May 31, 2018 Practice Points

Delaware Court Holds Privilege May Be Waived for Communications Put “At-Issue” in Insurance Coverage Dispute

If privileged documents are placed “at-issue” in litigation, they may be subject to disclosure

by Travis S. Hunter

It is a familiar adage that privilege cannot be used as both a “sword and shield” in litigation. Normally, the attorney-client privilege protects the communications between a client and an attorney acting in a professional capacity. A party can waive the attorney-client privilege, however, when that party places an otherwise privileged communication “at issue” in the litigation. Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 259 (Del. 1995) (citing 8 John H. Wigmore, Evidence in Trials at Common Law § 2327 (J. McNaughton rev. ed. 1961)). To determine whether communications have been placed at issue, courts must consider whether “(1) a party injects the privileged communications themselves into the litigation, or (2) a party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications.” Alaska Elec. Pension Fund v. Brown, 988 A.2d 412, 419 (Del. 2010) (citation omitted). These exceptions promote fairness by not allowing a party to use the privilege both offensively and defensively, as both a sword and a shield.Tackett, 653 A.2d at 259.

Although written opinions addressing the at-issue exception to the attorney-client privilege are rare, the Delaware Superior Court’s Complex Commercial Litigation Division (CCLD) recently had occasion to consider the applicability of the exception to certain communications in Arch Ins. Co. v. Murdock, C.A. No. N16C-01-104 EMD [CCLD]. Arch arose from a dispute regarding insurance coverage. Dole Food Company, Inc. had several insurance policies with the plaintiff insurers covering directors, officers, and corporate liability (referred to henceforth as “the policies”). David Murdock was CEO and 40 percent shareholder of Dole during relevant times. Michael Carter was an officer. In an earlier shareholder action in the Delaware Court of Chancery, a vice chancellor found that Mr. Murdock and Mr. Carter, two of the defendants in the Superior Court CCLD action, breached their duty of loyalty through fraud. Another shareholder action was also brought in federal court in Delaware. Following settlements in the underlying actions, the insurers sought a determination in the Delaware Superior Court that they were not required to provide insurance coverage to Messrs. Murdock or Carter.

In connection with discovery, the insurers sought the production of documents and communications relating to the settlements of the underlying actions. This request implicated the at-issue exception, and the court was required to evaluate whether the insureds had injected the communications into the litigation or whether resolution of the issues implicated in the litigation required disclosure. As to the first issue, the court found that the insureds had not attempted to inject any attorney-client communications directly into the litigation. However, the court did hold that “the truthful resolution of the reasonableness of the settlements does require an examination of the confidential communications[.]” In so holding, the court analogized the facts to the earlier case of Hoechst Celanese Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 623 A.2d 1118, 1122-23 (Del. Super. Ct. 1992). As in Hoechst, the settlements of the underlying actions here were central to the issues in dispute. In pleadings filed with the court, the insureds claimed that they complied with the policies’ terms and conditions regarding cooperation and consent to settle. Accordingly, the insurers required an examination of attorney-client communications with the insureds and their counsel to determine: (1) whether the insureds substantially complied with the terms of the policies, (2) reasonableness, and (3) the possibility of any prejudice to the insurers.

However, the court only granted the motion with respect to documents withheld on the basis of attorney-client privilege. To the extent the claim of privilege involved work product, the court held that an in camera review was needed because, even though the insurers had established a “compelling need” for the documents, the court must first undertake an in camera examination of the materials to fully determine whether the particular document actually satisfied the requirement of “compelling need” before ordering production.  

This case highlights the difficult privilege issues that can arise during the course of litigation. Information that would otherwise be privileged may be subject to disclosure if it is put at issue in the litigation. As highlighted by the court’s decision in Arch, sometimes the disclosure of privileged information is necessary to facilitate the truthful resolution of certain issues. Parties should be careful in drafting pleadings so as not to put privileged communications at issue.    

 

Travis S. Hunter is counsel at Richards Layton & Finger, P.A., in Wilmington, Delaware.


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