Texas SC blocks return of adjuster's notes in insurance case involving power plant

By The SE Texas Record | Nov 19, 2009

Texas Supreme Court

AUSTIN – Insurers who inadvertently surrendered an adjuster's notes in a Jefferson County lawsuit over a project in the Dominican Republic haven't recovered the notes.

The Supreme Court of Texas on Nov. 13 temporarily blocked an order from Ninth District appeals judges in Beaumont, who would have returned the notes to the insurers.

Next, the Supreme Court must decide whether the appeals court or District Judge Bob Wortham called the case correctly.

Wortham denied a motion from 14 British insurers to recover notes that Smith/Enron Cogeneration and Raytheon Ebasco Overseas obtained in routine discovery.

The Ninth District reversed him in August, adding that plaintiffs should have returned the notes while they awaited Wortham's decision.

Smith/Enron Cogeneration and Raytheon Ebasco Overseas built an electrical generation plant in the Dominican province of Puerto Plata.

In 1998, they told their insurance agent in Dallas that the plant suffered severe corrosion damage. They wrote that they would pursue a claim against the insurers.

Kent Westmoreland of Houston, already representing the insurers in other suits over the plant, answered that his clients reserved the right to deny coverage.

Brian Goetsch of Steege Kingston adjusting firm, already assisting Westmoreland in other cases, reviewed the claim with him and Karen Milholin of his firm.

The review sessions continued for three years, and Goetsch filled 57 pages with notes.

After the plant builders sued the insurers, Clifton Hall of Westmoreland's firm asked Steege Kingston for a copy of its file.

He reviewed the file and produced portions of it in discovery, without any dire result.

Later, the plant builders served a subpoena on Steege Kingston for the file.

Steege Kingston delivered the file to the court on Oct. 11, 2006, and Hall received a copy three weeks later.

Hall didn't review it, resting on assurances that it matched the one in his possession.

Four months later, on the eve of a deposition, Milholin discovered that the file included Goetsch's notes.

At the deposition she asserted privilege and asked plaintiffs to return the notes.

She didn't get them, and her clients filed a motion to compel their return. They cited Rule 193.3(d) of civil procedure, allowing parties to retrieve privileged documents in case of inadvertent production.

The builders argued that privilege didn't apply to early notes because when Goetsch took them, litigation had not begun and the insurers hadn't anticipated litigation.

They argued that an exception to privilege applied to later notes due to substantial need for the notes and undue hardship in obtaining them any other way.

They argued that the insurers should have objected within 10 days of receiving the file, rather than waiting until the deposition.

The arguments of the builders persuaded Wortham, who denied the motion last year. He didn't adopt findings or conclusions, and neither side asked him to do so.

On appeal, Justices David Gaultney, Charles Kreger and Hollis Horton directed him to require prompt return of the notes.

"While evidence that documents are sent creates an inference that the documents were reviewed around that time, that inference vanishes when opposing evidence is introduced to show that the document was not reviewed," they wrote in an unsigned opinion.

"We are not persuaded that the substantial need and undue hardship exception allows the policyholders to retain Goetsch's notes," they wrote.

They wrote that "the better practice is for parties to return documents asserted to be within the ambit of Rule 193.3(d) pending the ruling of the trial court, and we believe that policyholders should have done so here."

Rather than return the notes, the builders petitioned the Supreme Court.

Kent Adams, Michael Choyke, Thomas Wright, Bradley Snead and Marie Yeates represent the builders.

Westmoreland, Milholin, Hall, James Old Jr. and Kelli Smith represent the insurers.

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