Defending Against Bad Faith: a Nuts and Bolts Review of the Fair Debatability Doctrine and California’s Genuine Dispute Doctrine


10 No. 24 Westlaw Journal Insurance Bad Faith 1

Westlaw Journal Insurance Bad Faith
April 1, 2015


Texas Court Draws The Line On Allowing Broad Discovery Of Other Claims In Bad-faith Litigation

By Steven Plitt, Esq., Kunz Plitt Hyland & Demlong aa1

Copyright © 2015 Thomson Reuters .

Steven Plitt of Kunz Plitt Hyland & Demlong discusses how far courts may go in allowing discovery of other claims in bad-faith litigation in light of a Texas Supreme Court decision that disallowed what it called an ‘impermissible fishing expedition.’

The courts in various states have adopted discovery rules that are liberally construed to permit discovery of any information “relevant to the subject matter in the pending litigation.” 1 Generally, the information sought need only be “reasonably calculated to lead to the discovery of admissible evidence.” 2

In bad-faith cases where it has been alleged that the insurance company has engaged in a pattern and practice of bad-faith conduct, the discovery of other bad-faith claims and lawsuits may be relevant to establishing that pattern and practice. 3 As one court has noted, “[e]vidence of previous, similar acts alters the probability that the conduct in question was unintentional; the more frequently an act occurs, the more probable it is intentional.” 4 How an insurance company handles other claims may be admissible if those claims are sufficiently similar to the insured’s experiences to show a pattern of improper claims handling practice. 5

Aside from relevancy, courts have viewed these types of discovery requests as being unduly burdensome or expensive given the needs of the particular case, the amount in controversy, limits on the party’s resources and the importance of the issues at stake in the litigation. 6 As an example, in State Farm Mutual Auto Insurance Co. v. Superior Court, 7 the plaintiff sought discovery of detailed information relating to any lawsuit in which State Farm was accused of improper claims handling without limiting the inquiry to a specific time period or to facts similar to those at issue in the case.

Before allowing that type of broad discovery, the court held that the plaintiff was required to establish sufficient similarity between the obligations imposed by the state law in question and the law of other jurisdictions to warrant unlimited nationwide discovery. 8 Ultimately, the court found that the type of discovery sought was overly broad and unduly burdensome. 9

In reaching that conclusion, the court noted that State Farm would have to review more than 175,000 claims filed each year in the forum state alone to determine whether any claim met the plaintiffs criteria. On a nationwide basis, State Farm would have to review millions of such claims. The court said, “[a] party targeted by such a demand could well be tempted to settle a meritless claim rather than incur such effort and expense. This kind of collusive settlement, which occurs with some frequency, is a serious indictment on our civil justice system.” 10 An additional issue that comes into play when other claim files are sought is the issue of the insured’s right to privacy. 11

*2 Recently, the Texas Supreme Court addressed the issue of discovery of other claim files in the context of large-scale storm claims. In In re National Lloyds Insurance Co., 12 the Texas Supreme Court held that the trial court had abused its discretion in ordering production of the adjusting firm’s assessments of other insureds’ claims arising from the storms that damaged the insured’s home. In September 2011 and June 2012 storms swept through the City of Cedar Hill, causing damage to insured Mary Irving’s home. Irving, in turn, filed a claim with her homeowner’s insurer, National Lloyds Ins. Co. National Lloyds sent adjusters to inspect the insured’s premises in response to each of the claims submitted. Following those inspections, National Lloyds paid the claims. 13

Irving believed that National Lloyds had undervalued her claim submissions and therefore brought suit against the insurer. She alleged breach of contract, breach of the duty of good faith and fair dealing, fraud, conspiracy to commit fraud, and violations of Texas’ Deceptive Trades Act and the Texas Insurance Code. 14

Irving requested during discovery production of all claim files from National Lloyds Insurance Co. for the previous six years involving the three individual adjusters involved in the Irving claims. 15 Irving also requested claim files from the past year for properties in the Dallas and Tarrant Counties involving Team One Adjusting LLC and Ideal Adjusting Inc. — the two independent adjusting firms that handled Irving’s claims.

Finally, Irving sought through interrogatories the names, addresses, telephone numbers, policy numbers and claim numbers associated with the requested claim files. 16 National Lloyds objected to the request as overly broad, unduly burdensome and that she sought information that was neither relevant nor calculated to lead to the discovery of admissible evidence. The trial court ordered production of the files for claims handled by Team One and Ideal Adjusting. The trial court also limited the order of discovery to claims relating to properties in Cedar Hill and to the storms that caused damage to Irving’s home. 17

In reversing the trial court’s order, the Texas Supreme Court began its analysis by reviewing discovery principles under Texas law. First, under the Texas Rules of Civil Procedure, discovery was allowed of “any matter that is not privileged and is relative to the subject matter of the subject action.” 18 The phrase “relevant to the subject matter” was to be broadly construed by Texas courts. 19

It was an insufficient ground for objection under Texas law “that the information sought [would] be inadmissible at trial if the information sought appear[ed] reasonably calculated to lead to the discovery of admissible evidence. 20 Notwithstanding these broad rules governing discovery, the court in National Lloyds found that “even these liberal bounds have limits, and discovery requests must not be overbroad.” 21 In the past, the Texas Supreme Court had held that “[o]verbroad requests for irrelevant information are improper whether they are burdensome or not.” 22

*3 The court noted that the trial court’s order compelling production relating to the insurance claims filed by Cedar Hill residents in connection with the two storms that damaged Irving’s house was limited to claims that were assessed by the adjusting firms handling the Irving damage claims. Irving argued that “the requested production should provide proof one way or another whether the adjusters used the same methods, spent an equivalent amount of time and used the same pricing data when determining Irving’s claims as compared to the claims of her fellow Cedar Hill policyholders.” 23

Irving also argued that she “need[ed] the requested information to prove that the adjusters did not properly inspect her home or value her claims.” 24 It was Irving’s intent to prove that National Lloyds undervalued her claims by “establishing a baseline” and that by comparing her claims to that baseline, Irving believed that “[s]ignificant differences would … evidence bad faith and support other legal claims, including fraud.” 25 Thus, Irving had proposed to the trial court to compare National Lloyds’ evaluation of the damage to her home with National Lloyds’ evaluation of damage to other homes in support of her contention that her claims were undervalued. 26

However, the Texas Supreme Court failed to see how National Lloyds’ overpayment, underpayment or proper payment of the claims of unrelated third parties was probative of National Lloyds’ conduct with respect to Irving’s’ undervaluation claims at issue in the case. 27

The court noted that there could be many variables associated with a particular claim, including the timing of the claim filing, the property’s condition at the time of filing (including the presence of any pre-existing damage), and the type and extent of damage inflicted by the covered event itself. 28 It was at best an “impermissible fishing expedition” to allow Irving to scour claim files in the hope of finding similarly situated claimants whose claims were evaluated differently from Irving’s. 29 More was needed to establish that the discovery of the evidence had a tendency “to make the existence of any fact that is of consequence to the determination of the action more probable or less probable.” 30

The court rejected Irving’s assertion that the trial court had not abused its discretion because the trial court’s discovery order was narrowly tailored. Irving argued that the trial court’s discovery order was “limited in time because it compelled only production of evidence relating to the two storms at issue, and limited by location because it involved only properties in Cedar Hill.” 31

The court noted that while Irving was correct that the discovery must be reasonably limited in time and geographic scope, 32 those limits regarding time and geography did not in themselves render the underlying information discoverable. 33

*4 Because the information Irving sought was not reasonably calculated to lead to the discovery of admissible evidence, the Texas Supreme Court held that the trial court’s order compelling discovery was overbroad. Without hearing oral argument, the Texas Supreme Court granted mandamus relief and directed the trial court to vacate its discovery order.

If the Texas Supreme Court had permitted the trial court’s discovery order to stand, it would have substantially increased the discovery that is sometimes sought in bad-faith cases. All a plaintiff would have to do would be to argue that an individual claim had been undervalued vis-à-vis other claims in the area in order to gain access to large amounts of discovery in the hope that such differences would materialize in an unknown number of those claims.

The problem with this approach, as noted by the Texas Supreme Court, is there are many variables associated with these types of claims that result in differentiation. For example, were the properties compared identical or was there the presence of any pre-existing damage to one or more of the comparable properties and claims?

The type of damage inflicted by the covered event could also be different in nature and scope. Permitting a plaintiff to scour indiscriminate claim files in the hopes of finding similarly situated claimants whose claims were evaluated differently from the plaintiff’s claim would be an “impermissible fishing expedition,” the Texas Supreme Court said.

. See Steven Plitt and Jordan R. Plitt, Practical Tools for Handling Insurance Cases, § 7:22 at 7-130 (Thomson Reuters 2011).
. Id. at § 7:22.
. Id. at 7-131.
. Hawkins v. Allstate Ins. Co., 152 Ariz. 490, 733 P.2d 1073, 1081 (Ariz. 1987).
. See, e.g., Weiss v. United Fire & Cas. Co., 188 Wis.2d 81, 524 N.W.2d 648 at *7 (Wis. Ct. App. 1994), decision reviewed in part, 197 Wis.2d 365, 541 N.W.2d 753 (1995) (“[T]he other-acts evidence should have such a concurrence of common features and so many points of similarity with the crime charged that it can reasonably be said that the other acts and the present act constitute the imprint of the defendant.”). See, also, United States v. Hartmann, 958 F.2d 774, 778, 35 Fed. R. Evid. Serv. 572 (7th Cir. 1992) (“Admission of evidence of prior or subsequent acts will be approved if … the evidence shows that the other act is similar enough and close enough in time to be relevant to the matter at issue.”); United States v. Mays, 822 F.2d 793, 797, 23 Fed. R. Evid. Serv. 903 (8th Cir. 1987) (“to be admissible on such issues as intent, knowledge or plan, the other [acts] evidence must relate to wrongdoing ‘similar in kind and reasonably close in time to the charge at trial.”‘); Cleveland Constr. v. Firemen’s Fund Ins. Co., 2010 WL 2836105, *1-2 (W.D.N.C. 2010) (“Discovery as to the other 48 claims is not relevant to plaintiff’s claim because they arise from various causes: weather damage, vandalism, a light rail accident, etc. Thus, discovery would yield very little relevant information to plaintiff’s claims. Furthermore, the burden and expense of discovery of the other 48 claims outweighs its likely benefit.”).
. Supra note 3.
. 167 Ariz. 135, 804 P.2d 1323 (Ariz. Ct. App., Div. 1 1991).
. 804 P.2d at 1327. See also, Baker v. CNA Ins. Co., 123 F.R.D. 322 (D. Mont. 1988).
. See, e.g., State Farm Mut. Auto Ins. Co. v. Gray, 546 So.2d 36 (Fla. 3d Dist. Ct. App. 1989) (order requiring an insured to produce within four days the number of its referrals to a particular independent medical examination was unduly burdensome); State Farm Mut. Auto. Ins. Co. v. Stephens, 188 W.V. 622, 425 S.E.2d 577 (W. Va. 1992) (insured’s request for discovery of other bad-faith claims against the insurer was unduly burdensome); Cummins Inc. v. Ace Am. Ins. Co., 2011 WL 130158 (S.D. Ind. 2011) (the court held that the burden was enormous and undue, where insurers submitted an affidavit from a senior claims examiner who testified regarding the manner in which Lexington maintains its claims records and the effort required if Lexington were to search solely claims files regarding floods).
10 State Farm v. Super. Ct., 804 P.2d at 1327.
11 See, e.g., Mead Reins. Co. v. Super. Ct., 188 Cal.App.3d 313, 232 Cal.Rptr. 752 (Cal. Ct. App. 4th Dist. 1986) (discovery limited to claim files of insureds who waive the confidentiality privileges of the Insurance Privacy and Protection Act); Nat’l Sec. Fire & Cas. Co. v. Dunn, 705 So.2d 605 (Fla. 5th Dist. Ct. App. 1997) (order allowing insured discovery of other claim files violated the other insureds’ right of privacy); PECO Energy Co. v. Ins. Co. of North Am., 2004 Pa. Super. 221, 852 A.2d 1230, 1234 (Pa. Super. Ct. 2004) (“[T]he request must not be unduly burdensome and should be limited to environmental claims. In addition, confidential and sensitive matters regarding nonparty insureds, such as names, personal information, trade secrets and business practices, must be redacted.”)
12 2014 WL 5785871 (Tex. Oct. 31, 2014).
13 Id. at *1.
14 Id. at *1.
15 Id.
16 Id.
17 Id.
18 Id., citing Texas R. Civ. P. § 192.3(a).
19 Id., citing Ford Motor Co. v. Castillo, 279 S.W.3d 656, 664 (Tex. 2009).
20 Id., citing Texas R. Civ. P. § 192.03(a).
21 Id. at *2, citing In re Allstate County Mut. Ins. Co., 227 S.W.3d 667, 669-70 (Tex. 2007) (per curiam); In re CSX Corp., 124 S.W.3d 149, 153 (Tex. 2003) (per curiam).
22 In re Allstate County Mut. Ins. Co., 227 S.W.3d at 670.
23 Id. at *2.
24 Id.
25 Id.
26 Id.
27 Id., citing generally, In re GMAC Direct Ins. Co. No. 09-10-00493-CV, 2010 WL 5550672 at *1 (Tex. App. Ct.Dec. 30, 2010) original proceeding (Mem. Op.) (holding, in the context of plaintiffs’ tort and contract claims in connection with the adjustment of their homeowners insurance claim, that request for information about damage to other properties that were not tailored to include the information “actually used in adjusting the [plaintiffs’] claim” amounted to an improper fishing expedition).
28 Id. at *2.
29 Id., citing Texaco Inc. v. Sanderson, 898 S.W.2d 813, 815 (Tex. 1995) (per curiam).
30 Id.
31 Id. at *3.
32 Id., citing In re Deere & Co., 299 S.W.3d 819, 820-21 (Tex. 2009) (per curiam) (discovery order found to be overbroad because the trial court did not impose a “reasonable time limit” on the order, and the order required a party to produce documents “going back decades”); and Dillard Dep’t Stores v. Hall, 909 S.W.2d 491, 491-92 (Tex. 1995) (per curiam) (discovery order found overbroad because it compelled production of incident reports and all 227 of defendant’s department stores notwithstanding that plaintiff was only injured in one).
33 Id.
aa1 Steven Plitt is the current successor author of “Couch on Insurance 3d.” A practicing attorney, Plitt is a founding partner of the coverage boutique law firm Kunz Plitt Hyland & Demlong in Phoenix, where he serves as chairman of the insurance practice group and maintains a national practice. He is frequently called on as an expert witness in insurance-related cases on subjects including bad faith, coverage issues, insurance agent errors and omissions, and legal malpractice. He can be reached at [email protected].