In re Liberty Mutual Ins. Co., No. 14-09-00086-CV (Tex.App.- Houston [14th Dist.] Feb. 24, 2009)(Seymore)
(discovery mandamus granted, laches argument overruled, no lack of diligence)
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.
IN RE LIBERTY MUTUAL INSURANCE COMPANY, ARCH INSURANCE COMPANY, and SPECIALTY
ADJUSTERS, INC., Relators
ORIGINAL PROCEEDING WRIT OF MANDAMUS
M E M O R A N D U M O P I N I O N
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.
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.
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 “E,” 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 Ain
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 Anon-relevant discovery."
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 Ain 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)
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
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.
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. A[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.
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, A[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
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 E at the time it negotiated policy terms and whether
GAO agreed and understood, at that time, that Flood Zone A encompassed Flood Zone E. 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 “E" 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-
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
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
Aany 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
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.
/s/ Charles Seymore
Panel consists of Chief Justice Hedges and Justices Anderson and Seymore.
 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.
 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)