In coverage and bad faith litigation, there generally is no greater watershed event than the adjuster's deposition. If there has been proper preparation, and the adjuster does well, the insurer has gone a long way to constructing the defense that it needs to defend itself in the coverage of a bad faith case. On the other hand, if there has been inadequate preparation for the adjuster's deposition, the insured has taken a major step in prevailing in the case and, in many occasions, the insurer will have no choice but to settle the case based on the adverse testimony.
If the adjuster has been presented as a corporate representative, the impact is even more dramatic. The testimony is binding. It is a judicial admission, and if the appropriate objections are made at trial, it cannot be controverted, nor can inconsistent evidence be introduced.
This article and the ones to follow provide an outline of areas to focus on, whether taking or defending the deposition of the adjuster. There is no source for the presentation of the materials in this series. It did not come from a book or from case law on discovery in insurance coverage and bad faith cases. It is rather the product of taking and defending adjuster depositions for more than 30 years and seeing what works and what doesn't.
It should also be pointed out that the scope of this series is limited to the depositions of adjusters, not underwriters. That is an entirely different topic that should be addressed in a different paper. However, no coverage or bad faith suit should be prosecuted by an insured without the deposition of the underwriter. In many occasions, the ground is as fertile if not more fertile than taking the deposition of the adjuster. The topics and approaches are different. Because of that, this topic will not be addressed here.
Can and Should the Adjuster's Deposition Be Taken?
The first question that must be addressed is whether the adjuster's deposition should be taken at all. Is it relevant to any issue in the case? If so, what is the issue? Is the issue to be tried before the court a question of fact or law? If representing the insurer, be sure that there is a fact issue to be tried before presenting the adjuster for deposition.
If the question before the court deals with the duty to defend, it is doubtful that the deposition of the adjuster is proper. The duty to defend is governed by the eight-corners rule. See D.R. Horton-Texas, Ltd. v. Markel Int'l Ins. Co., 300 S.W.3d 740 (Tex. 2009). As such, it generally is a question of law for the court based on a reading of the petition and the insurance policy. That being the case, what the adjuster says or doesn't say is irrelevant in many cases involving the duty to defend. If the issue before the court is truly one of applying the eight-corners rule, counsel for the insurer should object to presenting the adjuster for a deposition because nothing he or she can say will be relevant or admissible in the determination of the duty to defend.
This, however, is not true in all cases. If a party (i.e., the insured) has pled ambiguity, then the testimony of the adjuster may become relevant. However, just because ambiguity has been pled does not necessarily mean that a fact issue has been created. The court must first apply the plain meaning rule. If, after the application of the plain meaning of the policy language, there can be given a specific or definite legal meaning or interpretation, then the provision is unambiguous and the court will interpret it as a matter of law. See Texas Farm Bureau Mut. Ins. Co. v. Sturrock, 146 S.W.3d 123 (Tex. 2004). The court must apply the accepted rules of interpretation in applying the plain meaning rule. If, after applying the rules regarding the meaning of words in reviewing the policy, the intent is clear, the court interprets the policy as a matter of law, and the inquiry ends.
The duty to defend issue is not the only issue in which the question may be a question of law for the court and not a question of fact. The law in Texas is quite clear that the duty to indemnify is determined by the actual facts and not the pleading. See D.R. Horton-Texas, supra. If the case is one that has been tried, the fact finder is generally limited to the evidence on which the underlying jury made its decision. See Swicegood v. Medical Protective Co., 2003 U.S. Dist. LEXIS 16556 (N.D. Tex. Sept. 19, 2003). On the other hand, if the case has been settled, the evidence is much broader and can include things such as pleadings, discovery, depositions, and documents produced in the case. See Enserch Corp. v. Shand Morahan & Co., Inc., 952 F.2d 1485 (5th Cir. 1992). In cases where the underlying facts are undisputed or are limited to the facts of the underlying case, it is doubtful that the adjuster's testimony would be relevant to any issue in the case. Anything he or she might say would be inadmissible under the rules governing the admission of evidence and should not be received into evidence.
Bad Faith Cases
Generally, the testimony of the adjuster is relevant on the issue of bad faith and the manner in which the claim was handled. On this issue, there perhaps is no more relevant evidence than the testimony of the adjuster. However, because there is a claim for bad faith or violations of the insurance code does not necessarily mean that the adjuster's testimony should be taken. Under Texas law, there can be no bad faith or violations of the insurance code unless there is coverage. See Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).
Even if the claim was handled improperly, if there is no coverage, then the conduct of the insurance company or the adjuster cannot be a proximate or producing cause of the insured's damages if there was no coverage initially. In many bad faith cases, and in many other areas of the law, the court will order separate trials where one issue is dependent on the finding of another part of the case, and the evidence to be introduced in the second part of the case would be prejudicial. For example, in a negligent hiring case, in many instances, the court will try the issue of whether the employee was negligent in the first place before going to the second phase of the negligent hiring because the testimony in the second phase could be prejudicial to the trial in the first. And, unless there is a finding of negligence on the part of the employee, as a matter of law, there can be no negligent hiring.
The same is true for bad faith cases. If the coverage part of the case is closely and hotly contested, the trial court may be required to order a separate trial on the issue of bad faith until there has been a determination of coverage. The same logic would apply in this situation. The evidence in the bad faith portion of the case could be extremely prejudicial to the coverage portion, and the trial court may be required under the rules governing separate trials to order a separate trial. If a separate trial is appropriate, the question is raised as to whether discovery in the second phase should be stayed as well. In this situation, defense counsel may want to object to the deposition of the adjuster going forward on the issue of bad faith.
Part 2 of this series addresses preparation of the adjuster for the deposition or, if one is taking the deposition, preparation of the attorney to take the deposition. This indeed is the key to a successful deposition, whether defending the adjuster or taking the adjuster's deposition. It cannot and must not be overlooked. It is so important, that this is the topic of Part 3 as well. Part 4 covers the appearance of the adjuster, as well as objections and privileges that can be asserted at the deposition.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.