Protected or Not?

Communications and information exchanged between adjusters and insurer in-house counsel present unique challenges for application of the work-product protection, and the law is not uniform in this area. Let’s explore the factors considered by courts when determining whether such communications and information are protected from disclosure to the insured and/or third-party claimant, and the typical disputes that arise in both coverage and bad-faith litigation.

Work-Product Protection

Work-product protection applies to protect disclosure of an attorney’s mental impressions, and prevent discovery of materials prepared in anticipation of litigation or trial. Most courts will require disclosure if the opposing party shows a substantial need for the material and an inability to obtain the substantial equivalent of the material by other means. Attorney involvement is generally not required.

Unlike attorney-client privilege, courts generally do not consider work-product protection “substantive” law. Accordingly, federal courts exercising diversity jurisdiction will apply federal law to determine whether information is protected work product, which can lead to disparities in treatment of information between federal and state courts in the same location.

Most states recognize that work-product protection extends to materials prepared by any party in anticipation of litigation, including insurance adjusters. In Union Ins. Co. v. Delta Casket Co., Inc., No. 06-2090, 2009 WL 10665128, at *7 (W.D. Tenn. Dec. 1, 2009), for example, communications between the adjuster and claims manager were considered protected work product when made in anticipation of litigation. But some states, such as Montana, limit work-product protection to documents produced by or for an attorney and do not extend the protection to documents produced before an attorney becomes involved in the claim. [See, for example, Cantrell v. Henderson, 718 P.2d 318, 322 (Mont. 1986); and also Dunn v. State Farm Fire & Cas. Co., 927 F.2d 869, 875 (5th Cir. 1991), which applied federal work-product law in stating, “Work product only protects documents produced by or for an attorney preparing for litigation.”

Application in Coverage Disputes

In litigation between an insurer and insured (and/or third-party claimant) seeking to determine whether insurance coverage exists, insureds and claimants often seek discovery of an insurer’s claim file and other documents that may include work-product materials.

In some jurisdictions, such as Florida, courts combine application of attorney-client privilege, work-product protection, and relevancy principles to preclude discovery of the claim file during coverage litigation. [See, for example, Homeowners Choice Prop. & Cas. Ins. Co., Inc. v. Avila, 248 So. 3d 180, 184 (Fla. Ct. App. 2018); and also State Farm Fla. Ins. Co. v. Aloni, 101 So. 3d 412, 414 (Fla. Ct. App. 2012), which held, “Generally, an insurer’s claim file constitutes work product and is protected from discovery prior to a determination of coverage.”] 

In federal courts, by contrast, an across-the-board protection does not apply, and, generally, courts will perform a document-by-document in camera review. The court will examine each document to determine whether privilege or work product protection applies. The case, MapleWood Partners, L.P. v. Indian Harbor Ins. Co., 295 F.R.D. 550, 628 (S.D. Fla. 2013), for example, discusses the difference between Florida state and federal court approaches to discovery of the insurer’s claim-file materials in a coverage dispute. In addition, because work-product protection extends only to “opinion work product” and materials prepared in anticipation of litigation, some states, as noted previously, permit discovery of otherwise non-privileged materials prepared prior to the denial of the claim.

Where claim-file materials may be discoverable, insureds and claimants will also likely scrutinize the role in-house counsel played in the adjustment of the claim, and may seek discovery of communications and material prepared by counsel on the basis that the attorney was acting as an investigator or claims handler rather than preparing legal advice. In Cont’l Cas. Co. v. Gen. Battery Corp., No. CIV. A. 93C-11-088, 1994 WL 682320 (Del. Super. Ct. Nov. 16, 1994), for example, in an insurance coverage declaratory judgment action, the insured argued privilege should not apply because counsel acted as adjuster in investigating the claims.

Application in Bad-Faith Claims

Different policy considerations are warranted in a bad-faith claim, which focuses more on the insurer’s actions and decision-making process as opposed to only the merits of the coverage position itself. An insurer’s defense to a bad-faith claim may be determined to put its decision-making process “at issue.” Thus, where the court has determined that the insurer has placed the privileged information “at issue,” courts generally allow broader discovery of those privileged and work-product materials in the bad-faith context. For example, the court in State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 55 (2000) found the privilege is only potentially waived if the party relying on the privilege asserts a claim or defense that necessarily included information received from counsel.

To the extent that this broader discovery would permit the insured to obtain otherwise undiscoverable material by asserting a bad-faith claim at the same time as the claim for coverage, courts will often stay or abate bad faith-claims and associated discovery until the conclusion of the coverage litigation, as seen in Alden Leeds, Inc. v. QBE Specialty Ins. Co., No. A-2034-14T1, 2015 WL 4507151, at *11 (N.J. Super. App. Div. July 27, 2015), where the court held, “Decisions to pierce the attorney-client or other privileges with respect to bad-faith evidence should ordinarily be deferred until the viability of the bad-faith claim has been established.”

The “Necessity” Exception to Work Product Protection

Generally, courts find that the work-product protection does not apply if the opposing party shows a substantial need for the material and an inability to obtain the substantial equivalent of the material by other means. Some jurisdictions, such as Florida, have applied this exception to hold that an insurer’s claim file is discoverable by the insured in a bad-faith case because the otherwise protected information is often the only evidence of an insurer’s claims handling and reasons underlying its coverage determinations. [See, for example Allstate Indem. Co. v. Ruiz, 899 So. 2d 1121, 1122 (Fla. 2005); and Genovese v. Provident Life & Acc. Ins. Co., 74 So. 3d 1064, 1068 (Fla. 2011)]. Work-product information regarding the insurer’s litigation of the bad-faith claim itself, however, would still be protected.

In applying attorney-client privilege, some jurisdictions distinguish between bad-faith claims asserted by an insured and bad-faith claims asserted by a third-party claimant, either by right of direct action or through an assignment from the insured. 

In West Virginia, for example, in a bad-faith action brought by a third-party claimant, courts permit the insurer a “quasi attorney-client privilege” that protects all communications generated on or after the date the claimant files suit against the insured. This creates a presumption of privilege from discovery, which the claimant can rebut. [See State ex rel. Allstate Ins. Co. v. Guaghan, 508 S.E.2d 75 (W. Va. 1998)]. 

This quasi-privilege belongs to the insurer and cannot be waived by the insured. For bad-faith actions brought by the insured, however, the court noted that, in many cases where the insurer is defending the insured against a third-party’s claim, attorney-client privilege would not attach to the insurer’s claim file “because the insurer created the file primarily on behalf of the insured.”  (Id. at 87 n.17.) However, the court also acknowledged that, in some cases, such as when an insured asserts a first-party property-insurance claim, the interests of the insured and insurer may be in conflict, such that privilege might apply.

Other jurisdictions, such as Florida, apply work-product protections in the same manner in all bad-faith litigation. [See Allstate Indem. Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005)]. However, if the claimant’s suit against the insured is pending at the same time as the bad-faith litigation, the insurer may still have a basis to rely on the privilege and withhold the claim file from production to the claim. At a minimum, a stay of the bad-faith litigation until the underlying lawsuit is fully resolved may be needed to avoid prejudicing the insured by disclosing the claim file to the claimant.  

Takeaways for Claims Professionals

You know the saying about assumptions. A communication may not be privileged simply because it is sent to or from an in-house counsel, and involving in-house counsel in the claim does not necessarily ensure greater protection from discovery. It is important to consider in-house counsel’s role in the claims-handling process, and, if possible, to clearly document which communications are made for the purpose of furthering the rendering of legal advice.

Work-product protection may also not apply simply because a claim is asserted or a claim for coverage is denied. It also may be important, in some jurisdictions, to document when the insurer became aware of the possibility of litigation and to prepare the documents at issue in anticipation of same.

Understand the applicable law at issue. As we have seen, privilege and work-product protections for communications and information exchanged between in-house counsel and adjusters varies from state-to-state, and even from state to federal court. The law that will apply to the current or anticipated coverage or bad-faith litigation can be a significant factor to evaluate in assessing the information that an adversary will be able to discover and present as evidence. The different scopes of discovery can also impact an insurer’s decision on whether and where to institute litigation and whether to remove a lawsuit to federal court.

Think before you write. Because there is a risk that communications or other claims handling materials will be subject to disclosure to the insured and/or third-party claimant in future coverage or bad-faith litigation, it is important to be mindful of who is included on the communication and who will have shared access to the materials; what “hat” in-house counsel is wearing for purposes of the communication or material at issue and the claim in general; and how the communication or material will reflect on the insurer, should it be disclosed.

Editor’s Note: Opinions expressed are solely of the authors and do not express the views or opinions of Kennedys CMK, LLP, Markel Corporation, or its affiliated companies.