insurance-policyInsurance companies often hire experts as consultants for claims investigation, especially when it involves claims related to failure of high-value industrial equipment.  If the claim is denied, the insured might sue the insurance company for insurance bad faith. These consultants are fact witnesses in the case if the claimant files a lawsuit. However, the insurance company can also retain their consultants as expert witnesses during litigation.  Litigators need to be aware of the difference between fact witnesses and expert witnesses because there is a distinction on the discovery deposition between the two.

Case Study:

In a recent case, defendant insurance company opposed the request by an energy company to obtain documents and deposition testimony of Rhode Island’s corporate representative of failure analysis consulting company (“FAP”) and the owner (“MC”).

A steam turbine power generator in Queens, NY was found to have a crack in the generator’s rotor.  The unit was out of service until May of 2009.  The energy company looked for coverage under its insurance policy, held by the insurance company and other carriers.  The insurance company hired FAP and MC as consultants to investigate. Their report concluded that the crack in the rotor started at least six months earlier, which was outside the policy period according to the insurer. Based on the report, the insurance company denied coverage, and the litigation ensued.

Although the scheduling order was extended several times, the parties agreed that all fact witness depositions had to be completed several months before expert disclosures and expert depositions.  The insurance company planned to use FAP and MC as experts in this litigation.

The plaintiff contended that FAP and MC had a key role in investigating the broken rotor.  Since they were out-of-state and nonparty witnesses who could not be served with ordinary deposition notices or subpoenas, an open commission was necessary.  The insurance company agreed, but objected to producing both as fact witnesses and expert witnesses.  The insurance company said it would produce them only for expert depositions. As a result, it objected to the open commission because MC and FAP agreed to appear—but not until after fact discovery was over.

The energy company claimed it would be prejudiced if it could not depose the experts during fact discovery. According to the plaintiff, their testimony could lead their investigation in new directions that would need to be explored before fact discovery ended.  Although the experts were not parties, they were hired by the insurance company and were paid a substantial fee for their work.  They were deeply involved in the coverage denial and expected to testify as the insurance company’s experts.  Even so, New York Supreme Court judge wrote, it was not clear that the insurance company could be compelled to produce them.  A party cannot be compelled to produce a nonparty witness, even if it hired the witness as a consultant, she said.  In addition, typically without an agreement to depose experts, a party can only be compelled to produce their experts to testify as fact witnesses under “special circumstances.”

For an open commission to be issued, the judge said, the requesting party is required to show that the out-of-state deponent wouldn’t cooperate with a notice of deposition or wouldn’t voluntarily come to New York.  Here, FAP and MC said that they would cooperate and testify only during expert witness depositions. However, the Justice explained that the plaintiff would be prejudiced if they could not depose FAP and MC during fact discovery in that its experts would be deprived of relevant facts until after they drafted their expert disclosures.

Judge said that pursuant to New York Civil Practice § 3107, a notice of deposition must state the time and place for the deposition and allow each party at least 20 days notice, unless the court orders otherwise or the parties agree otherwise. The judge cautioned Cooperation and compliance with a notice of deposition required attending the deposition on 20 days notice or adjourning the deposition for a reasonable period of time by agreement or court order.  Witnesses were allowed to testify more than once at a deposition. Judge held that the potential prejudice to the energy company outweighed the need to avoid the inefficiency of having the Rhode Island experts deposed twice.

Also, by withholding FAP and MC until after fact discovery, Justice wrote, the insurance company would be violating the scheduling order. Stipulations between parties are significant, the Justice said, and their strict enforcement “not only serves the interest of efficient dispute resolution but also is essential to the management of court calendars and integrity of the litigation process.” The defendant agreed to scheduled depositions and was required to honor that agreement.

The judge ordered the insurance company to ask FAP and MC to voluntarily appear for deposition within 30 days.

By: Kurt Mattson, J.D., LLM