Courts Continue to Struggle with Attorney-Client Privilege and Work-Product Doctrine

The previous year saw a number of important cases interpreting and developing the application of the attorney-client privilege and the work-product doctrine in the context of insurance claims.

Insurers and insureds consistently assert and challenge these protections in coverage disputes, and the two protections have received varying treatment from different courts. A few recent cases demonstrate the difficulty and complexity of applying the attorney-client privilege and the work-product doctrine to insurance cases.

Vicor v. Vigilant

In Vicor Corp. v. Vigilant Ins. Co., 674 F.3d 1 (1st Cir. 2012), the First Circuit Court of Appeals issued an important decision regarding the common-interest exception to the attorney-client privilege. The attorney-client privilege operates to protect confidential communications between an attorney and client regarding legal advice. This privilege becomes much more complicated in the context of the insurer-insured relationship.

In Vicor, an insurer retained defense counsel for its insured but after a coverage dispute arose, the insured attempted to shield its communications with its defense counsel from the insurer. The insurer did not dispute that the communications were privileged, but instead argued that the insurer and insured shared a common interest and therefore the privilege could not be asserted against the insurer. The common-interest doctrine states that where an attorney acts for two different parties who share a common interest, the parties’ communications with the attorney are privileged as to third parties but not one another.

Applying Massachusetts law, the court agreed with the insurer and held that an attorney retained by an insurer to represent the insured is an attorney for both the insurer and the insured, and therefore the privilege could not protect the communications.

The court further denied the insured’s argument that the fact that the insurer tendered the defense pursuant to a reservation of rights defeated any claim of common interest. Instead, the court found that the insurer paying for the defense and contributing to the initial settlement created a common interest such that the insured could not assert the privilege against the insurer.

The case highlights the complexity of applying the attorney-client privilege within the context of an insurance claim, and is important as it expands the common-interest exception to cases where the parties not only have conflicting interests but are disputing coverage against one another.

Melworm v. Encompass

Another significant case came down in New York, where the court in Melworm v. Encompass Indem. Co., 951 N.Y.S.2d 829 (N.Y. Sup. Ct. 2012), continued a trend in the state of contracting the applicability of the attorney-client privilege in the context of insurance claims. Although the attorney-client privilege and the work-product doctrine are two distinct protections with different elements, New York courts have routinely analyzed the two jointly in insurance cases. Whereas the attorney-client privilege protects communications regarding legal advice between an attorney and client, the work-product doctrine protects materials “prepared in anticipation of litigation.”

In Melworm, an insurer asserted the attorney-client privilege to protect certain attorney communications relating to the claim process. But the court, relying on a string of previous cases, denied application of the privilege, holding that “the payment or rejection of claims is part of the regular business of an insurance company” and reports that aid the insurer in that process are “made in the regular course of business.”

While such language is typically used to counter the work-product doctrine by showing that the material was prepared in the ordinary course of business and not in anticipation of litigation, the court here used it to pierce the attorney-client privilege. Presumably, the court’s reliance on this analysis was to show that the attorney was acting not as an attorney but as an investigator and that the communication was not legal advice but rather ordinary business advice falling outside of the privilege.

The opinion lacks clarity and appears to ignore the distinction between the privilege and the work-product doctrine. By combining the analyses, New York law has resulted in a blanket rule that leaves little room for the attorney-client privilege or the attorney work-product doctrine to protect attorney communications in claims files.

Barton Malow v. Lloyd’s

In a case bearing similar facts, a federal district court in Michigan came to the opposite conclusion after employing a similar though slightly more stable analysis.

Though flirting briefly with the combined analysis used by the New York court in Melworm, the court in Barton Malow v. Certain Underwriters at Lloyd’s of London, 2012 U.S. Dist. LEXIS 143014 (E.D. Mich. 2012), approached the attorney-client privilege and work-product doctrine independently. The court determined that the attorney’s communication, although created and transmitted during the claim investigation, communicated legal advice as it showed “counsel’s legal opinion regarding the scope of potential liability” and therefore was protected by the attorney-client privilege. The court found no need to address the applicability of the work-product doctrine because the attorney-client privilege shielded the document.

Although the decision offered limited guidance, it at least recognized the difference between the attorney-client privilege and the work-product doctrine, and was a positive decision for insurers.

Whether a communication is protected by the attorney-client privilege is primarily a question of fact which must be decided on a case-by-case basis. While New York courts continue to assail the applicability of any privilege to an attorney’s work in the insurance claims process, other courts continue to struggle to articulate and apply a clear and consistent standard.

Courts continue to address the complicated and difficult task of balancing the unique relationships that exist between insurers, policyholders and counsel, and the privileges and protections of the legal process. Insurers, insureds and their attorneys must take care to understand the laws of their state and to protect their communications.