By: Rebecca A. Moore
In its June 9, 2017, opinion, the Texas Supreme Court granted mandamus relief in In Re National Lloyd's Insurance Company, Wardlaw Claims Service, Inc., and Ideal Adjusting, Inc. The Court ruled that insurers are not required to produce records of attorneys’ fees incurred in the defense of a litigated claim simply because the insurer has challenged the policyholder’s request for an attorney fee award in connection with the litigated claim. This is an important case in first-party insurance litigation because this discovery tactic has been increasingly utilized and litigated over the past several years.
The discovery dispute in this mandamus proceeding arose in the context of multidistrict litigation (MDL) involving allegations of underpaid homeowner insurance claims. The issue was whether a party’s attorney billing information is discoverable when the party challenges an opposing party’s attorney fee request as unreasonable or unnecessary, but neither uses its own attorneys’ fees as a comparator nor seeks to recover any portion of its own attorneys’ fees.
Following two hailstorms that struck Hidalgo County in 2012, insurance homeowners sued various insurers and claims adjusters, alleging underpayment of insured property damage claims. The lawsuits were consolidated into a single MDL court for pre-trial proceedings, including discovery. Among other damages, the homeowners sought attorneys’ fees incurred in prosecuting their statutory and contractual claims. In addition to assailing the merits of the homeowners’ liability claims, National Lloyd’s Insurance Company (NLIC) asserted the homeowner’s attorney fee claims were excessive for a case of comparable complexity in the relevant jurisdiction. Two months before trial, and nearly a year after the parties served MDL master discovery requests, the homeowners requested a trial continuance and sought leave to serve additional discovery regarding NLIC’s attorney billing information. Even though NLIC was not making a claim for attorneys’ fees, the homeowners submitted (1) three interrogatories requesting hourly rates, total amount billed and total reimbursable expenses; and (2) four requests for production seeking all billing invoices; payment logs, letters and payment summaries; audits; and any documents pertaining to flat–rate billing.
After two non-evidentiary hearings, a discovery special master recommended that:
1) An opponent’s attorney billing information is, as a general proposition, relevant to the reasonableness of an attorney fee request in the same case;
2) To the extent the discovery requests in this case seek material from an expert witness on the attorney fee issue, the information falls within the scope of permissible discovery under Texas Rule of Civil Procedure 192.3(e);
3) Some of the discovery requests should be more narrowly tailored, but NLIC’s objections to the discovery requests as modified should be overruled; and
4) “[S]pecific records may be redacted for content protected by an appropriate privilege.”
Adopting these recommendations, the MDL pretrial court ordered NLIC to respond to the discovery requests. The court of appeals denied NLIC’s petition for mandamus relief. While the court acknowledged that an opposing party’s attorney billing information may be irrelevant in a given case, the court concluded the discovery order was not an abuse of discretion in the underlying cases because:
1) An opposing party’s attorneys’ fees are germane to at least two factors that inform the “reasonable and necessary” attorney-fee inquiry, as set forth in Arthur Andersen & Co. v. Perry Equipment Corp.;
2) The Arthur Andersen factors are explicitly nonexclusive;
3) NLIC’s designated expert witness previously testified he based his opinion on his own personal experience in defending the same case in which he was testifying as an expert;
4) The requested information is within the permissible scope of expert-witness discovery, as provided by Rule 192.3(e); and
5) NLIC produced no evidence that redaction would be insufficient to protect its privileges.
NLIC asserted two privileges in response to the discovery requests: the attorney-client privilege and attorney work product privilege. Analogizing to its analysis in National Union Fire Insurance Co. v. Valdez, the Court held that a request to produce all billing records invades a party’s work product privilege because, cumulatively, billing records constitute a mechanical compilation of information that, at least incidentally, reveals an attorney’s strategy and thought processes.
The Court determined that a request for all billing invoices, payment logs, payment ledgers, payment summaries, documents showing flat rates and audits is analogous to the request in Valdez for an attorney’s entire litigation file. These billing records—which are generated in anticipation of litigation and trial—are “almost certain to encompass numerous irrelevant and immaterial documents.” When a party neither seeks to recover its own attorney fees nor attempts to use its attorney-billing records to challenge the opposing party’s attorney fees, the party’s attorney should not be restricted in the preparation or presentment of his or her billing records by the prospect that they might have to be revealed in their entirety. Further, these billing records, which are useful to the requesting party only if they describe what the attorney has done in the case, reveal the attorney’s thought processes concerning the prosecution or defense of the case.
The Court also concluded that redacting privileged information—such as the specific topics researched or the descriptions of the subject of phone calls—would be insufficient as a matter of law to mask the attorney’s thought processes and strategies. The chronological nature of billing records reveals when, how and what resources were deployed. With this knowledge, a party in the same proceeding could deduce litigation strategy as to specific or global matters. Aggregate fee summaries also reveal strategic choices. When litigation is pending, the discovery rules impose a duty to amend or supplement discovery throughout litigation. A dramatic increase in mid-litigation spending could imply an upcoming filing or significant research expenditures related to elevated concerns over recent litigation events. For these reasons, the Court found redaction would be inadequate to protect the work product nature of the total billing information.
The Court therefore, held that, under such circumstances,
1) Compelling en masse production of a party's billing records invades the attorney work product privilege;
2) The privilege is not waived merely because the party resisting discovery has challenged the opponent’s attorneys’ fee request; and
3) Such information is ordinarily not discoverable.
The Court did caution that its holding does not prevent a more narrowly tailored request for information relevant to an issue in a pending case that does not invade the attorney’s strategic decisions or thought processes. Nor does its holding preclude a party from seeking noncore work product “upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the material by other means.” The Court held that to the extent factual information about hourly rates and aggregate attorney fees is not privileged, that information is generally irrelevant and not discoverable because it does not establish or tend to establish the reasonableness or necessity of the attorney fees an opposing party has incurred. A party’s litigation expenditures reflect only the value that party has assigned to litigating the matter, which may be influenced by myriad party specific interests. Absent a fee shifting claim, the party’s attorney fee expenditure need not be reasonable or necessary for the particular case. Barring unusual circumstances, allowing discovery of such information would spawn unnecessary case–within–a–case litigation devoted to determining the reasonableness and necessity of attorney fee expenditures that are not at issue in the litigation. The Court found this was not a proper discovery objective.
The full opinion of the Texas Supreme Court can be found here.
From our Houston office, Lugenbuhl shareholder Rebecca Moore focuses her practice on insurance litigation involving coverage issues and bad faith claims in both state and federal court. View her profile to learn more about her experience or visit our Insurance practice section to learn more about our firm’s expertise and services.
The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to insurance litigation and attorneys' fees, and it is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.