Wading through the sometimes muddy interplay between the cooperation clause, common interest doctrine, the tripartite relationship, privilege, and an insured’s independent counsel requires caution.
As many courts have noted, “[t]here can be no doubt that actual conflicts between insured and insurer are quite common and that the potential for conflict is present in every case.” Paradigm Ins. Co. v. Langerman Law Offices, 200 Ariz. 146, 150, ¶ 16 (2001). “Conflicts may arise over the existence of coverage, the manner in which the case is to be defended, the information to be shared, the desirability of settling at a particular figure or the need to settle at all, and an array of other factors applicable to the circumstances of a particular case.” Where an actual conflict exists, many jurisdictions recognize an insured’s right to independent counsel paid by the insurer. A few prior Practice Points illustrate many of the issues that arise with such a relationship: Independent Defense Counsel; The Right to Independent Counsel; Independent Counsel Required for Insurers to Avoid Conflicts; Nevada Adopts Cumis Rule.
What happens to privilege in situations where the insured and insurer have a conflict, but the insurer must still defend through independent counsel?
On the one hand, the insurer needs to review independent counsel’s invoices (including time entries) and case analyses for reasonableness and to make informed settlement decisions. On the other hand, “the insured is entitled to independent counsel and to a relationship with that counsel free from the fear of disclosure of privileged communications.” Rockwell Int'l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1263 (1994) (finding that “the attorney-client privilege was not rebutted by the cooperation clauses in the policies”). Communications between the insured and insurer that disclose privileged material and/or work product could result in an unwanted waiver either between the insured and insurer in later litigation, or even to a third party, such as the plaintiff in the underlying litigation. As stated by one court, “[w]hile the common interest of insurer and insured permits their communications to be shielded by the attorney-client privilege in specified circumstances, the protection does not apply to communications as to matters on which the parties are adverse.” Providence Piers, LLC v. SMM New England, Inc., (D.R.I. Mar. 25, 2014).
Knowing about this potential privilege waiver requires both insured and insurer to take proactive steps. For many issues in the underlying litigation the insured’s and insurer’s interests may be perfectly aligned and allow for the common interest doctrine to protect privilege. On other issues those interests may not be aligned, and the unwary attorney may unwittingly open the door to disclosure of privileged material. Where potential conflicts exist between the insured and insurer, when exchanging privilege communications, be sure to proceed with caution.
