A. Defense Counsel Selected and Paid for by Carrier
Most standard liability insurance policies include a provision indicating that the insurance company has the “right and duty” to defend lawsuits seeking damages covered by the policy. When triggered, the duty-to-defend provision also allows the insurer to select and retain counsel, pay the costs of that defense up front, and control the litigation. In instances where an insurance company accepts without reservation its duty to provide the policyholder with a defense in a litigated matter and the insurer selects and pays for counsel, courts generally acknowledge that tripartite communications are protected from disclosure by the attorney-client privilege. In that situation, both the insurer and the insured are “considered the clients of the defense counsel, and an attorney-client privilege is shared among all of them.”
It has been held that “so long as the interests of the insurer and the insured coincide, they are both the clients of the defense attorney and the defense attorney’s fiduciary duty runs to both the insurer and the insured.” Similarly, courts recognize that “when an insurer, as required by its contract of insurance, employs counsel to defend its insured, any communication with the lawyer concerning the handling of the claim against the insured, is necessarily a matter of common interest to both the insured and the insurer.”
When an insurer accepts a tender of defense without reservation, a circumstance that is relatively rare in today’s insurance setting, most jurisdictions hold that tripartite communications are protected from disclosure to third parties. However, not all communications within the tripartite relationship fall within the joint defense or common interest doctrines. As one court noted, an insured may communicate with its insurer for a variety of reasons, many of which have little to do with the pursuit of legal representation or the procurement of legal advice.
In some jurisdictions, courts conclude that, even though an insured and an insurer would have a common interest in defeating or minimizing claims against the insured and the insurer retains counsel for the insured, “the attorney’s only allegiance is to the client, the insured.” Other jurisdictions recognize that an insurer’s contractual obligation to pay its insured’s litigation expenses does not, by itself, create a common interest between the insurer and the insured that is sufficient to warrant application of the common interest exception to the attorney-client privilege. When there is no clear joint representation, courts are reluctant to insulate tripartite communications.
B. Defense Counsel Selected and Paid for by Carrier
As noted above, in situations where the insurer has agreed that it has a duty to defend and indemnify the insured, courts generally conclude that both the insured and the insurer are clients of defense counsel selected and paid for by the insurer. However, where the insurer defends under a reservation of rights, denying the duty to indemnify on some or all of the claims, a number of courts hold that appointed defense counsel represents only the insured and not the insurance company. In addition, when a reservation of rights creates a conflict of interest between the insurer and the policyholder, some states require the appointment of independent counsel paid for by the insurer. In those situations, independent counsel represents only the policyholder, and no attorney-client relationship exists between the insurer and independent counsel.
C. Insurer Denies Defense Obligation; Insured Retains Counsel
Courts uniformly conclude that where the policy at issue includes a duty to defend but the insurer denies or rejects that duty, requiring the insured to retain its own counsel wholly independent from the insurer, communications between that counsel and the insurer are generally not protected from disclosure under either the attorney-client privilege or the joint defense doctrine. The common thread of these cases is that actual joint representation and cooperation toward a common legal goal, as opposed to some theoretical common interest, is required.
Under these circumstances there is clearly no joint representation and therefore no shared privilege. While an insurer may share the same desire as the insured to limit or escape liability in the underlying action, this does not qualify as an “identical legal interest” sufficient to trigger the joint defense doctrine. In situations where an insurance policy includes a defense obligation and the insurer refuses to acknowledge or accept the tendered defense of an insured, the insurer’s legal interest directly conflicts with that of the insured; therefore, the joint defense doctrine does not apply.
D. Defense Counsel Selected and Paid for by Policyholder
Another setting in which courts refuse to protect tripartite communications is when the insurance policy at issue does not include a defense obligation and the insured retains and pays for defense counsel. Some insurance policies, like standard directors and officers (D&O) policies, expressly disavow any duty to provide a defense. For example, a typical defense clause in a D&O policy provides:
[T]he Insurer does not . . . under this policy, assume any duty to defend. The Insureds shall defend and contest any Claim made against them. The Insureds shall not admit or assume any liability, enter into any settlement agreement, or incur any Defense Costs without the prior written consent of the Insurer.
With these types of policies, the duty falls upon the policyholder (rather than the insurer) to select and retain defense counsel, and to front the costs of that defense, with the carrier reimbursing the policyholder for defense costs pursuant to the terms of the policy. Under a typical D&O policy, unlike standard liability policies, it is the insured that controls the defense of the underlying litigation. In these situations, courts generally refuse to recognize either the attorney-client privilege or the joint defense doctrine as protecting tripartite communication. Two California cases illustrate this approach.
In Continental Casualty Co. v. St. Paul Surplus Lines Insurance Co., the court applied California law in a wrongful death lawsuit arising from a fatal forklift accident. Continental agreed to defend the policyholder under a reservation of rights and agreed to pay for independent counsel because a conflict was created by virtue of the reservation. In contrast, St. Paul refused to participate in the insured’s defense under a policy that did not contain a duty-to-defend provision.
In related cross-claims to determine the respective liability of the two insurers, Continental sought discovery of communications between St. Paul, the insured, and its independent counsel. St. Paul refused to produce the communications on the grounds that the joint defense doctrine protected from disclosure the tripartite communications. The court rejected this argument, concluding that, because St. Paul did not provide a defense for its insured, it was not part of a protected tripartite relationship. The court further noted that the attorney-client privilege does not extend to communications between an insured, an attorney, and insurer who is defending with a reservation of rights, let alone to an insurer that is not defending at all.
Similarly, the court in Imperial Corp. of America determined that two status letters written by counsel for the insured to an insurer that issued a D&O policy were discoverable by a litigant opponent in an ongoing case. In those letters, counsel analyzed the allegations of the underlying litigation and provided his “candid analysis of the risk of exposure presented by the underlying action and further addresse[d] a settlement demand made by plaintiffs in the underlying action.” The second letter, which was more detailed than the first, also sought to persuade the D&O carrier to contribute to a settlement of the case. The court determined that the letters were not written by or to clients of counsel selected and paid for by the insureds. Instead, according to the court, the letters were written for the express purpose of apprising the insurer of the status of the case and seeking contribution towards a settlement, not for seeking or imparting legal advice. Accordingly, the letters were not protected from disclosure by the attorney-client privilege.
These status letters were discoverable by the litigant opponent despite the fact that the parties had executed two joint defense agreements, the stated purpose of which was to enable the defendants to share confidential information in order to facilitate their defense of the litigation and to maintain the confidentiality of the shared information. The agreements also barred disclosure by the signatories of confidential client communications, work product, discovery, and strategy. Both agreements were signed by in-house and outside counsel for the insureds and one of them was also signed by the insurer.
In concluding that the letters were not protected from disclosure, the court relied heavily on the fact that under the terms of the policy, the insurer did not have a duty to defend the director defendants; it played no role in the selection, retention, or payment of the legal fees incurred by counsel for the directors; and the insurer was represented by its own counsel, separate from the directors’ counsel. The holdings in In re Imperial Corp. and Continental Casualty v. St. Paul are not anomalies but rather the majority rule. In the D&O insurance setting, communications between defense counsel and the insurance company are generally not protected from disclosure by the doctrines of attorney-client privilege or joint defense.
As detailed in this article, the issue of whether communications between an insurance company, its policyholder, and/or the insured’s defense counsel are protected from disclosure to third parties depends upon a variety of factors including the type of insurance policy at issue and the insurer’s coverage position. It is abundantly clear that practitioners should not assume that communications shared with an insurer will not fall into the hands of a litigant opponent and that they should remain vigilant as to how best to balance the obligation to share information with an insurer, with the risk that such communications might be discovered in the underlying litigation, possibly by litigant opponents.