Summary
holding evidence from multiple parties regarding communications was not impermissibly cumulative
Summary of this case from In re Subpoenas for the Depositions BennettOpinion
No. 14-09-00086-CV
Opinion filed February 24, 2009.
Original Proceeding.
Writ of Mandamus.
Panel consists of Chief Justice HEDGES and Justices ANDERSON and SEYMORE.
MEMORANDUM OPINION
In this original proceeding, relators, Liberty Mutual Insurance Company, Arch Insurance Company, and Specialty Adjusters, Inc., seek a writ of mandamus ordering the respondent, the Honorable Patricia Hancock, presiding judge of the 113th District Court of Harris County, to set aside her order of December 15, 2008, granting the motion for protection filed by real party in interest, Gulf Atlantic Operations, Inc. ("GAO"). We conditionally grant the writ.
BACKGROUND
On August 29, 2005, Hurricane Katrina struck the Gulf Coast, flooding major portions of GAO's asphalt refinery and terminals located in Chickasaw, Alabama. On September 13, 2006, relators denied GAO's Hurricane Katrina-related losses in excess of $5 million. On June 7, 2007, GAO sued relators alleging they had (1) wrongfully denied coverage under their respective policies for GAO's losses from Hurricane Katrina above a $5 million policy sub-limit, and (2) acted in bad faith by failing to conduct a reasonable investigation of GAO's claims, and by failing to effectuate a prompt, fair, and equitable settlement of GAO's claims after liability had become reasonably clear. GAO seeks to recover for property damage, business interruption losses, professional fees, and other consequential damages.
GAO brought claims for breach of contract, breach of representation and warranty, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, negligence, fraud, negligent misrepresentation, and statutory and common law bad faith.
On October 6, 2008, GAO filed a motion for partial summary judgment contending relators, as a matter of law, had breached their respective policies by denying GAO's Katrina losses in excess of $5 million. At issue in the summary judgment proceeding was whether GAO's property, located in "Flood Zone AE," is subject to the $5 million sub-limits in the policies "in respect of Flood Zones 'A' and 'V.'" The term "Flood Zones" refers to a classification system developed by Federal Emergency Management Agency ("FEMA")for the purpose of determining property insurance coverage. Under the FEMA system, land areas have been divided into different zones reflecting FEMA's determination of flooding risk and severity in those areas. Relators responded to GAO's motion with the contention that the only reasonable construction of the sub-limit of "$5,000,000 per occurrence . . . in respect of Flood Zones 'A" and 'V'" is that it applies to all "A" flood zones, including Flood Zone AE; therefore, the policies' $5 million flood sub-limit applies to all flood losses sustained by GAO at properties located in Flood Zone AE.
On November 12, 2008, the trial court granted GAO's motion for partial summary judgment, finding, as a matter of law: (1) relators had breached their respective insurance policies by denying GAO's claims for losses related to Hurricane Katrina that were in excess of $5 million; (2) the $5 million sub-limit "in respect of Flood Zones 'A' and 'V'" in the policies does not apply to any of GAO's Hurricane Katrina-losses; and (3) the $5 million sub-limit "in respect of Flood Zones 'A' 'V'" does not apply to GAO's claims for business interruption losses, professional fees or non-flood property losses. GAO's bad faith and tort claims are still pending.
Beginning in September 2008, relators issued a number of third-party subpoenas and requests for documents related to GAO's understanding of the flood zone designations at the time it acquired the insurance on the subject properties and the subsequent negotiation of the sub-limit. On November 21 and 24, 2008, GAO requested that relators withdraw each of the third-party document requests to eliminate this "non-relevant discovery."
Relators sought information from the following third parties: Trigeant EP, Ltd. (the company that sold the properties to GAO); El Paso Corporation (a company that formerly held an interest in the GAO facilities, and held a note on the properties at the time of the sale to GAO); CRA Services (a company that had surveyed the properties and assessed the Flood Zone designations); EDS Specialty Insurance Services-Travelers (the company that prepared flood hazard determinations for the properties and issued a Flood Certification to GAO in March 2005); Johnson, Deluca, Kennedy Kurisky, P.C. (attorneys who represented GAO during the negotiations for the purchase of the properties); Stephen Heller Associates, Inc. (a company that performed hazard analysis of the properties, including analysis of flood risks for Trigeant); Sutherland, Asbill Brennan, LLP (attorneys who represented Trigeant in the sale of the properties to GAO); John L. Wortham Son, L.P. (the company that brokered the renewal of GAO's coverage in 2006 and 2007).
On November 26, 2008, relators filed a motion for reconsideration and clarification, requesting that the trial court suspend its partial summary judgment ruling and rehear the issues after adequate discovery had been completed, and argued that the limited amount of evidence strongly suggests GAO knew the Flood Zone sub-limit applied to its properties. Relators further argued "the expectations and understanding of the scope of coverage of the parties and their brokers is clearly relevant to whether the Insurers acted in good faith," and alternatively requested that the trial court allow discovery on the intentions and understandings of the parties with respect to the scope of the coverage because it is relevant to relators' defense of GAO's bad faith allegation. On December 15, 2008, the trial court denied relators' motion for reconsideration and clarification.
On December 9, 2008, GAO filed a motion for a protective order requesting that the trial court strike relators' third-party discovery requests and limit the scope of discovery because (1) the discovery directed toward third parties relates to issues already disposed of in the partial summary judgment ruling, i.e., the $5 million sub-limit "in respect of Flood Zones 'A' and 'V'" does not apply as a matter of law to GAO's properties, and (2) whether relators acted in bad faith rests on the facts before them at the time of the denial of coverage, not on subsequent information developed during discovery. GAO further objected that the discovery requests are overly broad, unduly burdensome, not reasonably related to any issue in this case, harassing, oppressive, irrelevant, not reasonably calculate to lead to the discovery of admissible evidence, not relevant to the subject matter of the remaining claims, not relevant to any valid defense, without support in the pleadings, nothing more than delay tactics, or merely a fishing expedition.
On December 15, 2008, the trial court granted GAO's motion, striking most of relators' discovery requests and further restricting relators "from seeking discovery to justify their denial of GAO's Katrina claims beyond the documents or information that were before Defendants at the time GAO's Katrina claims were denied." On January 16, 2009, relators filed this petition for writ of mandamus requesting that we compel the trial court to set aside its December 15, 2008 protective order. On January 29, 2009, we issued an order staying the December 15, 2008 protective order, the February 2, 2009 discovery cut-off date, and the March 2, 2009 trial date.
STANDARD OF REVIEW
To be entitled to the extraordinary relief of a writ of mandamus, relators must show that the trial court clearly abused its discretion and they have no adequate remedy by appeal. In re Team Rocket, L.P., 256 S.W.3d 257, 259 (Tex. 2008) (orig. proceeding). A trial court clearly abuses its discretion if it reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law, or if it clearly fails to correctly analyze or apply the law. In re Cerberus Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex. 2005) (orig. proceeding) (per curiam); Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding). The scope of discovery is a matter of trial court discretion. In re CSX Corp., 124 S.W.3d 149, 152 (Tex. 2003) (orig. proceeding) (per curiam). However, a writ may issue where the trial court's order improperly restricts the scope of discovery defined by the Texas Rules of Civil Procedure. Lindsey v. O'Neill, 689 S.W.2d 400, 401 (Tex. 1985) (orig. proceeding) (per curiam).
The purpose of discovery is to ensure that lawsuits are "'decided by what the facts reveal, not by what facts are concealed.'" In re Alford Chevrolet-Geo, 997 S.W.2d 173, 180 (Tex. 1999) (orig. proceeding) (quoting Jampole v. Touchy, 673 S.W.2d 569, 573 (Tex. 1984) (orig. proceeding)). Therefore, discovery is not limited to information that will be admissible at trial. Jampole, 673 S.W.2d at 573. Instead, to increase the likelihood that all relevant evidence will be disclosed and brought before the trier of facts, the law contemplates a significantly larger class of discoverable evidence to include anything reasonably calculated to lead to the discovery of material evidence. Id.; see also In re Transwestern Publ'g Co., L.L.C., 96 S.W.3d 501, 504 (Tex.App.-Fort Worth 2002, orig. proceeding) (citing Tex. R. Civ. P. 192.3(a)) (explaining rules governing discovery do not require, as prerequisite to discovery, that information sought be admissible evidence; it is enough that information appears reasonably calculated to lead to discovery of admissible evidence). This broad grant is limited by the legitimate interests of the opposing party to avoid overly broad requests, harassment, or disclosure of privileged information. In re Am. Optical Corp., 988 S.W.2d 711, 713 (Tex. 1998) (orig. proceeding) (per curiam).
ABUSE OF DISCRETION
Scope of Discovery
Relators argue the trial court abused its discretion by prohibiting discovery relevant to their defenses of GAO's bad faith claims. The "special relationship" between the insured and the insurer imposes on the insurer a duty to investigate claims thoroughly and in good faith, and to deny those claims only after an investigation reveals there was a reasonable basis to do so. Viles v. Sec. Nat'l Ins. Co., 788 S.W.2d 566, 568 (Tex. 1990). A breach of the duty of good faith and fair dealing will give rise to a tort action that is separate and apart from any cause of action for breach of the underlying contract. Id. at 567. The Texas Supreme Court, in Aranda v. Insurance Company of America, set forth two elements of the tort of bad faith: (1) the absence of a reasonable basis for denying or delaying payment of the benefits of the policy, and (2) the carrier knew or should have known there was no reasonable basis for denying the claim or delaying payment of the claim. 748 S.W.2d 210, 213 (Tex. 1988). The supreme court subsequently clarified that an insurer breaches its duty of good faith and fair dealing by denying or delaying payment of a claim when the insurer knew or should have known that it was reasonably clear the claim was covered. Universal Life Ins. Co. v. Giles, 950 S.W.2d 48, 56 (Tex. 1997).
The first element of this test requires an objective determination of whether a reasonable insurer under similar circumstances would have delayed or denied the claimant's benefits. Aranda, 748 S.W.2d at 213. The second element balances the right of an insurer to reject an invalid claim and the duty of the carrier to investigate and pay compensable claims. Id. This element will be met by establishing that the carrier actually knew there was no reasonable basis to deny the claim or delay payments, or by establishing that the carrier, based on its duty to investigate, should have known there was no reasonable basis for denial or delay. Id. Under the test, carriers will maintain the right to deny invalid or questionable claims and will not be subject to liability for the erroneous denial of a claim. Id. "[T]he issue in bad faith focuses not on whether the claim was valid but on the reasonableness of the insurer's conduct in rejecting the claim." Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 601 (Tex. 1993).
Evidence establishing only a bona fide coverage dispute does not demonstrate that there was no reasonable basis for denying a claim. Provident Am. Ins. Co. v. Castaneda, 988 S.W.2d 189, 193 (Tex. 1998); State Farm Fire Cas. Co. v. Simmons, 963 S.W.2d 42, 44 (Tex. 1998). Moreover, "[e]vidence of a coverage dispute is not evidence that liability under the policy had become reasonably clear." Castaneda, 988 S.W.2d at 193. "Nor is bad faith established if the evidence shows the insurer was merely incorrect about the factual basis for its denial of the claim, or about the proper construction of the policy." Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tex. 1994).
Also, an insurer does not act in bad faith where a reasonable investigation reveals the claim is questionable. United Servs. Auto. Ass'n v. Croft, 175 S.W.3d 457, 471 (Tex.App.-Dallas 2005, no pet.) (citing St. Paul Lloyd's Ins. v. Fong Chun Huang, 808 S.W.2d 524, 526 (Tex.App.-Houston [14th Dist.] 1991, writ denied)). Instead, insurance carriers maintain the right to deny questionable claims without being subject to liability for the erroneous denial of the claim. Id. (citing Aranda, 748 S.W.2d at 213).
To prevail on its bad faith claims, GAO must prove that relators denied its claims when liability had become reasonably clear or failed to conduct a reasonable investigation before making their coverage decision. Relators' defenses to GAO's bad faith claims include showing that they were reasonable in applying the sub-limit, whether another reasonable basis supported their coverage position, and whether there was a bona fide dispute regarding coverage or construction of the policies.
Pursuant to the trial court's order, relators are precluded from discovery that might reveal whether GAO knew the subject properties were in Flood Zone AE at the time it negotiated policy terms and whether GAO agreed and understood, at that time, that Flood Zone A encompassed Flood Zone AE. GAO argues the trial court correctly limited discovery to documents or information possessed by relators at the time they denied GAO's Hurricane Katrina-related claims. See Viles, 788 S.W.2d at 567 ("Whether a reasonable basis for the denial of a claim exists must be judged by the facts before the insurer at the time such claim was denied."). Relators, on the other hand, contend that there is no authority that limits an insurer to its own files in defending a bad faith claim. See Provident Am. Ins. Co., 988 S.W.2d at 193-94 ("[C]onsidering all the facts in existence at the time of the denial, there is no evidence that there was no reasonable basis for Provident American's denial of Castaneda's claim (subpart G) or that liability had become reasonably clear (subpart J).") (emphasis added); Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 340 (Tex. 1995) ("The facts compelling denial of the Stokers' claim were in existence at the time of the denial. . . . What is dispositive is whether, based upon the facts existing at the time of the denial, a reasonable insurer would have denied the claim.") (emphasis added). However, we need not resolve this issue in this original proceeding.
We agree with relators' contention that evidence pertaining to the parties' understanding of the policy provisions is relevant to the relators' defense that they acted reasonably and in good faith in applying the $5 million sub-limit to GAO's Hurricane Katrina-related claims. Such evidence is also relevant because the jury will be required to determine whether a reasonable insurer acting under similar circumstances would have adopted the same coverage position. Moreover, evidence regarding whether GAO understood that Flood Zone "AE" was included in Flood Zone "A" is relevant to whether GAO relied on any alleged misrepresentations by relators and whether any alleged consequential damages were foreseeable and proximately caused by any such misrepresentation. The scope of discovery is not limited to information that is admissible at trial, but is expansive enough to include information that appears reasonably calculated to lead to discovery of admissible evidence. See Tex. R. Civ. P. 192.3(a); Jampole, 673 S.W.2d at 573.
Unduly Broad and Burdensome Discovery Requests
GAO further contends the trial court's ruling is properly based on any of its objections that the discovery requests are overly broad, unduly burdensome, not reasonably related to any issue in this case, harassing, oppressive, irrelevant, not reasonably calculated to lead to the discovery of admissible evidence, not relevant to the subject matter of the remaining claims, not relevant to any valid defense, without support in the pleadings, nothing more than delay tactics, or merely a fishing expedition.
The trial court may exercise some discretion in granting a protective order and controlling the nature and form of discovery. Masinga v. Whittington, 792 S.W.3d 940, 940 (Tex. 1990) (orig. proceeding). That discretion, however, is not without bounds. Id. The party seeking to avoid discovery must show a particular, specific, and demonstrable injury by facts sufficient to justify a protective order, and the trial court may not grant a protective order limiting discovery unless the party seeking such protection has met this burden. Id. at 940-41; see also Garcia v. Peeples, 734 S.W.2d 343, 345 (Tex. 1987) (orig. proceeding) (requiring "a particular, articulated and demonstrable injury, as opposed to conclusory allegations"). Thus, the party resisting discovery is not free to make conclusory statements that the requested discovery is unduly burdensome or unnecessarily harrassing, but, instead, must produce some evidence supporting its request for a protective order. In re Alford Chevrolet-Geo, 997 S.W.2d at 181. In support of their motion for a protective order, GAO produced no specific evidence that the third-party discovery requests are unduly burdensome or unnecessarily harassing to it. Therefore, the trial court's protective order cannot be properly based on GAO's stock objections.
Cumulative or Duplicative Discovery
GAO also asserts the trial court has a duty to limit discovery that is cumulative or duplicative, and relators concede the information they seek is additional to that already in the summary judgment record. See Tex. R. Civ. P. 192.4(a) (providing that discovery methods permitted by these rules should be limited by the court if it determines that "the discovery sought is unreasonably cumulative or duplicative, . . ."). Contrary to GAO's argument, evidence regarding communications with GAO submitted in support of relators' response to GAO's motion for partial summary judgment is from relators' own employees, while relators are seeking information about those communication from GAO and third-party participants. The information sought is not impermissibly cumulative.
Accordingly, we conclude the trial court abused its discretion by limiting relators to discovery of documents and information in their possession at the time they denied GAO's Hurricane Katrina-related claims.
LACHES
Finally, GAO argues relators' petition should be denied on the equitable ground of laches. See Rivercenter Assocs. v. Rivera, 858 S.W.2d 366, 367 (Tex. 1993). GAO asserts relators have slumbered on their rights because they waited over a year after filing their answer to serve the first of their third-party subpoenas, they did not seek a continuance of the summary judgment hearing for purposes of pursuing third-party discovery, failed to move to compel any responses to the third-party subpoenas, and waited until shortly before the end of the discovery period to file this original proceeding.
GAO cites to the supreme court's decision in Rivercenter Associates in support of this argument. However, Rivercenter Associates involved the application of laches when a relator unjustifiably delays seeking mandamus relief. 858 S.W.2d at 367. Such delay in seeking mandamus relief is not at issue here. In any event, when the trial court granted GAO's motion for partial summary judgment, on November 12, 2008, neither GAO nor relators had taken any depositions. Indeed, although the discovery period was set to close on February 2, 2009, GAO waited until January 16, 2009, to unilaterally notice depositions for eighteen witnesses. Moreover, discovery on GAO's bad faith claims necessarily follows the trial court's ruling that GAO's Hurricane Katrina-related claims are covered by the policies. See Stoker, 903 S.W.2d at 341 ("As a general rule there can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered."). We find no lack of diligence on the part of relators to justify the denial of their petition for writ of mandamus on equitable grounds.
INADEQUATE REMEDY BY APPEAL
Relators argue the errors created by the trial court's December 15, 2008 discovery order cannot be corrected on appeal. To determine if a party has an adequate remedy by appeal, we ask whether "any benefits to mandamus review are outweighed by the detriments." In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 136 (Tex. 2004) (orig. proceeding). An appeal from a trial court's discovery order is not adequate if (1) the appellate court would not be able to cure the trial court's error on appeal; (2) the party's ability to present a viable claim or defense is vitiated or severely compromised; or (3) missing discovery cannot be made a part of the appellate record. In re Ford Motor Co., 988 S.W.2d 714, 721(Tex. 1998) (orig. proceeding); In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998) (orig. proceeding) (per curiam).
We agree that the restricted discovery will, at the very least, severely compromise relators' ability to develop and present a viable defense to GAO's claims. Moreover, without the requested discovery, relators will not be in position to proffer evidence in a bill of exceptions. Therefore, we conclude relators' substantial rights have been impaired and, there is no an adequate remedy by appeal. See Walker, 827 S.W.2d at 842 (stating appeal is not adequate when parties stands to lose substantial right).
CONCLUSION
We therefore conditionally grant the petition for a writ of mandamus and direct the trial court to vacate its December 15, 2008 order granting GAO's motion for protection. The writ will issue only if the trial court fails to act in accordance with this opinion. We further lift the stay issued on January 29, 2009.