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

of 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).

11

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

of 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))

17

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,

opinions, 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.

18

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, opinions, 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

of 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

on 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

obligation 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.”)

36

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.”)

37

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

of the relationship between counsel and the insurer, not the dominant

purpose of each document created. Proponent of privilege has option

of 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

of 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.

43

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.)

46

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.”

47

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.

51

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.

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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

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

investigating and evaluating or processing the claim.”

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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.

56

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.

57

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.)

58

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.)

59

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.)

62

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.”)

63

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.)

64

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 outside counsel is ‘copied in’ on correspondence or memoranda.” (Zurich American Ins. Co. v. Superior Court (2007) 155 Cal.App.4th 1485, 1504.)

65

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.)

66

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

other 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… .”)

69

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

71

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?

73

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.

74

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.

75

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.

76

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.”

77

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

79