REAL ESTATE LAW
Confidential or Not? Attorney-Client and Work Product Privilege in Bad Faith Property Claims
Through the past eight years, the property insurance industry has faced some of the most devastating and costly insured events in history. It is not hyperbole to suggest insurers and policyholders addressed issues never before considered in the context of a property policy. With so much at stake, an attorney needs to understand thoroughly the property claims process, especially to avoid exposing supposedly confidential communications to disclosure later on.
We discuss here some of the fundamentals and nuances that go into preparing and presenting a property claim. We then analyze and review cases that have addressed the attorney- client and work product privilege in the context of a threatened or actual bad faith property claim.
Caveats for handling property claims. Lawyers representing either party in a property adjustment or litigation must recognize the sensitivities, experience, and relationship of the parties to the claim. Generally, businesses do not have frequent property claims. Insurance risk managers experienced in handling these claims are rare. Most risk managers are much better versed in liability claims, casualty, directors and officers coverage, and workers’ compensation issues. Lawyers will need to explain the applicability of terms and conditions of the property policy up front, in the proper context, and with documented support. Do not presume a risk manager has handled property claims regularly or is familiar with the process or policy. In fact, assume the contrary is true: that the client is facing a property or business interruption claim for the first time.
Do not fall victim to the famous tenet of property adjustment—the “that’s-the-way-it-is-done” cop-out. Nothing is more certain to agitate a risk manager or policyholder—and aggravate the adjustment circumstances—than failing to point to specific policy language to support a position. Give the risk manager the tools and information needed to respond to the inevitable questions from others in the corporate hierarchy. Anticipate that the risk manager will take your report and simply pass it on to others in the organization, and assume safely that those other people know little or nothing of the facts surrounding the claim. Precision is required. If addressing gray areas of coverage, clearly explain the policy provisions that may apply and caution the policyholder that differing interpretations can result.
The property insurance practitioner must be sensitive to the relationship between the policyholder and the insurer. Property claims are the unique insurance situation that puts the insured and the insurer in an adversarial position. The risk manager is more comfortable working with the insurance company, addressing workers’ compensation issues or defending liability and other third-party claims in which the parties’ interests are aligned. In many instances, the property insurer also provides the policyholder’s liability, workers’ compensation, auto, directors and officers, and other forms of coverage. In presenting a property claim, the insured is in the un- comfortable position of negotiating against a carrier with whom it normally cooperates as a partner.
Attorneys must recognize the property claim is not akin to litigation. Normally, when one business partner files a claim against another business partner, that business relationship comes to an end. In the property claim context, the claim is just the mechanism to indemnify the insured; it is not meant to dissolve the relationship.
The insured has the affirmative duty under most property policies to cooperate with reasonable requests for information from an insurer. Lawyers who do not regularly handle property claims erroneously equate information requests to discovery demands permitted by court rules. The property policy does not define the extent or qualification of the insurer information requests. The policyholder’s response must be based on the particular language of the policy and the ultimate intent of adjusting the claim.
Protecting and obtaining confidential material. Courts have stated that an allegation of bad faith in and of itself is insufficient to overcome the attorney-client privilege. The privilege in a bad faith action, however, may be overcome by an express or implied waiver. Courts have routinely held that the privilege is waived when a party places a privileged matter “at issue.” When the insurer establishes that it relied on the advice of competent counsel, that evidence shows that the insurer acted in good faith. However, by relying on the advice of counsel defense, the insurer is placing the subject matter of counsel’s advice at issue—and thus waives the privilege.
Waiver of the attorney-client privilege can be found even without the carrier asserting the advice of counsel defense. In State Farm Mutual Automobile Insurance Co. v. Lee, a class of approximately 1,000 policyholders sought discovery of claims files relating to State Farm’s rejection of their underinsured and uninsured motorist claims. State Farm claimed that correspondence with counsel relating to the stacking claims was protected by the attorney-client privilege. The court disagreed and held that the privilege was waived when State Farm asserted the reasonableness of its evaluation of the law as its defense. The court held that State Farm’s defense necessarily included information received from counsel and put counsel’s advice at issue.
An Ohio court chose another route altogether in compelling discovery of attorney-client communications. In Boone v. Vanliner Ins. Co., the court relied on an earlier case that held that materials “showing the lack of a good faith effort to settle” were undeserving of protection. The Boone court, however, limited the discovery to “claims file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of coverage.”
Boone was expanded in Garg v. State Automobile Mutual Insurance Co. and Unklesbay v. Fenwick. Garg and Unklesbay rejected arguments that Boone is limited to bad faith claims involving only the denial of coverage. Rather, in the words of the Unklesbay decision, “claims-file materials showing an insurer’s lack of good faith in processing, evaluating, or refusing to pay a claim are unworthy of the protection afforded by the attorney-client or work product privilege.” Garg also expanded Boone’s rationale and applied Boone to the work product doctrine.
Insurance companies are in the business of evaluating claims that may lead to litigation; therefore, courts have drawn a distinction between work product and ordinary claims investigation. In such scenarios, “if a declination decision has been made, documents subsequently drafted are presumed to have been created in anticipation of litigation; if the claim has not yet been rejected the documents are part of the claim investigation process and are not work product” ( Amoco Oil Co. v. Hartford Accident & Indem. Co., 1995 WL 555696). However, there is no bright line distinction to guide counsel.
At times, especially following widespread disasters likely to present similar coverage questions across many policyholders, insurers retain counsel to process property claims. When the attorney acts as claims adjuster, he or she investigates and evaluates the claim just as would a claims adjuster and makes recommendations to an insurer on the merits of a claim. Under this circumstance, should the attorney’s communications with the insurance company be privileged? It is well stated that “an insurance company may not insulate itself from discovery by hiring an attorney to conduct ordinary claims investigation” ( Arkwright Mut. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 1994 WL 510043).
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Arnold F. Mascali Jr. is a managing director of Aon Global Risk Consulting and the chief executive officer of Aon Horizon/Rapid Response; he may be reached at firstname.lastname@example.org. James R. Tortorella is an assistant director of Aon Horizon; he may be reached at email@example.com.