In In re Texas Farm Bureau Underwriters, 374 S.W.3d 651 (Tex. Ct. App. 2012), an intermediate Texas appellate court conditionally granted an insurer’s writ of mandamus and held that a trial court abused its discretion by denying the insurer’s motion to sever a policyholder’s extracontractual claims from the contract claims.  The court also held that the trial court abused its discretion when it failed to abate discovery on the extracontractual claims.

The ex-wife and children of a man shot and killed by the policyholder filed suit against the policyholder.  The insurer declined to defend.  The policyholder paid for his defense and a jury found he was not liable for the death.   The policyholder then sued his insurer for reimbursement of his defense costs and for an alleged breach of the insurer’s duty of good faith and fair dealing.

The parties filed competing summary judgment motions on the liability issues.  The insurer also filed a motion to sever the extracontractual claims, arguing that evidence of the insurer’s offer to settle the breach of contract claim would likely be relevant to the bad faith claim but prejudicial on the issue of damages.  The insurer also argued that discovery on the extracontractual claims should be abated pending resolution of the damages question.  The trial court found that coverage existed and granted the policyholder’s summary judgment motion.  The trial court also  denied the insurer’s motion to sever and abate.  The insurer filed a writ of mandamus with the intermediate appellate court.

Turning first to the issue of severance, the appellate court concluded that severance was necessary “to prevent manifest injustice” because the insurer “would be unfairly prejudiced by the admission of its settlement offer in the trial of the breach of contract claim, and [the policyholder] would be unfairly prejudiced by the exclusion of the settlement offer in the trial of the extracontractual claims.”

The court next addressed whether to abate discovery on the extracontractual claims.  The court stated that because a policyholder may not prevail on his contractual claims, courts have abated discovery on extracontractual claims until after there is a decision on the contract claims so to avoid unnecessary costs.  Because the trial court had already held that coverage existed, the policyholder argued that discovery related to the extracontractual claims would take place and thus the parties would not incur unnecessary costs.  The appellate court explained, however, that cost is not the only consideration.  The court reasoned that the policyholder was likely to seek information that “is relevant and discoverable on the extracontractual claims, but is privileged and protected from discovery when focusing only on the breach of contract claim.”  Because the policyholder was not entitled to this information when litigating the breach of contract claim, the court held that the trial court abused its discretion by not abating discovery on the extracontractual claims.

This decision reaffirms that an insurer has a right to sever discovery and trial of a policyholder’s extracontractual claims from breach of contract claims.  It also reaffirms an insurer’s right to limit the scope of discovery related to breach of contract claims.