United States District Court, D. Kansas
MEMORANDUM & ORDER
K. GARY SEBELIUS, Magistrate Judge.
This matter comes before the court upon the defendants' Motion for Sanctions (ECF No. 252). The movants, Aspen Insurance (UK) LTD. and Lloyd's Syndicate 2003 ("liability insurers"), are the sole defendants left in this action. Their motion requests the court to: (1) deduct $44 million from B&V's $63 million damages claim; (2) deem admitted their Second Requests to Admit; (3) compel B&V to produce a copy of its final settlement agreement with Zurich; or alternatively, they seek a court order that would (a) preclude B&V from asserting a privilege objection to the production of financial documents; (b) require B&V to produce documents responsive to the liability insurers' requests for production of documents; and (d) extend the scheduling order. For the following reasons, the court grants in part and denies in part the liability insurers' motion.
The court has set out the background of this case in several previous orders. In brief, B&V entered into a series of agreements to construct several wet flue gas desulfurization systems, also known as jet bubble reactors ("JBRs"). After construction of the JBRs, the owners alleged significant defects to the JBR components. B&V agreed to pay the owners a lump-sum for repair costs and to replace defective components. The total amount incurred by B&V was several millions of dollars. To recover some of the incurred costs, B&V submitted claims to its various liability and property insurers. B&V has settled a number of those claims, including its claim against its primary general liability insurer, Zurich. B&V explains that when Zurich realized that B&V's claims would exceed the available limits on its policy, it agreed to pay B&V 75% of all costs up to the available coverage limits. In this action, B&V seeks to recover the remainder of its costs from defendants, which provided policies for excess liability coverage. Specifically, B&V brought this breach-of-contract and declaratory judgment action against the liability insurers seeking damages and an adjudication of rights, duties, and obligations under certain insurance policies.
The current dispute centers on B&V's damages claim and whether B&V has produced sufficient documentation of its claim. B&V claims its production is sufficient. It claims that Zurich's reimbursements "were not made on an invoice by invoice basis, but rather pursuant to an agreed process whereby a percentage of all rebuild costs submitted were paid." Instead of disclosing every invoice, payroll log, receipt and document underlying its claim, B&V produced and relies on an expert report, the Benes Report, to prove damages. It explains that, due to the number of invoices involved, Mr. Benes, the damages expert, calculated damages on a "sample basis." He did not review every invoice or timesheet, instead he inspected a sampling of the underlying documents to ensure that they were accurately reported. B&V asserts that it has provided the liability insurers with "ample opportunity to examine and analyze" its damages computations and that it has "invited follow-up inspection in the event additional information was required."
Whether B&V should be required to produce additional documentation supporting its damages claim has been an issue in this litigation for over a year and has largely been addressed in previous orders. However, the court will address the issue to the extent the liability insurers allege that B&V violated specific court orders and seeks to have the court determine whether B&V's responses are sufficient with regard to specific discovery requests. The liability insurers assert that B&V has failed to comply with Fed.R.Civ.P. 26, the scheduling order, and the court's February 28, 2014 memorandum and orders. They also challenge B&V's responses and production associated with their Second Requests to Admit and Third Production Requests.
The liability insurers bring this motion under Fed.R.Civ.P. 37. However, the motion is not formulated as a motion to compel under Fed.R.Civ.P. 37(a), which would require the liability insurers to attach "copies of the notices of depositions, the portions of the interrogatories, requests, or responses in dispute." The liability insurers attach as exhibits the requests for production and requests to admit that are at issue, but they do not explain which responses, if any, they seek to compel. On the contrary, they state that "Given that discovery is nearly complete, compelling the production of these documents does not remedy the harm."
Rather, the liability insurers seem to bring this motion under Fed.R.Civ.P. 37(b), which allows a party to seek sanctions for another party's failure to obey a court order to permit discovery. They assert that "At this late date in the discovery of this case, the only solution is to credit or reduce the $44 million reimbursement from B&V's claim."
a. The court's prior orders and Rule 26
The first matter before the court is whether B&V has violated either Fed.R.Civ.P. 26 or a previous court order-whether its disclosure of the Benes Report on Damages along with the information Mr. Benes relied on in generating his report was sufficient, or whether it was required to turn over every invoice; receipt; wage report; proof of reimbursement; and any other document upon which B&V bases its claim for damages. As explained below, the court finds that B&V's disclosures complied with the requirements of Rule 26, but this does not absolve B&V from the requirement of complying with other discovery requests or the court's subsequent orders. The liability insurers are still entitled to test B&V's calculation of damages to the extent that the production they seek was previously ordered or was validly requested under Rule 34. As explained below, the court finds that the liability insurers are entitled to all documentation that relates to the expenses B&V incurred as a result of the rebuilds and all documentation of any reimbursements it received from third parties.
First, the liability insurers seek sanctions for B&V's alleged failure to comply with Fed.R.Civ.P. 26(a). This argument is related to defendants' argument that B&V violated previous court orders and the scheduling order,  because those orders all discussed Rule 26 and required compliance with the rule.
Fed. R. Civ. P. 26(a)(1)(A)(ii) requires "a copy-or a description by category and location-of all documents, electronically stored information, and tangible things that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses, unless the use would be solely for impeachment." The rule also requires parties to timely supplement these disclosures. "If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless."
On February 28, 2014, the court entered three orders, two of which are relevant to this matter. In both, the court discussed Rule 26 and explained that the scheduling order restates the plain language of the Rule. The court reminded each party to comply with the Rule by producing anything it might use to support its case. The court ordered B&V to supplement its initial disclosures "to include a specific computation of each category of claimed damages" and to make available for inspection and copying the documents supporting the computation.
The liability insurers claim that B&V's production of the Benes Report on Damages, which was generated using only a sampling of the underlying documentation of B&V's claim, was insufficient under Rule 26, the scheduling order, and the court's February 28, 2014 orders. They believe that B&V should have produced all documentation underlying B&V's claim, not just a sampling or summary. They claim that recent depositions and discovery responses have, for the first time, put them on notice that B&V produced documents supporting its damages claim on a "sample basis."
B&V responds that "The documents relied on by Benes to test the data have all been produced, and the explanation of the testing and the sampling method used by Benes is set out in detail in the Benes Report on Damages, issued September 3, 2013." B&V also states that it has continually offered to make additional documents available for inspection, but that the liability insurers only recently requested to view additional documentation. It appears that B&V intends to use the Benes Report to support its claim of damages, not the underlying documentation, and it certifies that it has produced all of the information Mr. Benes relied upon in generating that report.
When deciding whether production under Rule 26 is sufficient, the court considers the underlying objectives of the rule. It was "designed to accelerate the exchange of basic information, help focus the discovery that is needed, facilitate preparation for trial or settlement, and eliminate surprise." The general purpose of discovery "is to avoid one side ambushing the other and the litigants should not indulge in gamesmanship with respect to their disclosure obligations." Under Fed.R.Civ.P. 37(c) a party that fails to comply with its disclosure requirements is precluded from using previously undisclosed information unless its failure was "substantially justified or is harmless." This prohibition was "designed to prevent the sandbagging of ...