Shaw v. Zurich American Insurance Company

Filing 62

MEMORANDUM OPINION AND ORDER. Signed by Judge Rodney Gilstrap on 6/26/2014. (ch, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION

FORREST L. SHAW,
Plaintiff,
v.
ZURICH AMERICAN INSURANCE CO.,
Defendant.

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CASE NO. 2:12-CV-00797-JRG

MEMORANDUM OPINION AND ORDER
Before the Court are Plaintiff’s Motion to Compel (Dkt. No. 43), filed May 12, 2014, and
Defendant’s Motion for Protective Order (Dkt. No. 52), filed June 3, 2014. Plaintiff Forrest L.
Shaw (“Shaw”) seeks to compel Defendant to produce certain documents and answer certain
interrogatories; Defendant Zurich American Insurance Company (“Zurich”) asks the Court to
limit discovery in this case pursuant to Federal Rule of Civil Procedure 26(b)(2)(C)(iii). For the
reasons set forth below, the Court finds that Plaintiff’s Motion (Dkt. No. 43) should be
GRANTED IN PART AND DENIED IN PART and that Defendant’s Motion (Dkt. No. 52)
should be DENIED.
I.

BACKGROUND

This is a diversity action concerning Zurich’s decision to deny benefits allegedly owed to
Shaw under an insurance policy issued by Zurich to Shaw’s former employer. Shaw alleges that,
while working as a commercial truck driver, he was involved in an accident in late 2010, and that
this accident resulted in serious and disabling injuries. Shaw alleges that Zurich failed to pay
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benefits that were owed to him. Shaw’s Complaint brings suit, not only for breach of contract
under Texas common law, but also for violations of the Texas Insurance Code. Shaw alleges that
his benefits were denied in bad faith and that Zurich knowingly violated the Texas Insurance
Code, and seeks exemplary damages.
II.

LEGAL STANDARDS

Sitting in diversity, federal courts “‘apply state substantive law and federal procedural
law.’” Hanna v. Plumer, 380 U.S. 460, 465 (1965). Although federal law generally looks to state
law for guidance on questions of privilege, the federal work product doctrine is not a “privilege”
within the meaning of Federal Rule of Evidence 501, and as such is a matter of federal law. See,
e.g., United Coal Cos. V. Powell Const. Co., 839 F.2d 958, 966 (3d. Cir. 1988); Allied Irish
Banks v. Bank of America, N.A., 240 F.R.D. 96, 105 (S.D.N.Y. 2007). The federal work product
doctrine provides that a party is not entitled to obtain discovery of documents “prepared in
anticipation of litigation” by “another party or its representative” absent a showing of substantial
need and undue hardship to the party seeking discovery. Fed. R. Civ. P. 26(b)(3).
Under Federal Rule of Civil Procedure 26(b), parties “may obtain discovery regarding
any nonprivileged matter that is relevant to any party’s claim or defense.” Relevant information
“need not be admissible at the trial if the discovery appears reasonably calculated to lead to the
discovery of admissible evidence.” Id. A court must limit discovery if “the burden or expense of
the proposed discovery outweighs its likely benefit, considering the needs of the case, the
amount in controversy, the parties’ resources, the importance of the issues at stake in the action,
and the importance of the discovery in resolving the issues.” Id.

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III.

ANALYSIS
1. Zurich’s Claims of Privilege

Plaintiff first seeks discovery of certain documents from Zurich’s “claims file” relating to
this case. Zurich claims work product privilege over four documents: three “computer note
entries” regarding “plan of action” and “file management” entered on December 11 and 12, 2012
(the day before Zurich issued its denial of Shaw’s claim); and one “90-day Supervisory Review
regarding plan of action” prepared on October 17, 2012.
Zurich argues that its December notes were prepared in anticipation of litigation, on the
eve of its denial of benefits to Mr. Shaw. Shaw argues that Zurich could not have reasonably
anticipated litigation before he filed suit. However, “[p]rudent parties anticipate litigation, and
begin preparation prior to the time suit is formally commenced. Thus the test should be whether,
in light of the nature of the document and the factual situation in the particular case, the
document can fairly be said to have been prepared or obtained because of the prospect of
litigation.” 8 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE

AND

PROCEDURE § 2024 (3d ed. 2014); accord, e.g., Raso v. CMC Equipment Rental, Inc., 154 F.R.D.
126, 128-29 (E.D. Pa. 1994). It seems likely that Zurich, an insurance company, anticipated
litigation from its denial of benefits; indeed, the timing of Zurich’s computer notes suggests that
the notes relate directly to the potential for litigation. Accordingly, the Court finds that Zurich
properly withheld documents labeled ZAIC 25 in its privilege log because those documents are
subject to work product protection.
Zurich does not mention its 90-day supervisory review in its responsive briefing. The
supervisory review was prepared nearly two months before Zurich denied Shaw’s claim. There is
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no evidence that the supervisory review was prepared specifically in anticipation of litigation
rather than in the course of Zurich’s day-to-day business. The work product doctrine does not
protect such materials. See, e.g., Allied Irish Banks, 240 F.R.D. at 106. Accordingly, the Court
finds that withheld document ZAIC 186 was not properly subject to a claim of work product
protection and must be produced to the plaintiff.
2. Withheld Reserve Information
Zurich has redacted from its productions information respecting the amount of money it
has held in reserve for Mr. Shaw’s claims. Though its objections to Shaw’s request for
production cite “relevancy” and “confidentiality” objections, relevance is the only ground for
objection set forth in Zurich’s briefing. Zurich argues that the amount of money Zurich holds in
reserve for a case has no relevance to the question of whether Zurich did or did not properly deny
Shaw’s claim. This argument, however, fails to address Shaw’s claims for punitive damages and
for knowing violations of the insurance code—particularly with respect to settlement. Without
resolving questions about the final admissibility of evidence, it should be clear that the existence
and amount of Zurich’s reserve in this case may reasonably be expected to be relevant to, at a
minimum, (a) whether Zurich denied Shaw’s claims in good faith; and (b) whether it failed to
engage in a good faith attempt to settle Mr. Shaw’s claims in accordance with TEX. INS. CODE §
541.060. See U.S. Fire Ins. Co. v. Bunge North Am., Inc., No. 05-2192-JWL-DJW, 2007 WL
1531846 (D. Kan. May 25, 2007). The Court finds that information about Zurich’s reserves is
relevant and discoverable and was improperly withheld.

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3. Information Regarding Independent Medical Examiners
Shaw requests information regarding Zurich’s past employment of the two Independent
Medical Examiners it hired to review Shaw’s claims. Zurich requests, for each case in which
Zurich has hired either examiner, details concerning the amounts claimed, the amounts paid and
denied, the basis for denying payment, and assorted administrative details. Shaw also requests
documentation of amounts paid to said examiners. Zurich argues that its treatment of other
claimants is irrelevant to its treatment of Shaw’s claim. Shaw, however, alleges that Zurich
deliberately hired its two examiners because it knew that they could be relied upon to arbitrarily
and artificially deflate Shaw’s claim. Such deliberate use of purportedly “independent”
examiners as “cover” would in fact demonstrate bad faith on the part of Zurich, and Zurich’s
history with its medical examiners is clearly relevant to Shaw’s claim. The Court notes that the
information Shaw requests would not be overly burdensome for Zurich to gather, with the caveat
that Zurich need not explain in detail its reasons for any denials of claims—a simple listing and
identification of the reasons for denial will suffice.
4. Defendant’s Affirmative Defenses
Shaw requests that the Court compel a more complete response to his third interrogatory,
which requests that Zurich state the factual basis of each affirmative defense and that Zurich
identify any evidence to be offered at trial and witnesses who will testify in support of the
affirmative defense. Zurich’s response to this interrogatory merely refers Shaw to Zurich’s
answer and states that “witnesses and exhibits will be identified in accordance with the Federal
Rules of Civil Procedure and the Court’s Docket Control Order.”
Interrogatories seeking “an opinion or contention that relates to fact or the application of
law to fact” are explicitly condoned by Federal Rule of Civil Procedure 33(a)(2). Obviously,
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Zurich need not commit itself to a complete marshaling of all of its evidence before trial, but
Shaw is within his rights to insist on a reasonable narrative description of Zurich’s contentions
and the basis thereof. In its briefing, Zurich makes no mention of this issue and presents no
reason why it cannot provide such a narrative immediately.
5. Itemizations of Zurich’s Claims and Benefits
Shaw requests that Zurich produce detailed itemizations of claims, bills, and expenses
related to Shaw’s case. Zurich responds that it has produced Shaw’s entire case file as it is kept
in its ordinary course of business and is not obligated to undertake a further effort to summarize
or organize this information for Shaw’s benefit. In this respect, Zurich is correct. Fed. R. Civ. P.
34(b)(2)(E)(i).
6. Zurich’s Personnel Files
Shaw next requests that Zurich produce “a complete copy” of the personnel file of certain
individuals participating in Zurich’s decision to deny Shaw’s claims. Zurich first argues that this
information is irrelevant, but again overlooks the files’ potential relevance to Shaw’s claims of
bad faith. Shaw alleges that Zurich deliberately denies legitimate insurance claims as a matter of
course, and such a policy might well make itself evident in patterns of discipline or evaluation
contained in Zurich employees’ personnel files.
Zurich also claims that material in its employees’ files is “confidential, privileged
employment information” in which its employees have a protected privacy interest. Zurich cites
to many district courts which have held that complete disclosure of personnel files is
unwarranted. These cases seem to be premised on the notion that “protecting individuals’
expectations of privacy and/or promoting free communication of candid evaluations and

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criticisms within an organization was strong enough to limit liberal pretrial discovery.” Stabilus
v. Haynsworth, Baldwin, Johnson and Greaves, P.A., 144 F.R.D. 258, 266 (E.D. Pa. 1992).
Zurich’s employees should not have to worry that information regarding, for instance,
health problems or interpersonal conflicts will be needlessly disclosed, even under a protective
order. However, this privacy interest should not trump information that is clearly relevant to
Shaw’s case. The Court finds that Zurich must produce any document from the requested
personnel files having to do directly with Zurich employees’ acceptance or denial of claims of
any kind. This criterion is to be read broadly, and shall include, for example, evaluations of an
employee’s aggregated claims paid or denied; characterizations of an employee’s attitude with
respect to questionable claims; or records of bonuses tied to claim handling. However, Zurich
may withhold all other personnel information not specifically described above, including but not
limited to employees’ financial account data or health information. Zurich shall prepare and
serve a privilege log describing any documents withheld from this request.
7. Zurich’s Policies and Procedures Manual
Shaw requests production of a set of policies and procedures relating to claim processing
and referral of claims to an independent medical examiner. These policies bear directly on
Shaw’s claim of bad faith denial of benefits. Zurich appears to contend that its policies are
protected by Texas trade secret law.
As noted above, federal courts rely on state law to decide questions of privilege. The
Texas Rules of Evidence state clearly that “a person has a privilege . . . to refuse to disclose . . . a
trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud
or otherwise work injustice.” Tex. R. Evid. 507. A trade secret is broadly defined as a “formula,
pattern, device or compilation of information used in a business, which gives the owner an
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opportunity to obtain an advantage over his competitors who do not know or use it.” Triple Tee
Golf, Inc. v. Nike, Inc., 485 F.3d 253, 261 (5th Cir. 2007) (quoting Taco Cabana Intern. v. Two
Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991). It would be easy to read this definition as
protecting, not only information that derives its value from secrecy, but also information that
would harm the owner if disclosed. This is what Zurich is claiming here. Essentially, Zurich
benefits from nondisclosure of its policies and procedures because, to the extent that its practices
are unknown to its competition, its competitors are less able to seek out an advantage.
The Court’s standard protective order (which, the Court notes, the parties have not yet
protects against ordinary disclosures that might harm a party. Trade secret protection, however,
exists to protect information that is valuable only if it is kept secret—classically, recipes or algorithms.
Zurich has not made a case for why the underlying value of its claims processing policies and procedures
depends on their being unavailable to its competitors. Shaw’s discovery request is inherently based on
the assertion that allowing the privilege would conceal fraudulent or unjust conduct. Accordingly, Zurich
is wrong to withhold its policies and procedures manual on the basis of trade secret privilege.

8. Zurich’s Disclaimers
Shaw also asks the Court to “remove all language of Defendant’s responses as ‘subject to
and without waiving the foregoing objections and privileges.’” Shaw fears that this language
gives Zurich some additional right to amend discovery or introduce documents at trial beyond
the bounds of the Federal Rules of Civil Procedure. Zurich has not, thus far, attempted to assert
that its objections make the Federal Rules inapplicable. As such, no controversy on this matter is

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currently ripe for judicial intervention, and the Court properly elects to take no action at this
time. However, as general guidance to the parties, the Court does not generally allow broad and
general qualifiers to work a surprise on an opposing party in contravention of the Federal Rules
of Civil Procedure.
9. Zurich’s Request for a Protective Order
To the extent that Zurich presents the Court with a request for a protective order on the
basis of grounds other than its opposition to Shaw’s motion to compel, the Court finds such a
request proper and will enter its standard protective order separately but concurrently with entry
of this Order. Such protective order shall not limit the effect of the Court’s rulings herein. Any
changes or adjustments to the Court’s standard protective order may be resolved through a
subsequent motion tendered to the Court.
IV.

CONCLUSION

In accordance with the reasoning set forth above, IT IS HEREBY ORDERED that:
1. Zurich shall produce unredacted versions of previously withheld or redacted
documents labeled ZAIC 29-541, as set forth in Zurich’s Privilege Log for Shaw’s
First Request for Production;
2. Zurich shall respond to Shaw’s First Interrogatory No. 1 and Second Request for
Production No. 8, in compliance with instructions set forth in Section (III)(3) of this
Order;
3. Zurich shall respond to Shaw’s First Interrogatory No. 3, in compliance with
instructions set forth in Section (III)(4) of this Order;
4. Zurich shall respond to Shaw’s Second Request for Production No. 7, in compliance
with instructions set forth in Section (III)(6) of this Order;
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5. Zurich shall respond to Shaw’s Second Request for Production Nos. 11, 12, and 13, in
compliance with instructions set forth in Section (III)(7) of this Order;
Shaw’s motion to compel (Dkt. No. 43) is DENIED in all respects other than those noted above.
Zurich’s motion for a protective order (Dkt. No. 52) is GRANTED, as specified above.
SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 26th day of June, 2014.

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RODNEY GILSTRAP
UNITED STATES DISTRICT JUDGE

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