Protecting Against the Inadvertent Waiver of the Attorney-Client Privilege When Providing Defense-Related Information to an Insurer

Transcription

1 Protecting Against the Inadvertent Waiver of the Attorney-Client Privilege When Providing Defense-Related Information to an Insurer Kirk A. Pasich March

2 Introduction Insurers often ask that their insureds share with them information about the defense of underlying lawsuits and claims against their insureds. The requested information often includes defense counsel assessments of an insured s potential liability, the anticipated cost of the defense, and settlement and mediation communications. Insurers often state that they request this information because they share a common interest with their insured in minimizing the insured s potential exposure and in assessing the course, scope, and extent of any underlying litigation. Insurers also often state that an insured is obligated to provide this information pursuant to its duty to cooperate. Too often there is an assumption that if an insured or its defense counsel provides this kind of information to an insurer, the information is protected by the attorney-client privilege and/or the work product doctrine and that providing the information to the insurer does not waive those protections. As explained below, that may be true when an insurer is defending its insured without reserving any rights to deny coverage or when an insurer is defending its insured under a reservation of rights when it has a duty to defend and is paying for independent defense counsel for its insured. However, at least some insurers have argued, and some courts have held, that the protections do not apply, or are waived, when an insurer has denied coverage or does not have a duty to defend, but only a right to defend or a duty to reimburse the insured for defense costs that it has incurred. We discuss below these issues. California Civil Code Section 2860 California Civil Code section 2860 specifically recognizes that information disclosed by an insured to an insurer that is defending it, but has a conflict of interest, is not a waiver of the privilege as to any other party. Cal. Civ. Code 2860(a), (b), (d). However, it appears that this protection might be limited to situations in which the policy imposes a duty to defend and the insurer is honoring that duty. See id. Absent that protection, there may be some risk, and perhaps a substantial risk, that a disclosure of information to excess insurers could result in that information losing its privileged or work product status as against the underlying plaintiffs both because the excess insurers are not defending the insureds and because of the excess insurers reservations of rights. There is some legal authority suggesting that possibility. Because of the many variations in policy language, this alert does not address all of the issues. It also does not replace, and should not be relied on instead of, legal advice based on the specific policy language involved and an insured s particular situation. However, it does provide a starting point and is intended to be an aid in considering what sometimes is a maze of factual and legal issues regarding insurance. This alert may be considered advertising in some states. Page 1

3 Durkin v. Shields (In re Imperial Corp. of America) In Durkin v. Shields (In re Imperial Corp. of America), 167 F.R.D. 447 (S.D. Cal. 1995), the insured s defense counsel provided the directors and officers ( D&O ) liability insurer with letters assessing the insureds risk in the underlying litigation and settlement demands. The underlying plaintiffs contended that these letters were not privileged or subject to work product protection. The insureds argued that even though the D&O insurer did not have a duty to defend (it had a duty to indemnify for defense costs), it shared a common interest in the ultimate outcome of the lawsuit so that the privilege should attach to their communications. The court rejected this argument, even though the insurer had signed joint defense agreements with the insureds and their co-defendants. The court held as follows regarding the attorney-client privilege: Id. at [The insureds defense counsel] did not have an attorney-client relationship with [the insurer]. The [counsel s] letters were not written by or to clients of [the defense counsel] and do not reveal any directors or officers communications to [defense counsel]. The letters were written for the purpose of apprising [the insurer] of the status of the case, not for seeking or imparting legal advice. [The insurer] did not have a duty to defend the [insureds] and did not defend the [insureds], nor pay their legal expenses. Finally, [the insurer] and the [insureds] did not share common legal representation; rather, [the insurer] had separate representation. The court then held that any work product protection had been waived by providing the letters to the insurers: At the time [defense counsel] sent the letter to [the claims adjuster], the [insureds] and [the insurer] were not adversaries in litigation. However, there can be no doubt that [defense counsel] was aware that when an insurer has not committed to indemnify its insured after demand has been made to do so, the possibility of a future coverage action pitting the insured against the insurer is a distinct possibility. Therefore, there can be no doubt that [defense counsel] understood that at the time the letter was sent to [the claims adjuster], and copied to [another insurer], litigation between his clients and [the insurers]... was a very real possibility. Consequently, [defense counsel] s transmittal of the... letter to [the insurers] not only increased the likelihood, but virtually assured, that potential opponents in future litigation would gain access to the disputed documents as well as to [defense counsel] s opinions and thought process regarding his clients liability. Id. at (footnote omitted). Page 2

4 Continental Casualty Co. v. St. Paul Surplus Lines Insurance Co. A similar conclusion was reached in Continental Casualty Co. v. St. Paul Surplus Lines Insurance Co., 265 F.R.D. 510 (E.D. Cal. 2010). Continental involved a lawsuit by an equipment lessee s insurer against the equipment manufacturer s insurer. Both the lessee and the manufacturer tendered their defense to the lessee s insurer. The lessee s insurer agreed to defend the lessee, but initially refused to defend the manufacturer and, in fact, paid for the lessee s cross-suit against the manufacturer for two years. Later, the lessee s insurer agreed to defend the manufacturer and paid for independent Cumis defense counsel for the manufacturer. The manufacturer s insurer did not defend either party. Its policy was subject to a self-insured retention ( SIR ) and gave it the right, but not the duty, to defend. After the lessee s insurer settled the underlying lawsuit, it sought contribution from the manufacturer s insurer. It also sought discovery of communications among the manufacturer, the manufacturer s insurer, and independent defense counsel. The court permitted the discovery. It ruled that the privileged relationship relates only to communications between [independent defense counsel] and his client, [the manufacturer], and not to [the manufacturer s insurer]. Id. at 523. The court explained: Id. at 525. [W]hile the conflict of interest is explicit between an insured and a defending insurer that reserved its rights, such a conflict is also objectively manifested between an insured and a non-defending insurer that retains its own interests in the outcome of the litigation while sitting on the sidelines. The manufacturer, its insurer, and defense counsel argued that the privilege should apply to their communications because while the insurance policy did not require that the manufacturer s insurer defend the manufacturer, it did give the insurer the right to investigate or defend and did require [the manufacturer] to provide information to [its insurer] about the [underlying] action. Id. They also argued that a failure to extend the privilege to those communications would place an insured in a position of having to choose between violating the terms of the insurance contract and opening its confidential communications to the world. Id. (citation omitted). The court disagreed: [E]videntiary privileges are statutorily created in California and must be strictly construed. Id. It noted that California Civil Code section 2860 protects the attorneyclient privilege as to communications shared with the insured s insurer when the insurer is defending the insured under a reservation of rights. However, it emphasized that any disclosure and cooperation requirements do not require the disclosure of privileged material. Id. (citing Cal. Civ. Code 2860(f) and Assurance Co. of Am. v. Haven, 32 Cal. App. 4th 78, 90 (1995) ( [T]he duties specified in Civil Code section 2860 that Cumis counsel owes the insurer are Page 3

5 limited to the duties to disclose, inform, consult and cooperate regarding nonprivileged information. )). It then held: [T]he attorney-client privilege has never been extended to cover communications among an insured, defense counsel, and an insurer that is not defending its insured without reservation, let alone an insurer that is not defending its insured at all. This court does not find any justification for creating a new privilege to cover those communications. Id.; see also Vt. Gas Sys., Inc. v. U.S. Fid. & Guar. Co., 151 F.R.D. 268, 277 (D. Vt. 1993) (The common interest doctrine does not apply where there is an adversarial relationship between an insured and insurer as to whether coverage exists, the parties have never shared the same counsel or litigation strategy and the documents at issue were prepared in an atmosphere of uncertainty as to the scope of any identity of interest shared by the parties. ); NL Indus. v. Commercial Union Ins. Co., 144 F.R.D. 225, (D.N.J. 1992) (common interest doctrine does not apply when insurer has denied coverage); Dixie Mfg. Co. v. Ricks, 112 S.E. 370, 373 (Ga. 1922) (privilege does not apply to communication between insured and insurer s counsel when insured had been informed that insurer was disputing coverage). The Continental court also rejected the argument that the work product doctrine applied to the communications. It explained: Here, the common interest exception to work product waiver does not apply because... [the manufacturer s insurer] did not defend or intend to defend [its insured] in the [underlying] action, and therefore any disclosure of work product to [the insurer] was not reasonably necessary for the accomplishment of the purpose for which the disclosing attorney was consulted, namely, [the manufacturer] s defense. 265 F.R.D. at 529. The court next addressed the applicability of California s mediation confidentiality (found in California Evidence Code sections 1119, et seq.) to documents relating to an underlying mediation. The court held that the mediation confidentiality did not protect against the disclosure of mediation communications to the manufacturer s insurer: [The manufacturer s insurer] did not participate in the mediation and is not part of a tripartite relationship with [the manufacturer and defense counsel], and cannot therefore claim that information [the manufacturer or defense counsel] shared with [the manufacturer s insurer] about what occurred at the mediation is privileged. Additionally, neither [defense counsel] nor [the manufacturer] (nor [the manufacturer s insurer], on their behalf) may contend that any communications they had with [the manufacturer s insurer] about what occurred in the mediation are covered by the mediation privilege. By divulging communications made by [the lessee s insurer] in the mediation or in settlement negotiations, [the manufacturer] and/or [defense counsel] violated their duty of confidentiality with [the lessee s insurer], and therefore may not now use the Page 4

6 mediation privilege to protect their communications with [the manufacturer s insurer]. Id. at 530 (footnote omitted). Restrictions on an Insurer s Access to Privileged Information Some jurisdictions hold that an insurer has a right to access an insured s privileged information, at least in some circumstances. The leading case is Waste Management, Inc. v. International Surplus Lines Insurance Co., 579 N.E.2d 322 (Ill. 1991). In Waste Management, the insureds had been sued for injuries and damage arising out of the disposal of toxic waste at their landfill. The insureds paid for their own defense and settled the underlying litigation. When the insureds sought indemnification from their insurers, the insurers denied coverage. In the coverage litigation, the insureds refused to produce certain documents from the underlying litigation, asserting attorney-client privilege. The Illinois Supreme Court held that the insureds had a duty to produce that information. First, the court held: Id. at 328. [T]he cooperation clause imposes a broad duty of cooperation and is without limitation or qualification. It represents the contractual obligations imposed upon and accepted by insureds at the time they entered into the agreement with insurers A fair reading of the terms of the contract renders any expectation of attorneyclient privilege, under these circumstances, unreasonable. We conclude that the element of confidentiality is wanting and, therefore, the attorney-client privilege does not apply to bar discovery of the communications in the underlying lawsuits. The Illinois Supreme Court then held that the insurers had a right to access to privileged information pursuant to the common interest doctrine. It explained: Id. at Clearly, here both insurers and insureds had a common interest either in defeating or settling the claim against insureds in the [underlying] litigation. We believe that the communication by insureds with defense counsel is of a kind reasonably calculated to protect or to further those common interests [W]e believe that the doctrine may properly be applied where the attorney, though neither retained by nor in direct communication with the insurer, acts for the mutual benefit of both the insured and the insurer. Finally, the Illinois Supreme Court accepted the insurers argument that the insureds had placed the privileged documents at issue by seeking coverage. It stated: We... agree that defense counsel s litigation files in the underlying case are relevant and at issue in the present declaratory judgment action. However,... the attorney-client privilege has no application in this case. Id. Page 5

7 at 327. If these issues are raised under California law, the outcome should be different from the outcome in Waste Management. This is true for two reasons. First, California Civil Code section 2860 provides insurers with certain rights of access to privileged information when the insurer has a duty to defend and when it is performing that duty through the appointment of independent counsel. Specifically, section 2860(d) states, in relevant part: When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured 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 action.... Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party. Cal. Civ. Code 2860(d). Thus, section 2860(d) expressly recognizes that the sharing of information between an insured s independent defense counsel and the insurer is not a waiver of any privilege and that the insured and its independent defense counsel are not, in any event, obligated to share privileged materials relevant to coverage disputes. Second, a California appellate court expressly has rejected the holdings of Waste Management. In Rockwell International Corp. v. Superior Court, 26 Cal. App. 4th 1255 (1994), the court expressly considered Waste Management. The Rockwell court rejected the notion that the cooperation clause somehow negates any expectation of privilege: [T]he plain language of the clause..., by any rational reading, requires the insured s cooperation without so much as a hint that communications from the insured to its attorney in furtherance of the insured s duty to cooperate in the defense of the underlying action should occur without an expectation of confidentiality. Id. at The court noted that at the time the standard cooperation clause was drafted, its drafter did not consider or intend that it would operate as a waiver of the attorney-client privilege in this situation or in any situation. Id. at The court also pointed out that where the carrier questions the availability of coverage and provides a defense in the third party action subject to a reservation of rights, a conflict exists because the insured s goal is coverage, which flies in the face of the insurer s desire to avoid its duty to indemnify. Id. at Therefore, the court rejected the Waste Management holding, explaining: In Illinois, they don t let little things like conflicts of interest get in their way. Id. at 1264 n.3. It then turned to the common interest doctrine. It noted that the Illinois Supreme Court was [u]ndisturbed by the fact that the carriers had not provided a defense or otherwise participated in the underlying actions, and [was] undeterred by the fact that, as a result, no single attorney was acting jointly for two clients. Id. at It rejected the argument, explaining that in California, the common interest exception applies only where two or more clients have retained or consulted a lawyer upon a matter of common interest. Id. at 1267 (quoting Cal. Evid. Code 962). The court noted that on the case before it, the attorneys were retained to represent the insured and only the insured and that, Page 6

8 therefore, the Waste Management common interest rule is inconsistent with California statutory law. Id. Then, the court addressed the in issue doctrine. It stated: Believe it or not, the Illinois Supreme Court bought this one too.... Id. at It rejected the argument, holding: The in issue doctrine creates an implied waiver of the privilege only when the client tenders an issue involving the substance or content of a protected communication, not where the privileged communication simply represents one of several forms of indirect evidence in a particular case. For this reason, the doctrine has no application in a coverage action between an insured and its carrier where the issues turn on the underlying facts and the insured is not relying on the advice of counsel for any purpose. Id. (citations omitted). The Rockwell court s reading of California law was premised upon, in part, Civil Code section Indeed, section 2860 specifically recognizes that when the insured selects independent counsel and the insurer provides counsel as well, those counsel shall cooperate fully in the exchange of information that is consistent with each counsel s ethical and legal obligation to the insured. Cal. Civ. Code 2860(f). Thus, as a general rule, when California law applies, it is clear, pursuant to section 2860 and Rockwell, that (i) an insurer generally does not have a right to privileged information relating to coverage issues, (ii) the cooperation clause in an insurance policy does not constitute a waiver of the attorney-client privilege, (iii) there is no common interest sufficient to entitle the insurer to access to privileged defense-related information other than as provided within section 2860, and (iv) the insured s pursuit of coverage does not entitle the insurer to have access to privileged defense-related communications. Still, there may be uncertainty about what law governs a particular case, and insureds often are confronted with situations where an insurer requests status updates, information evaluating the insured s potential liability in the case, or the results of mediation. Therefore, an insured should carefully consider how best to ensure that the attorney-client privilege remains intact, while attempting to provide an insurer with information that the insurer might request in order to participate in funding a settlement. Approaches to Protecting the Privilege Given these decisions and insurer arguments, insureds and their defense counsel should cautiously approach sharing information with insurers. Because some jurisdictions (e.g., Illinois) have held that privileged information must, at least in some circumstances, be shared with insurers, an insured must consider what law governs its relationship with and duties to its insurer to avoid waiving privilege or to avoid jeopardizing its coverage if it otherwise may have a duty to disclose privileged information. When California law applies, the attorney-client privilege may protect the disclosure of otherwise privileged information to (i) a defending insurer that has neither denied coverage nor reserved its right to deny coverage and (ii) a defending insurer that has reserved its right to deny coverage, but has provided independent defense counsel in accord with the provisions of Civil Code section Page 7

9 However, when an insurer has denied coverage, that insurer often has no right to privileged information and the provision of privileged information to that insurer may constitute a waiver of the privilege. Furthermore, if an insurer has not denied coverage, but has not assumed its insured s defense or has no present duty to defend (because, for example, it is an excess insurer or its policy has only a duty to pay or indemnify for defense costs), then an insured should carefully consider whether providing otherwise privileged information to the insurer may constitute a waiver of the attorney-client privilege and work product protections. The above decisions suggest that at least in some (or many) circumstances, such a waiver may result even if there is a joint defense agreement. Therefore, an insured may wish to raise the issue with the requesting insurer and consider refusing to produce the requested information without adequate assurances from the insurer that the information will not become discoverable by the underlying plaintiffs because it is provided to the insurer. The insurer presumably would not want its insured to share defense-related information if there is a potential waiver of these protections or a potential to prejudice the defense of the underlying litigation against the insured for which the insurer might bear some financial responsibility. An insured also may consider the appointment of separate joint defense counsel. This counsel would work with the insured s own independent defense counsel but, unlike independent counsel (who represents only the insured), would represent both the insured and the insurer. This associated defense counsel would provide coverage-related advice to either the insured or the insurer, but rather would have the classic tripartite relationship where it has two clients. In that way, the associated defense counsel would have access to privileged defense-related information and work product, and should be able to share that information in a privileged fashion with its clients. While this approach has not been tested (to our knowledge) outside the context of section 2860, it would appear to be in accord with authorities holding that when a lawyer or law firm has joint clients, its communications with those clients are privileged. It also addresses the situation that gives rise to arguments and findings of privilege waivers that it, that when the defense counsel represents only the insured, it has no attorney-client relationship with the insurer and, given a reservation of rights, there is no sufficient community of interest between the insured and insurer to protect the privilege. Therefore, we recommend that when an insurer has denied coverage or is not defending its insured in accord with section 2860, the insured carefully consider what information it and its defense counsel share with the insurer and consider whether the approaches outlined above might protect it from waiving the attorney-client privilege and work product doctrine while not jeopardizing its coverage. Page 8

10 About the Author Kirk Pasich is the leader of Dickstein Shapiro s Insurance Coverage Practice and serves on the firm s Executive Committee. He has been named by Chambers USA: America s Leading Lawyers for Business as one of the nation s top 12 policyholder lawyers, by Best Lawyers as the 2011 Los Angeles Insurance Lawyer of the Year, and by Los Angeles Business Journal as one of the Top 10 litigators in Los Angeles. Chambers says that All-star lawyer Mr. Pasich is an unmistakable feature of California s insurance landscape, while Lawdragon has said, When it comes to representing policyholders, there s no bigger name on the West Coast. Chambers also says: Kirk Pasich is the leading name at this national practice, whose skill at always putting the right people on a matter ensures that it remains a go-to firm for complex insurance matters. Mr. Pasich conducts an active trial and appellate practice. He has helped client obtain insurance recoveries of more than $2 billion since 2007 and served as lead trial counsel for Sempra Energy in obtaining a $48.5 million verdict against an insurance broker in 2008 (affirmed in full on appeal in August 2010). Mr. Pasich also is the author of more than 400 articles regarding insurance issues and the author, co-author, or editor of several books on insurance-related topics. He may be reached at pasichk@dicksteinshapiro.com or (310) About Dickstein Shapiro LLP Dickstein Shapiro LLP, founded in 1953, is a multiservice law firm with attorneys nationwide. The firm s clients include more than 75 of the Fortune 500 companies, start-up ventures and entrepreneurs, multinational corporations, major motion picture studios, charitable organizations, and government officials. Dickstein Shapiro s core practice groups Antitrust & Dispute Resolution, Business & Securities Law, Corporate & Finance, Energy, Government Law & Strategy, Insurance Coverage, and Intellectual Property involve the firm in virtually every major form of counseling, litigation, and advocacy. For additional information, please visit dicksteinshapiro.com. About Dickstein Shapiro s Insurance Coverage Practice Dickstein Shapiro is one of the United States leading law firms in representing insureds around the world in disputes with their insurers. With more than 70 insurance coverage attorneys and ranked as one of the largest practices in the United States by Business Insurance Dickstein Shapiro has the deep experience in a broad range of issues that is necessary to provide clients with superior representation in all insurance coverage matters. The firm s insurance coverage attorneys provide advice and strategies that identify coverage opportunities, protect against unnecessary losses, and secure revenue from insurance policies through litigation and alternative means. This work is conducted with one primary focus maximizing each client s bottom line. Since the beginning of 2007, firm attorneys have recovered more than $4 billion on behalf of insureds in matters involving a wide range of coverage types, claims, and industries. Page 9