The legal opinions of an insured's coverage counsel regarding a settlement's potential impact on future insurance coverage are privileged from disclosure in litigation with the insurer. The insured's careful and limited redaction of counsel's opinions allowed the court in Baxter International, Inc. v. AXA Versicherung to uphold the privilege claim, and deny the insurer's motion to compel, after in camera review of the documents.
Insurance Coverage Counsel's Work-Product Protected
Baxter involved an insurance coverage lawsuit arising out of underlying products liability litigation in Illinois. The insured retained separate counsel for the underlying litigation and for the anticipated litigation with its insurer over coverage. During discovery in the coverage litigation, the insured produced a memorandum with redactions prepared by its coverage counsel during the underlying litigation. The insured asserted privilege over the redacted portions of this memorandum as attorney-client communications and attorney work-product. The insurer disputed this claim and moved to compel production of an unredacted version of the memorandum.
In Waste Management v. International Surplus Lines Ins. Co., the Illinois Supreme Courthad previously rejected privilege between an insurer and its insured regarding communications in the underlying litigation for which the insured submitted a claim. Relying on this decision, the insurer in Baxter argued that the attorney-client privilege did not apply to the memorandum. The insurer also claimed that the communications came prior to the insured's reasonable anticipation of litigation (such that work product would not apply), and that the insured had waived all privileges over the memorandum by disclosing it to the insured's underlying litigation counsel.
Privilege Applies to Coverage Counsel's Analysis
The Baxter courtupheld the insured's claims of attorney-client communication and work product privileges. The court determined that the Waste Management rule only applied when the insured had a contractual duty to cooperate with the insurer regarding the settlement of a claim or when a common interest existed between them. The Baxter court determined that neither circumstance was present in this case, and that Waste Management did not control.
The court also held that work-product protection existed because the insured could have reasonably anticipated litigation with the insurer. The court cited undisputed evidence from the insured that it had provided notice of the underlying litigation to the insurer, but the insurer refused to acknowledge coverage or to defend the insured in that case.
No Waiver by Disclosure to Litigation Counsel
The court also rejected the insurer's argument that the insured had waived privilege. The court described the test for subject matter waiver as whether the disclosure was misleading as to the contents of the undisclosed materials. After an in camerareview of the redacted portions, the court determined that previously disclosed communications were not misleading and no subject-matter waiver had occurred.
Despite the concern that any disclosure of privileged material will lead to broad subject-matter waiver, courts actually have "a lot of discretion" in considering a waiver claim, opines Landis C. Best, New York, NY, cochair of the ABA Section of Litigation's Attorney Client Privilege Task Force. A key consideration for many courts is whether the disclosure appears to be due to gamesmanship, and an in camera review may convince the court it is not, explains Best.
But in camerainspection may have led to confusion in this case. The court essentially concluded that "it is not misleading because I've looked at the materials and I find it is not misleading, which is a little circular," notes Erin R. Schrantz, Chicago, IL, cochair of the Section of Litigation's Attorney Client Privilege Task Force. "A stronger argument may have been that there was no waiver because the insured produced the memorandum and allowed discovery of its author, such that further production was not necessary," suggests Schrantz.
The Devil Is in the Details When Claiming Privilege
"This seems to be a well-reasoned opinion that seems to faithfully follow the precedent that the court references" but the "devil is in the details, depending on the facts of the case," observes Best. Here, the court's distinction between discussions "in the underlying litigation—where there is a common interest with the insurer—and the coverage lawsuit—where that interest does not exist—seems valid," reasons Schrantz. "And having to wait for a formal denial of coverage [to create a reasonable anticipation of litigation] would seem to be an artificial requirement, especially if facts suggest that such a decision is likely," advises Best.
Sound practice is to memorialize litigation analysis and coverage analysis separately. "The attorney-client privilege and work-product doctrine are not absolute privileges," observes Teresa R. Bult, Nashville, TN, cochair of the Section's Employment and Labor Relations Law Committee. Attorneys would do well to assess "insurance and indemnification issues separate from an analysis of the underlying lawsuit, to prevent intertwining the two in a way that the whole memorandum becomes discoverable to the indemnitor or insurer," opines Bult.
But if privileged and non-privileged information ends up in the same memorandum, practitioners are advised to learn from the insured's narrow and limited redactions. "A court is going to look at whether [the producing party] has taken a narrow brush and tried to apply it thoughtfully," advises Best.
Adam E. Lyons is an associate editor for Litigation News.