the insurerat 747, the insured propounded an interrogatory will inevitably be called upon to introduce numerousseeking information for the most recent five years as documents from the other claim files, call itsto "the identity of each person who has employees who handled the other claims to testify,communicated any type of complaint to you relating and call any expert consultants to testify about theirto your failure to pay a claim or your delay in conclusions regarding the other claims decisions. Aspayment of a claim" (under any policy) and whether such, thirty minutes of testimony from the insured'sthe company communicated with regulators bad faith expert regarding other claims might requireregarding any such claims. Id. at 751. Although the the insurer to introduce twenty hours of testimonyHouston [1 Dist.] Court of Appeals held it was not from other witnesses explaining the insured'sst

an abuse of discretion to compel discovery of this justification for denying the other claims. The trialinformation, it implicitly limited the answers to would be unnecessarily lengthened, the jury wouldlawsuits filed in Texas. Id. at 752. be easily confused, and the trial would quickly

c. Privacy Rights of Non-Party InsuredsTexas courts have been sensitive to the

potential harm inherent in allowing discovery relatingto claims made by non-party insureds. In AlphaLife Ins. Co. v. Gayle, 796 S.W.2d 834, 836 (Tex.App.—Houston [14 Dist.] 1990, no writ), theth

insurer sought mandamus relief from an order whichrequired it to produce unredacted copies of certainclaim files unrelated to the plaintiff's own claims filein question. In rejecting the plaintiff's discoveryefforts based upon the privacy rights of the insurer'sother insureds, the Houston Court held:

The real parties in interest have not shown anylegitimate right to or interest in the names of theother claimants. We find that [the insurer's]interest in protecting the privacy rights of itsclaimants clearly outweighs any right the realparties in interest have to discovery the identityof other claimants.

The court, however, did permit the disclosure ofother claims files with the names and otheridentifying information of insureds redacted.

3. Trial IssuesIf an insured seeks to introduce evidence of

other claims or other lawsuits against an insurer attrial, the insurer will be entitled to defend itself. Assuch, one of the most persuasive arguments for notopening up the discovery door into evidence of thisnature is the inherent need of the trial court tocontrol the length of the trial and limit the inquiry tothe dispute between the parties. If an insured isallowed at trial to introduce documents or testimonyshowing that an insurer denied several dozen claimssubstantially similar to the claims of the insuredplaintiff, the insurer should be allowed to defenditself by explaining why those other claims were

degenerate into a jumble of interwoven claims,arguments, and defenses. The insured and counselmay quickly find themselves the target of the jury'swrath for unnecessarily introducing issues into thetrial which, in the mind of the jury, have nothing to dowith the dispute between the insured and the insurer.

Trial courts must be extremely cautious inallowing evidence of other claims, lawsuits, orcomplaints to be introduced at trial because of theprejudicial implications to litigants and the inevitablelengthening of the trial. In light of the potentialadverse trial implications, the trial court should alsovery seriously consider limiting discovery of suchitems.

4. The Offensive Use of "Other Claims" bythe Insurer to Refute Specific Bad FaithClaimsOn occasion, an insurer may attempt to

offensively introduce evidence about how it handledother claims in order to defend the extra-contractualallegations of an insured claiming he or she wasunfairly singled out or discriminated against by theinsurer in the insurer's handling of the insured'sclaim. For example, if a large hail storm passesthrough a residential area, the extent of damage toroofs will depend on a multitude of factors inherentin each individual roof in the area including age,degree of slope, direction, hail size, and the presenceof overhanging trees. As a result, some roofs maybe damaged while other roofs in close proximity maynot be damaged. A homeowner who sees all of hisneighbors getting new roofs may feel her insurerimproperly handled her claim because the insurersfor all of her neighbors paid for new roofs. Aninsurer sued in this situation may be tempted tointroduce evidence of the millions of dollars it paid inhandling the claims arising out of this particularstorm in order to show its general "good faith." Verylittle case authority exists addressing the propriety of





rebuttal evidence of this type, so it is difficult to Rangel v. Time Ins. Co., 790 P.2d 964 (Kan. App.predict how a Texas court would react. 1990), plaintiff sought to introduce evidence of a

The insurer has a number of possible options. market survey prepared by the Kansas InsuranceOn a general level, it could produce evidence upon Department to show the defendant's prior pattern ofand seek to introduce its own evidence of other wrongful denial of claims. The court refused toclaims: admit the evidence. Thereafter, the insurer

• To refute the allegation of profiteering through "good reputation" evidence. The trial court thena pattern of unfair denials, it could introduce a permitted plaintiff to introduce the previouslysummary of loss claims paid by the company to excluded evidence because the defendant hadshow that most claims are paid, not denied. "opened the subject up." The appellate courtSee, e.g., Schwarz v. Farmers Ins. Co., 166 affirmed.P.2d 33 (Ariz. 1990) (admission of this type ofevidence).

• It might introduce statistics showing there is alow percentage of claim denials which aredisputed, and an even lower percentage whichare taken to litigation.

• An insurer seeking to demonstrate its good faiththrough statistics or summaries of its handlingof other claims should anticipate an objectionbased on Rule 403 of the Federal or TexasRules of Evidence. Plaintiffs may argue suchevidence should not be admitted because of itslow probative value (i.e., there is no way toknow if the facts and circumstances are thesame as those in the claim at issue) andbecause it is unduly time consuming (trial timewould be spent litigating claims not at issue).

A Colorado appellate court addressed this issuein Loza v. State Farm Mut. Auto. Ins. Co., 1997Colo. App. LEXIS 251 (1997). In this case, the trialcourt was called upon to decide "whether StateFarm can use payments [on other claims] asevidence of good faith as a defense for bad faithnonpayment." The court held it could not: "I thinkthat [the jury needs] to decide whether the . . . non-payment of this particular bill was in bad faith or not,because, otherwise, an insurance company gets thebenefit of a finding of good faith any time they . . .pay a large number of the bills even if there'sevidence that shows that the nonpayment of aparticular bill was done in bad faith." The court ofappeal held the trial court had acted within itsdiscretion in excluding this evidence.

Defense counsel who have successfullyresisted plaintiff's efforts to introduce extrinsic actsevidence should be particularly careful about seekingto introduce similar evidence on the insurer's behalf.Even if the evidence is not precisely the same, ajudge may reverse the earlier ruling on the grounddefendant has "opened the door." For example, in

introduced the testimony of a witness who provided

G. The Discoverability of Drafting History andOther Extrinsic Evidence12

In recent years, policyholders involved incoverage litigation with their insurers have attemptedto obtain a extrinsic or parole evidence to evaluatethe meaning of certain policy terms in the insurancepolicy under scrutiny. In Texas, the majority ofthese fights have been in the environmentalcoverage context. The scenario is simple: acorporate insured seeks to obtain documents fromthe Texas Department of Insurance or otherregulatory agencies showing the insurance companystated a particular policy provision meant one thingwhen it sought approval to sell a particular policyform in the state. This evidence is intended to showthe insurance company's current interpretation of theterm is different than the meaning represented toregulators several decades ago. This search for"drafting history" has led policyholder lawyers toscour the regulatory archives of DOIs across thecountry searching for policy interpretation positionstaken by various insurers or insurance industry tradegroups in seeking to have various policy formsapproved. Some regulatory filings imply theinterpretations made by certain insurers today arenot the same policy interpretations made by thesesame insurers several years ago when they soughtpermission to sell these policies.

The search for extrinsic evidence is not limitedto regulatory documents. Also in the environmentalcoverage context, policyholder lawyers across thecountry have fought protracted battles to obtain theinsurers' advertisements and other policyexplanations dating back several decades toinsureds, trade associations, national regulatory

I wish to thank Patricia dé la Pena of12

Bracewell & Patterson's Austin office of her help indrafting this section of the paper.

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bodies (such as NAIC), and prospective applicants. support of their argument, insureds cite the followingIn non-environmental cases, policyholders have also language in Balandran: “[w]hile parol evidence ofsought to conduct discovery from expert witnesses the parties’ intent is not admissible to createand current regulatory officials on the meaning of ambiguity, see National Union, 907 S.W.2d at 520,certain policy terms. All of these discovery effortsare designed to obtain evidence to bolster aparticular coverage position.

Insurers usually oppose the discovery of suchevidence arguing any evidence outside the terms ofthe policy is irrelevant to the clear terms of thepolicy. Insurers argue discovery into evidenceoutside the policy itself should not be allowed unlessand until the policy term at issue is found to beambiguous. A policy provision is ambiguous if it is"subject to two or more reasonable interpretations".National Union, 907 S.W.2d at 520. As the TexasSupreme Court stated in National Union, "[o]nlywhere a contract is first determined to be ambiguousmay the courts consider the parties' interpretation, .. . and admit extraneous evidence to determine thetrue meaning of the instrument." Id. (citationsomitted). In that case, the Court refused to allowthe insured to obtain discovery regarding theinsurers’ “understanding” as to the meaning of theabsolute pollution exclusion because the exclusionwas unambiguous on its face.

Insureds, on the other hand, argue a recentdecision by the Texas Supreme Court entitles themto the discovery of such evidence to prove anambiguity exists. Insureds claim in Balandran v.Safeco Ins. Co. of America, 972 S.W.2d 738 (Tex.1998), the Texas Supreme Court effectively heldthat “circumstances surrounding the promulgation of[the] policy form” is admissible and, indeed, anecessary prerequisite to all contract interpretationin Texas. Balandran, 972 S.W.2d at 741. In13

the contract may be read in light of surroundingcircumstance to determine whether anambiguity exists.” Balandran, 972 S.W.2d at 741(emphasis added) (citations omitted). InBalandran, the insureds contend, the Court lookedat the circumstances surrounding the promulgation ofthe policy form in determining both whether anambiguity existed on the face of the policy andwhether Balandran’s interpretation was reasonable.

In attempting to reconcile the holding inBalandran with the holding in National Union,insureds argue the Balandran Court implied thathistorical drafting and regulatory materials should beadmitted as “surrounding circumstance” evidence,not as the type of “extrinsic” evidence previouslydiscussed in National Union.

Insurers argue the insureds have misreadBalandran. In Balandran, the Court interpretedthe meaning of a particular exclusion in ahomeowner’s insurance policy. The Court held boththe insurer’s and the insured’s interpretations of theexclusion were reasonable. Balandran, 972 S.W.2dat 741. Therefore, under the rules of constructionapplicable to insurance contracts, the exclusionaryprovision was ambiguous on its face. Id. Afteralready determining the provision at issue wasambiguous, the Court (in dicta) said the draftinghistory of the applicable policy form supported theinsured’s interpretation and, therefore, the court’sfinding of ambiguity. Id.

Insurers further argue the insureds'characterization of the Balandran decision isinaccurate. Indeed, they point to language in theBalandran opinion wherein the Supreme Court itselfdismissed this specific notion, stating:

Contrary to the dissenting justices’ contention,we are not considering this [drafting history]evidence for the purpose of creating anambiguity. Because the Balandrans’interpretation of the contract language is

In Balandran, the Court dealt with the13

question of whether a Texas homeowners' policyprovides coverage for damage to the insured'sdwelling from foundation movement caused by anunderground plumbing leak. The policy contained anexclusion for loss to a dwelling caused by, inter alia,settling, cracking or bulging of foundations. Thequestion at issue was whether an exception to theexclusion (which applies when the structural damage policy. The insurer argued it did not. The Texasresults from a plumbing leak), located in the personal Supreme Court found the policy was ambiguousproperty section of the policy, applied to repeal this because both the insurer’s and the insured’sexclusion. The insured argued the exclusion repeal interpretations were “reasonable.” Therefore, theprovision applied to the dwelling exclusion despite its Court, pursuant to Texas rules of construction,location in the personal property section of the adopted the insured’s interpretation of the policy.







reasonable, an ambiguity exists on the similarly had turned to a consideration of theface of the policy. We merely highlight "circumstances surrounding the promulgation ofthis evidence because it further supports the policy form" only after determining that thethe result we reach. exclusion repeal provision at issue was patently

Balandran, 972 S.W.2d at 748, n.3. In other words, Relying on these decisions, the Gulf Metals courtinsurers argue, the drafting history was not used to found because the "sudden and accidental" pollutioninterpret the exclusion and determine whether or not exclusion was clear and unambiguous, "evidence ofit was ambiguous; rather, the court first found the the circumstances surrounding the promulgation ofexclusion was ambiguous, and then used the drafting the form of [the] policies may not be considered tohistory to support its finding. This is in line with the create a latent ambiguity." Gulf Metals, 993Texas Supreme Court's decision in National Union S.W.2d at 809.Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517. The dissent in Gulf Metals implied that

The issue of the discovery of extrinsic evidence Balandran had overturned National Union. Thewas discussed recently in Gulf Metals Industries, dissent also said Balandran "proclaimed thatInc. v. Chicago Ins. Co., 993 S.W.2d 800 (Tex. surrounding circumstances evidence is admissible toApp.—Austin 1999, no writ). In this case, the determine whether an ambiguity exists." Gulfdistrict court had held the "sudden and accidental" Metals, 993 S.W.2d at 814 (Smith, J., dissenting).pollution exclusion in the policies at issue clearly and The dissent would have reversed the summaryunambiguously precluded coverage for judgment and remanded the case to the trial court toenvironmental cleanup costs resulting from the allow further discovery of evidence of theinsureds' sale of zinc materials. On appeal, the circumstances surrounding the promulgation of theinsureds argued the district court erred "in not policy form. Id.considering evidence of the circumstances While National Union and the majority opinionsurrounding the promulgation of the qualified in Gulf Metals supports the argument that thepolluter's exclusion provision of the insurance discovery of extrinsic evidence should not bepolicies at issue." Id. at 804. The insureds claimed permitted unless and until the policy provision at"the policy terms are 'possibly ambiguous,' and the issue is first found to be ambiguous, Balandran andevidence the district court failed to consider would the Gulf Metals dissenting opinion provide someaid in the interpretation" of the meaning of the support for the argument that such discovery shouldsubject language. Id. at 805. The insureds argued be allowed to determine if an ambiguity exists.the decision in Balandran "allows consideration ofcircumstances surrounding the promulgation of aninsurance policy form when determining theexistence of an ambiguity." Id. at 807.

The appellate court disagreed holding:"Balandran must be read in conjunction withNational Union." Gulf Metals, 993 S.W.2d at 807.The court noted the National Union court had beencareful to restrict when "surrounding circumstances"outside the four corners of the policy could beconsidered. Although the determination of“‘whether a contract is ambiguous is a question oflaw for the court to decide by looking at the contractas a whole in light of the circumstances presentwhen the contract was entered’. . . the parties’interpretation of a contract can be considered onlyafter the court has found the contract to beambiguous." Gulf Metals, 993 S.W.2d at 808 (citingNational Union, 907 S.W.2d at 520) (emphasisadded).

The Gulf Metals court went on to analyze theBalandran opinion and noted the Balandran court

ambiguous. Gulf Metals, 993 S.W.2d at 809.

H. The Discoverability of PersonalInformation About the Insured by theInsurerWhen sued by their insureds, insurers

frequently go on the offensive in making discoveryrequests to the insured which the insured resists.Although far fewer cases exist in this context thanexist in the area of the insured's offensive discoveryefforts, enough cases exist to permit the identity ofseveral trends among Texas courts.

1. Permissible DiscoveryTexas courts generally allow insurers fairly

broad discovery in several major areas. Obviously,any non-privileged information or documentation inthe insured's possession pertaining to the claim orincident made the basis of a first-party lawsuit isclearly discoverable. Certain types of suits havegenerated a number of opinions worth noting.












a. Arson or Other Consumer Fraud CasesConsumer fraud cases, including arson litigation,

are unique animals in the litigation world. Althoughthe insured takes the offensive against the insurer inbringing a first-party lawsuit, the very nature of theinsurer's coverage position forces the insured to beextremely defensive. Allegations that the insureddestroyed their own property, filed a false claim, orotherwise engaged in fraud against the insurer opensup a relevance door not otherwise entered in mostfirst-party insurance litigation. Consumer fraudcases almost inevitably implicate the insured's ownfinancial situation, their economic motive forfabricating a claim or destroying their own property,and their opportunity to commit the allegedlyfraudulent act. As a result, discovery by the insurerin these types of cases normally involves discoveryinto the insured's banking and credit records, taxreturns, debt obligations, and spending habits.

Although information of this nature is alwaysextremely sensitive and subject to serious privacyconcerns, Texas courts have been fairly consistentin allowing the insurer sufficient latitude to prove itsconsumer fraud position. For example, in ValleyForge Ins. Co. v. Jones, 733 S.W.2d 319 (Tex.App.—Texarkana 1987, orig. proceeding), theinsurer sought mandamus relief to get documentsfrom the insured demonstrating its financial distressat the time the insured's business burned. In additionto records from the corporation, the insurer soughtrecords from the majority stockholder, who objectedto discovery requests due to the invasion of hisprivacy. The court noted that mere ownership ofshares in a corporation is not sufficient to require thedisclosure of sensitive financial information. When,however, a major stockholder is believed to havefinancial motivation to set fire to his own property inorder to recover the insurance proceeds, discoveryof the individual's financial condition is discoverable.Any privacy concerns of the individual can beameliorated with a protective order prohibiting theinsurance company from doing anything with theinsured's financial records other than defending thelawsuit.

b. Damage Claims

(i) Economic Damage ClaimsFrequently an insured will sue one insurer for

failing to pay a claim which other insurers havealready paid in part. To quantify the damage claimagainst it, the insurer is entitled to discover thenature of the insured's damage by discovering the

payments the insured received from other insurers.The Waco Court of Appeals recently addressed thisissue in In re Continental Ins. Co., 994 S.W.2d 423(Tex. App.—Waco 1999, orig. proceeding). InContinental, Union Pacific sued one of its excessinsurers to pay policy benefits under a liability policy.The insurer sought the settlement documents whichUnion Pacific had entered with its other primaryinsurers to whom Union Pacific had submittedclaims and settled. Union Pacific settlementagreements with its other primary carriers containedconfidentiality agreements and the insured objectedto the disclosure of those settlement documents dueto such provisions. In strongly chastising UnionPacific for its "gamesmanship" through discovery,the court held:

A contractual provision which requires a partyto assert improper and baseless objections to aproper discovery request is void as againstpublic policy. Likewise, any provision in acontract, including a confidentiality provision,that requires a party to refuse the production ofdiscoverable information or documents,including the contract, until a court ofcompetent jurisdiction has specifically orderedproduction, violates public policy. Parties to acontract cannot require a litigant to raisefrivolous objections or grounds for refusing toproduce discoverable information. Ifinformation is otherwise discoverable, a partyabuses the discovery process if the only reasonthey resist discovery is because they haveagreed not to surrender the information withouta court order.

Id. at 425. As such, Union Pacific was ordered todisclose all of its prior settlement agreementsbecause "the amounts paid could either negateliability or directly offset Continental's liability fordamages." Id. at 428.

Although the insured may be required toproduce prior settlement agreements, it is probablynot required to produce its internal bookkeepingrecords with respect to how the insured allocated oraccounted for money received from priorsettlements with other insurers. In the continuinglitigation saga between Union Pacific andContinental Insurance Company, the Texas SupremeCourt recently decided the insurer’s right to compeldiscovery of the insured’s internal financial recordsdemonstrating how it allocated or accounted forproceeds received settlement agreements with other




insurers. In In re Union Pacific Resources Co., 43 insurer will only be entitled to discovery an insured'sTex. S.Ct. J. 145 (Tex. Dec. 2, 1999), the Texas tax returns in very limited circumstances and theSupreme Court held the insurer was not entitled to obligation on the insurer to show relevance andthe insured’s internal bookkeeping information. materiality is high. See, generally, Texhoma StoresBecause the insurer had already received the v. American Central Ins. Co., 424 S.W.2d 466settlement documents the insured entered into with (Tex. App.—Dallas 1968, no writ).other insurers, the Texas Supreme Court determinedthe trial court could properly evaluate any credits oroffsets that the parties may be entitled to receivewithout examining the insured’s internalbookkeeping. Because the lower appellate court hadordered the trial court to permit discovery of theinsured’s internal attorney records, the TexasSupreme Court conditionally granted the writ ofmandamus as to the Court of Appeals therebyaffirming the trial court’s initial decision that suchinternal bookkeeping records were not discoverable.

(ii) Physical and Mental Anguish DamagesFirst-party insurance lawsuits brought by

individuals against their insurers frequently includedamage elements consisting of mental anguish orphysical damage. When an insured places his or herphysical or mental condition in controversy byseeking to recover damages due to the insurer'sconduct, Texas courts generally permit discovery ofmedical information pertaining to the insured. Whenan insured alleges the insurer's handling of a claimresulted in any physical manifestations of mentalanguish or emotional distress, discovery should bepermitted regarding the alleged physicalmanifestations. See, generally, Midkiff v. Shaver,788 S.W.2d 399 (Tex. App.—Amarillo 1990, orig.proceeding) (discovery permitted for "the medicaland hospital records related to the medical attentionsought for the symptoms of the respective mentalanguish claims"). A mental anguish claim, however,does not "open the door" to an insured's entiremedical history. Id. at 403.

Similarly, if an insured defends his conduct ininteracting with the insured in a particular manner orin failing to comply with certain conditions precedentunder an insurance policy based upon a physical ormental condition, the insurer is entitled to conductdiscovery regarding the alleged physical and mentalcondition. Stewart v. Crouch, 1996 WL 543272(Tex. App.—San Antonio 1996, orig. proceeding).

2. Limitations on an Insurer's DiscoveryThe limitations imposed by Texas courts when Vermont and Washington—have written ethics

an insurer seeks discovery from an insured has been opinions on the issue of legal audits by insurers. Tolimited to very case specific situations. In terms of date, the State Bar of Texas has not weighed in onidentifying major themes, it is fairly obvious an the issue. This is an area of the law where further

I. The Discoverability of Fee Bills Due toLegal AuditsThe recent trend of insurers to audit the fee

bills of the lawyers it hires has recently raised aunique discovery question. The issue of fee auditsby insurers has spurred a fire storm of controversyin the past few years. (Brian Martin of Sheinfeld,Maley & Kay in Houston has authored an excellentreview of the legal and ethical issues raised by legalaudits in his article "Audits of Law Firm Bills: TheIssues Inside and Out", 11 Ins. Lit. Rptr. 355 (July1999)). The discovery implication of this institutionalpractice are worthy of noting.

Initially, turning bills over to a third-party, non-client auditor at the request of an insurer may waivethe attorney-client privilege which would normallyattach to the fee bill. In United States v. MIT, 129F.3d 681 (1 Cir. 1997), the First Circuit Court ofst

Appeals held legal bills given to third-party auditorsare no longer protected by the attorney-clientprivilege. Although the MIT case involved thesubmission of legal bills to the IRS for an audit, theparallels are close enough to cause substantialconcern among many members of the defense bar.Further concern has been echoed following UnitedStates v. South Chicago Bank, 1998 U.S. Dist.Lexis 17445, *7 (E.D. Ill. 1998) where a federalcourt in Illinois held that "auditors are not generallypart of the circle of persons, including secretariesand interpreters, for example, with whomconfidential information may be shared withoutdestroying the [attorney-client] privilege." Accordingto Brian Martin: "Theoretically, because bills turnedover to auditors would lose the attorney-clientprivilege under MIT, defense lawyers fear thatsavvy plaintiffs' lawyers could subpoena them anddiscover case strategy." 21 Ins. Lit Rptr. at 362.Although not directly addressing the discovery andattorney-client privilege issues, at least thirteen statebar associations—Alabama, Florida, Indiana,Kentucky, Louisiana, Massachusetts, Missouri,North Carolina, Pennsylvania, South Carolina, Utah,






guidance is desperately needed by Texas courts who proceeding) (insured's accident report to liabilitywill inevitably have the opportunity to address thisissue as litigants seek the discovery of fee bills fromcounsel who have submitted their bills for legalaudits.

III. Third-Party LitigationLiability insurers called upon to defend their

insureds in suits brought by third parties are alsocalled upon to deal with a host of discoverabilityissues unique to the insured/insurer relationship.

A. Statements by InsuredsThird-party claimants frequently seek discovery

from an insured defendant or their liability insurerregarding the liability insurer's investigation of theclaim in question. Historically, these discoveryefforts have focused on statements made by theinsured to their liability insurer. As previouslydiscussed, as of January 1999, "witness statements"are now fully discovery under TEX. R. CIV. P. 192even if they were prepared "in anticipation oflitigation." This material change in Texas discoverylaw is important because it makes a large body ofcase law relevant which had been decided under theold discovery rules. In a third-party context, themost important opinion in recent years was theTexas Supreme Court's holding in National Tank v.Brotherton, 851 S.W.2d 193 (Tex. 1993). InBrotherton, the Texas Supreme Court held theliability insurer's investigation of the claim was notprivileged under the attorney-client privilege, butdocuments prepared in anticipation of litigationagainst the insured could be cloaked with aninvestigative privilege. If statements made by theinsured to the insurer about an incident areinterpreted by Texas courts as "witness statements,"they would no longer be privileged underTEX. R. CIV. P. 192. As such, counsel should behesitant to rely upon the plethora of decisions holdingsuch reports or statements from an insured to theirliability insurer are privileged. See, e.g., DNS v.Schattman, 937 S.W.2d 151 (Tex. App.—FortWorth 1997, orig. proceeding) (narrative report byinsured to liability insurer was privileged partycommunication); Hiebert v. Weiss, 622 S.W.2d 150(Tex. App.—Fort Worth 1981, orig. proceeding)(report by insured to insurers was privileged);Menton v. Lattimore, 667 S.W.2d 335 (Tex.App.—Fort Worth 1984, orig. proceeding)(interviews by liability insurer of insured wasprivileged); Cupples Products v. Marshall, 690S.W.2d 623 (Tex. App.—Dallas 1985, orig.

insurer was privileged). As previously stated,new Rule 192 makes all of the aforementionedcases irrelevant.

A liability insurer's claim file may still beprivileged from discovery by a third-party claimantif the items in the claim file are protected byattorney-client privilege or the investigative privilege.The mere investigation of a potential liability claimagainst an insured does not constitute "in anticipationof litigation" and will not cloak the claim file withprivilege. In re Ford Motor Co., 988 S.W.2d 714(Tex. 1998). If the insurer can meet the legalrequirements establishing certain items in the claimfile were prepared in anticipation of litigation, it willbe privileged. Id. at 718. If the liability insureranticipates litigation against its insured when itobtains an expert report regarding the underlyingincident, it may be privileged. Henry P. RobertsInvestments v. Kelton, 881 S.W.2d 952 (Tex.App.—Corpus Christi 1994, orig. proceeding). See,also, Riggs v. Sentry Ins., 821 S.W.2d 701 (Tex.App.—Houston [14 Dist.] 1992, no writ); Childth

World v. Solito, 780 S.W.2d 954 (Tex.App.—Houston [14 Dist.] 1989, orig. proceeding).th

Litigants should be aware, however, that even if theclaim file is privileged, if the liability insurer was theonly one to investigate the facts, people or eventswhich can no longer be examined, the third-partyplaintiff's lack of any other avenue to obtain therelevant evidence may result in the discoverability ofthis information which would otherwise beprivileged. See, generally, Shannon v. Devine,917 S.W.2d 465 (Tex. App.—Houston [1 Dist.]st

1996, orig. proceeding).Finally, if a witness statement was taken prior

to January 1999 and the discovery request for thewitness statement was made after January 1999, thewitness statement will be discoverable, unless it wastaken by counsel and implicates the attorney-clientprivilege. In in re W&G Trucking, 990 S.W.2d 473(Tex. App.—Beaumont 1999, orig. proceeding), theBeaumont Court of Appeals held witness statementscollected by a liability insurer are discoverableregardless of when they were taken. The insurerargued witness statements taken prior to the changein the Texas Discovery Rules should still beprivileged; however, the Beaumont Court of appealsdisagreed because the new discovery rules apply topending cases without regard to when the witnessstatements were taken. Because the discovery ruleis a procedural rule, it does not impair any vestedright, and the witness statements are discoverable.














IV. Procedural Considerations -- ProperlyPreserving Privileges and ConfidentialInformation14

Finally, I wish to briefly set forth the proceduralmechanics for how to preserve the privileges,confidentialities, and other objections discussed in theprior sections of this paper. In the past ten monthsnumerous CLE papers have been written on the It is improper to object to discovery on the basisprocedural considerations raised by the discovery of privilege. TEX. R. CIV. P. 193.2(f) requires:rules. What follows is a brief summary of the basicmechanics to preserve objections under the new A party should not object to a request forrules. written discovery on the grounds that it calls for

A. Written DiscoveryTEX. R. CIV. P. 193 is the primary rule

governing the assertion of privileges concerning"written discovery." TEX. R. CIV. P. 192.7(a)defines written discovery to be "requests fordisclosure, requests for production and inspection ofdocuments and tangible things, requests for entryonto property, interrogatories, and requests foradmission."

B. Initial Response to Written Discovery thatSeeks Privileged MaterialsA party served with written discovery should

follow these steps:

1. Withhold MaterialsThe responding party should withhold the

privileged materials. However, the rules contain aprovision covering inadvertent disclosure, which isaddressed later in this paper.

2. The ResponseTEX. R. CIV. P. 193.3(a) outlines the necessary

content of a response to written discovery assertingprivilege:

The party must state—in the response (or anamended or supplemental response) or in aseparate document—that:

(1) information or material responsive tothe request has been withheld,(2) the request to which the information ormaterial relates, and(3) the privilege or privileges asserted.

The response should be served but not filed. TEX.R. CIV. P. 191.4(a)(4).

3. What a Party Asserting Privileges ShouldNot Do

a. Object

production of material or information that isprivileged but should instead comply with Rule193.3. A party who objects to production ofprivileged material or information does notwaive the privilege but must comply with Rule193.3 when the error is pointed out.

As one can see, all is not lost if a party objectsrather than complies with TEX. R. CIV. P. 193.

b. Move for Protective OrderContrary to the old rules, a motion for

protective order is not a proper means of assertingprivileges. TEX. R. CIV. P. 192.6 reads: "A personshould not move for protection when an objection towritten discovery or an assertion of privilege isappropriate, but a motion does not waive theobjection or assertion of privilege."

4. Comparison to Former RulesThe new procedures for asserting privileges

provide an important clarification concerning whena party resisting discovery must produce sufficientinformation about the withheld material to permit thediscovering party to determine the validity of theprivilege. The old rules did not specifically andclearly address the issue. One line of casesattempted to clarify the issue, although the caseswere never widely followed in practice.

Former TEX.R.CIV. P. 166b(4) said objectionsmust be "specifically" pled. While the language itselfsuggested that mere identification of the specificprivilege would be sufficient to preserve a claim ofprivilege, a number of cases have held that mereidentification of a specific privilege (e.g., "attorney-client") does not preserve objection. Rather, thesecases have held "not only must the particularprivilege be identified, its application must bespecifically pleaded. A litigant who fails to properlyassert a privilege from discovery within the timeallowed for a response to the discovery request

I want to thank Chris Rentzel of14

Bracewell & Patterson's Dallas office for hiscontributions to this section of the paper.


waived the privilege." Hyundai Motor America v.O’Neil, 839 S.W.2d 474 (Tex. App.–Dallas 1992, nowrit). For example, one court held Kentucky FriedChicken National Management Company ("KFC")waived its claim to the physician-patient privilegeeven though it identified the privilege withparticularity. The First District Court of Appealsheld the privilege was waived, because KFC "failedto show its applicability to the request for documentsrelevant to KFC's defenses, i.e. by stating why thepsychiatric records would not be relevant."Kentucky Fried Chicken Nat'l. Mgmt. Co. v.Tennant, 782 S.W.2d 318 (Tex. App.–Houston [1st

Dist.] 1989, no writ). This line of cases was aPandora's Box for the unwary.

C. The Requesting Party May Demand aPrivilege Log

1. Request for Privilege LogTEX. R. CIV. P. 193.3(b) provides:

(b) Description of withheld material orinformation. After receiving a responseindicating that material or information has beenwithheld from production, the party seekingdiscovery may serve a written request that thewithholding party to identify the information andmaterial withheld.

2. 15 Days to RespondTEX.R.CIV. P. 193.3(b) specifies the time limit

for the withholding party to produce a privilege log:"Within 15 days of service of that request, thewithholding party must serve a response."

3. The Privilege Log

a. Contents of the LogUnder the new rules, a privilege log is legallysufficient if it:

(1) describes the information or materialswithheld that, without revealing theprivileged information itself or otherwisewaiving the privilege, enables other partiesto assess the applicability of the privilege,and(2) asserts a specific privilege for eachitem or group of items withheld.

TEX. R. CIV. P. 193.3(b).

b. ExemptionTEX. R. CIV. P. 193.3 contains an important

exemption to what items must be listed on theprivilege log. The rule reads:

(c) Exemption. Without complying withparagraphs (a) and (b), a party may withhold aprivileged communication to or from a lawyeror lawyer's representative or a privilegeddocument of a lawyer or lawyer'srepresentative—

(1) created or made from the point atwhich a party consults a lawyer with aview to obtaining professional legalservices from the lawyer in theprosecution or defense of a specific claimin the litigation in which discovery isrequested, and

(2) concerning the litigation in which thediscovery is requested.

This provision cures the necessity to always assertnumerous privileges to patently overbroad requestssuch as ones seeking "any and all documents relatingto" some topic. These types of requests faciallyseek documents generated by attorneys in thelitigation. As these documents are clearly notdiscoverable, forcing parties to catalog them wouldproduce significant and unnecessary expenses.

D. The Hearing

1. WhoAny party may request a hearing on a claim of

privilege. TEX. R. CIV. P. 193.4(a).

2. Need for RulingThe party resisting discovery need not obtain a

ruling. Like the current rules, a party resistingdiscovery on the basis of privilege need not obtain aruling on its privilege claims. TEX. R. CIV. P.193.4(b) reads: "A party need not request a rulingon that party's own objection or assertion of privilegeto preserve the objection or privilege. . ." The rulefurther provides that a party withholding material onthe basis of privilege cannot use that material at trial.The Rule reads: "but a party may not use—at anyhearing or trial—material or information withheldfrom discovery under a claim of privilege withouttimely amending or supplementing the party'sresponse to that discovery."




3. EvidenceIf a ruling is sought, the party asserting the

privilege has the burden of proving its privilege and"must present any evidence necessary to support theobjection or privilege." TEX. R. CIV. P. 193.4(a); seeComment 6 ("The party seeking to avoid discoveryhas the burden of proving the objection orprivilege."). The party asserting the privilege maypresent live testimony at a hearing or affidavitsserved at least seven days before the hearing or atsuch other reasonable time as the court permits.TEX. R. CIV. P. 193.4(a).

Cases construing the former rules have heldclaims of privilege for a document may be sustainedif the document itself clearly supports privilege as amatter of law, even in the absence of other evidencesuch as affidavits. Barnes v. Whittington, 751S.W.2d 493, 495 (Tex. 1988). This principle willapparently remain in force because a party assertingprivilege need only produce "necessary" evidence.

The new rules do not address or otherwisemodify the sufficiency of evidence needed toestablish privilege and, presumably, prior case lawstill controls. Accordingly, a party asserting aprivilege needs to produce evidence of each elementof the privilege. Griffin v. Smith, 688 S.W.2d 112,114 (Tex 1985).

a. AffidavitsThe new rules do not address the sufficiency of

affidavits. Consequently, prior cases should stillcontrol. Affidavits provide no evidence of privilegeif they merely contain global assertions of privilegeor contain nothing more than a recitation of factsascertainable from documents for which privilege isclaimed. Barnes v. Whittington, 751 S.W.2d 493,495 (Tex. 1988); Weisel Enterprises, Inc. v. Curry,718 S.W.2d 56, 58 (Tex. 1986).

b. In Camera ReviewAs under the old rules, a court may conduct an

in camera review of materials. TEX. R. CIV. P.193.4(a) reads: "If the court determines that an incamera review of some or all of the requesteddiscovery is necessary, that material or informationmust be segregated and produced to the court in asealed wrapper within a reasonable time followingthe hearing."

c. Ex Parte AffidavitsCases construing the old rules also prohibited

consideration of affidavits tendered ex parte.Chapa v. Garcia, 848 S.W.2d 667, 669 (Tex.

1992); Remington Arms Co. v. Canales, 837S.W.2d 624, 626 n.3 (Tex. 1992); Barnes v.Whittington, 751 S.W.2d 493, 495 (Tex. 1988).This rule will likely be observed under the new rulesfor written discovery as the new rules do notspecifically address the issue. Additionally, thesection concerning hearings on deposition privilegeassertions does specifically permit the tendering ofex parte affidavits, which suggests a consciousomission with respect to TEX. R. CIV. P. 193.4(a).

E. The Ruling

1. Court Sustains PrivilegeTEX. R. CIV. P. 193.4(b) provides: "To the

extent the court sustains the objection or claim ofprivilege, the responding party has no further duty torespond to that request."

2. Court Overrules Privilege"To the extent the court overrules the objection

or claim of privilege, the responding party mustproduce the requested material or information within30 days after the court's ruling or at such time as thecourt orders." TEX. R. CIV. P. 193.4(b).

F. Later Found or Generated Documents orInformationOne very significant improvement to the rules

is the clarification concerning the procedure forasserting privileges for documents and materialsfound or generated after initial discovery responseshave been served. The new rule reads: "(d)Amendment. An objection or response to writtendiscovery may be amended or supplemented to statean objection or basis that, at the time the objection orresponse initially was made, either was inapplicableor was unknown after reasonable inquiry." TEX. R.CIV. P. 193.2(d); see, also, Comment 3 ("Thestatement should not be made prophylactically, butonly when specific information and materials havebeen withheld. The party must amend or supplementthe statement if additional privileged information ormaterial is found subsequent to the initialresponse.").

The old rules did not address this situation.Case law provided contradictory results. Perhapsthe most controversial case was Hyundai MotorAmerica v. O’Neil, 839 S.W.2d 474 (Tex.App.–Dallas 1992, no writ). The court addressedthe legal sufficiency of an assertion of attorney-client and other privileges with the followinglanguage attached: “in the event that any such












W:0001\001200006173.WPD

document . . . may be located or generated.” called upon to resolve the discovery dispute. WithRelying on the general rule that a conditional the growing reluctance of Texas' appellate courts toassertion of privilege is insufficient to preserve the grant mandamus relief, the initial rulings of the trialprivilege, the court held that the party resisting court on discovery issues remain one of the mostdiscovery waived its privilege. Id. at 480. important factors in determining the value of a case.

The dissent criticized this position and outlined While the appellate courts can and do provide reliefthe problem created by the Fifth Court of Appeals: in extraordinary circumstances, the vast majority of

While the duty to supplement is ongoing, the As such, there is no substitute for precise arguments,opportunity to assert objections is not. A party sound reasoning, and persuasive drafting inmust plead any privilege or exemption to presenting discovery issues to Texas trial courts. Idiscovery within thirty days after the request is hope this paper helps in your efforts to do so.served. Otherwise the privilege is waived.Thus the only effective way to preserve a claimof privilege for documents located or generatedin the future is to object in the initial response.

Hyundai at 484. The dissent explained it would notrequire an initial assertion of privilege to documentsnot yet located and generated. Subsequent opinionsfollowed the Hyundai dissent. Ford Motor Co. v.Ross, 888 S.W.2d 879 (Tex. App.—Tyler 1994, nowrit). However, the presence of Hyundai and itsreasoning has been sufficient to multiply assertionsof disruptive boilerplate privileges in ordinarylitigation. Hopefully, the new rules correct thispractice.

V. ConclusionDespite the attempt of the Texas Supreme

Court to decrease discovery gamesmanship,discovery battles are destined to remain a fixture inTexas insurance litigation for the foreseeable future.I hope this paper provides a starting point forpractitioners and litigants who may find themselvesin unfamiliar territory when confronted with anunusual discovery request or when desiring to seekdiscovery in an insurance case. I realize I have onlyscratched the surface of many of these issues, butspace limitations have prohibited me fromcomprehensively examining all of these issues. Ihope this provides a good start.

Discovery battles seem to be one of the lastbastions of oral advocacy and persuasive writingskills in the modern litigation practice. Becausediscovery disputes in insurance cases are inherentlyfact-intensive, the characterization of the uniquefactors justifying the disclosure or non-disclosure ofinformation or documents is frequently going to restexclusively within the discretion of the trial court

discovery disputes never get beyond the trial court.
