An insurer’s duty to afford coverage to an insured may depend, in large part, upon the nature of the claim asserted against the insured in an underlying demand or complaint as compared to the language of the policy. Those documents will usually be the focal point of any initial coverage determination, and a decision on coverage may be evident from those documents alone.
Oftentimes, however, nuances of insurance-coverage law in certain jurisdictions may play a pivotal role in determining whether a claim is covered. Choice of law rules, policy-interpretation standards, and public-policy considerations may not be uniform between courts in every state. Given the variations in policy language and the diverse views of courts from jurisdiction to jurisdiction on policy interpretation, carriers will frequently seek the advice of coverage counsel to assist in making a determination of their legal obligations to their policyholders. In that scenario, the insurer is justified in expecting that communications with that counsel remain protected by the attorney-client privilege.
When coverage litigation ensues, plaintiffs’ attorneys will usually seek production of an insurer’s claims files, which will contain these protected communications. Whether that request is relevant to the coverage dispute will largely depend on the nature of the claim asserted against the insurer. In a pure declaratory judgment action or breach-of-contract claim, the only pertinent documents may be the underlying complaint and the policy. Accordingly, the threshold question is whether any portion of the claims file has a relationship to the claims asserted against the carrier. The insurer’s first line of defense to that discovery request may, therefore, come in the form of a relevance objection and a decision to withhold the claims file in its entirety.
Where bad-faith or extra-contractual claims are properly pled and remain a part of the suit, however, attorneys for the insured will argue that the entire claims file is relevant to show the insurer’s defective decision-making process and malfeasance. In responding to that discovery request, insurers and their counsel may produce portions of the claims file, but withhold communications with inside or outside coverage counsel as protected by the attorney-client privilege (unless they are asserting an “advice of counsel” defense, which is not the subject of this article). After all, those communications were exchanged with counsel for the purpose of providing legal advice and may have been generated in anticipation of litigation.
The assertion of privilege in that scenario is well-founded. Courts have long held that the legal advice of counsel to an insurer in making a coverage decision falls within the purview of the attorney-client privilege. As the California Appellate Court noted in Aetna Cas. & Sur. v. Superior Ct., “...an insurance company should be free to seek legal advice in cases where coverage is unclear without fearing that the communications necessary to obtain that advice will later become available to an insured who is dissatisfied with a decision to deny coverage.” Despite that sound rule, two decisions from the past year have called into question how much insurers can actually rely on a privilege objection to withhold those communications.
Outside Help
In Canyon Estates Condo Association v. Atain Specialty Ins. Co., the U.S. District Court for the Western District of Washington held that the attorney-client privilege was waived where outside counsel authored an insurer’s coverage letters. Canyon Estates filed suit against its insurers, including Great Lakes, and sought unredacted copies of Great Lake’s claims file and invoices for activities and communications related to its outside coverage counsel. Great Lakes argued that compelling disclosure of these materials was a violation of the attorney-client privilege.
The court, applying Washington law, recognized that there is a presumption of “no attorney-client privilege relevant between the insured and the insurer in the claims-adjusting process.” In order to rebut this presumption and protect privilege, Great Lakes asserted that it intentionally kept its outside counsel separate from the claims investigation and insisted that he did not participate in the claim-handling process. The court rejected that argument, finding that counsel “engaged in at least some quasi-fiduciary activities” in investigating the claim, as he authored the draft letters that were signed by Great Lakes. The court determined that when an insurer’s attorney is involved in “both quasi-fiduciary and coverage or liability capacities,” the attorney-client privilege is likely waived because the attorney’s analysis almost always implicates the work performed in the attorney’s quasi-fiduciary capacity. Therefore, the court found that the attorney-client privilege did not apply.
Inside Job
Of course, privilege does not only become relevant in the context of communications between insurers and their outside coverage counsel. Many carriers employ in-house attorneys to provide advice on coverage obligations and disputes. Much like outside counsel, those individuals may play an important role in determining the legal obligations of an insurer in responding to a claim, and insurers likewise expect those communications to be protected from discovery.
The Mississippi Supreme Court recently rejected that broad rule. In Travelers Property Casualty Company of America v. 100 Renaissance LLC, the court held that, in a claim for bad faith, an insurer waived the attorney-client privilege when it substantially relied upon the evaluation and advice of in-house counsel to deny the claim. Renaissance filed a claim with its insurer, Travelers. Travelers denied coverage through a claims handler, Charlene Duncan, who communicated via email with Renaissance’s attorney and explained why the incident was not covered. Duncan later obtained advice from Travelers’ in-house counsel, Jim Harris, before sending a second email in which she offered further support for the denial of coverage. Despite being the sender of the email, however, Duncan was unable to establish her personal knowledge of the message at her deposition, including who wrote the email or why Renaissance’s claim was denied.
Renaissance sought to depose Harris and compel production of the emails between Duncan and Harris concerning their discussions about Renaissance’s claim. After reviewing the emails, the trial court ordered production of the emails and production of in-house counsel for a deposition. The Mississippi Supreme Court affirmed the trial court’s decision and found that Travelers waived the attorney-client privilege. Since Duncan was unable to testify as to the reasons for denying Renaissance’s claim, the court found that Renaissance was entitled to depose Harris and compel production of the emails between Duncan and Harris regarding the denial. The court found that Duncan’s signature on the denial letter was “simply an effort to hide the fact that Harris, not Duncan, had the personal knowledge of Travelers’ reasons to deny the claim and to use the attorney-client privilege as a sword to prevent Renaissance from discovering the reasons” why the claim was denied. Therefore, the denial of coverage was not based on Travelers’ own investigation, as they claimed, but based on Travelers’ in-house counsel’s evaluation and advice. Since the communications between Harris and Duncan were key to showing whether or not Travelers had a legitimate basis to deny Renaissance’s claim, the attorney-client privilege would not protect these communications.
We believe the Canyon Estates and Renaissance decisions are wrongly decided, or, at most, they are outlier decisions limited to their facts and the jurisdictions in which they were issued. These rulings should not be seen as a trend toward the erosion or complete destruction of privilege between an insurer and its coverage counsel.
Nevertheless, caution is warranted. Understanding whether a coverage dispute may be litigated in a court in one of these jurisdictions is an appropriate inquiry. Further, the insurer and its counsel should be mindful of the role played by coverage counsel in the claims handling process, and always be aware of the potential that communications could eventually be produced in coverage litigation, or even land in front of a jury in a bad-faith suit.