An insurance company that receives a claim from one of its policyholders inevitably wears both a white hat and a black one. The insurer is there to help its insured deal with the claim – it may dispatch claims handlers or service providers to help the policyholder in its time of need; the insurer, however, also is the insured’s adversary in the sense that it must determine whether it has any obligation to pay the insured. To the latter extent, the insured and the insurer have directly adverse interests. (The law of first-party insurance bad faith is predicated on the recognition in part of this fundamental adversity of interests between the insurer and its insured, especially at the precise moment when the insured is calling upon the insurer for performance.)
The insurer’s wearing two hats poses the opportunity for mischief when those roles get confused or blurred. Take the example of a defense lawyer hired by an insurance company to defend the insured: the defense attorney plainly has an attorney-client relationship with the insured, the touchstone of which is confidentiality. Assume that the defense lawyer is told a fact by the insured that supports the insurer’s denying coverage: the insured confesses to being drunk while driving, the insured acknowledges that it knew of a latent problem before it purchased the policy, or the insured knew of the potential claim against it for a long time but had simply hoped it would go away and so did not notify the insurer sooner. The insurance company might wish to learn of this fact because it might permit it to terminate its defense obligation and avoid paying anything on the claim. In these circumstances, may the defense counsel tell the insurance company about this admission from the insured?
Ratting out the insured in this fashion would be found to be a breach of the lawyer’s duties to his or her client (the policyholder). What happens if the insurance company acts on this information to deny coverage? Has the insurer breached any duty?
Different courts have approached this question somewhat differently, but no court (to my knowledge) is comfortable with the insurer acting on this information. The Arizona Supreme Court has held that the insurer has committed an act of bad faith if it denies coverage based on defense counsel’s breach of the policyholder’s confidence. In Parsons v. Continental National American Group, 660 P.2d 94 (Ariz. 1976), the court held:
When an attorney who is an insurance company’s agent uses the confidential relationship between an attorney and a client to gather information so as to deny the insured coverage . . . . we hold that such conduct constitutes waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability.
550 P.2d at 99. Other courts have adopted an exclusionary-rule approach, barring the insurer from using the information or any fruit from the poisonous tree in service of a denial of coverage Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 560-61 (Tex. 1973); Snodgrass v. Baize, 405 N.E.2d 48, 54 (Ind. App. 1980). These cases recognize that mixing the insurer’s two roles – mixing up its white and black hats – is at a minimum inappropriate and potentially abusive. This double betrayal – of confidence and using the confidence as a weapon against the insured – calls for some remedy.
But let’s vary the situation somewhat, from an insurer that has provided defense counsel to an insurer that has not provided counsel when the insured believes it should have done so. In those circumstances, the insured will defend the liability case against it and separately pursue coverage against the insurer in a coverage case. Routinely, we see insurers seeking discovery of underlying defense counsel’s files. Often, this is seemingly an effort to obtain evidence that will embarrass the insured and sway the jury – for example, a memo from defense counsel to the insured evaluating the liability case and stating something like “the [insured] company’s conduct flagrantly disregarded standards for appropriate conduct and safety and this led directly to the injury.” In a coverage case, the insurer would like to proffer this kind of document against the insured to argue that the insured expected/intended the injury and thus coverage should not be provided. (Moreover, carrier counsel wants to argue at closing that “even the insured’s defense counsel agrees that the insured flagrantly disregarded safety standards, etc. etc.”) Discovery of this kind of document also makes carrier counsel’s job easier because the defense lawyer has investigated and synthesized the facts leading to the liability claim.
Insurers have argued that they are entitled to the discovery of this information in the coverage case on the ground that it fits within the scope of discovery and that, although the documents constitute privileged communications, no privilege is properly assertable as against them. The rationale insurers offer is that they share a common interest with the insured in these privileged communications.
A tiny number of jurisdictions have accepted this argument, and the vast majority of cases have rejected it. In Illinois for example, where the argument has been accepted, insurance companies have an unfettered right of access to defense counsel’s files. Waste Management Inc. v. International Surplus Lines Ins. Co., 579 N.E.2d 332 (Ill. 1991). The Illinois Supreme Court reasoned that, even though the insurer was alleged to have breached its contract with the policyholder, the insurers nonetheless shared a “common interest” with the insured in defeating the underlying plaintiff’s claim against it. Because the insurers “shared” in the privilege, relevant materials could not be withheld on this ground. (In other words, like Big Brother, in Illinois one’s insurers are always looking over defense counsel’s shoulder, even where the insurer has breached its contract to perform.)
Thus, even though there is direct adversity of interests between the insurers and the policyholder at the time that the insurers are seeking discovery of defense counsel-s files, the Illinois courts hold that at the time of document creation (as opposed to disclosure) the insurer’s are privy to the thoughts of defense counsel.
Policyholders find this argument preposterous; the insurer may be in breach of contract and unquestionably is seeking bullets to fire at the insured. Ruling that insurers are on the same side as the policyholder and therefore get access to defense counsel’s files confuses the two different roles of insurers – in service of a coverage denial insurers plainly have adverse interests with the insured, and when the insurer has failed to perform they have failed to come to the insured’s aid and rescue (the role that forms the premise for the Illinois courts’ ruling that insurers have a common interest with the insured). As the Fifth Circuit observed in a related context:
We know of no case in which the insured’s duty of assistance and cooperation has been used to force a putative insured to divulge to the insurer every jot and tittle of information which may aid the insurer in defeating his claim for coverage but which in no way hinders the insurer’s ability to provide the insured with a proper defense.
Martin v. Travelers Indemnity Co., 450 F.2d 542, 553 (5th Cir. 1971).
Most courts have rejected the Illinois approach, on a variety of rationales. See Remington Arms. Co. v. Liberty Mut. Ins. Co., 142 F.R.D. 408, 418 (D. Del. 1992). One is that, properly understood, the common interest “privilege” is no privilege at all but rather is a shorthand way of considering whether the disclosure of otherwise privileged communications effects a waiver of the privilege. See United States v. McPartlin, 485 F.2d 1321, 3336 (7th Cir. 1979). As a result, whether there is a common interest depends on the circumstances at the time of disclosure. In these circumstances, while the coverage war is en flagrante there will typically not be a common interest. Put differently, the insured’s privilege still exists and may properly be interposed as a basis for refusing to produce otherwise relevant documents and materials. In Re Envtl. Ins. Declaratory Judgment Actions, 612 A.2d 1338, 1341-43 (N.J. Super. App. Div. 1992). An insurer cannot force a waiver by the fact that a coverage suit is pending. (Relatedly, courts uniformly hold that the mere fact that the insured has been required to file a suit against its insurer does not waive privilege or put all privileged communications “at issue” (which is simply another variant of waiver principles). See FDIC v. US, 527 F. Supp. 942, 950-51 (S.D.W.Va. 1981) (advice-of-counsel defense places communications at issue and subject to discovery); Long Island Lighting Co. v. Allianz Underwriters Ins. Co., 749 N.Y.S.2d 488, 496 (App. Div. 2002); Home Ins. Co. v. Advance Mach. Co., 443 So. 2d 165, 168 (Fla. 1st Dist. App. 1983); Rockwell Int’l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1268 (1994).)
Nor is the insured’s duty of cooperation with its insurers construed as a waiver of privilege. Metropolitan Life Ins. Co. v. Aetna Cas. & Sur. Co., 730 A.2d 51, 63-64 (Ct. 1999); Martin, 450 F.2d at 553. See also Gulf Ins. Co. v. Transatlantic Reinsurance Co., 788 N.Y.S.2d 44 (1st Dep’t 2004).
So, insurers cannot compel insureds to provide them with privileged (or work product) information. This is true both informally and in the context of coverage litigation. Nevertheless, insureds and their insurers may wish to exchange defense counsel’s evaluation of a case, for example. Can an insured provide its carrier with privileged communications without fear that it has effected a broad waiver with respect to the tort claimants? Does a policyholder need fear that its carrier will use that communication against it to deny coverage?
Policyholders may wish to share defense-counsel’s analysis with its insurers to facilitate the insurers decision to pay to settle a case. I have found it reasonably common in the directors’ and officers’ liability insurance, fiduciary-liability insurance, and errors and omissions insurance contexts that policyholders and their insurers do share privileged communications, reflecting the reality that in many cases the insurers will pay for settlement of the underlying claim against the insured. On the other hand, in the product-liability and mass-tort context, such sharing of information is seemingly more rare.
If an insured elects to share privileged information, is there a risk of finding of waiver? While I am reluctant to provide a definitive conclusion one way or the other, no doubt there is a risk that a court may find waiver.
The starting point for any analysis of this problem is that, in most jurisdictions, there is no insured-insurer privilege. Linde v. Resolution Trust Corp., 5 F.3d 1508, 1514-15 (D.C. Cir. 1993) (“we now firmly reject any sweeping general notion that there is an attorney-client privileged in insured-carrier communications”). As the Linde court ruled:
An insured may communicate with its carrier for a variety of reasons, many of which have little to do with the pursuit of legal representation or the procurement of legal advice. Certainly, where the insured communicates with the carrier for the express purpose of seeking legal advice with respect to a concrete claim, or for the purpose of aiding an insurer-provided attorney in preparing a specific legal case, the law would exalt form over substance if it were to deny application of the attorney-client privilege. However, a statement betraying neither interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the attorney-client relationship and thus does not come within the ambit of the privilege. . . . . [I]f what is sought is not legal advice, but insurance, no privilege can or should exist.
Linde, 5 F.3d at 1515. See also Aiena v. Olsen, 194 F.R.D. 134, 136 (S.D.N.Y. 2000). As the Alaska Supreme Court explained, “communications between insured and insurer are not in the same class as communications between client and attorney, because the insurer may use its information for purposes inimical to the interests of the insured.” Langdon v. Champion, 752 P.2d 999, 1002-03 (Alaska 1988). Thus, some courts have found that otherwise privileged communications lose their protection from sharing them with an insurer. See Go Medical Indus. Pty., Ltd. V. C.R. Bard, Inc., 1998 WL 1632525 (D. Conn. Aug. 18, 1998); Hartford Fire Ins. Co. v. Guide Corp., 206 F.R.D. 249, 250-51 (S.D. Ind. 2001).
Even if both the carrier and its policyholder would benefit from a defense victory over a tort plaintiff, that may not be sufficient to establish a “common interest” to maintain privilege. See Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 893 (S.D.N.Y. 1999) (holding that the fact that two entities would benefit from a judgment in favor of the plaintiff, that is not sufficient to find that they share an identical legal interest). What constitutes a common interest has been defined in the following manner:
A community of interests exists among different persons or separate corporations where they have an identical legal interest . . . . The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial. The fact that there may be an overlap of a commercial and legal interest for a third party does not negate the effect of the legal interest in establishing a community of interest.
North River Ins. Co. v. Columbia Cas. Co., 1995 WL 5792, at *3 (S.D.N.Y. Jan. 5, 1995) (citation omitted). The court continued, “What is important is not whether the parties theoretically share similar interests but rather whether they demonstrate actual cooperation toward a common goal.” Id. at *4. Stated further, the same court held in International Insurance Co. v. Newport Mining Corp., 800 F. Supp. 1195 (S.D.N.Y. 1992):
The “common interest,” logically viewed, and New York law supports, which makes the privilege inapplicable, is where an attorney actually represents both the insured and the carrier – joint representation – and accordingly both clients are working together with a single attorney toward a common goal.
Id. at 1196 The International Insurance court found that, while the insurance carrier and its insured shared the same desire for a successful defense of a legal claim against the insured, this was insufficient to find a common legal interest. Id. The International Insurance case involved a defendant-insured seeking to withhold from a plaintiff-carrier materials that were privileged. When the plaintiff-insurer argued that the common-interest exception should apply and the privileged materials (which were otherwise relevant) therefore should be produced, the court disagreed. The court stated:
I conclude that while the insurer had the same ‘desire’ as its insured to have a successful defense of [the actions that necessitated the case at bar], for if coverage was later determined to exist, it would be responsible for any obligation of its insured remaining, this in my view is an insufficient ‘common interest’ to warrant invasion of the attorney-client relationship with the privilege . . .
By extension, and this is the key point, if the insured provided these types of materials to its insurers, then it is providing the communications to an entity that does not share a common interest; therefore, privilege (or immunity) may not be preserved vis a vis (other) third parties. Kansas City Fire & Marine Insurance Corp., 351 N.Y.S.2d 767, 768 (App. Div. 1974).
In Go Medical Industries Pty, Ltd. v. C.R. Bard, Inc., 1998 WL 1632525, a patent-infringement action, the defendant sought production of the plaintiff’s communications with its insurance carrier, which included certain opinions of its lawyer that had been provided to the carrier. The plaintiff alleged the common-interest extension of the attorney-client privilege shielded these documents from discovery. The court in Go Medical disagreed, finding that the plaintiff and its insurance carrier did not share common legal interests:
Go Medical’s [the plaintiff] purpose in providing these documents to CIC [its insurance carrier] was to try to obtain coverage from CIC for expenses Go Medical would incur in litigation to stop the alleged infringement of its patent. However, whereas Go Medical’s interest is in protecting its patent, CIC has no interest in the  patent. CIC’s interest in Go Medical’s infringement claim is limited to CIC’s coverage of Go Medical’s litigation expenses. 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 rule of the attorney client privilege.
Id. at *3.
So, can communications with an insurer be conducted in a manner that does not result in a waiver? Certainly, if the insurer acknowledges coverage and takes over control of the defense, unquestionably in that circumstance the insurer is functioning as the insured’s lawyer and is entitled to no less protection. When the insurer has not yet provided full-throated acknowledgement of coverage, the insured and the insurer need to lay a foundation to show that, in the particular circumstance, the exchange of privileged information should not be deemed to be a waiver. To accomplish this, the parties are advised to make clear that there is a purpose related to the settlement or defense of the underlying case that justifies sharing the information – that is, the justifies extending the cone of silence over lawyer-client communications of the policyholder to include the carrier. (The carrier’s merely sharing the hope that the policyholder may win the liability case is not likely to be sufficient basis for proving sufficient commonality of interest. E.g., Shamis, 34 F. Supp. 2d at 893.)
So the issue for all counsel involved – policyholder, carrier, tort plaintiffs, government investigators – is whether a foundation has been established that satisfies a showing that in the particular circumstance disclosure of privileged/work product material is consistent with preserving the confidentiality protections we otherwise protect them with. See Cutchin v. State of Maryland, 143 Md. App. 81 (2002); Metroflight Inc. v. Argonaut Ins. Co., 403 F. Supp. 1195 (N.D. Tex. 1975); Reavis v. Metro Property & Liability Ins. Co., 117 F.R.D. 160 (S.D. Cal. 1987); Bellman v. District Court, 531 P.2d 632 (Colo. 1975); Grand Union Co. v. Patrick, 246 So.2d 474 (Fla. Dist. Ct. App. 1971); People v. Ryan, 197 N.E.2d 15 (Ill. 1964). Some courts have ruled that statements to an insurance adjuster are protected by the work-product doctrine, and thus the plaintiff who later sues the insured making the statement cannot obtain its discovery. In re Fontenot, 13 S.W.3d 111 (Tex. App. 2000); Heidebrink v. Moriwaki, 706 P.2d 213 (Wash. 1985). Some courts have employed seemingly more stringent proof requirements to show that privilege should be preserved. In Re Bevill, Bresler & Schulman Asset Mgmt Corp., 805 F.2d 120, 126 (3d Cir. 1986); Government of Virgin Islands v. Joseph, 685 F.2d 857, 862 (3d Cir. 1982); Sheet Metal Workers Int’l Ass’n v. Sweeney, 29 F.3d 120 (4th Cir. 1994); Ft. Howard Paper Co. v. Affiliated FM Ins. Co., 64 F.R.D. 694 (E.D. Wisc. 1974); Travelers Ins. Cos. v. Superior Court, 143 Cal. App. 3d 436 (1983).
The key lesson is that, if one desires to preserve the privilege (or immunity) that would otherwise attach to a statement shared with an insurance company, the circumstances surrounding sharing the statement should indicate that it is being provided to assist the insurer in the defense or in evaluating the settlement of the claim. E.g., Exxon Corp. v. St. Paul Fire & Marine Ins., 903 F. Supp. 1007, 1010 (E.D. La. 1995). In other words, to the extent that one can show that the insurer’s role is in protecting the interest of the insured, then the communication is more likely to remain protected. If the role of the insurance company is more ambiguous – that is, if it is unclear which hat the insurer is wearing and whether the statement might be used against the insured in service of a denial of coverage – then the risk of a court finding waiver is increased. See Hedebrink, 706 Pl.2d at 220 (Goodloe, J., dissenting) (“The use of the statement for a purpose adverse to the interest of the insured is certainly inconsistent with the claim of privilege upon his behalf.”); see also Vermont Gas Systems, Inc. v. United States Fid. & Guar. Co., 151 F.R.D. 268, 277 (D. Vt. 1993); cf. Great American Surplus Lincs, Inc. v. Ace Oil Co., 120 F.R.D. 533 (E.D. Cal. 1988) (preserving insurer’s privilege re information shared with reinsurer). Ideally, the policyholder and the insurer will enter into an agreement that pledges the insurer will maintain the communication in confidence, is receiving the communication for the purpose of evaluating the defense of the claim or settlement of the claim, and will not use the communication as a basis to deny coverage to the insured (subject to the insurer’s being able to use the documents in defense of a failure-to-settle bad-faith claim and allowing the insurer to seek the identical discovery in a coverage case against the insured, though without being able to argue that sharing the information effected a waiver). Such an approach differentiates the insurer’s white hat and black hat and allows the policyholder’s privileged information to be kept under the insurer’s hat.