When is a lawyer not a lawyer? When the lawyer handles claims. Perhaps that is an overstatement regarding the title, but when a lawyer handles claims, or gives an insurance company advice in the ordinary course of claims handling business, the communications are not privileged and are not work product. That is true whether the lawyer is in-house counsel or outside counsel. Not convinced? Case law is clear on this point, but, if you need additional convincing, look at what insurance companies have said about this. When insurance companies get involved with internecine disputes regarding allocation or reinsurance or any number of issues, they often make the same arguments that they dispute when the argument comes from policyholder's counsel. A good example of this is the recent Southern District of New York decision in AIU Insurance v. TIG Insurance, No. 07 Civ. 7052, 2008 U.S. Dist. LEXIS 66370 (S.D.N.Y. Aug. 28, 2008) ("AIU").
In typical insurance coverage litigation between a policyholder and its insurance company regarding an insurance company's denial of coverage for a claim (in whole or in part), the policyholder seeks discovery of communications that relate to the claim and how the insurance company handled the claim. And, in such a typical dispute, the insurance company asserts that if any claims handling documents were copied to, written by, or allegedly created at the direction of counsel, the documents may be withheld on the basis of attorney-client privilege, the work product doctrine, or both. AIU involved the same scenario, but used the opposite arguments. AIU sued its reinsurer for coverage of a settlement relating to asbestos claims that AIU entered into with its policyholder, Foster Wheeler Corporation. See 2008 U.S. Dist. LEXIS 66370, at *2-*4. After receiving the reinsurance claim, over the course of approximately five months, TIG requested numerous documents from and conducted an audit of AIU. See id. at *4-*7. AIU then sued TIG for failure to indemnify AIU. See id. at *7. During the discovery process, "TIG withheld and redacted documents on the basis of attorney-client privilege and the work-product doctrine." Id. AIU refused to accept TIG's assertions of privilege and work product, and moved to compel: All the documents listed on TIG's privilege log and the full text of certain documents on TIG's redaction log[, including] . . . (1) documents relating to TIG's handling of claims . . . and TIG's July 2007 audit of AIU's files and (2) documents relating to commutations between TIG and other insurance companies that purport to show the economic prejudice TIG suffered as a result of AIU's late notice of Foster Wheeler's claims. Id. at *8 (footnotes omitted). From the perspective of policyholder's counsel, that motion is quite surprising. After all, in insurance coverage actions between insurers and policyholders, insurers argue consistently that the exact information that AIU sought in AIU is privileged. Indeed, AIU's arguments, as the court's opinion's illustrates, could have been pulled from a policyholder's brief: “AIU contends that the documents withheld on the basis of the attorney-client privilege should be produced because they do not involve legal communications (Plf. Mem. at 12). Specifically, AIU argues that many of these documents were not drafted by TIG's in-house or outside counsel, as reflected by the information provided on the privilege and redaction logs. AIU also claims that numerous documents drafted by Staley and Pascale and not distributed to TIG's counsel were improperly withheld on the theory that they were prepared "at the direction of counsel." Lastly, even where the privilege and redaction logs indicate that TIG's counsel drafted or received a document, AIU contends that TIG's counsel was acting solely in an investigatory function (Plf. Mem. at 12-13). Id. at *25-*26 (emphasis added). AIU's arguments, as summarized by the court, are absolutely correct. Insurance companies cannot rely on attorney-client privilege or the work-product doctrine to withhold communications that reflect claims handling in the ordinary course of business. It is well established that claims handling and analysis is business advice in the ordinary course of an insurer's business, and communications regarding such advice is not privileged. See, e.g., Brooklyn Union Gas Co. v. Am. Home Assurance Co., 23 A.D.3d 190, 191, 803 N.Y.S.2d 532, 534 (2005) ("[d]ocuments prepared in the ordinary course of an insurance company's investigation to determine whether to accept or reject coverage and to evaluate the extent of a claimant's loss are not privileged [and] . . . do not become privileged merely because an investigation was conducted by an attorney") (citation and internal quotation marks omitted). The AIU court agreed, ordering TIG to produce a number of documents, including claims handling documents created by in-house counsel who was acting in a business capacity for the purposes of evaluating the AIU claims. See AIU, 2008 U.S. Dist. LEXIS 66370, at *28-*32.
The AIU court also followed the principle that insurance companies cannot rely on the work-product doctrine to withhold such documents. "Application of the work-product doctrine to an insurance company's claims files has been particularly troublesome because it is the routine business of insurance companies to investigate and evaluate claims." AIU, 2008 U.S. Dist. LEXIS 66370, at *34-*35. Thus, attorney-created "documents in a claims file created by or for an insurance company as part of its ordinary course of business are not afforded work-product protection." Id. at *35. Overall, the court applied the same principles that policyholders usually cite when moving to compel claims handling documents. And on that basis, the court granted AIU discovery over a number of documents that TIG had withheld as privileged (and that other insurers attempt to withhold on a regular basis). So, if you are in an insurance coverage dispute, and the insurer asserts privilege or work product protections over claims handling documents created in the ordinary course of business, look to AIU's successful arguments to support your argument that such documents should be produced.
The case did not find that the lawyers were acting as claims people but only that the insurer''s lawyers failed to prove a right to assert the privilege. It said:
"[T]he burden is on a party claiming the protection of a privilege to establish those facts that are the essential elements of the privileged relationship." . . . More broadly, the party seeking to invoke the privilege must establish all elements of the privilege. . . This burden can be met only by an evidentiary showing based on competent evidence, . . . and cannot be "discharged by mere conclusory or ipse dixit assertions."
So what we have is not a finding that the privilege and the work product protection are not done away with when a lawyer acts with regard to claims handling but that the insurer did a poor job of establishing its case by using a purely conclusory declaration from the lawyer.
I am a lawyer -- when I give advice to my clients on a claims issue -- my advice is legal advice. I am not a claims adjuster and have not served in that capacity since 1972. No matter how often a plaintiff''s lawyer claims I am acting as a claims person he cannot succeed unless, as in the case you site, counsel for the insurer is incompetent or lazy.
Regardless, when representing insurers I always make all of my communications in a fashion that they can be read to the "ladies and gentlemen of the jury" and have nothing in them that would be difficult to explain to the jury. Often I am called upon to testify for an insurer -- who waives the privilege -- since my advice is a defense to the claims of bad faith.
In addition, the court concluded: "Additionally, in many of the emails from Parker to other TIG employees, Parker is clearly acting in his capacity as Vice President by giving business advice and not providing legal advice in his role as in-house counsel."
Insurers who wish to avoid this problem should not have their lawyers perform functions outside their professional duties.
The problem may not have been lack of diligence in making a record, though that is certainly a possibility. TIG apparently claimed privilege for lots of stuff that is not privileged. To begin with, any communications with nonclients and any simple reporting of what was learned from nonclients is not privileged. Moreover, if the lawyer is acting as a decisionmaker, instead of as an advisor, then there may be no separate communications seeking and rendering legal advice. One simply cannot tell enough from the opinion to make precise judgments, but none of what is described looks like a very good candidate for a privilege claim. One should not leap to the conclusion that privilege claims for communications relating to the adjusting process are never valid. Legal questions frequently arise in adjusting, and communications by adjusters to lawyers seeking legal advice and by lawyers rendering such advice are indeed privileged.
Work product provides much more limited protection. Some courts hold that adjusting is the ordinary course of business, not anticipation of litigation. But, even if litigation is anticipated, the insured can frequently make a showing of substantial need to learn what the insurer knew and when it knew that. So, ordinary work product will get little protection. Opinion work product is very different and should get almost absolute protection, but that is a very limited subset of work product, apparently not at issue in this case.
William T. Barker
Sonnenschein Nath & Rosenthal, LLP
I agree Mr. Barker.
Attorneys who work for insurers should, if they don't wish to be considered as an adjuster, is to avoid making decisions for clients and limiting their work to providing opinions and legal advice.