Common Interest Exception? Third Party Denied Privileged Communications

In 2011, a group of shareholders of the Chicago Tribune Company sued the foundations and their directors and officers. The shareholders alleged that the foundations had violated securities laws by orchestrating a leveraged buyout that allowed the foundations to sell their preferred shares for $2 billion just a year before the company went bankrupt. The foundations tendered the claims against them to their new insurance company. The carrier denied coverage based on the policy’s exclusion for claims “in any way relating to any purchase of securities.”

The foundations then sued Gallagher for breach of contract and professional negligence. The foundations alleged that the new policy Gallagher had recommended offered far less coverage, barring indemnity for all claims alleging securities violations. The foundations further claimed that if Gallagher had not recommended they change policies, the foundations would have continued with their original coverage, which would have saved them extensive litigation costs. The foundations alleged that the old policy had a more limited exception and would not have excluded these securities claims.

During the litigation, Gallagher moved to compel production of all communications between the foundations and their attorneys about the Chicago Tribune Company’s bankruptcy and the resulting litigation. The foundations maintained that the communications with their attorneys were privileged and not subject to discovery. The trial court disagreed and granted the motion. The foundations appealed, and the issue ultimately came before the Illinois Supreme Court.

A Common Exception

The court explained that the attorney-client communications privilege “recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer being fully informed by the client.” But an exception to the privilege exists when an attorney represents two parties in litigation. “When an attorney acts for two different parties who each have a common interest, communications by either party to the attorney are not necessarily privileged in the subsequent controversy between the two parties,” the court noted.

“The common interest exception is usually implicated in the context of an indemnification agreement, where an insurer and its insured agree to cooperate in trying to settle claims that are covered under the policy,” says Tracy A. DiFillippo, Las Vegas, NV, cochair of the ABA Section of Litigation’s Pretrial Practice & Discovery Committee. “Normally, there must be a duty to defend the claim before courts will find that the exception to the privilege applies,” she continues.

The common interest exception serves an important public policy purpose by encouraging attorneys for the insured and the insurance company to cooperate. “In many circumstances, the policy holder wants the insurance company to settle the claim against them. In order to encourage the insurer to settle, the insured needs to be able to communicate frankly with the insurer without worrying that those communications will later be turned over to the other side,” summarizes Seth H. Row, Portland, OR, cochair of the Section of Litigation’s 2020 Insurance Coverage Litigation Committee Conference.

Limiting the Exceptions

Gallagher attempted to rely on the Illinois Supreme Court’s previous decision in Waste Management, Inc. v. International Surplus Lines Insurance Company to pierce the foundations’ privilege. In that case, an insured sued its insurer seeking reimbursement for costs defending a prior lawsuit. The insurer moved to compel the insured to provide communications with its counsel during the underlying litigation. The court granted the request based on the cooperation agreement in the insurance agreement. But the Gallagher court easily distinguished Waste Management. While Waste Management established that the common interest exception could extend to subsequent litigation where an insured and its insurer are adverse, the absence of an insurance agreement and cooperation clause meant the exception did not apply.

Gallagher countered that although it was the broker rather than the actual insurer in this case, it was a “de facto” insurer based on a provision of the insurance broker agreement with the foundations that required Gallagher to indemnify the foundations for Gallagher’s own negligence. The court rejected this argument explaining that “[i]n this case, there was no cooperation clause, and the relationship of the parties was such that they never had a need for cooperation—Gallagher agreed to indemnify for its own negligence, not for the foundations’ negligence, and it never had any duty or right to defend the foundations like an insurance company would.”

The fact that Gallagher acted as an insurance broker and not as an actual insurer was likely dispositive of the issue. Gallagher’s promise to indemnify merely for its own negligence was insufficient to create the kind of common legal interest necessary to overcome the attorney-client privilege. “Ultimately Gallagher was never going to be on the hook to pay the claims against the foundations unless they could show how Gallagher himself acted negligently in dealing with them. Thus, the parties had no common interest in the lawsuit and in fact were adverse from the start,” explains DiFillippo.

Section leaders also note that the privilege is rarely used as a sword to compel production and more likely as a shield to protect communications between insurers and their insured. “Adverse litigants seeking an advantage in litigation will rarely be able to use the common interest exception to compel production unless there is a cooperation agreement at issue in the case,” opines DiFillippo.

Importance of Awareness of Privilege

Even though this decision ultimately protected the foundations’ privileged communications, it highlights the importance of lawyers being aware of the limits of the common interest exception when litigating insurance cases. Lawyers should be aware that the presence of insurance brokers in discussions over settling claims against an insured could, in the right circumstances, lead to a waiver of the attorney-client privilege. “This decision shows that the common interest exception may not be as broad as many litigators generally assume and that litigators should think twice before assuming that communications involving an insurance broker will be protected,” explains Row.

Lawyers representing insurance companies should also be aware that asserting coverage of a claim may cause the parties to waive confidentiality for communications related to those supposedly excluded claims, as the insured and insurer no longer share a common interest. Likewise, attorneys for the insured should make the insurer aware that broad assertions of exclusions may make cooperation between the insured and insurer more difficult.

Stephen Carr is an associate editor for Litigation News.

Resources

• Peter J. Murphy, “Privilege Waived for Email Copied to Unrepresented Third Party,” Litigation News (Nov. 1, 2018).
• Martha L. Kohlstrand, “Joint Defense Rule Shrouds Information Shared in Common Interest,” Litigation News (May 11, 2018).
• Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 190 (1991).

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