Liability insurance for a large, complex claim is often a love-hate relationship. On the one hand, the policyholder and the insurer may stand on common ground in their adversity to the underlying claimant. On the other hand, the policyholder may find that the insurer—though the enemy of his enemy—is not necessarily his friend. The bigger and thornier the claim, the more likely that the insurer will reserve its rights to deny coverage. That reservation of rights often results in the policyholder defending the underlying litigation with independent counsel, while facing actual or potential coverage litigation with the insurer. This is hardly the “common interest” defense relationship found in a simple auto accident or slip-and-fall claim, where the insurer accepts its duty to defend without reservation and hires counsel to defend its policyholder in the underlying litigation.
During the course of this ambivalent, rights-reserved insurance claims relationship, the insurer is still likely to ask the policyholder or its defense counsel for work product or privileged information about the underlying case. The policyholder may want to provide that information, for a variety of good reasons: to get its defense costs paid; to elicit the insurer’s expertise in defending the claim; or to avoid the risk of motivating the insurer to assert a new coverage defense alleging breach of the so-called cooperation clause in its policy. The insurer’s motives in requesting the information may range from fulfilling its duty to pay reasonable defense costs, to offering useful input on settlement evaluation, to setting its own reserves, to discovering ammunition for its coverage defenses.
Meanwhile, given the actual or potential adversity between the policyholder and the insurer, the policyholder’s in-house and outside counsel confront a grave risk on another front: the underlying plaintiff might successfully claim that when the policyholder disclosed documents from defense counsel’s confidential files to a less-than-friendly insurer, it waived all attorney-client privilege and work product protection attaching to them.
In short, the policyholder and its counsel are caught between the risk of impairing coverage (for cooperating too little with the insurer) and the risk of waiving privilege (for cooperating too much). Tacking to compensate for the risk on one side may simply enhance the risk on the other. The classically inclined might describe this dilemma as “sailing ’twixt Scylla and Charybdis.” We call it “caught between a rock and a hard place.”
That awkward position is the focus of this article. In Part I, we pose a simplified hypothetical to provide more context for the dilemma that policyholders and their counsel face. Part II then analyzes relevant case law and statutes that shed light on how the dilemma is currently addressed—or ignored—in various jurisdictions. Finally, again in the context of the hypothetical, Part III concludes with a few practical tips for navigating the straits between cooperation clause violations and privilege waivers.