Attorney-Client Privilege in Insurance Disputes: Preserving - - PowerPoint PPT Presentation

Attorney-Client Privilege in Insurance Disputes: Preserving Confidentiality and Meeting Legal Ethics Standards

Addressing Waiver and Exceptions to the Privilege, the Tripartite Relationship, and the Role of Counsel in Claims Handling and Litigation

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Presenting a live 90-minute webinar with interactive Q&A Louis A. Chiafullo, Partner, McCarter & English, Newark, N.J. Valarie H. Jonas, Partner, Meckler Bulger Tilson Marick & Pearson, San Francisco

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Application of the Attorney-Client Privilege in Insurance Defense and in Insurance Coverage Disputes

Louis A. Chiafullo, Esq. McCarter & English, LLP Newark, NJ Valarie Jonas, Esq. Meckler Bulger Tilson Marick & Pearson, LLP San Francisco, CA

Attorney-Client Privilege – the Basics

♦ Evidentiary privileges are created by statute and courts are generally powerless to carve out exceptions or create new ones. ♦ The attorney-client privilege has been described as the “‘oldest rule of privilege known to the common law.’” Upjohn Co. v. United States, 449 U.S. 383, (1981), quoting Wigmore, Evidence §2290 (McNaughton Rev. 4th ed. 1961).) ♦ For privilege to attach there must first be an attorney-client relationship, and it only protects confidential communications that are made for the purpose of obtaining or providing legal advice.

6

Privilege Defined

Privilege attaches where: ♦ 1) legal advice of any kind is sought; ♦ 2) from a professional legal advisor in his capacity as such; ♦ 3) the communication relates to that purpose; and ♦ 4) the communication is made in confidence. ♦ United States v. Evans, 113 F.3d 1457 1461 (7th Cir. 1997)(citing Wigmore Evidence §2290 (McNaughton Rev. 4th ed. 1961).)

7

Privilege—the Basics

♦ Privilege protection extends only to communications, not facts. ♦ Upjohn Co. v. United States, 449 U.S. 383, 396(1981).

8

State Law Governs Scope of Privilege in Federal Diversity Cases

♦ Rule 501 of the Federal Rules of Evidence provides that evidentiary privileges are “governed by the principles of the common law as they may be interpreted by the courts of the United States in light of reason and

• experience. However, in civil actions and proceedings, with respect to an

element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State or political subdivision thereof shall be determined in accordance with State law.” ♦ See First Pacific Networks Inc. v. Atlantic Mut. Ins. Co., 163 F.R.D. 574, 577 (N.D. Ca. 1995) (A federal court exercising diversity jurisdiction applies California law to issues relating to the attorney-client privilege.)

9

Who is the “Client” for Purposes of Privilege?

♦ The seminal case which defines who the corporate “client” is for purposes

• f the attorney client privilege is Upjohn Co. v. United States, 449 U.S. 383

(1981). ♦ In Upjohn, the U. S. Supreme Court rejected the “control group” test, which limited privilege protection to officers and agents responsible for directing the company’s actions, in favor of a broader application of privilege, extending to mid-level and lower level employees—all those who have relevant information needed by the attorney to adequately advise the client.

10

Is Disclosure Reasonably Necessary to Further the Purpose of the Legal Consultation?

♦ While the Court in Upjohn attempted to create a uniform rule that reflects the reality of corporate litigation, the case has not made application of privilege in the insurance context more predictable. Whether privilege attaches in the corporate context continues to be decided on a case by case basis. ♦ See, e.g., Zurich American Ins. Co. v. Superior Court (2007) 155 Cal.App.4th 1485 (remanding on the issue of whether corporate employees fall within the scope of the attorney-client privilege, on a “need to know” basis).

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Who Owns the Attorney-Client Privilege? Who Can Waive It?

♦ Determined by state law in diversity cases.

12

Who Owns Privilege Where Corporation No Longer Exists?

♦ An April 2013, California Court of Appeal decision has addressed the issue

• f who owns the privilege where a corporation no longer exists.

– Melendrez v. Superior Court (2013) 215 Cal.App.4th 1343. Where a corporation no longer exists and the court is unable to appoint a director or officer to verify discovery, “we believe that the corporation’s attorney-client privilege would be passed to its insurers, the de facto assignee of its policies and the claims against them.”

13

Scope of Waiver of Attorney-Client Privilege Also Governed by State Law

♦ Garcia v. Progressive Choice Insurance Co., 2012 U.S. Dist. LEXIS 105932 (S.D.

• Ca. 2012) (Because attorney-client privilege is governed by state law in

diversity cases, California controlled the scope of waiver of the privilege. California law narrowly construes any waiver of privilege and does not recognize “subject matter” waiver.) ♦ Employers Ins. of Wausau v. California Water Service Co., 2007 U.S. Dist. LEXIS 77363 (N.D. Ca. 2007) (applying California’s narrow view of privilege waiver where documents inadvertently produced)

14

Work Product Doctrine Under FRCP Rule 26(b)(3)(B)

♦ In cases of diversity jurisdiction, federal courts will apply state law to questions of attorney-client privilege. Work product protection in federal diversity cases, on the other hand, is governed by F.R.C.P. 26(b)(3). ♦ But see, Ward v. Equilon Enterprises, 2011 U.S. Dist. LEXIS 75451 (N.D. Ca. 2011) (“Because the work product doctrine is a statutory privilege under California law, work product materials are not automatically discoverable under Rule 26(b)(1).”)

15

Scope of Work Product Protection

♦ F.R.C.P. 26(b)(3) provides that a party is not entitled to discovery of “documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative” unless a showing of substantial need and lack of undue hardship is made. ♦ “The work-product doctrine is a qualified immunity which protects from discovery documents and tangible things prepared by a party or that party’s representative in anticipation of litigation. …The party claiming the work- product privilege bears the burden of establishing that documents claimed as work product were prepared in anticipation of litigation.” (Kintera Inc. v. Convio, 219 F.R.D. 503, 507 (S.D. Ca. 2003))

16

Fact versus Opinion Work Product

♦ Fact Work-Product—qualified immunity. – “Fact work-product consists of factual material that is prepared in anticipation of litigation or trial. In determining whether documents were prepared in anticipation of litigation, the court should consider whether the documents ‘would have been generated but for the pendency or imminence of litigation.” (Kintera, Inc. v. Convio, 219 F.R.D. 503, 507 (S.D. Ca. 2003), quoting Griffith v. Davis, 161 F.R.D. 687, 698- 99 (C.D. Ca. 1995))

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Work Product Re Witness Interviews

♦ Coito v. Superior Court (2012) 54 Cal.4th 480. Recorded witness statements are entitled as a matter of law to at least qualified work product protection and may be entitled to absolute protection if proponent of privilege can show that disclosure would reveal its “attorney’s impressions, conclusions,

• pinions, or legal research or theories.”

♦ As to identity of witnesses from whom counsel has obtained statements, such information is not automatically entitled to absolute or qualified

• protection. In order to invoke the privilege, defendant must persuade the

court that disclosure would reveal attorney’s tactics, impressions or evaluation of the case (absolute privilege) or would result in opposing counsel taking undue advantage of attorney’s industry or efforts (qualified privilege.

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Fact versus Opinion Work Product

♦ Opinion Work-Product—“nearly absolute protection” ♦ Holmgren v. State Farm, 976 F.2d 573 (9th Cir. 1992, Mont.) The Ninth Circuit does not extend absolute privilege to attorney work product. Interprets “shall” as “may” under FRCP Rule 26. (Attorney opinion work product may be discoverable in bad faith case where mental impressions are at issue in a case and the need for the material is compelling.)

♦ Kintera, Inc. v. Convio, Inc., 219 F.R.D. 503, 507 (S.D. Ca. 2003))

“Opinion work product receives ‘nearly absolute protection.” “Where the selection, organization, and characterization of facts reveals the theories,

• pinions, or mental impressions of a party or the party’s representative, that

material qualifies as opinion work product. …In ordering discovery of such materials, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation. Fed.R.Civ.P. 26(b)(3). (Id.)

19

Who Owns the Work Product Privilege?

♦ Courts generally hold work product belongs to the attorney, and it is the attorney who can waive its protections. ♦ See Hartford Fire Ins. Co. v. Garvey, 109 F.R.D. 323 (N.D. Ca. 1985)(“[A]s attorney work product ‘belongs’ to the attorney, the disclosure will be analyzed under the case law applying to inadvertent disclosure.”) ♦ Hechinger Investment Co. v. Official Committee of Unsecured Creditors, 303 B.R. 18, *10 (Bankr. D. Del. 2003) (“[W]ork product is the privilege of the attorney…thus the attorney is the one who may waive it.”)

20

Issues Unique to Insurance Defense: No Protection for Insurer-Insured Communications

♦ Neither federal common law nor the vast majority of states recognize any type of insurer-insured privilege. – It appears that only Illinois, Indiana and Missouri recognize an insurer- insured privilege.

21

The “Tripartite” Relationship

♦ The “joint-defense” or “common interest” doctrine protects information shared among parties involved in litigation who are represented by separate counsel but who are engaged in the joint defense of a claim. – The doctrine is not technically a privilege in and of itself but, instead, creates an exception to the general rule that the attorney-client privilege is waived when privileged information is voluntarily disclosed to a third party. – It was established to facilitate communications between aligned parties in order to protect their common interests in a litigated matter with respect to communications designed to further that joint legal effort.

22

Tripartite Relationship Defined

♦ Where an insurer retains counsel to defend its insured, a tripartite relationship arises among the insurer, insured and counsel. As a consequence, confidential communications between either the insurer or insured and counsel are protected by the attorney-client privilege, and both insurer and insured are holders of the privilege. Work product also does not lose its protection when it is transmitted to the insurer.

– Bank of America v. Superior Court (2013) 212 Cal.App.4th 1076, 1083.

23

Tripartite Relationship—a “Coalition”

♦ “Both the insured and the carrier have a common interest in defeating or settling the third party’s claim. …In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. …The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency

• f the claim or litigation against the insured. Communications are routinely

exchanged between them relating to the joint and common purpose—the successful defense and resolution of the claim.”

– American Mut. Liab. Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579, 591- 592.

24

Suggested Strategies for Protecting Tripartite Communications

♦ Execute a Joint Defense Agreement ♦ Execute a Confidentiality Agreement ♦ Implement Procedures to Maintain the Privilege ♦ Whenever Possible, Avoid Written Communications ♦ Consider Mediating the Insurance Issues

25

The Ethics of It All

♦ The governing standard is stated in ABA Model Rule 1.7, which is substantively identical

• n this point to the law in all states:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. A material limitation (as that term is used in paragraph (a)(2) of the rule) exists when “there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited because of the lawyer’s other responsibilities or interests.”

The Ethics of It All

Rule 1.6 Confidentiality Of Information (a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

The Ethics of It All

Example: Assigned counsel is asked to defend a case involving an auto accident in which the policyholder’s cousin was injured when the car operated by the policyholder ran into a tree. The cousin had been living with the policyholder while attending a nearby school, but has returned to his parents’ home after being released from the hospital. The claim representative assumes the policyholder’s defense, but reserves the right to deny coverage under the policy’s exclusion for injuries to relatives residing in the policyholder’s household. Coverage counsel brings a declaratory judgment action to resolve that issue. Because the resident relative issue does not overlap with the issues in the tort action, courts have found that it does not create any conflict of interest, and assigned counsel may undertake the defense.

Impact of Reservation of Rights on Privilege

♦ No waiver where tender of defense accepted without reservation:

– Continental Casualty Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510 (E.D.

• Ca. 2010) (Both insurer and insured are “considered the clients of the

defense counsel, and an attorney-client privilege is shared among all of them.”

♦ Finding that ROR does not impact the privilege:

– Bank of America v. Superior Court (2013) 212 Cal.App.4th 1076, 1091(tripartite attorney-client relationship exists notwithstanding reservation of rights)

29

Impact of ROR on Privilege

Finding ROR may waive attorney-client privilege:

– Higgins v. Karp, 239 Conn. 802, 810 (1997) (Although insured and insurer may have common interest in defeating or minimizing claims against the insured and the insurer retains defense counsel, “the attorney’s only

• bligation is to the client, the insured.”)

Finding no privilege between insured and insurer:

– In re Pfizer Inc. Securities Litigation, 1993 U.S. Dist. LEXIS 18215 (S.D. N.Y. 1993) (rejecting argument that insured and insurer share common interest and holding that disclosure by insured to insurer waived attorney-client privilege)

30

Impact of ROR on Privilege

♦ No privilege where insurer denies defense and indemnity obligation: – Where the policy includes a duty to defend and insurer denies or rejects that duty, communications between that counsel and the insurer are not protected from disclosure under either the attorney-client privilege or the joint defense privilege.

• North River Ins. v. Philadelphia Reinsurance,

797 F. Supp. 363, 367 (D.N.J. 1992)

• Vermont Gas Systems, Inc. v. United States Fidelity & Guaranty Co.,

151 F.R.D. 268, 277 (D. Vt. 1993)

• Remington Arms Co. v. Liberty Mutual Ins. Co.,

142 F.R.D. 408, 417-18 (D. Del. 1992)

• CAMICO Mutual Insurance Co v. Heffler Radetich & Saitta, C.A. No. 11-4753 (E. D. Pa. Jan.

28, 2013).

31

Impact of ROR on Privilege—Independent Counsel

♦ Where ROR leads to appointment of independent counsel:

– No Privilege: Lectrolarm Custom Systems, Inc. v. Pelco Sales, Inc., 212 F.R.D. 567 (E.D. Cal. 2002) (“[M]ost important element of the attorney client privilege” is missing when a conflict of interest requires the appointment of independent counsel.) – In Continental Casualty Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510 (E.D. Cal. 2010), the court noted that the attorney-client privilege does not extend to communications between an insured, an attorney, and insurer who is defending with a reservation of rights, let alone to an insurer that is not defending at all.

32

Impact of ROR on Privilege—Independent Counsel

– California Civil Code § 2860 (d) independent counsel is to “disclose to the insurer all information … except privileged materials relevant to coverage disputes” and any information disclosed by independent counsel to the insurer is “not a waiver of the privilege as to any other party.” – Privilege remains in effect: Bank of America v. Superior Court (2013) 212 Cal.App.4th 1076 (Even where independent counsel is appointed, both insured and defense counsel have a duty “to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the claim. (Civ. Code §2860, subd. (d).) Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.”)

33

No Waiver of Privilege for Cumis Counsel

♦ Fidelity National Financial, Inc. v. National Union Fire Insurance Co., 2014 WL 1393743 (April 9, 2014, S.D. Ca.) Cumis attorney did not waive privilege by providing copy of settlement analysis to insurer b/c Cumis counsel is required by statute to share this information and, in doing so, Cumis attorney was not acting without coercion.

34

The Use of Counsel in Claims Investigations

♦ “The application of the work product doctrine is particularly difficult in the context of insurance claims.”

– Gilliard v. Great Lakes Ins., 2013 U.S. Dist. LEXIS 56968 (D.S.C. 2013) (finding that “the proponent of work product protection must establish that the ‘driving force’ behind the preparation of each requested document is the prospect of litigation)

35

Claims Handling and Privilege: Was the Report Created in the “Ordinary Course of Business”?

♦ California: “It is settled that the attorney-client privilege is inapplicable where the attorney merely acts as a negotiator for the client, gives business advice or otherwise acts as a business agent.” (Aetna Cas. & Surety Co. v. Superior Court (1984) 153 Cal.App.3d 467, 475). ♦ Nebraska: Church Mutual Ins. Co. v. Clay Center Christian Church, 2012 U.S.

• Dist. LEXIS 10552 (D. Neb. 2012) (work product protection inapplicable

to report created in ordinary course of business). ♦ Minnesota: Mission National Ins. Co. v. Lilly, 112 F.R.D. 160, 163 (D. Minn. 1986) (work product immunity did not apply were “immediately upon receiving notice of the [incident], [insurer decided] to employ attorneys to fulfill its ordinary business function of claims investigation.”)

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Claims Handling and Privilege: Was the Report Created in the Ordinary Course of Business?

♦ Iowa: St. Paul Reinsurance Co. v. Commercial Fin. Corp., 197 F.R.D. 620, 636 (N.D. Iowa 2000) (It is the insurer’s business to investigate claims.;) ♦ Meighan v. Transguard Ins. Co. of America, 298 F.R.D. 436 (N.D. Iowa 2014). Documents related to insurer’s surveillance of insured not subject to privilege. ♦ Indiana: Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655, 663 (S.D. Ind. 1991) (“[A] document or thing produced or used by an insurer to evaluate an insured’s claim in order to arrive at a claims decision in the ordinary and regular course of business is not work product regardless of the fact that it was produced after litigation was reasonably anticipated.”)

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Claims Handling and Privilege: Was the Report Created in the Ordinary Course of Business?

♦ Pennsylvania. Henriquez-Disla v. Allstate Property and Cas. Ins. Co., 2014 WL 2217808 (May 29, 2014, E.D. Pa.) Claim file “log entries and emails related to scheduling and taking EUOs, including collection of information for the EUOs, are part of the ordinary business function of claims investigation and therefore fall outside the attorney-client privilege. However, any communications seeking counsel’s advice remains privileged.” And, once EUOs are taken, “counsel’s observations and opinions concerning the content of the statement are privileged.”

38

What is the “Dominant Purpose” of the Attorney’s Work?

♦ Some jurisdictions look to the “dominant purpose” of hiring counsel. – Costco Wholesale Corp. v. Superior Court of Los Angeles County (2000) 47 Cal.4th 725 (Trial court must “determine dominant purpose of the relationship between the insurance company and its in-house attorneys. i.e., was it one of attorney-client or one of claims adjuster-insurance corporation… .”) – McAdam v. State National Ins. Co., 2014 U.S. Dist. LEXIS (S.D. Cal. March 21, 2014)—California courts will look to the dominant purpose

• f the relationship between counsel and the insurer, not the dominant

purpose of each document created. Proponent of privilege has option

• f seeking in camera review. Must include declarations.

39

“Predominant Purpose”

♦ New Jersey courts have also addressed the issue in terms of the "predominant purpose" of the attorney-insurer relationship: – Munich Reinsurance America, Inc. v. American National Insurance Company, 2011 U.S. Dist. LEXIS 41826 (D.N.J. 2011) (proper inquiry is whether the attorney-client relationship is “predominantly for the purpose of rendering legal services”) (quoting Louisiana Municipal Police Employers Retirement System v. Sealed Air Corp., 252 F.R.D. 300 (D.N.J. 2008))

40

“Driving Force” behind Preparation of Document

♦ South Carolina: Gilliard v. Great Lakes Ins., 2013 U.S. Dist. LEXIS 56968 (D.S.C. 2013). What is the “driving force” behind preparation of each document? Focus is on the communication, not the relationship between counsel and insurer.

41

Bad Faith: the Cedell Case

♦ Cedell v. Farmers Insurance Exchange, 295 P.3d 239 (Wash. 2013)—holds that if an insurer is sued for bad faith for denying first-party coverage, the insurer’s entire claim file is subject to discovery, including advice from its counsel. ♦ “We start from the presumption that there is no attorney-client privilege relevant between the insured and insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant.”

42

Cedell

♦ Insurer may overcome presumption of discoverability by showing that the attorney was not engaged in a “quasi-fiduciary” investigation and evaluation

• f the claim.

♦ Upon such showing, the insurance company is entitled to an in camera review of the claims file and to redaction of communications that reflect attorney’s mental impressions unless those mental impressions are directly at issue in its “quasi fiduciary” responsibilities to its insured. ♦ The insured’s burden is minimal—the insured merely needs to allege (not prove) facts that show an act of bad faith has occurred.

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Cedell: Four Scenarios for Disclosure

♦ 1. Insurer cannot overcome initial presumption that attorney-client privilege and work product are waived in the first party bad faith context. ♦ 2. In camera review reveals that insurer’s attorney engaged in “quasi fiduciary” roles of investigating, processing or evaluating claim. ♦ 3. In camera review reveals that attorney’s opinion work product is “directly at issue” in the insurer’s “quasi fiduciary” roles ♦ 4. In camera review leads the trial court to find there is sufficient foundation for a civil fraud bad faith claim to proceed. ♦ See Philadelphia Indemnity Ins. v. Olympia Early Learning Center (2013) 2013 WL 3338503, *4 (W.D. Wash.)

44

Cases Leading up to Cedell

♦ Tilden-Coil constructors, Inc. v. Landmark American Ins. Co., 2010 WL 3789104 (W.D. Wash. 2010) (outside counsel’s review of documents in preparation for drafting denial letters not subject to work product protection.) ♦ Panattoni Construction, Inc. v. Travelers, 2012 WL 6567141(W.D. Wash. 2012). In bad faith cases insurer-attorney communications are subject to disclosure if relevant to the issue of bad faith.

45

How Cedell Changes the Game

♦ Far easier to “pierce the attorney client privilege”: “If nothing else, it is now clear that the scope of discovery in first party bad faith actions is very broad, and the attorney-client privilege and work product doctrine are less difficult to overcome now than they were prior to the opinion.” Philadelphia Indemnity Ins. v. Olympia Early Learning Center (2013) 2013 WL 3338503, *4 (W.D. Wash.) ♦ Changes Court’s Role: The in camera review contemplated by Cedell “put[s] the trial court in the uncomfortable position of sorting through evidence to determine if an insured has a potential civil fraud claim—essentially an investigative role for the court, rather than an adjudicative one.” (Id.)

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Criticism of Cedell

♦ In Philadelphia Indemnity Ins. v. Olympia Early Learning Center (2013) 2013 WL 3338503, *3 (W.D. Wash.), the District Court for Washington criticized Cedell— “Unfortunately, the opinion creates rather than alleviates confusion about what must be produced and under what circumstances.”

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Criticism of Cedell

♦ Philadelphia Indemnity also notes that Cedell “conflates attorney client privilege and the work product doctrine.” (Id.) ♦ “To this Court’s knowledge there is not and has never been in Washington a ‘substantial need’ exception to the attorney-client privilege…If the Washington Supreme Court intended to create such a vast exception to the attorney-client privilege…it did so without explanation and without acknowledging that it was fundamentally altering the law in this area.” (Id.) ♦ See also MKB Constructors v. American Zurich Ins. Co., 2014 WL 2526901, *5 (May 27, 2014 W.D. Wash.) noting that Cedell fails to “elaborate upon what it means for an insurer’s act of bad faith to be ‘tantamount to civil fraud.’”

48

Cedell’s Progeny

♦ Twelve cases to date follow Cedell, in Washington, Idaho and Louisiana: ♦ 1) MKB Constructors v. American Zurich Ins. Co., 2014 WL 2526901(May 27, 2014, W.D. Wash.) Insured’s “allegation of bad faith conduct alone, even where sufficiently supported by the record to establish prima facie case, does not suffice to make out a claim for waiver of attorney-client privilege based on the civil fraud exception.” Also holds that federal district court, based on Erie doctrine, does not have to view documents in camera but, rather, may choose “other procedure or mechanism [that] is equally or more appropriate… in the specific context of the case before it.”

49

Cedell’s Progeny

♦ 2) Woodward v. American Family Mutual Ins. Co., 2014 WL 2198808, *1 (May 27, 2014, W.D. Wash.) Noting that court “is unlikely to find” that a categorical refusal to produce documents created after litigation is contemplated “is an acceptable limitation of Cedell.” ♦ 3) Garoutte v. American Family Mutual Ins. Co., 2013 WL 5770358, *3 (Oct. 24, 2013, W.D. Wash.). “[T]he Court is not persuaded that every document created by an insurance company after suit has commenced is protected by the work product privilege.” It is insurer’s “burden to overcome this presumption.”

50

Cedell’s Progeny

♦ 4) Grange Ins. Ass. v. Lund, 2014 WL 584011 (February 13, 2014, W.D. Wash.). Ordering production to insured’s assignee of all documents in claims file, including between in house and outside claims counsel, but limiting range of production to documents generated between “pre- judgment limits-related bad faith claims” and “postjudgment conditional settlement bad faith claims” that arose after underlying bad faith case was settled.

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Cedell’s Progeny

♦ 5) Carolina Casualty v. Omeros, 2013 WL 1561963 (W.D. Wash., April 12, 2013): extends Cedell to third party liability based on “quasi fiduciary relationship.” Documents created after underlying litigation settled are likely subject to privilege but documents created during period “when it appears coverage counsel took an active role in resolving [underlying litigation], Carolina Casualty may have no basis for withholding documents.”) ♦ 6) Ten Talents v. Ohio Security, 2013 WL 3155379 (W.D. Wash. June 21, 2013): Production of coverage opinion. “It does not appear to this Court that the new Cedell standard is particularly difficult one for an insured to meet.”

52

Cedell’s Progeny

♦ 7) Philadelphia Indemnity v. Olympia Early Learning Center, 2013 WL 3338503, (July 2, 2013, W.D. Wash.). Claim file subject to single in camera review to analyze four-part test under Cedell. ♦ 8) Palmer v. Sentinel Ins. Co., 2013 WL 3819925 (July 23, 2013, W.D. Wash.) Attorney investigated facts, interviewed witnesses, hired experts, advised on coverage and exposure—privilege waived. Privilege as to communications with subrogation counsel not waived. ♦ 9) Everest Ins. Co. v. QBE Ins. Co., 980 F. Supp.2d 1273 (October 31, 2013, W.D. Wash.) Third party liability. Insurer counsel subject to deposition.

53

Cedell’s Progeny

♦ 10) Stewart Title v. Credit Suisse, 2013 WL 1385264 (D. Idaho): Counsel had mixed role; all files must be produced in bad faith cases. ♦ 11) Hilborn v. Met. Group Ins. Co., 2013 WL 6055215 (November 15, 2013,

• D. Idaho). “In a bad faith insurance claim settlement case, the strategy,

mental impressions and opinion of the [insurer’s] agents concerning the handling of the claim are directly at issue.” (finding that attorneys who placed call to Border Patrol Agents who were present at fire, “as part of the

• ngoing claims investigation” were “engaged in the quasi-fiduciary tasks of

investigating and evaluating or processing the claim.”

54

Cedell’s Progeny

♦ 12) The Shaw Group, Inc. v. Zurich American Ins. Co., 2014 WL 199626 (June 14, 2012, W.D. La.). Adopting reasoning of Cedell to deposition of Zurich’s claims counsel but finding, based on affidavits, that Zurich overcame presumption of waiver of privilege.

55

Jurisdictions with Similar Approach to Cedell

♦ Alaska: USAA v. Werley, 526 P.2d 28. No privilege for insurers in bad faith cases ♦ Arizona: State Farm Mutual v. Lee, 13 P.3d 1169 (Ariz. 2000). UM/UIM

• case. Court finds waiver b/c legal advice was sought and relied on.

♦ But see Hartford Roman Catholic Diocesan v. Interstate Fire & Cas. Co., 297 F.R.D. 22 (D. Conn. 2014) (communications between insurer and counsel did not come within bad faith exception to attorney client privilege and were not discoverable where insured failed to allege that insurer gave information to or sought advice of counsel for purposes of concealing or facilitating alleged bad faith conduct.

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Communications Prior to Denial Not Subject to Privilege

♦ Ohio: Boone v. Vanliner, 744 N.E.2d 154 (Ohio 2001). Insured is entitled to discover claims file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of

• coverage. The claim file “may cast light” on whether the insurer acted in

bad faith. ♦ Ohio: C.B. Fleet Co. v. Colony Speciality Ins., 2013 U.S. Dist. LEXIS 6504 (N.D. Ohio 2013). Even where the insurer has denied coverage after the inception of the coverage litigation, it may be required to turn over privileged information from its claim file, up to the date of denial.

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Communications Prior to Denial Not Subject to Privilege

♦ New York:

♦ National Union Fire Insurance Company of Pittsburgh v. Transcanada Energy USA, 114 A.D.3d 595 (N.Y. S.Ct., 2014). Coverage opinion subject to discovery. Documents prepared in the ordinary course of insurance company’s investigation of whether to pay or deny insured’s claims were not protected by attorney client privilege or work product doctrine. ♦ Melworm v. Encompass Indemnity Co., 112 A.D.3d 794 (N.Y. S.Ct. 2013) (Letters drafted by counsel who conducted investigation before claim denied are subject to disclosure.)

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Communications Made Before Coverage Determination

♦ Bombard v. Amica Mutual Ins. Co., 783 N.Y.S.2d 85 (2004) (holding that reports prepared by insurance investigators, adjustors or attorneys before the decision is made to pay or reject a claim are not privileged and are discoverable even where such reports are motivated in part by the potential for litigation with insured.)

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Communications Prior to Denial Not Subject to Privilege

♦ Indiana: Illiana Surgery and Medical Center LLC v. Hartford Fire Ins. Co., 2010 U.S. Dist. LEXIS 122827 (D. Ind. 2010) (outside counsel’s work did not “equate to legal advice” where outside counsel conducted phone conferences with in-house adjusters and never rendered a coverage opinion)

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Attorney Involvement Not Necessarily the Key to Privilege Attaching

♦ New Jersey: American Home Assurance Co. v. U.S., 2009 U..S. Dist. LEXIS

93957 (D.N.J. 2009). Report of investigator not attorney work-product under FRCP Rule 26 (b)(3) even where insurer believed it was prepared in anticipation of litigation: “[S]imple involvement of counsel in an insurer’s claim investigation does not transform the investigation to one undertaken in anticipation of litigation. …Generally work-product protection is not afforded to documents prepared prior” to a coverage decision being made.

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Was the Document Created in Anticipation of Litigation?

♦ Application of work product protection to claim file under Rule 26 depends on “whether, under the specific facts of the case, the claims analysis would have been created because of anticipated litigation or whether it would have been created in the ordinary course of business.” (Safeco Ins. Co. v. M.E.S. Inc., 2011 U.S. Dist. LEXIS 140700 (E.D.N.Y. 2011)) ♦

• St. Paul Fire & Marine Co. v. SSA Gulf Terminals, Inc., 2002 U.S. Dist. LEXIS

11776 (E.D. La. 2002) (for work product protection to attach, insurer must establish that “primary motivating purpose” of investigations, reports and meetings “was to aid in future litigation.”) ♦ Raritan Bay Federal Credit Union v. Cumis Ins. Society, Inc., 2010 U.S. Dist. LEXIS 112640 (D.N.J. 2010) (investigator’s communications with insurer’s counsel and notes and summaries of interviews of witnesses were prepare in ordinary course of insurer’s investigation of claim and therefore not subject to work product or attorney-client protection.)

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Was the Document Created in Anticipation of Litigation?

♦ Where documents are generated as an “inherent and long-standing part” of the defendant’s business, “that litigation appeared imminent is of no moment.” The documents therefore are not subject to privilege. (MBIA

• Ins. Corp. v. Countrywide Loans, 93 A.D.3d 574, 575 (N.Y., 2012).)

♦ See also, Dinh v. Samsung Fire & Marine Ins. Co., 2013 WL 1625184 (D. Tex.) (“Because litigation was commenced in this case two months after the accident and before the defendant had completed its investigation, it was just not possible to separate the legal advice from the claims investigation process.”) ♦ Westchester Surplus Lines Ins. Co. v. Clancy & Theys Construction Co., 2013 WL 6058203 (E.D. N.C. 2013) (Threat of litigation must be “substantial and imminent.”)

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Burden on Insurer to Establish that Each Document Is Subject to Privilege

♦ Consugar v. Nationwide Ins. Co. of America, 2011 U.S. Dist. LEXIS 61756 (M.D. Pa. 2011) (The date the insurer “decided the possibility of litigation was substantial and imminent” is not the relevant inquiry. Insurer must provided privilege log specifying grounds for application of protection with respect to each document.)

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General Principles—You Can’t Convert Non- Privileged Information Into Privileged Information

♦ “Any relevant fact may not be withheld merely because it was incorporated into a communication involving an attorney.” (Upjohn Co. v. United States, 449 U.S. at 395-396.) ♦ “It is established that otherwise routine, non-privileged communications between corporate officers of employees transacting the general business of the company do not attain privileged status solely because in-house or

• utside counsel is ‘copied in’ on correspondence or memoranda.” (Zurich

American Ins. Co. v. Superior Court (2007) 155 Cal.App.4th 1485, 1504.)

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Advice of Counsel Defense: Opening the Door

♦ The deliberate injection of the advice of counsel into a case waives the attorney-client privilege as to communications and documents relating to the advice. Handgards, Inc. v. Johnson & Johnson, 413 F.Supp. 926 (N.D. Ca.

1976) ♦ City of Glendale v. National Union Fire Ins. Co., 2013 WL 1797308 (April 29, 2013,

• D. Ariz.) “‘When a litigant seeks to establish its mental state by asserting that it

acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question. …Thus the advice received from counsel as part of the investigation and evaluation is relevant to the court’s truth seeking functions.’” (quoting State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.2d 1169, 1175.)

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No Implied Waiver

♦ Nguyen v. American Commerce Ins. Co., 2014 WL 1381384 (April 8, 2914, Ariz.). Where a party relies solely on objective reasonableness and merely consults attorney to evaluate the reasonableness of its position, there is no implied waiver.

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No Implied Waiver Where Insurer Does Not “Interject” Advice of Counsel into Litigation.

♦ But see Empire West Title Agency LLC, 323 P.3d 1148 (Ariz. 2014). Rejecting

claim that insurer has impliedly asserted the advice of counsel defense – “The party claiming the privilege must affirmatively interject the issue of advice of counsel into the litigation. …Merely pleading a claim…does not waive the attorney-client privilege.”

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Advice of Counsel—No Implied Waiver

♦ See also, Cudd Pressure Control, Inc. v. New Hampshire Ins. Co., 297 F.R.D. 495 (W.D. Ok. 2014) “An insurance company just as any

• ther individual or entity has the right to seek confidential legal

advice.” (finding that insurer’s reliance on legal advice when formulating coverage opinion is not the equivalent of asserting an “advice of counsel” defense— “Defendants have not taken any affirmative step in this litigation that would make the substance of its attorney’s previous advice relevant… .”)

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Use of Bifurcation to Protect Privilege

♦ DeVito v. Grange Mutual Cas. Co., 996 N.E.2d 547 (Ohio 2013). Trial Court granted bifurcation of bad faith claim, but refused to stay discovery of bad faith issues, which would have opened claim file up to insured. Court of Appeal found that “failure to impose a stay [of discovery re bad faith] would result in manifest prejudice to Defendant’s ability to defend the coverage issues. …Once the underlying claims are decided, and provided the bad-faith claim remains unresolved, discovery may proceed on the bad- faith claim… . In this regard, courts have determined that an in camera review of the claims file is appropriate to determine which materials in the claims file are relevant to bad faith.”

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Best Practices for Preserving Privilege

♦ Retention letters for attorneys with clear directives as to the engagement ♦ Use of investigators and adjusters ♦ Role of privilege log ♦ Bifurcation of bad faith claim in jurisdictions where permissible ♦ In camera inspection – know your jurisdiction (e.g., California prohibits in camera review absent request by privilege holder; Washington courts must conduct in camera review under Cedell.) ♦ Decide whether advice of counsel will be used early on ♦ Limit written communications ♦ Washington, Idaho, Louisiana: know that presumption is that claims file will be subject to discovery

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Privilege Issues Unique to Insured-Broker Relationship -- Hypothetical

♦ In a coverage litigation relating to an underlying professional negligence claim, the insured and an employee of its broker – WillMar – had multiple communications relating to the claim, the relevant insurance policies, and the potential for coverage under those policies. These communications included a discussion of relevant case law and potential legal strategy. The broker both received and authored communications, and notes were taken by the insured and the broker memorializing phone conversations during which the above subjects were

• discussed. The broker employee was also a licensed attorney, but in

many communications an automated email “footer” stated that the broker was not providing legal advice.

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Hypothetical - continued

♦ During discovery, the insurers moved to compel all documents prepared by, transmitted to, or summarizing communications with the broker. In response, the insured sought to withhold the communications pursuant to the attorney-client privilege, claiming that in addition to being its insurance broker, Aon also provided legal counsel and, thus, any communications between them were subject to the privilege. ♦ Do the insurers get the documents?

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Privilege and Brokers

♦ Cellco Partnership d/b/a Verizon Wireless v. Certain Underwriters at Lloyd’s, London, et al., 2006 WL 1320067 (D.N.J. 2006).

– Insurers moved to compel production of communications that were prepared by, transmitted to, or that summarized communications with the insured’s insurance broker, Aon. – The insured sought to withhold these communications pursuant to the attorney-client privilege, claiming that Aon also provided legal counsel and, thus, any communications between them were subject to the privilege. – The insured relied in part on the fact that the Aon employee responsible for handling its claim submission was also a licensed attorney and was providing legal counsel to the insured.

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Privilege and Brokers

– The court rejected Cellco’s argument, finding that there was no retainer agreement between Aon and Cellco, and finding that Cellco failed to sufficiently demonstrate how Aon’s role and function changed to that of legal counsel from insurance broker. The court also found that the broker/attorney employed by Aon explicitly stated that the information he was providing was not intended to be legal advice. – The court concluded, based upon these facts, that neither Aon nor the insured could have reasonably believed that an attorney-client relationship existed or that they had an expectation of confidentiality surrounding their communications.

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Privilege and Brokers

♦ In re Tetra Technologies Inc., No. 4:08-cv-0965, 2010 WL 1335431 (S.D. Tex. April 5, 2010).

– Tetra argued that its insurance brokers were its agents and therefore fell within the ambit of the attorney-client privilege. Plaintiffs argued that many of Tetra’s communications with its brokers took place in the context of a dispute between Tetra and its insurer – thus, the brokers were simply facilitators and not agents. – The court held that, even in situations where an insured and its insurers are in a dispute, an insurance broker can nonetheless act as the insured’s agent when the purpose of the communication was made “to facilitate the rendition of legal services.” The court noted that what is vital to the attorney-client privilege is that “the communication be made in confidence for the purpose of obtaining legal advice from a lawyer.” The court ruled that it would review in camera the communications that the plaintiffs alleged did not meet such criteria to determine whether or not that particular communication fell within the attorney-client privilege.

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Privilege and Brokers

♦ Amtel Corp. v. St. Paul Fire & Marine Ins. Co., 409 F. Supp. 2d 1180 (N.D.

• Cal. 2005)

– Insurer moved to compel the production of attorney-client privileged materials that the insured, Amtel, had sent to its insurance broker. The insurer argued that brokers are independent contractors and do not act as agents for either the insurer or insured. – The court rejected that argument by noting that the broker had negotiated the policies at issue and thereafter served as a “necessary advisor” to Amtel on insurance coverage and claim issues. Accordingly, the court ruled that “[g]even the relationship between [the broker] and Amtel, the attorney-client privilege was not waived because [the broker] was present to further Amtel’s interests and disclosure to [the broker] was reasonably necessary to provide information to the insurers.”

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Privilege and Brokers

♦ SR Int’l Bus. Ins. Co. v. World Trade Center Prop., LLC, No. 01 Civ. 9291, 2002 WL 1334821 (S.D.N.Y. June 19, 2002) (third-party insurance broker no within scope of attorney-client privilege). ♦ J.E. Dunn Constr. Co. v. Underwriters at Lloyd’s, London, No. 05-0092-CV, 2006 WL 1128777 (W.D. Mo., April 25, 2006) (communications to third-party broker not privileged, even where insured and broker entered into joint defense agreement, because broker’s interest in litigation was to minimize its own liability to the insured – therefore, there was no “common interest”)

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Contacts

Louis A. Chiafullo, Esq. McCarter & English, LLP Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 973-848-5340 lchiafullo@mccarter.com Valarie Jonas, Esq. Meckler Bulger Tilson Marick & Pearson LLP 575 Market Street, Suite 2200 San Francisco, California 94105 415-593-9620 Valarie.Jonas@mbtlaw.com

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