Texas Supreme Court Holds an Insurance Company’s Attorney Billing is not Discoverable on the Reasonableness of the Opposing Party’s Fee Claim

Case:   In re Nat'l Lloyds Ins. Co.
             Texas Supreme Court
             60 Tex. Sup. Ct. J. 1165 (2017)

Following two hail storms which struck Hidalgo County in 2012, insured homeowners sued various insurers and claims adjustors, alleging underpayment of property damage claims and asserting statutory, contractual, and extra-contractual claims. The lawsuits were consolidated into a single multidistrict litigation (MDL) court for pretrial proceedings, including discovery. Among other damages, the homeowners sought attorney fees incurred in prosecuting their statutory and contractual claims. In addition to challenging the merits of the homeowners’ liability claims, the insurer disputed the homeowners’ attorney-fee claims as excessive and unreasonable for a case of comparable complexity in the relevant locality.

A mere two months before trial, the homeowners requested a trial continuance and sought leave to serve additional discovery regarding the insurer’s own attorney-billing information. Though the insurer was not making a claim for attorney 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, ledgers, and payment summaries; audits; and any documents pertaining to flat-rate billing. 

The insurer objected to the discovery on grounds that it was overly broad and sought information that was both irrelevant and protected by the attorney-client and work-product privileges. With regard to relevancy, the insurer principally relied on its stipulation that it “will not use its own billing invoices received from its attorneys; payment logs, ledgers, or payment summaries showing payments to its attorneys; or the hourly fees or flat rates being paid to its attorneys; audits of the billing and invoices of its  attorneys to contest the reasonableness of [the homeowners’] attorney’s fees.

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) the information falls within the scope of permissible discovery under Texas Rule of Civil Procedure 192.3(e); (3) the insurer’s objections to the discovery requests 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 the insurer to respond to the discovery requests.

The intermediate court of appeals denied the insurer’s petition for mandamus relief. While the court acknowledged that an opposing party’s attorney-billing information may be irrelevant in a some cases, the court concluded the discovery order was not an abuse of discretion in the underlying cases because (1) an opposing party’s attorney 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) the insurer’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) the insurer produced no evidence that redaction would be insufficient to protect its privileges.

The Texas Supreme Court granted mandamus relief to the insurers. The Court reasoned that information about an opposing party's attorney fees and expenses is, in the ordinary case, privileged or irrelevant and, thus, not discoverable. The Court did caution, however, making a claim for attorney fees or using attorney fees as a comparator in challenging an opponent’s fee request can put a party’s attorney fees at issue in the litigation. In addition, designating counsel as an expert opens the door to expert-witness discovery as provided and limited by the Texas Rules of Civil Procedure. Outside of these scenarios and absent unusual circumstances, the Court denied production of the attorney fees and expenses in the underlying case.