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Blurred Lines

By Marc S. Voses and Steven P. Nassi
February 26, 2014

Protecting an insurer's claims file and material created during the investigation of claims using the attorney-client privilege and work-product doctrine has always been of particular concern to insurers, especially in the context of coverage litigation. Yet, in many jurisdictions, insurers are without proper statutory or decisional guidance on the scope of these protections, and how to properly preserve them. Last year brought a number of decisions from various jurisdictions concerning the applicability of the attorney-client privilege and work-product doctrine in the context of an insurer's claims investigation.

Each of the decisions analyzed below offers important guidance on how insurers can best utilize attorneys to assist with their investigation while at the same time protecting privileged information.

Creation of Documents: Pre-Denial vs. Anticipation of Litigation

In August 2013, the New York Supreme Court, New York County, issued a decision examining the line that separates attorneys in their capacity as claims investigator versus legal counsel. In TransCanada, National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., No. 650515/2010, 2013 WL 4446915 (N.Y. Sup. Ct., Aug. 15, 2013), the insured sought coverage for repair costs and business interruption losses arising out of a month-long outage of a steam turbine power generator. When its insurers received notice of the claim, they jointly retained outside counsel to investigate and evaluate the claim. It should be noted, however, that the insurers in this case never entered into a common interest agreement ' or anything of the like ' explicitly retaining any privileges or protections that may apply to their communications or work product. The court noted that the attorneys supervised, coordinated, and directed the investigation, which included collecting documents and hiring investigators. In addition, the attorneys prepared reports summarizing the results of the investigation.

After the investigation, the insurers simultaneously denied coverage and filed a declaratory judgment action. During the course of discovery in the coverage litigation, the insured sought those documents relating to its insurers' investigation of the claim, most of which were created before the insurers' denial of coverage. The insurers claimed that these documents were protected by the attorney-client privilege and work-product doctrine.

Following an in-camera review of the documents in question, the court found that all of the documents were discoverable on three grounds. First, the court noted that coverage investigations are an “ordinary business activity for an insurance company” and do not constitute legal advice. Thus, if attorneys are working to investigate claims and determine coverage, their documents do not constitute legal advice and are not protected work product or trial-preparation materials.

Second, because the insurers did not produce evidence showing when the coverage decision was actually made, the court determined that the decision was made when the denial letter was issued, such that any documents created prior to the denial letter are not protected work product or trial-preparation materials.

Third, the attorneys freely communicated with all of the insurers, which are independent third parties to each other, and there was no attempt to segregate the communications or keep them confidential. Thus, the common interest privilege exemption did not apply and the parties waived any attorney-client privilege that may have otherwise applied.

However, contrast the TransCanada decision with a recent Florida state court decision dealing with privilege issues arising out of South Miami Health Center's insurance coverage action against State Farm Mutual Automobile Insurance Company, claiming breach of contract. State Farm Mut. Auto. Ins. Co. v. South Miami Health Center, Inc., No. 12-031 AP (Fla. Cir. Ct., App. Div. Oct. 15, 2013). Here, the court found that the documents in question were protected because they were prepared in anticipation of litigation.

The decision notes that during discovery, State Farm produced its entire claims file save for 17 pages of documents that it deemed work product. The documents at issue in the discovery dispute consisted of five pages of notes from a State Farm adjuster that State Farm had deemed work product. After reviewing the notes under seal, the appellate division held that in a breach of contract action that did not involve any bad-faith claims, the “normally automatic work product protection” applies to documents that were obtained or developed in anticipation of litigation or trial.

The court also noted that the “anticipation of litigation” requirement should be construed broadly in such circumstances. The court acknowledged that in a bad-faith context, however, the work product doctrine generally does not bar the production of claims files.

Beware of the Quasi-Fiduciary Responsibility to the Insured

Under certain circumstances, outside counsel assisting an insurer with its claim investigation may owe the insured a quasi-fiduciary duty. The Washington Supreme Court addressed this issue in Cedell v. Farmers Ins. Co. of Washington, 295 P.3d 239 (Wash. 2013), where the insurer's outside counsel wrote a letter to the insured, noting that the origin of the fire at the covered premises was undetermined and that coverage might be denied based on a delay in reporting and inconsistent statements by the witnesses. Counsel also extended a one-time settlement offer of $30,000 good for 10 days, when the actual damages ultimately determined by the court were four times that amount.

The insured's calls to the insurer regarding the offer allegedly went unreturned. As a result, the insured commenced an action against the insurer, alleging bad faith in failing to provide coverage for the fire. After filing suit, the insured moved to compel the production of documents and responses to interrogatories.

The court ultimately found that, in the context of first-party bad-faith claims other than in the underinsured motorist context, there is a presumption that the entire claims file is discoverable. The presumption can be overcome if the insurer can prove that the insurer's attorneys were “not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability, for example, whether or not coverage exists under the law.”

Upon such a showing by an insurer, the documents in question may be submitted for an in camera review, and any communications revealing counsel's mental impressions regarding issues of coverage or other matters relating to the insurer's potential liability may be redacted. Be mindful, however, that even if an insurer can meet its burden and have certain communications redacted, the insured may still be able to access the redacted communications through the civil fraud exception. Application of the civil fraud exception entails a two-step process. First, the court will perform an in camera review of the claimed privileged materials upon a showing that a reasonable person would have a reasonable belief that an act of bad faith occurred. Second, after the in camera review and upon a finding that there is a foundation to permit a bad faith claim to proceed, the attorney-client privilege will be presumed to be waived.

Another decision that scrutinized the role of the attorney as claim investigator and counsel arose when Credit Suisse was sued by lien claimants. Stewart Title Guar. Co. v. Credit Suisse, Cayman Islands Branch, No. 1:11-CV-227-BLW, 2013 WL 1385264 (D. Idaho Apr. 3, 2013). In the underlying matter, Credit Suisse's title insurer retained defense counsel to represent Credit Suisse, and also hired separate counsel to investigate the claim and advise on the scope of coverage available under its policy.

Upon completion of the investigation, the insurer sought a declaratory judgment that it had no duty to defend. Credit Suisse alleged that the insurer fraudulently and/or in bad faith handled the defense and settlement of the lien claims, and sought in discovery the communications between the insurer and the investigating coverage attorneys. In response, the insurer claimed that the communications were privileged.

In evaluating the attorney-client privilege, the district court referenced the Cedell decision discussed above, and held that the insured is presumptively entitled to the entire claims file and that the insurer may overcome the presumption by identifying communications where its attorneys were “not engaged in the quasi-fiduciary tasks of investigating and evaluating the claim.” The court did confirm, however, that such communications may be redacted insofar as they reflect mental impressions of the attorneys to the insurers unless those “mental impressions are directly at issue in their quasi-fiduciary responsibilities to [the insured].” The court added that all documents “dealing with the factual investigation of the lien claims are discoverable,” and that all documents discussing both factual and coverage matters are discoverable, although coverage materials may be redacted to the extent they do not involve the bad-faith claim.

The court also noted that the work-product doctrine does not apply in a bad-faith insurance claim settlement case, because the “strategy, mental impressions and opinion of the insurer's agents concerning the handling of the claim are directly at issue.” The court further advised that for future reference, insurers should set up and maintain separate files so as to avoid comingling factual material with legal advice implicating coverage issues.

When the Claims Handler Is an Attorney

In Mehta v. ACE American Ins. Co., 2013 WL 3105215 (D. Conn. June 18, 2013), a third party brought a claim against an insurer seeking payment under an underinsured motorist policy, and sought discovery of certain documents that mostly consisted of e-mails to and from the insurer's claims specialist, an attorney, prior to the coverage decision.

After an in-camera review of the documents, Connecticut's federal district court held that an insurer may not “insulate itself from discovery by hiring an attorney to conduct ordinary claims investigations” and that to the extent an attorney functions as a claims adjuster, claims process supervisor, or claims investigation monitor, the attorney-client privilege does not apply. The documents are privileged only if they contain “truly confidential inquiries or responses to counsel concerning legal advice, rather than the insurance claims.”

In light of the holding, the court determined that the insurer may withhold a privileged e-mail from the insurer's in-house counsel containing legal advice, a post-complaint coverage opinion by outside counsel, and post-complaint internal communications prepared in anticipation of trial.

Conclusion

While these recent decisions concerning the applicability of privilege in the claim investigation context were of mixed results, the lessons that can be learned are important and potentially highly beneficial to insurers. Based on these decisions, some guidelines that may assist the reader in protecting attorney-client communications and work product are as follows:

  • When utilizing attorneys to perform the “ordinary business activities” of an insurer, be mindful that their documents may not constitute legal advice and therefore may not be privileged or otherwise protected from disclosure in coverage litigation.
  • Documents created prior to an insurer's decision to deny coverage may not be protected work product.
  • When a law firm is retained by multiple carriers, segregation of communications as to each of the insurers and treating them as confidential is important to prevent the unintended waiver of privilege. Insurers in this kind of arrangement would also be wise to enter into a common-interest agreement, extinguishing any doubt as to their intention to preserve the privileges and protections that may apply to their communications and work product.
  • Keep in mind that the facts of a case may support an “anticipation of litigation” argument in favor of privilege.
  • Be aware that an attorney's statements and work product made while investigating, evaluating and processing a claim may not be privileged.
  • On the other hand, providing an insurer with counsel as to its liability should be given the protections afforded by the attorney-client privilege and work product doctrine.

Keeping these guiding principles in mind while utilizing attorneys to investigate claims will help protect the confidentiality of advice and information from counsel, which is one of the primary benefits of retaining an attorney in the first place.


Marc S. Voses and Steven P. Nassi are partners with Nelson Levine de Luca & Hamilton, LLC, a law firm focused solely on the business of insurance.

Protecting an insurer's claims file and material created during the investigation of claims using the attorney-client privilege and work-product doctrine has always been of particular concern to insurers, especially in the context of coverage litigation. Yet, in many jurisdictions, insurers are without proper statutory or decisional guidance on the scope of these protections, and how to properly preserve them. Last year brought a number of decisions from various jurisdictions concerning the applicability of the attorney-client privilege and work-product doctrine in the context of an insurer's claims investigation.

Each of the decisions analyzed below offers important guidance on how insurers can best utilize attorneys to assist with their investigation while at the same time protecting privileged information.

Creation of Documents: Pre-Denial vs. Anticipation of Litigation

In August 2013, the New York Supreme Court, New York County, issued a decision examining the line that separates attorneys in their capacity as claims investigator versus legal counsel. In TransCanada, National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., No. 650515/2010, 2013 WL 4446915 (N.Y. Sup. Ct., Aug. 15, 2013), the insured sought coverage for repair costs and business interruption losses arising out of a month-long outage of a steam turbine power generator. When its insurers received notice of the claim, they jointly retained outside counsel to investigate and evaluate the claim. It should be noted, however, that the insurers in this case never entered into a common interest agreement ' or anything of the like ' explicitly retaining any privileges or protections that may apply to their communications or work product. The court noted that the attorneys supervised, coordinated, and directed the investigation, which included collecting documents and hiring investigators. In addition, the attorneys prepared reports summarizing the results of the investigation.

After the investigation, the insurers simultaneously denied coverage and filed a declaratory judgment action. During the course of discovery in the coverage litigation, the insured sought those documents relating to its insurers' investigation of the claim, most of which were created before the insurers' denial of coverage. The insurers claimed that these documents were protected by the attorney-client privilege and work-product doctrine.

Following an in-camera review of the documents in question, the court found that all of the documents were discoverable on three grounds. First, the court noted that coverage investigations are an “ordinary business activity for an insurance company” and do not constitute legal advice. Thus, if attorneys are working to investigate claims and determine coverage, their documents do not constitute legal advice and are not protected work product or trial-preparation materials.

Second, because the insurers did not produce evidence showing when the coverage decision was actually made, the court determined that the decision was made when the denial letter was issued, such that any documents created prior to the denial letter are not protected work product or trial-preparation materials.

Third, the attorneys freely communicated with all of the insurers, which are independent third parties to each other, and there was no attempt to segregate the communications or keep them confidential. Thus, the common interest privilege exemption did not apply and the parties waived any attorney-client privilege that may have otherwise applied.

However, contrast the TransCanada decision with a recent Florida state court decision dealing with privilege issues arising out of South Miami Health Center's insurance coverage action against State Farm Mutual Automobile Insurance Company, claiming breach of contract. State Farm Mut. Auto. Ins. Co. v. South Miami Health Center, Inc., No. 12-031 AP (Fla. Cir. Ct., App. Div. Oct. 15, 2013). Here, the court found that the documents in question were protected because they were prepared in anticipation of litigation.

The decision notes that during discovery, State Farm produced its entire claims file save for 17 pages of documents that it deemed work product. The documents at issue in the discovery dispute consisted of five pages of notes from a State Farm adjuster that State Farm had deemed work product. After reviewing the notes under seal, the appellate division held that in a breach of contract action that did not involve any bad-faith claims, the “normally automatic work product protection” applies to documents that were obtained or developed in anticipation of litigation or trial.

The court also noted that the “anticipation of litigation” requirement should be construed broadly in such circumstances. The court acknowledged that in a bad-faith context, however, the work product doctrine generally does not bar the production of claims files.

Beware of the Quasi-Fiduciary Responsibility to the Insured

Under certain circumstances, outside counsel assisting an insurer with its claim investigation may owe the insured a quasi-fiduciary duty. The Washington Supreme Court addressed this issue in Cedell v. Farmers Ins. Co. of Washington , 295 P.3d 239 (Wash. 2013), where the insurer's outside counsel wrote a letter to the insured, noting that the origin of the fire at the covered premises was undetermined and that coverage might be denied based on a delay in reporting and inconsistent statements by the witnesses. Counsel also extended a one-time settlement offer of $30,000 good for 10 days, when the actual damages ultimately determined by the court were four times that amount.

The insured's calls to the insurer regarding the offer allegedly went unreturned. As a result, the insured commenced an action against the insurer, alleging bad faith in failing to provide coverage for the fire. After filing suit, the insured moved to compel the production of documents and responses to interrogatories.

The court ultimately found that, in the context of first-party bad-faith claims other than in the underinsured motorist context, there is a presumption that the entire claims file is discoverable. The presumption can be overcome if the insurer can prove that the insurer's attorneys were “not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability, for example, whether or not coverage exists under the law.”

Upon such a showing by an insurer, the documents in question may be submitted for an in camera review, and any communications revealing counsel's mental impressions regarding issues of coverage or other matters relating to the insurer's potential liability may be redacted. Be mindful, however, that even if an insurer can meet its burden and have certain communications redacted, the insured may still be able to access the redacted communications through the civil fraud exception. Application of the civil fraud exception entails a two-step process. First, the court will perform an in camera review of the claimed privileged materials upon a showing that a reasonable person would have a reasonable belief that an act of bad faith occurred. Second, after the in camera review and upon a finding that there is a foundation to permit a bad faith claim to proceed, the attorney-client privilege will be presumed to be waived.

Another decision that scrutinized the role of the attorney as claim investigator and counsel arose when Credit Suisse was sued by lien claimants. Stewart Title Guar. Co. v. Credit Suisse, Cayman Islands Branch, No. 1:11-CV-227-BLW, 2013 WL 1385264 (D. Idaho Apr. 3, 2013). In the underlying matter, Credit Suisse's title insurer retained defense counsel to represent Credit Suisse, and also hired separate counsel to investigate the claim and advise on the scope of coverage available under its policy.

Upon completion of the investigation, the insurer sought a declaratory judgment that it had no duty to defend. Credit Suisse alleged that the insurer fraudulently and/or in bad faith handled the defense and settlement of the lien claims, and sought in discovery the communications between the insurer and the investigating coverage attorneys. In response, the insurer claimed that the communications were privileged.

In evaluating the attorney-client privilege, the district court referenced the Cedell decision discussed above, and held that the insured is presumptively entitled to the entire claims file and that the insurer may overcome the presumption by identifying communications where its attorneys were “not engaged in the quasi-fiduciary tasks of investigating and evaluating the claim.” The court did confirm, however, that such communications may be redacted insofar as they reflect mental impressions of the attorneys to the insurers unless those “mental impressions are directly at issue in their quasi-fiduciary responsibilities to [the insured].” The court added that all documents “dealing with the factual investigation of the lien claims are discoverable,” and that all documents discussing both factual and coverage matters are discoverable, although coverage materials may be redacted to the extent they do not involve the bad-faith claim.

The court also noted that the work-product doctrine does not apply in a bad-faith insurance claim settlement case, because the “strategy, mental impressions and opinion of the insurer's agents concerning the handling of the claim are directly at issue.” The court further advised that for future reference, insurers should set up and maintain separate files so as to avoid comingling factual material with legal advice implicating coverage issues.

When the Claims Handler Is an Attorney

In Mehta v. ACE American Ins. Co., 2013 WL 3105215 (D. Conn. June 18, 2013), a third party brought a claim against an insurer seeking payment under an underinsured motorist policy, and sought discovery of certain documents that mostly consisted of e-mails to and from the insurer's claims specialist, an attorney, prior to the coverage decision.

After an in-camera review of the documents, Connecticut's federal district court held that an insurer may not “insulate itself from discovery by hiring an attorney to conduct ordinary claims investigations” and that to the extent an attorney functions as a claims adjuster, claims process supervisor, or claims investigation monitor, the attorney-client privilege does not apply. The documents are privileged only if they contain “truly confidential inquiries or responses to counsel concerning legal advice, rather than the insurance claims.”

In light of the holding, the court determined that the insurer may withhold a privileged e-mail from the insurer's in-house counsel containing legal advice, a post-complaint coverage opinion by outside counsel, and post-complaint internal communications prepared in anticipation of trial.

Conclusion

While these recent decisions concerning the applicability of privilege in the claim investigation context were of mixed results, the lessons that can be learned are important and potentially highly beneficial to insurers. Based on these decisions, some guidelines that may assist the reader in protecting attorney-client communications and work product are as follows:

  • When utilizing attorneys to perform the “ordinary business activities” of an insurer, be mindful that their documents may not constitute legal advice and therefore may not be privileged or otherwise protected from disclosure in coverage litigation.
  • Documents created prior to an insurer's decision to deny coverage may not be protected work product.
  • When a law firm is retained by multiple carriers, segregation of communications as to each of the insurers and treating them as confidential is important to prevent the unintended waiver of privilege. Insurers in this kind of arrangement would also be wise to enter into a common-interest agreement, extinguishing any doubt as to their intention to preserve the privileges and protections that may apply to their communications and work product.
  • Keep in mind that the facts of a case may support an “anticipation of litigation” argument in favor of privilege.
  • Be aware that an attorney's statements and work product made while investigating, evaluating and processing a claim may not be privileged.
  • On the other hand, providing an insurer with counsel as to its liability should be given the protections afforded by the attorney-client privilege and work product doctrine.

Keeping these guiding principles in mind while utilizing attorneys to investigate claims will help protect the confidentiality of advice and information from counsel, which is one of the primary benefits of retaining an attorney in the first place.


Marc S. Voses and Steven P. Nassi are partners with Nelson Levine de Luca & Hamilton, LLC, a law firm focused solely on the business of insurance.

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