Imagine John Smith, a fresh hire in the subrogation department of Catastrophe Insurance Company. After reviewing one of the 1,000+ files referred to him by the property department, he finds what could be a proverbial "golden nugget." The case involves a leak from a recently repaired water line on the top floor of a downtown office building. The independent adjuster previously hired by Catastrophe concluded in his final report that the potential for subrogation was "nil" because his plumbing expert determined that the leak was due to a hydraulic hammer from water pressure problems throughout the building. But John knows an attorney who tells him of a case in the same building against this same plumbing contractor which resulted in a substantial verdict based upon evidence of the plumber's negligent repairs. The attorney, however, cautions that the contractor often uses forms waiving subrogation rights.
John dutifully prepares a detailed report to his supervisor summarizing the prior expert's report and the advice received from his friend. Based upon this report, he is authorized to refer the matter to the referenced attorney, who files suit. The first round of discovery from the defendant (the plumber) demands the entire contents of Catastrophe's claim file.
Do you see any problems here?
The issue facing John is how he and his attorney can ethically protect what may prove to be prejudicial portions of the claim file. This dilemma arises primarily from two factors. First, an insurance company normally does an early investigation of the cause of damages to determine coverage and may not anticipate the use of its findings in litigation. Second, John and others at Catastrophe Insurance must accurately report to their superiors on the claim's early assessment so that a decision can be made regarding whether subrogation should be pursued. All of that is in the requested file.
What Is Discoverable?
In determining what portions of the claim file are discoverable, the first question a court considers is whether a particular report or other document is relevant. Most jurisdictions define relevancy as information that is not privileged and that might lead to the revelation of admissible evidence. This standard has been broadly interpreted to categorize as relevant any information which "might reasonably assist a party in evaluating the case, preparing for trial, or facilitating settlement," as in Lipton v. Sup. Ct. [emphasis in original]. Since just about anything can be viewed as assisting in trial preparation or evaluating the case for settlement purposes, it is relatively clear that the battle usually comes down to whether a portion of the claim file is privileged.
There are two areas of privilege that may apply to the claim file in this case: attorney-client communications and work product. They are the usual battlegrounds when it comes to what may be protected.
Attorney-Client Privilege
In order for an attorney-client communication to be privileged, it must be confidential in nature (i.e., between an attorney and the client) and concern litigation or potential litigation. Here, John Smith's conversation with his lawyer friend occurred before the decision was made to subrogate and before the lawyer was actually retained. Fortunately, the privilege has been extended to communications between an insurer and its attorneys before and after the attorney is retained, as long as they relate to potential legal matters. (See Houston General Ins. Co. v. Sup. Ct.) Therefore, John's initial discussions with the attorney as documented in the claim file would be protected from discovery. As a practice point, the adjuster should document in the claim file that the source of the information was part of an initial or subsequent attorney-client conference.
What about John's later report to his supervisor outlining the potential case against the plumber and its drawbacks as related to him by the attorney? Confidentiality is lost if the communication is revealed to a third party. Fortunately, this does not extend to John's supervisor in this case. The key concept is who has the "need to know." When legal advice is communicated to other company personnel whose involvement is necessary to reach a decision, the privilege remains intact. In the 2007 Zurich American Ins. Co. v. Sup. Ct. case, a discovery referee ordered the production of all correspondence from counsel within the claim file that had been passed on to other company personnel. The appellate court reversed, concluding that the "need to know" standard determined how the privilege would be enforced.
That is not to say that the claim handler's own opinions regarding various legal issues involved in the case or the settlement value of the case are protected from disclosure. Nor can the independent adjuster's prior advice that the potential for subrogation was "nil" likely be withheld. But John's case evaluation would be protected if it was clear from the claim file (if not expressly stated) that it was based upon advice from his attorney.
Work Product Doctrine
So the plumber is unlikely to get the portions of the claim file representing the attorney's confidential communications with John or his superiors. This privilege, however, may not extend to factual information obtained by the adjuster or attorney, such as expert reports or other potentially relevant documents. What about the prior expert's report and the statement from the insured obtained by the adjuster and provided to the attorney?
The work product doctrine protects the results of work performed by an attorney so that those findings may not be unfairly utilized by an adversary. Some jurisdictions extend the privilege to non-attorneys working in contemplation of litigation (see Nacht v. Sup. Ct., 1996). However, other jurisdictions strictly scrutinize privilege and require a specific decision by the insurer to pursue subrogation before it applies (see Weber v. Paduano, 2003). The investigation of claims is part of the ordinary business of insurance companies, but at a definable moment, the focus of the investigation "shifts from the ordinary course of business to anticipation of litigation," according to the decision in Fine v. Bellefonte Underwriters Ins. If the court can discern that shift, it will draw the line there between discoverable materials and work product.
The mere fact that counsel is hired and even had a hand in preparing certain materials in claims files (including expert reports) is not dispositive of where that line is drawn, according to the Fine court. Rather, as stated by the Weber court, "An insurer does not have an identifiable resolve to litigate until it has made a decision regarding subrogation...[and] documents created as part of this process would have been created in the same form regardless of the insurer's eventual decision as to litigation."
In a 2010 California case, Coito v. Sup. Ct. (on review), the court chose to part company with the Nacht appellate court's protection of witness statements, which had been followed for 16 years. Coito held that written and recorded witness statements, including not only those produced by the witness and turned over to counsel but also those taken by counsel, were not attorney work product. The court explained that, since witness statements can be admitted at trial, these statements should be discoverable because, otherwise, the party denied access will "have had no opportunity to prepare for their use."
Therefore, the trend in claim file discovery appears to be to make discoverable those expert reports that were prepared before litigation was contemplated, as well as witness statements, whether taken by an attorney or adjuster even in anticipation of potential litigation. You have a better chance of protecting an expert report if the expert is initially retained by counsel as a consultant, particularly in view of the change in Federal Rule 26 providing some protection to drafts of expert reports.
In the above hypothetical case, initial expert reports are likely to be unprotected since they are part of the insurance company's usual practice of determining the cause of the loss. The statements obtained by the first adjuster would also be discoverable, particularly in light of his conclusion that subrogation was "nil" or unlikely.
Keep Files Lean and Clean
Too much information in the claim file may not always be a good thing. Consider whether a statement from an insured, in particular, is really necessary. Do you need a report from an expert consultant who may not have all the facts? Avoid negative comments regarding subrogation potential, and, when you are relying upon the advice from counsel, make it clear that you are doing so.