DISCOVERY IN AN INSURANCE CASE. ERIKA L. BRIGHT Wick Phillips Dallas, Texas

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1 DISCOVERY IN AN INSURANCE CASE ERIKA L. BRIGHT Wick Phillips Dallas, Texas CHRISTOPHER KIPPER BURKE Great American Insurance Company Cincinnati, Ohio REBECCA DIMASI Buchanan DiMasi Dancy & Grabouski, LLP Austin, Texas State Bar of Texas 11 TH ANNUAL ADVANCED INSURANCE LAW COURSE April 24-25, 2014 Houston CHAPTER 6

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3 Law with Purpose. Erika Bright Partner 2100 Ross Avenue, Suite 950 Dallas, Texas Phone Facsimile Mobile V-CARD PRINT PRACTICE AREAS Insurance Coverage Consultation Insurance Coverage Litigation Commercial Litigation Construction and Real Estate Litigation Indemnities and Risk Management Strategies EDUCATION JD from the University of Oklahoma, with distinction AWARDS & PUBLICATIONS Erika Bright is an experienced trial lawyer and partner based in Wick Phillips Dallas office. For more than 15 years, she has helped her clients successfully litigate insurance coverage, construction and business disputes throughout all major industries. Erika has a distinguished track record of innovation and success representing clients in trials, arbitrations, negotiations and proactively protecting clients with thoughtful risk-management strategies. Recognized as one of the nation s leading authorities on insurance coverage and litigation, Erika represents policyholders in trials and arbitrations against insurance carriers and advises clients on all insurance-related topics, including how to minimize risk, draft indemnity agreements and obtain optimum insurance coverage. Erika has extensive experience in the courtroom and has litigated insurance disputes involving virtually all types of coverage, including Directors and Officers (D&O), Errors and Omissions (E&O), Fiduciary Liability, Commercial General Liability (CGL), Property, Builder's Risk, Employer's Liability, Environmental and Energy policies. Additionally, Erika is an accomplished lecturer and author on insurance issues and frequently speaks at industry conferences,

4 Texas Super Lawyers- Insurance Coverage, Business Litigation, and Construction Litigation ( ) Texas Super Lawyers- Rising Stars Edition (2009, 2011) Best Lawyers in America in Insurance Law ( ) events and law schools nationwide. Ms. Bright serves as Faculty Member and lecturer for the Texas Bar CLE s Advanced Insurance Law Course and UT Law CLE s Annual Insurance Law Institute. She has authored and contributed to many leading publications, such as the ABA s Handbook on Additional Insureds and Law 360. Prior to joining Wick Phillips, Erika was a partner at Haynes and Boone, LLP in the firm's insurance coverage and business litigation practice groups. Fellow-Texas Bar Foundation Member of the State Bar of Texas, Insurance Law Section Member of the Higginbotham Inn of Court Faculty Member for Texas Bar CLE s 2014 Advanced Insurance Law Course Faculty Member for UT Law CLE s 2014 Annual Insurance Law Institute Privacy Disclaimers Sitemap 2014 Wick Phillips. Dallas, Texas. All rights reserved. Law with Purpose Ross Avenue, Suite 950 Dallas, Texas (214) Throckmorton Street, Suite 500 Fort Worth, Texas (817) Bee Caves Rd. Bld 1, Suite 110 Austin, TX (512)

5 Christopher Kipper Burke Divisional Vice President and Senior Claims Counsel Great American Insurance Company 301 E. 4 th Street Cincinnati, OH Mr. Burke is Senior Claims Counsel at Great American Insurance Company. Claims Counsel at Great American provides advice and counsel to the various business units and wholly owned subsidiaries on the legal issues relating to the claims operations. Claims Counsel provides advice and counsel on insurance coverage issues, regulatory compliance matters, Medicare compliance, as well as a wide variety of claims related issues. Prior to joining Great American in 2008, Mr. Burke was an officer with a national insurance carrier and was responsible for the management of the claims of construction defect across the country. Prior to that, he was in private practice in San Antonio, Texas, where he focused his practice primarily on the representation of insurers in disputes with policyholders. Mr. Burke is a frequent speaker on topics relating to insurance coverage issues. He has expertise in analyzing complex coverage issues in a wide variety of contexts, including auto, commercial general liability, ocean marine, commercial property, excess and umbrella, contractual liability insurance, directors and officers, workers compensation and employment practice liability, and numerous others. His articles have been cited by several courts relating to insurance coverage for construction defects. He has a passion for the interplay between insurance coverage and indemnity issues. He has provided numerous presentations regarding the best methods for analyzing and seeing the issues that present themselves in claims for additional insured status and indemnity. His presentations in this arena receive very high marks for their clear presentation of these complex issues. Mr. Burke received his Bachelor of Science in Electrical Engineering from Rice University in He received his J.D. from St. Mary s University School of Law in He is admitted to practice in Texas, and maintains an active Corporate Designation in Ohio.

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7 Brittan L. Buchanan Blair Dancy Rebecca S.C. DiMasi Laura J. Grabouski Paul J. Van Osselaer REBECCA DIMASI, Partner Direct Rebecca Download V-card Ms. DiMasi is a commercial trial lawyer, with her primary focus on insurance coverage and bad faith litigation. She handles lawsuits involving a vast array of insurance issues, and provides advice regarding coverage and extra-contractual claims. Education J.D., cum laude, Baylor University School of Law, 1998 Managing Editor, Baylor Law Review Order of the Barristers Baylor Moot Court Team B.A., with honors, University of Texas at Austin, 1995 Judicial Clerkship or Other Professional Experience Law Clerk, Honorable Sam D. Johnson, U.S. Court of Appeals for the Fifth Circuit, Professional Recognition and Honors Repeatedly named a "Texas Rising Star" by Law & Politics and Texas Monthly magazines ( ) Participated in panel regarding The Developing Law of Insurance Coverage for Rip and Tear Damages in Construction Defect Litigation, Annual Conference of the ABA s Insurance Coverage Litigation Committee, Tucson, AZ, March 2013 Presented and authored Overview of Coverage B, 9th Annual State Bar of Texas Advanced Insurance Law Course, April 2012 Participated in national webinar panel regarding Horizontal vs. Vertical Exhaustion of Insurance - Establishing Priority of Coverage and Resolving Disputes When Primary Carrier Settles for Less Than Policy Limits, Stafford Publications, November 2011 Presented and authored "Clarifying the Confusion Over the Business Risk Exclusions and Other Related Construction Defect Topics," University of Texas School of Law, 11th Annual Insurance Law Institute, December 2006 Professional and Community Activities Member, Insurance Section of the State Bar of Texas Member, Austin Bar Association Member, Austin Young Lawyers Association Volunteer judge, National Mock Trial Competition Licenses In addition to the courts of the State of Texas, Ms. DiMasi is admitted in all federal district courts in Texas, as well as the U.S. Court of Appeals for the Fifth Circuit and the U.S. Supreme Court GREAT HILLS TRAIL, SUITE 300 WEST AUSTIN, TEXAS tel fax Buchanan Dimasi Dancy & Grabouski LLP. All Rights Reserved Disclaimer Site by Zocalo Design

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9 TABLE OF CONTENTS INTRODUCTION... 1 I. BASICS OF A CLAIM FILE... 1 A. Effect of going paperless... 1 B. How do you make sure s get in to the file?... 1 II. ATTORNEY-CLIENT/WORK PRODUCT PRIVILEGE ISSUES... 1 A. The General Privilege Rules in Texas... 1 B. The Attorney-Client Privilege In Insurance Matters The Basic Attorney-Client Privilege Protects Many Insured-Insurer Communications Insurance-Related Communication With A Representative Of The Client Insurance-Related Communication With A Representative Of The Lawyer Other Attorney-Client Privilege Issues Arising In The Insurance Context The Work-Product Privilege In Insurance Matters... 8 C. Anticipation of litigation and effect on notice of legal hold Spoliation Document retention policies... 9 III. RESERVE INFORMATION... 9 A. First Party Cases B. Third Party Cases C. Conclusions Regarding Reserve Information IV. UNDERWRITING FILES V. REINSURANCE INFORMATION i

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11 DISCOVERY IN AN INSURANCE CASE INTRODUCTION In addition to the standard discovery sought in any lawsuit, coverage suits involve specialized requests unique to insurance disputes. An insured most certainly will request the claim file, and the request often uses that specific phrase. This raises the question of what is included in a claim file for discovery purposes, and what objections the carrier should make. While the claim file is almost always relevant, certain information in the claim file, such as communications with counsel or reserve information, may not be discoverable. Given that many carriers are now paperless, no hard copy file may exist, and questions arise as to whether all of the electronic correspondence has been included. Issues pertaining to the attorneyclient and work product privileges are almost always present, whether it s the carriers communications with their own counsel, issues pertaining to the tripartite relationship, or spoliation issues related to a legal hold. In addition, insureds often request information and documents pertaining to reserves, underwriting and reinsurance, which may or may not be discoverable. These issues will all be addressed below. I. BASICS OF A CLAIM FILE The claim file should contain all documents, notes, and work papers which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed and the [adjuster s] actions pertaining to the claim can be determined. Cal. Code of Reg (Lexis 2014). This does not mean that every piece of paper and every note needs to make it in the file. The file should stand on its own and be able to explain the file handlers investigation, thoughts and analysis, and conclusions. A. Effect of going paperless A claim file historically was a paper file kept by the handling adjuster that contained all of the documents relevant to the claim. With the advent of computerized document storage and electronic systems designed to assist in the claims handling and financial processing of claim payments, many companies developed hybrid systems where some of the claim file was kept in paper form, and some of the claim file was kept in computer files. Now, many carriers have moved so that the vast majority of all documents and other data is stored in electronic form. While there are always exceptions for certain carriers or certain types of tangible items that are not capable of storage in electronic form, the likelihood is that an insurer will 1 locate records using one or more computerized systems. B. How do you make sure s get in to the file? So, what about s? This is a topic that causes a good deal of concern. Some say that every should be included. Others contend that only the last in a string of s, but that each should be included. The more reasoned approach is that only those s that pertain to a claim and are necessary to show the activities and dates of an activity that are otherwise not documented in the claim file. So, a file note, rather than a string of s, maybe sufficient to document the claim. Many companies that have moved to electronic systems have semi-automatic methods to move s to a file. The person sending the can include a claim number, and cc or bcc a certain address that will automatically put the in the claim file. Other companies require the adjuster to take action to save the in the system. Still others save s indefinitely and will conduct a search if a document collection effort is required. II. ATTORNEY-CLIENT/WORK PRODUCT PRIVILEGE ISSUES The practice of insurance law brings with it a host of privilege issues that affect insurance lawyers on both sides of the v. The claims process involves many players outside the insurer-insured relationship. Evaluating a claim might require communication with brokers, agents, claims adjusters, engineers, experts, defense counsel, and third-party claimants, to name a few. The free flow of information between the various players is likewise essential to proper claims handling. Issues often arise when a party attempts to discover this confidential information. This is especially true in the liability insurance context, when a third-party claimant seeks to discover information the insured has shared with its insurer regarding the underlying lawsuit. Privilege issues also arise in coverage disputes when one party seeks to discover documents created when evaluating or investigating a claim. It is therefore in insureds and insurers best interests to understand how to maintain the free information flow without creating privilege issues in the future. A. The General Privilege Rules in Texas Texas Rule of Evidence 503 governs the attorneyclient privilege in Texas. 1 The attorney-client privilege protects confidential communications made for the purpose of facilitating the rendition of professional legal services to the client from disclosure and 1 TEX. R. EVID. 503.

12 promotes unrestrained communication and contact between the attorney and client. 2 The privilege belongs to the client and lasts indefinitely, unless waived. Attorney-client privilege remains intact even after the client resolves the controversy and terminates the attorney-client relationship. 3 The attorney-client privilege affords broad protection to not only those communications directly between attorneys and their clients, but also communications: (a) between the client or a representative of the client and the client s lawyer or a representative of the lawyer; (b) between the lawyer and the lawyer s representative; (c) by the client or a representative of the client, or the client s lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein; (d) between representatives of the client or between the client and a representative of the client; or (e) among lawyers and their representatives representing the same client. 4 A representative of the client includes a person having authority to obtain professional legal services... on behalf of the client or any other person who, for the purpose of effectuating legal representation for the client, makes or receives a confidential communication while acting in the scope of employment for the client. 5 A representative of the lawyer includes persons or entities that assist the lawyer in the rendition of professional legal services. 6 The attorney-client privilege therefore protects communication between attorneys and their clients or representatives for purposes of providing legal services. A party can also prevent discovery of material that falls within the work-product privilege. Texas Rule of Civil Procedure defines work product as material prepared or mental impressions developed in anticipation of litigation or for trial by or for a party or a party s representatives Work product also includes communications made in anticipation of litigation or for trial between a party and the party s representatives or among a party s representatives The work product definition expressly includes communications with and documents created by the party s attorneys, consultants, sureties, indemnitors, insurers, employees, or agents. 9 Texas courts distinguish core work product from other work product. Core work product includes material and communication containing the attorney s or the attorney s representative s mental impression, opinions, conclusions, or legal theories. 10 Work-product privilege absolutely protects core work product, and other parties cannot discover it regardless of their need or hardship. 11 In contrast, other parties can discovery all other work product if they can show substantial need and that they would not be able to obtain equivalent material without undue hardship. 12 Although these rules seem clear in print, their application to discovery disputes in the insurance context remains largely uncertain in Texas. With its unique issues and players, the line between privileged and non-privileged communication in insurance matters is often blurred. Knowing how these rules apply in the insurance context will assist you in protecting your client s interests and avoiding privilege issues from the onset. One of the most obvious privilege issues that arises in the insurance context is how to protect communication directly between an insured and its insurer, especially when the insurer is not involved in the relevant dispute. Consider this all-too-common example: Homeowners sue their general contractor for negligently performing work. The contractor files a claim with its insurance carrier. The contractor then sends the insurer a proof of loss supporting its claim that includes numerous confidential documents. Can the homeowners discover the contractor s claim file? Privilege issues also arise in coverage disputes. For example, insurers often send adjusters or other personnel to investigate a claim. Does privilege protect the adjuster s notes and reports in a coverage dispute? What about reports the insured s engineers 2 See TEX. R. EVID. 503(b)(1); Huie v. DeShazo, 922 S.W.2d 920, 921 (Tex. 1996); West v. Solito, 563 S.W.2d 240, 245 (Tex. 1978). 3 Bearden v. Boone, 693 S.W.2d 25, (Tex. App. Amarillo 1985, orig. proceeding). 4 TEX. R. EVID. 503(b)(1). 5 Id. 503(a)(2). 6 Id. 503(a)(4). 2 7 TEX. R. CIV. P (a). 8 Id. 9 Id. (emphasis added). 10 Id (b)(1). 11 Id.; In re Bexar County Crim. Dist. Attorney s Office, 224 S.W.3d 182, (Tex. 2007) ( Core work product is sacrosanct and its protection impermeable. ). 12 TEX. R. CIV. P (b)(1).

13 create or communication between the insured and its brokers? All of these communications and other material would be extremely relevant in a coverage dispute, but the parties will understandably want to resist requests to produce them. B. The Attorney-Client Privilege In Insurance Matters 1. The Basic Attorney-Client Privilege Protects Many Insured-Insurer Communications Texas does not recognize a bright-line insuredinsurer privilege, but several Texas courts have found that the attorney-client privilege covers insured-insurer communication. In one of the first cases to tackle this issue, Northern District Judge Hill recognized a limited privilege between an insurer and its insured. 13 The court found that Texas law recognizes a privilege for such communications when the court finds that communications were intended for the assistance of an attorney in the defense of a possible claim against the insured. 14 The court reasoned that it is no great leap to extend the attorney-client privilege to insuredinsurer communications when the policy requires the insurer to defend its insured and the communications further this obligation. 15 Moreover, the court reasoned that such an extension is economically beneficial because the insurer can investigate and possibly settle the case without having to involve an attorney. 16 Courts in several other jurisdictions have cited Metroflight as recognizing a limited privilege for insured-insurer communications under Texas law, but no Texas state courts have followed suit. 17 In fact, several subsequent Texas courts have held that the attorney-client privilege did not apply to communications between insureds and insurers. In In re Ford Motor Co., 988 S.W.2d 714 (Tex. 1998), the Texas Supreme Court held that the attorneyclient privilege did not apply to communication between an insured and a claims adjuster. 18 The Ford 13 Metroflight, Inc. v. Argonaut Ins. Co., 403 F. Supp. 1195, 1197 (N.D. Tex. 1975) ( Texas provides a limited privilege for communication between an insured and his insurer. ); see also U.S. v. Hoeffner, 254 F.R.D. 302, (S.D. Tex. 2008) (citing Metrofight for the proposition that attorney client privilege extends to communications between an insurer and its insured ). 14 Id. 15 Id. 16 Id. at See, e.g., Kerner v. Terminix Int l Co.., LLC, No. 2:04-cv- 0735, 2008 U.S. Dist. LEXIS , at *8 (S.D. Ohio Jan. 31, 2008); Cutchin v. Maryland, 792 A.2d 359, 364 n. 4 (Md. Ct. Spec. App. 2002). 18 In re Ford Motor Co., 988 S.W.2d 714, 719 (Tex. 1998). 3 case arose out of an automobile accident that the victims (including the insured) alleged resulted from defective brakes. 19 After the victims sued Ford, Ford attempted to discover the insured s post-accident statements she made to the adjuster concerning brake defects. 20 The insured did not make the statements at counsel s direction and apparently had not even hired counsel at the time the adjuster recorded her statements. The insured nonetheless argued that attorney-client privilege protected these statements. 21 The court found that no attorney-client relationship existed when the insured made the allegedly privileged statements, even though the statements concerned an accident that could result in covered liability. 22 Without a detailed analysis, the court held that the attorney-client privilege did not apply because the insurer was not the insured s counsel or counsel s representative. 23 Although the court did not discuss Metroflight, the decision does seem to cut away at the broader privilege recognized in that case. 2. Insurance-Related Communication With A Representative Of The Client Though Texas case law does not clearly answer whether insured-insurer communication generally falls within the attorney-client privilege, Rule 503 s plain language arguably includes many insurance-related communications. Rule 503 includes communications between an attorney and their client or their respective representatives. Rule 503 thus expressly covers communication beyond that directly between the attorney and client. If the insurer acts as the insured s representative, attorney-client privilege would cover communication with the insurer. The Texas Supreme Court has recognized that an insurer can be an insured s representative if it has authority to hire counsel and act on counsel s advice on behalf of the insured. 24 Several courts have found that attorney-client privilege covered insured-insurer communication for this reason. a. Asserting That The Insurer Is The Insured s Representative To Resist Third-Party Discovery Requests In In re Fontenot, 13 S.W.3d 111 (Tex. App. Fort Worth 2000, orig. proceeding), for example, the 19 Id. at Id. 21 Id. at Id. at Id. 24 See Nat l Tank Co. v. Brotherton, 851 S.W.2d 193, 199 (Tex. 1993).

14 Fort Worth Court of Appeals held that attorney-client privilege protected communication between an insured and its insurer because the insurer was the insured s representative. More specifically, the court held that attorney-client privilege covered a letter and detailed claim form submitted by an insured doctor to his medical liability insurer. 25 The court began its analysis by noting that the insured s insurance policy expressly conferred a duty to defend i.e., the right and contractual duty to obtain and facilitate legal representation upon the insurer. 26 The court then observed that a representative of the client includes a person having authority to obtain professional legal services, or to act on advice thereby rendered, on behalf of the client. 27 The court concluded that attorney-client privilege covered the letter and claims form because the insured submitted them to the insurer as a representative of the insured. 28 In In re Arden, No CV, 2004 Tex. App. LEXIS 2596 (Tex. App. El Paso Mar. 24, 2004, orig. proceeding), the court held the attorney-client privilege protected the insured s post-accident statement taken by the insurer s adjuster because the adjuster was acting as the insured s representative for purpose of obtaining and facilitating his legal representation. 29 The court found that the adjuster s role in recording the insured s statement would fall within Rule 503 s representative of the client definition. 30 The adjuster took the insured s statement to obtain and facilitate the insured s representation. 31 Further, the insured submitted the adjuster s affidavit along with its motion for a protective order that supported its position. The adjuster s affidavit stated that, based on his 17 years experience, he believed litigation was likely and that the insurer would owe a defense. 32 The affidavit also stated that the adjuster took the insured s statement to obtain and facilitate the insured s defense. 33 Fontenot and Arden clarify that communication directly between the insured and insurer or the insurer s employees can fall within the attorney-client privilege under certain circumstances. In practice, however, many insureds deal with their insurers indirectly through an intermediary broker or agent. Attorney-client privilege issues become even murkier when one injects an additional third party into the mix. It therefore begs the question of whether the insured s broker is its representative for attorney-client privilege purposes. The Federal District Court for the Southern District of Texas recently addressed this very issue. In In re Tetra Technologies, Inc., No. 4:08-cv- 0965, 2010 U.S. Dist. LEXIS (S.D. Tex. April 5, 2010), the court held that communications between an insured, its brokers, and the insured s attorney were covered by the attorney-client privilege and rejected the third-party claimants discovery requests. 34 The court adopted the reasoning applied by other jurisdictions, that an insurance broker can act as an agent [of the insured] when its communications are made for the purpose of facilitating the rendition of professional legal services to the client. 35 The court in Tetra went out of its way to note that the broker communication must involve an attorney to fall within the privilege. 36 b. Resisting Discovery Of Communication With Representatives In Coverage Disputes. The principles from the above cases should apply in coverage disputes. Insureds rely on their brokers and other professionals to work with their insurers to resolve coverage issues. These brokers often act as a conduit for exchanging information with the insurers for purposes of obtaining a defense. Just as the attorney-client privilege protected the insured-broker communication in Tetra from the underlying plaintiff s discovery request, so too should it protect communication between the parties and their respective representatives if a coverage dispute arises. 25 In re Fontenot, 13 S.W.3d 111, 114 (Tex. App. Fort Worth 2000, orig. proceeding) 26 Id. at Id. 28 Id. at In re Arden, No CV, 2004 Tex. App. LEXIS 2596, at *4 (Tex. App. El Paso Mar. 24, 2004, orig. proceeding). 30 Id. at *9. 31 Id. 32 Id. at *2. 33 Id In re Tetra Techs., Inc., No. 4:08-cv-0965, 2010 U.S. Dist. LEXIS 33012, at *14-15 (S.D. Tex. April 5, 2010) (applying Texas law). 35 Id. (citing Navigators Mgmt. Co., Inc. v. St. Paul Fire & Marine Ins. Co., No. 4:06-CV1722-SNLJ, 2009 U.S. Dist. LEXIS (E.D. Mo. Feb. 24, 2009); Exxon Corp. v. St. Paul Fire & Marine Ins., 903 F. Supp. 1007, (E.D. La. 1995) (holding that an insurance broker acted as a representative of a client when it received confidential communication for the purpose of effectuating legal representation for a client )). 36 Id. ( In order to fall within the privilege, however, these communications must involve an attorney. ).

15 3. Insurance-Related Communication With A Representative Of The Lawyer Rule 503 extends attorney-client privilege to communication involving a representative of the client and a representative of the lawyer. Even if an insurer is not the insured s representative, the insured could argue that the insurer is acting as the attorney s representative. The same argument should also apply to various people that the insurer and insured hire to investigate claims. The attorney-client privilege extends to nonattorney consultants who assist the attorney in providing legal services, such as, experts, accountants, counselors, and translators. Further, several Texas courts have found that the attorney-client privilege applies to investigators because the investigators were acting as the attorney s representative. 37 It is not a stretch to add insurers and other claim investigators to this list. The court s rationale in Metroflight supports an argument that insurers can act as the insured s attorney s representative. The court reasoned that, pursuant to the insurer s obligation to defend its insured, the insurer ordinarily investigates the facts underlying any possible claim against the insured and [t]he investigation file often includes statements from the insured concerning the facts of the claim. 38 As a practical matter, insurers are adept at gathering and analyzing facts to determine whether it should cover a claim. Insurers also have an interest in communicating directly with defense counsel (which they likely hired) about those case facts. Just as the attorney-client privilege extends to communication between an attorney or client and an investigator, so too should it extend to an insurer serving the same purpose. A third-party claimant seeking insured-insurer communication could argue that Rule 503 s plain language cuts against an insurer qualifying as the insured s attorney s representative. A representative of the lawyer only includes those persons employed by the lawyer. 39 As a practical matter, the insured s 37 See, e.g., IMC Fertilizer, Inc. v. O Neill, 846 S.W.2d 590, (Tex. App. Houston [14th Dist.] 1993, orig. proceeding) (privilege applied to investigators hired by counsel because they were lawyer s representatives); Bearden v. Boone, 693 S.W.2d 25, 28 (Tex. App. Amarillo 1985, orig. proceeding) (same). 38 Metroflight, Inc. v. Argonaut Ins. Co., 403 F. Supp. 1195, 1197 (N.D. Tex. 1975). 39 See TEX. R. EVID. 503(a)(4); see also In re Ford Motor Co., 988 S.W.2d 714, 719 (Tex. 1998) (finding that attorneyclient privilege did not protect communication between insured and adjuster because the insurer was not the insured s counsel s representative). 5 lawyer will rarely employ the insurer or its investigators. Insureds and insurers have a stronger argument that attorney-client privilege protects communication with a representative of the attorney in coverage disputes. Insurers often use adjusters to investigate claims. Insureds hire engineers, forensic accountants, and other professionals to investigate claims, especially after an insurer denies coverage. If the party resisting discovery can show that the attorney employed these professionals assist in rendering legal services, attorney-client privilege would arguably cover communication with them Other Attorney-Client Privilege Issues Arising In The Insurance Context a. The Attorney-Client Privilege Only Protects Communication With An Attorney Acting As An Attorney. Practitioners must remember that the attorneyclient privilege only applies to communications with attorneys (or their representative) for legal purposes. Those who represent or work with both insureds and insurers commonly wear multiple hats. Although this practice can conserve resources and expedite the claims process, when an attorney serves both a legal and business function it can jeopardize privilege. Insurance lawyers often represent their clients during the claims handling process, the underlying lawsuit, and the eventual coverage dispute. These lawyers work closely with the adjusters, investigators, and engineers to develop the case facts. The line between providing legal services and claims handling or investigation may become blurred. Because attorney-client privilege only protects communications made for legal purposes, this situation raises the issue of when claims handling ends and legal work begins. In re Texas Farmers Insurance Exchange, 990 S.W.2d 337, 341 (Tex. App. Texarkana 1999, orig. proceeding) exemplifies this point. Farmers arose out of a coverage dispute following a house fire. 41 After receiving the insured s claim, the insurer began to suspect that the fire resulted from arson. 42 The insurer hired an attorney to interview the insured homeowners. 43 After the interview, the insurer denied coverage for the fire damage. 44 The insureds filed suit against the insurers and noticed the attorney s 40 See Metroflight, 403 F. Supp. at In re Tex. Farmers Ins. Exch., 990 S.W.2d 337, (Tex. App. Texarkana 1999, pet. denied). 42 Id. 43 Id. 44 Id.

16 deposition. 45 The insurer attempted to quash the deposition, arguing that the attorney s involvement and knowledge fell within the attorney-client privilege. 46 The court disagreed, holding that the attorney was acting as an investigator, not an attorney, when he took the insureds statements. 47 The same would be true when the attorney performs a purely business function for the insured. If that attorney investigates the facts surrounding a potential insurance claim, the facts that he gathers on the insured s behalf and opinions he renders may fall outside the attorney-client privilege s scope. 48 Insureds and insurers alike need to be aware when attorneys merge business and legal services, they run the risk of jeopardizing privilege. b. The Common Interest Doctrine And Reservation Of Rights Issues i. Insureds And Insurers Often Share A Common Interest Even if insured-insurer communication does not fall within the basic attorney-client privilege definition, the privilege may nonetheless protect such communication if the insurer and insured have a common legal interest. Rule 503 also contains the common interest doctrine. 49 The common interest doctrine protects confidential communications made for the purpose of facilitating the rendition of legal services... by the client or a representative of the client, or the client s lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and 45 Id. 46 Id. 47 Id. 48 See, e.g., id. (holding that attorney-client privilege did not protect communication with attorney acting as an investigator); Cellco P ship v. Certain Underwriters at Lloyd s London, No , 2006 U.S. Dist. LEXIS 28877, at *8-10 (D. N.J. May 12, 2006) (holding that attorney-client privilege did not protect communication with a broker who was a licensed attorney because the broker was not providing legal services); but see Harlandale Indep. School Dist. v. Cornyn, 25 S.W.3d 328, (Tex. App. Austin 2000, pet. denied) (attorney-client privilege protected report from attorney who performed independent investigation in her capacity as an attorney for purposes of providing legal services and advice). 49 Courts sometimes call the common interest doctrine the joint defense privilege. This can be confusing because the doctrine does not exist just for co-defendants. In re Seigel, 198 S.W.3d 21, 27 (Tex. App. El Paso 2006, orig. proceeding). 6 concerning a matter of common interest therein. 50 This doctrine does not create a separate privilege, but is merely an exception to the general rule that a party waives the attorney-client privilege by injecting a third party into the attorney-client relationship. 51 In other words, the common interest doctrine expands the persons with whom a party can share confidential information without waiving privilege. Because the common interest doctrine is an outgrowth of the attorney-client privilege, a party relying on it to prevent discovery of confidential communication must first show that the attorney-client privilege would apply to the communication absent disclosure to third parties. 52 Attorney-client privilege protects such communication even though communicated to a third party if: (1) a common legal interest exists between the parties; and (2) the parties exchange the communication in confidence to assist in the parties common cause. 53 Insureds and insurers often share a common legal interest. This is especially true in the liability insurance context, where defeating the third-party claim or minimizing exposure is in both insureds and insurers best interest. 54 Thus, attorney-client privilege will cover communication between them to further that interest if the party resisting discovery can show that the insurer and insured share a common legal interest. 50 In re Monsanto Co., 998 S.W.2d 917, 922 (Tex. App. Waco 1999, orig. proceeding) (quoting TEX. R. EVID. 503(b)(1)(c)) (emphasis added). 51 See In re Skiles, 102 S.W.3d 323, 327 (Tex. App. Beaumont 2003, orig. proceeding); see also In re Lexington Ins. Co., No CV, 2004 Tex. App. LEXIS 1053, at *6 n.2 (Tex. App. Houston [14th Dist.] Feb. 2, 2004, orig. proceeding) (noting that the common interest doctrine is an exception to the general rule that no attorney client privilege attaches to communications that are made in the presence of or disclosed to a third party ). 52 See TEX. R. EVID 503(b)(1)(c); In re Lexington Ins. Co., 2004 Tex. App. LEXIS 1053, at *6 n.2; Brown v. Adams (In re Fort Worth Osteopathic Hosp., Inc.), No DML-7, 2008 Bankr. LEXIS 3156, at *51 (Bankr. N.D. Tex. Nov. 14, 2008) ( [I]f a document... would be protected by attorney-client privilege were it not shared, then it should be deemed protected to the same extent under the joint defense agreement privilege under Texas law if it had been shared with the [common third party] ). 53 See In re Lexington Ins. Co., 2004 Tex. App. LEXIS 1053, at *6 n.2 (citing In re LTV Sec. Litig., 89 F.R.D. 595, 604 (N.D. Tex. 1981)). 54 Universe Life Ins. Co. v. Giles, 950 S.W.2d 28, 60 (Tex. 1997) ( In a third party case, both the insurer and insured have a common interest in challenging a third-party s claim. ).

17 If a conflict arises between the insured and insurer, the common interest doctrine may not apply. At this point, the insurer and insured no longer have a common interest and the insured s defense counsel represents only the insured s interests. 55 The point at which the insured-insurer relationship becomes sufficiently adversarial is up for debate, however. 56 ii. Limitations to the Common Interest Doctrine In In re XL Specialty Insurance Company and Cambridge Integrated Services, Group, Inc., the Texas Supreme Court addressed the scope of the joint defense and common interest privilege doctrines. 373 S.W.3d 46 (Tex. 2012). In that case, XL Specialty Insurance Company was Cintas Corporation s workers compensation insurer. The plaintiff, a Cintas employee, sought workers compensation for a work-related injury. A claims representative with XL s third-party administrator denied the employee s claim. During the workers compensation administrative proceeding, XL s counsel sent communications about the proceedings to Cintas and the claims administrator. The plaintiff employee later sued XL and the claims administrator for bad faith. In discovery, the plaintiff employee requested communications made between XL s lawyer and Cintas during the worker s compensation proceeding. XL argued that the communications were protected from discovery by the attorney-client privilege. The trial court held that the privilege did not apply, which decision was affirmed by the Dallas court of appeal and the Texas Supreme Court. In so holding, the Texas Supreme Court noted that XL was the client and the communications were between XL s lawyer and a third party, Cintas, who was not represented by XL s lawyer (or any other lawyer) and was not a party to the litigation or any other related pending action. The Court did state that Cintas [the insured/employer], having contracted for a 55 See Fugro-McClelland Marine Geosciences, Inc. v. Steadfast Ins. Co., H , 2008 U.S. Dist. LEXIS , at *3-11 (S.D. Tex. Dec. 19, 2008) (holding that the common interest doctrine did not apply when insured funded its own defense after a coverage dispute arose). 56 See, e.g., id.; First Pacific Networks, Inc. v. At. Mutual Ins. Co., 163 F.R.D. 574, (N.D. Cal. 1995) (holding that reservation of right to deny coverage injected tension into the insured-insurer relationship); 670 Apartments Corp. v. The Agricultural Ins. Co., No. 96 Civ. 1464, 1997 U.S. Dist. LEXIS (S.D.N.Y. Dec. 30, 1997) (finding common interest doctrine inapplicable where insurer declines to provide a defense and takes a position antagonistic to the insured); Waste Mgmt., Inc. v. Int l Surplus Lines Ins. Co., 579 N.E.2d 322, (Ill. 1991) (holding that common interest doctrine applied even where insurer denied coverage). 7 substantial deductible, may have shared a joint interest with XL during the administrative proceedings in the outcome of the claim. Even so, the Court held that the communications were not privileged under Rule 503(b)(1)(C) because no matter how common XL s and Cintas s interests might have been, our rule requires that the communication be made to a lawyer or her representative representing another party in a pending action. The Court also rejected the argument that joint client rule protected the communications. The Court noted that there were no arguments or evidence that XL s lawyers also represented Cintas. While the Court recognized the possibility that the same lawyer could represent both the insured and insurer in certain circumstances, the Court found that that argument had not been pleaded or proved. As a result, practioners should exercise caution, knowing that a common interest privilege may not protect communications among counsel for different parties concerning an investigation that is not related to a pending action. The decision raises privilege concerns for communications made by an insured s counsel to the insurer in other insurance-related situations where the insurer is not a party to a pending litigation. iii. Privilege Issues Regarding Reservation Of Rights Whether an insurer s reservation of rights places the insured and insurer in an adversarial position is a particularly thorny issue. Allowing an insurer to defend under reservation of rights without waiving privilege benefits both parties. On the other hand, a reservation of rights puts the insured and insurer at odds with one another. 57 Though few Texas courts have analyzed this issue, one Texas court has held that the common interest doctrine applied to communications between counsel for the insured and its insurer defending under a reservation of rights. 58 Courts in other jurisdictions have reached the opposite result. In First Pacific Networks, Inc. v. Atlantic Mutual Insurance Co., 163 F.R.D. 574 (N.D. Cal. 1995), the court held that the attorney-client privilege did not protect communication between an insured, the insured s counsel, and its insurer after the 57 See The Housing Auth. of the City of Dallas v. Northland Ins. Co., 333 F. Supp. 2d 595, (N.D. Tex. 2004); N. County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004). 58 See In re Skiles, 102 S.W.3d 323, 327 (Tex. App. Beaumont 2003, orig. proceeding); see also Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567, 571 (E.D. Cal. 2002) (holding that common interest doctrine applied notwithstanding the reservation of rights)

18 insurer reserved its rights to deny coverage. 59 The court reasoned that the tension a reservation of rights creates is fundamentally inconsistent with a basic requirement of all attorney-client communication: the requirement that the client have a reasonably based expectation that the communication will not be used against the client. 60 The court also rejected the insured s argument that the common interest doctrine applied. 61 Although no Texas cases have followed First Pacific Networks, practitioners should be aware that attorney-client privilege may not cover communication between the insured and insurer after the insurer reserves its rights to deny coverage. 5. The Work-Product Privilege In Insurance Matters The work-product privilege may protect insurance-related communication that does not fall within attorney-client privilege s protection. The work product privilege is generally broader than the attorney-client privilege. Recognizing that sharing confidential information with an insurer is vital to both proper claims handling and to support the insurerprovided defense, the Texas Legislature included communications between a client and its insurers under the work-product umbrella. 62 The work-product privilege should thus protect information exchanged and communication between an insured and its insurer as long as it is in anticipation of litigation. a. Insurance-Related Work Product Created In Anticipation Of Litigation The work-product privilege applies not only to documents generated by the attorney, but to memoranda, reports, notes, and summaries of interviews prepared by others for an attorney s use. 63 Work-product privilege issues often arise when third parties seek to discover post-accident investigations. Issues also arise in coverage disputes when one party attempts to discover reports and other investigatory material in the other party s claim files. To resolve these issues, the court will determine whether the party performed the investigation in anticipation of litigation or in the ordinary course of business. Unlike the attorney-client privilege, documents may fall within the work-product privilege even if the party creates 59 First Pac. Networks, Inc., 163 F.R.D. at Id. at Id. at TEX. R. CIV. P In re Bloomfield Manufacturing Co., 977 S.W.2d 389, 392 (Tex. App. San Antonio 1998, orig. proceeding). 8 them in the ordinary course of business as long as the party also prepares them in anticipation of litigation. 64 No bright line exists between when routine claims handling ends and anticipating litigation begins. One could argue that the insured anticipates litigation any time a claim arises, especially in the liability insurance context. But the Texas Supreme Court has noted that Texas does not adopt the minority rule that the work-product privilege protects all claims investigations. 65 Instead, the party resisting discovery must show that the post-accident investigation or other material s objective and subjective purpose was to prepare for anticipated litigation. 66 b. Insurance Cases Illustrating The Anticipation Of Litigation Requirement Though whether the disputed material constitutes privileged work product will depend largely on the facts and circumstances at the time the party creates the work product, the following cases illustrate the anticipation of litigation requirement in the insurance context. In Humphreys v. Caldwell, 888 S.W.2d 469 (Tex. 1994), the Texas Supreme Court found that work-product privilege protected the insurer s claim file and prevented a third-party claimant from discovering the file s contents. 67 The claim file included memoranda and correspondence created by the insured s attorney. 68 The court found that it was evident on the documents face that the attorney created them in anticipation of litigation. 69 The court in In re Certain Underwriters at Lloyd s London, 294 S.W.3d 891 (Tex. App. Beaumont 2009, orig. proceeding) reached the same result in a coverage dispute. 70 The court found that work-product privilege protected an adjuster s handwritten notes that the adjuster compiled when investigating the claim. 71 This included notes the adjuster took during conversations with the insurer s attorneys and representatives. 72 The court held that the insurer anticipated litigation when it 64 Nat l Tank Co. v. Brotherton, 851 S.W.2d 193, 206 (Tex. 1993). 65 Id. at 206 n Id. at Humphreys v. Caldwell, 888 S.W.2d 469, (Tex. 1994). 68 Id. 69 Id. 70 In re Certain Underwriters at Lloyd s London, 294 S.W.3d 891, 900 (Tex. App. Beaumont 2009, orig. proceeding). 71 Id. at Id.

19 asked the adjuster to investigate the claim and prevented the insured from discovering the notes. 73 In contrast, the court in In re Texas Farmers Insurance Exchange, 990 S.W.2d 337 (Tex. App. Texarkana 1999, orig. proceeding) held that the insured could discover a report that the insurer s fire investigator created shortly after a house fire. 74 The evidence showed that the insurer was gathering evidence to determine whether to cover the insured s claim, not anticipating litigation with the insured. 75 The court held that, because the primary motivating factor of the investigation [was] to determine whether the claim should be paid or settled and the potential lawsuit avoided, then it would not appear to meet the test set forth in National Tank. 76 C. Anticipation of litigation and effect on notice of legal hold 1. Spoliation It is essential for insurers and insureds alike to preserve documents and other tangible things whenever litigation has commenced or either reasonably anticipates litigation. The federal courts have been active in asking counsel what steps have litigants taken to ensure preservation of information that might be relevant and lead to the discovery of admissible information. This process has come under more scrutiny as the complexity of the location and types of data have increased. When paper files were all that an insurer or insured would keep, the process was quite simple. Now, however, information can be stored in a wide variety of places: paper files, computer servers, company desktop computers, company laptop computers, company issued portable drives, company issued cell phones, personal cell phones, personal laptops, personal home computers, and personal portable drives. It is important that early in the life of the litigation that every person who might know the location of potentially relevant information be identified as a custodian of records, have the custodians identify where any documents might be stored, and inform each custodian of the obligation to retain records. While would seem obvious to attorneys who deal with these issues regularly, many people are unaware of the obligation to retain these records. Courts continuously struggle with how to deal with spoliation issues. Moreover, much time and energy is devoted to the fight between litigants about 73 Id. at In re Tex. Farmers Ins. Co., 990 S.W.2d 337, (Tex. App. Texarkana 1999, pet. denied). 75 Id. at Id. at lost and/or destroyed data and documents, including the degree of culpability of the various parties. For both insurers and insureds, well-crafted legal hold procedures can minimize the amount of expensive and time consuming battles regarding the spoliation of evidence. 2. Document retention policies Most businesses with any degree of complexity and volume of data have developed written document retention policies that permit the destruction of documents or data after a certain period of time. As long as that time frame is reasonable for that line of business, and as long as there is not litigation pending or reasonably anticipated, the business will be free to destroy the documents. Conflict occurs when the document retention policy leads to the destruction of evidence where there is litigation pending. That is why a legal hold informing information technology services not to destroy any data relevant to the pending litigation is so important. III. RESERVE INFORMATION As part of standard discovery sent to carriers, policy holders are increasingly requesting information pertaining to the reserves sent by the carrier for the claim at issue. Reserves have been described as a sum of money set aside to pay a claim, with the purpose of guarding against insurer insolvency. Lincoln Gen. Ins. Co. v. Access Claims Administrators, Inc., 2009 WL at *17 (E.D. Cal. Jan. 22, 2009). Another federal district court stated that setting reserves involves managing litigation by assessing the value of the claim based on the available evidence and the strengths and weaknesses of the claim, but also takes into account the probability of an adverse judgment, the jurisdiction, and the fees and expenses that may be incurred in defense of the claim. Nicholas v. Bituminous Cas. Corp., 235 F.R.D. 325, (N.D. W. Va. 2006). Yet another court recognized that reserves are statutorily compelled estimates and are likely to be frequently adjusted during the course of litigation. Thus, a particular reserve amount may be substantially more or less than the amount ultimately paid on a particular claim. Lipton v. Superior Ct., 48 Cal. App. 4 th 1599, 56 Cal. Rptr.2d 341, (Cal.2d DCA 1996). In both first and third party cases, insureds will often request that the carrier provide information regarding the reserves it has set for a claim. In a first party case, the insured will contend that the reserve information is relevant to whether coverage is available and how the carrier valued the claim and continues to value the claim over time. Arguably, a carrier would not place a reserve on a claim that is not covered, and would not place a higher reserve on a claim than what it actually paid. Similarly, in a third party case, the

20 insured may argue that the carrier s reserves are indicative of whether there is coverage, and whether the carrier inappropriately denied defense or, ultimately, indemnity coverage. Of course, in a third party case, the relevance determination should be limited by the claims the insured can assert against the carrier under Texas law. For example, because a Stowers claim is arguably the only extra-contractual claim available to an insured in a third party case, the insured should not be entitled to seek discovery related to a common law bad faith claim. In response, carriers generally contend that reserves must be set pursuant to the Texas Insurance Code, 77 and that the number represents a worst case scenario, as opposed to the actual value of a claim. Thus, the information is not only irrelevant, but potentially misleading. Carriers may also contend that the reserve amount is protected by the work product or trade secret privilege. A. First Party Cases Generally, courts are less likely to allow discovery of reserve information in first party cases then in third party cases. LITIG. & PREV. INS. BAD FAITH 12:16 (3 rd ed.) (2013). In a first party case, the issues will include (1) whether coverage is available under the policy at issue and (2) whether the carrier engaged in any extra-contractual conduct which warrants the imposition of damages. Carriers contend that the amount they have set in reserves is irrelevant to whether coverage is available under the policy, which is determined based on the relevant policy language and the circumstances of the loss. American Protection Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448, 450 (E.D. Cal. 1991). In holding that reserve information was not discoverable the American Protection court held that the policy either provides coverage for the loss or does not, the insurer s good faith is determined by the manner and depth of its investigation and the determination of whether there was a good faith factual and/or legal question as to whether the loss was covered. Id. at 450. Thus, the carrier s potential liability or estimation of its potential liability was marginally relevant at best. Id. Whether or not a carrier has placed reserves on the file (as required by state statute), arguably has no bearing on whether coverage is available. See, e.g., Sundance Cruise Corp. v. Am. Bureau of Shipping, 1992 WL at *3 (S.D.N.Y. Mar. 31, 1992). Another court recognized that due to 77 TEX. INS. CODE ANN (West 2014). 10 business risk and regulatory compliance issues, loss reserves information are not synonymous with, and may not be particularly probative of, an Insurer s opinion on the true value of a particular claim or on coverage. Cummins, Inc. v. Ace Am. Ins. Co., 2011 WL at *12 (S.D. Indiana Jan. 14, 2011). Thus, the court held that the connection between the loss reserves and the issues in the case was too attenuated to require the insurer to search for and produce every document related to reserves. Id. Interestingly, the court appeared to base its decision on an unduly burdensome objection, as it went on to hold that the information was not wholly irrelevant, and that the insurer was not permitted to redact reserve information from documents already produced. Id. In a first party case, reserve information arguably has little bearing on whether the carrier properly investigated the claim and/or engaged in other conduct with which the insured takes issue. See Safeguard Lighting Systems, Inc. v. N. Am. Spec. Ins. Co., 2004 WL at *3 (E.D. Pa. Dec. 30, 2004); Spearman Indus., Inc. v. St. Paul Fire & Marine Ins. Co., 128 F.Supp.2d 1148, (N.D. Ill. 2001). The scope of the investigation should be more readily determined from claim file and the adjuster s notes. However, one court has noted that [t]he setting of reserves bears some relationship to the insurer s calculation of potential liability, and [has] been found to be discoverable when bad faith is asserted. Alta Vista Productions, LLC v. St. Paul Fire & Marine Ins. Co., 2011 WL at *2 (E.D. Louisiana Aug. 1, 2011) (citations omitted). After an in camera review, though, the magistrate judge in the Alta Vista case determined that the information was not relevant to the particular bad faith claim. Id. at *3. Carriers may also contend that reserve information should be protected by the attorney-client or work product privileges, as it may be based on the opinions of counsel, or the trade secret privilege, as it contains confidential or proprietary calculations. See, e.g., Cummins, Inc WL at 12. These objections will require specific factual support, and confidentiality issues can be addressed with a protective order. See id. To the extent the reserves are set as a matter of course in the carrier s internal business, rather than for a litigation purpose, the work product privilege should not apply. B. Third Party Cases In a third party case, the insured will contend that the reserve amount is relevant to the value of the claim. One Texas court summarily held that Paragraph 4, requiring documentation and deposition information regarding the setting of reserves for third-party claims against the plaintiffs is improper because the information