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Insurer’s Communications with Outside Counsel Privileged? New York Supreme Court Says Fuggetaboutit

3/6/14

By William Ezzell 
Consider the following scenario: an insurance company retains an attorney to assist in whether to deny coverage to an insured.  The attorney investigates the facts underlying the claim and reads and analyzes the coverage provisions contained in the insurance policy – i.e., the contract. Only this isn’t a homeowners or auto policy – this policy covers losses stemming from an electric utility provider’s enormous steam turbine power generator, meaning the loss could be well over the seven-figure mark.  In fact, the potential exposure is so great that the original underwriter turned to the market to obtain co-insurers and reinsurers. No matter how correct the decision, denying coverage for a multi-million dollar loss would almost certainly result in litigation.
Are the attorneys’ communications from the investigation and coverage determination privileged? In other words, are documents created before coverage is denied considered to be prepared in anticipation of litigation? Are they attorney-client communications? Does the sharing of documents between insurers constitute a waiver of any privilege?
The First Department of the New York Supreme Court, Appellate Division, recently faced this scenario.  Adopting the holding of the trial court, the Supreme Court held (in part) that attorneys working to determine whether to deny coverage was an ordinary business activity for an insurance company.  An insurance company cannot claim documents are prepared in anticipation of litigation until it makes a firm decision to deny coverage.  Thus, the majority of the documents the attorney’s created during their investigation were subject to discovery.  While acknowledging that documents created by attorney’s prior to a denial of coverage could be protected from discovery by the attorney-client privilege, such documents would need to be “primarily of a legal character, and not related to an insurance company’s ordinary business activities” to be entitled to such protection.  The Supreme Court also refused to apply the common interest exception which would have negated any waiver of privilege when the insurers exchanged (disclosed) documents between one another during the investigation and analysis of the claim.  As a result, all documents that were shared between the insurers prior to the decision to deny coverage were deemed subject to discovery.
This precedent certainly puts New York insurers and counsel in a difficult position and it may be cited as  persuasive authority in other jurisdictions.  Even though many of the documents in this case involved the routine investigation of the claim, there were undoubtedly a significant number of documents that included counsel’s legal analysis of coverage obligations.  Absent a successful appeal of this ruling, these documents will now be turned over to the insured’s counsel and will provide a blueprint for how to attack the coverage determination made by the carriers.  This case should serve as an important reminder for carriers and outside counsel alike.  Hiring counsel to assist in a coverage analysis does not magically shield the entire investigation from discovery.  More importantly, great care must be taken to ensure that attorney-client privileged communications do not become discoverable because they are intertwined with a factual report or shared with other carriers on the risk.