Horn 1: Insurance Cooperation and Disclosure Obligations
Standard general liability policies contain a cooperation clause requiring the policyholder to cooperate with the insurer in the investigation or settlement of the claim or defense of the underlying litigation. Some insurers claim this cooperation language entitles them to review privileged materials from a defense counsel's files. In addition, in connection with settlements, the standard "voluntary payments" clause provides that no insured may voluntarily make a payment or assume any obligation without the insurer's consent. Insurers may withhold such consent until they have reviewed defense counsel's settlement evaluations and perhaps additional privileged information from counsel's files. If coverage litigation over the claim ensues, insurers will routinely assert the right to discover defense counsel's privileged files, usually relying on:
- the cooperation provisions in the insurance contract
- the common interest doctrine, which "serves to protect the confidentiality of communications passing from one party to the attorney for another party where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel," United States v. Schwimmer, 892 F.2d 237, 243 (2d Cir. 1989) (citation omitted); see generally, e.g., Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 2.07(b) (15th ed. 2010)
- the at issue doctrine, which is related to the general waiver doctrine and essentially holds that "[b]y taking an action that places privileged information 'at issue' the party may forfeit the privilege," Remington Arms Co. v. Liberty Mut. Ins. Co., 142 F.R.D. 408, 412; see generally, e.g., Ostrager & Newman, supra § 2.07(b)
Where the insurer is acting under a reservation of rights, a company and its defense counsel may be reluctant to disclose privileged materials to the insurer, particularly if the insurer appears to be seeking evidence to support a coverage defense. Whether they nonetheless must do so depends on the law governing the issue.
At least one state has imposed broad duties of disclosure and cooperation on policyholders. In Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178, 201 (1991), the Illinois Supreme Court held that the attorney-client privilege did not prevent the insurer from discovering the policyholder's counsel's files in the underlying litigation—even though the policyholder had independent defense counsel in that litigation, and even though the parties were actively at odds in a coverage action.
The reasoning of Waste Management has gained less traction outside Illinois. See, e.g., Allianz Ins. Co. v. Guidant Corp., 373 Ill. App. 3d 652, 664 (2007) (applying Waste Management under Illinois law, but noting that "almost every foreign jurisdiction that has considered the holding of Waste Management has assailed the decision as unsound and improperly reasoned"); Dedham-Westwood Water Dist. v. Nat'l Union Fire Ins. Co. of Pittsburgh, No. Civ. A. 96-00044, 2000 WL 33593142 (Mass. Super. Feb. 4, 2000) ("Waste Management has been rejected or criticized on numerous occasions."); Rockwell Int'l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1264, 1268 n.6 (1994) (rejecting Waste Management's reasoning, while recognizing that "in issue" doctrine may have more particular application). Illinois courts, however, are not the only ones to hold that insurers share a common interest with their insureds—even when they are disputing their coverage obligations. See, e.g., Metro Wastewater Reclamation Dist. v. Cont'l Cas. Co., 142 F.R.D. 471, 479–80 (D. Colo. 1992) (policyholders cannot shield documents from their insurers due to common interest doctrine).
In several other jurisdictions, the courts have variously addressed the cooperation clause, the common interest doctrine, and/or the "at issue" doctrine and held that they do not require a policyholder to disclose defense counsel's privileged files to its insurers. For example, a Connecticut court rejected all three grounds for disclosure, finding that if an insurer had reserved its rights or denied coverage, it was not entitled to receive privileged communications between the policyholder and its independent defense counsel. Metro. Life Ins. Co. v. Aetna Cas. & Sur. Co., 249 Conn. 36, 60–63 (1999). Similarly, a Florida court denied an insurer's motion to compel discovery of communications between a policyholder and independent counsel, rejecting the insurer's argument based on the cooperation clause and the "at issue" doctrine. E. Air Lines, Inc. v. U.S. Aviation Underwriters, Inc., 716 So. 2d 340, 343–44 (Fla. App. 1998).
Finally, some states partially regulate insurers' rights to information and cooperation by statute. For example, California's so-called Cumis statute requires that if the policyholder selects independent defense counsel to defend an underlying action, the insured and its counsel have a duty "to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action." Cal. Civ. Code § 2860(d). Alaska has a similar statute. See Alaska Stat. § 21.89.100(e). Both statutes, anticipating the potential for disputes inherent in such disclosure obligations, expressly provide a process for court resolution of privilege issues.
In sum, when an insurer demands confidential information about its policyholder's underlying defense, counsel may need to parse uncertain rules, or choose among conflicting rules, to determine what, if anything, must be disclosed.
Horn 2: Waiver of Privilege as to Third Parties
Whether or not applicable law requires disclosure, in the real world of insurance claims–handling, a policyholder may have financial reasons to disclose privileged or protected information to its insurer voluntarily. For example, the insurer may require such information as a condition of its consent to a proposed settlement, or of a defense cost payment. Here the policyholder encounters the second horn of its dilemma: how can it share confidential materials with its insurer without exposing the materials to discovery by adversaries in the underlying litigation? If the insurer has not agreed to cover the policyholder's underlying liability and thus the information does not clearly fall within the protection of the common interest doctrine, an underlying plaintiff or another third party could assert that the policyholder has waived privilege or work product protection for any materials that it shared with its insurer.
Unfortunately, case law addressing what the company may safely disclose is sparse and conflicting. First, courts in a number of jurisdictions have held that no insurer-insured privilege independently protects communications with insurers. See, e.g., Linde Thomson Langworthy Kohn & VanDyke, P.C. v. RTC, 5 F.3d 1508, 1514–15 (D.C. Cir. 1993) ("if what is sought is not legal advice but insurance, no privilege can or should exist"). Instead, the insurer's interest must be deemed sufficiently "common" with the policyholder's to preserve privilege or work product protection for materials disclosed to the insurer.
A cautionary tale for policyholder counsel is found in cases such as In re Imperial Corp. of America, 167 F.R.D. 447 (S.D. Cal. 1995). Counsel for the insureds (individual directors and officers named as defendants in a shareholder derivative suit) sent letters to their insurer addressing the likelihood of success in the underlying defense, as well as a settlement demand by plaintiffs in that action. Id. at 450. After learning of these letters during a deposition in the underlying case, the shareholder plaintiffs demanded their production. In spite of a joint defense agreement signed by both the policyholders and their insurer (which was deemed ineffective because the parties were potentially adverse in coverage litigation), the court found no attorney-client protection for the letters. Id. at 452–53. The court further held that the policyholders' defense counsel had waived work product protection in disclosing the letters to an insurer that had not committed to coverage because it knew "a future coverage action pitting the insured against the insurer [was] a distinct possibility." Id. at 454–55; see also, e.g., Cont'l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 523, 528 (E.D. Cal. 2010) (in contribution action by defending insurer against non-defending insurer, the latter was required to produce its communications with policyholder and underlying defense counsel; both attorney-client privilege and work product protection were waived due to lack of common interest).
Another California federal court, however, applied a more nuanced analysis in rejecting waiver. In Lectrolarm Custom Systems, Inc. v. Pelco Sales, Inc., 212 F.R.D. 567 (E.D. Cal. 2002), the underlying plaintiff (Lectrolarm) sought discovery of documents the policyholder (Pelco) sent to its insurer, which was partially paying Pelco's independent defense counsel under a reservation of rights. The court acknowledged that because of "inherent tension between the carrier's interest and the interests of the insured," and because of their separate counsel, "communications between Pelco and [its insurer] are not privileged per se"; and that "[g]enerally, disclosure of otherwise privileged communication to a third party waives the attorney client privilege and/or the attorney work product privilege." Id. at 571–72. But despite the parties' potential adversity on coverage for the claim, the court held that the common defense doctrine, typically applied only to codefendants in the same litigation, precluded a waiver. Id. at 572. Looking at the particular communications at issue—those "relating to the claims and defenses in the underlying lawsuit"—the court found sufficient "commonality of interest" to preserve both attorney-client privilege and work product protection. In contrast to the Imperial court, therefore, the Lectrolarm court's waiver analysis implicitly distinguished insurer-insured adversity on the coverage side of their relationship from their common interest in the underlying defense. Accordingly, it barred the underlying plaintiff from discovering policyholder-insurer communications supporting the latter interest. Id. at 573.
Other courts have distinguished attorney-client privilege from work product. For example, in Go Medical Industries PTY, Ltd. v. C.R. Bard, Inc., No. 3:95MC522(DJS), 1998 WL 1632525, at *1 (D. Conn. Aug. 14, 1998), rev'd in part on other grounds, 250 F.3d 763 (Fed. Cir. 2000), one party in patent infringement litigation (Bard) sought documents that the other party (Go) had shared with its insurer. Id. at *1. The court found that Go's and its insurer's interests were "insufficiently compatible for the common interest rule to apply," and therefore that Go's disclosure to its insurer waived the attorney-client privilege. Id. at *3–4; see also Linde Thomson Langworthy Kohn & Van Duke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1515 (D.C. Cir. 2003) (much communication between a policyholder and its insurer has "little to do with the pursuit of legal representation or the procurement of legal advice," and is thus not protected by the attorney-client privilege). Work product shared with the insurer fared better, however: "unlike the attorney-client privilege, the work product privilege is not automatically waived by any disclosure to third persons." Go Med. Indus., 1998 WL 1632525, at *7 (internal quotations omitted). Because Go's disclosure to its insurer "did not substantially increase the opportunity for C.R. Bard to obtain its work product," it did not waive work product protection. Id.; see also In re Pfizer, Inc. Secs. Litig., No. 90Civ.1260(SS), 1993 WL 561125, at *8 (S.D.N.Y. Dec. 23, 1993) (policyholder waived attorney-client privilege but not work product protection when it disclosed documents to its insurer).
Policyholders whose claims fall within the purview of California's independent counsel statute may also find some statutory protection against waiver, at least with respect to underlying plaintiffs. In First Pacific Networks, Inc. v. Atlantic Mutual Insurance Co., 163 F.R.D. 574, 584 (N.D. Cal. 1995), the court relied on the statutory provision that "information disclosed [to the insurer] by the insured or by independent counsel is not a waiver of the privilege as to any other party," to hold that a policyholder did not waive the attorney-client privilege for documents provided to its insurer. The court suggested, however, that absent the statute, waiver would have occurred because no common interest existed between the policyholder and an insurer acting under a reservation of rights. Id. at 579–80.
In sum, some courts have rejected underlying adversaries' claims of waiver when policyholders have disclosed privileged or protected defense-related materials to their insurers. Other policyholders have been less fortunate.
Tips for Company Counsel
In the ambivalent, rights-reserved relationship of liability insurance claims, few safe havens emerge from the case law on cooperation and privilege waiver. When an insurer who is not funding and controlling the policyholder's defense demands privileged or protected defense information as a precondition to coverage, policyholder counsel faces a dilemma with no perfect solutions. Nonetheless, we offer here a few practical pointers to consider.
Learn the traps, or bring in help. In-house counsel and defense counsel should first inform themselves about the rules of cooperation and waiver under the law (or, more likely, laws) potentially governing them. Alternatively, experienced coverage counsel can provide guidance both with the rules and with the practices of particular insurers.
Coordinate litigation defense and coverage pursuit. Defense counsel and coverage counsel should consult whenever questions about disclosure and privilege arise—as they inevitably will, both in the coverage claim and in the underlying defense. Defense counsel should carefully segregate these coverage-related communications from their underlying defense files and preferably open a separate billing file for coverage-related work.
Assume hostile eyes will see time entries. The ABA ethics opinions recognize that billing and time records should generally be "protected by the confidentiality rule or the attorney-client privilege or both." ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 01-421 (2001). The parties should explore alternatives to producing counsel's time records to insurers, such as summaries or redactions. Nonetheless, underlying defense lawyers should understand that the insurer may eventually see their time records if the policyholder is to receive the benefit of its defense coverage. Moreover, an underlying plaintiff may seek to discover what was disclosed to the insurer. Thus, timekeepers should record their time accurately and informatively, but with sufficient lawyerly generality to avoid revealing the specifics of strategy or sensitive matters to adversaries.
Assume hostile eyes will see settlement and litigation analyses. For similar reasons, written settlement evaluations and litigation analyses should stick to the objective facts, particularly those that relate to causation and the plaintiff's quantifiable damages. If the company's conduct or intent is the litigation's focus, counsel wishing to discuss sensitive or nuanced defense issues should remember that an old-fashioned conversation is usually preferable to an exchange of emails.
Consider mediation. Many states recognize some form of statutory mediation privilege, cloaking communications made during mediation with enhanced protection from disclosure to third parties. See, e.g., Cal. Evid. Code § 1119; D.C. Code §§ 16-4203 to -4205. If the parties are otherwise inclined toward a coverage resolution, a formal mediation procedure can provide the context for the policyholder's responses to insurer requests for defense invoices or other sensitive information. Thus, the mediation process may relieve the tension between insurance cooperation and privilege protection; and if it succeeds in eliminating policyholder-insurer adversity on coverage, it will reduce the risk of privilege waiver against third parties going forward.
Craft an appropriate insurance information protocol. An early policyholder-insurer agreement can both define the parties' information expectations and memorialize their intent to protect confidentiality and privilege. Of course, as the Imperial case demonstrates, a one-size-fits-all "joint defense agreement" between policyholder and insurer may prove ineffective against third parties. See 167 F.R.D. at 455–56. But by clarifying and memorializing the parties' interests and intentions, an information agreement could help a court to distinguish the friendly side of the policyholder-insurer relationship from its unfriendly side, so that it protects confidential communications supporting the former (as the Lectrolarm court did, 212 F.R.D. at 573). Such agreements must be tailored to the specific circumstances, but should include the following features:
- Regulate disclosure of protected material. As indicated above, summaries or other alternatives may suffice instead of actual protected documents. It is in both parties' interest to minimize the waiver risk by limiting sensitive disclosures in the first instance.
- Define and confine the scope of policyholder-insurer adversity. The insurer's reservation or denial of coverage may be limited to particular issues, for example, a punitive damages claim in the underlying complaint. The agreement should identify the boundaries of the parties' adversity and the circumstances under which adversity may disappear, for example after dismissal of a claim.
- Define common interests, and confine disclosures to their support. The agreement should memorialize where the parties' interests are aligned, for example, in preventing or minimizing the underlying liability. It should further clarify that confidential information is provided solely to further common interests.
- Document the expectation of privacy. The agreement should provide for confidential treatment of privileged or protected information, confine its use to common interests, and memorialize the parties' intent to preserve applicable privileges without waiver.
John Buchanan is a partner in the Washington, D.C., office of Covington & Burling LLP. Wendy Feng is special counsel in Covington & Burling's San Francisco office.