James R. Murray, Jared Zola and Omid Safa
Upon receiving an insurance claim from its policyholder, an insurer is obligated to promptly and reasonably investigate, adjust, and determine whether to pay a claim. Those are fundamental aspects of an insurer’s business that arise with respect to every claim. Reports by insurance investigators or adjusters, prepared during the processing of a claim, are discoverable as made in the regular course of the insurer’s business.
Insurers frequently allege that attorneys working for the insurers perform or assist with the claim investigation or adjustment and then assert privilege in an effort to avoid producing such reports during litigation. Policyholders should be wary of any such assertion and consider case law from across the country compelling insurers to produce claims handling documents (and related testimony) generated by or in connection with insurer coverage counsel. Many courts hold that the decision to have lawyers undertake or be involved in basic claims handling functions does not imbue this business task with privilege, and protection from discovery. Thus, communications among these attorney claims handlers, independent claims personnel, and insurers about the results of their claim handling activities should not be cloaked in privilege.
For example, the New York Appellate Division held, “[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.” Brooklyn Union Gas Co. v. Am. Home Assur. Co., 803 N.Y.S.2d 532, 534 (1st Dep’t. 2005). New York courts recognize that attorney work product applies only to documents “prepared by counsel acting as such, and to materials uniquely the product of a lawyer’s learning and professional skills, such as those reflecting an attorney’s legal research, analysis, conclusions, legal theory or strategy.” ACWOO Intl. Steel Corp. v. Frenkel & Co., 564 N.Y.S.2d 40 (1990). Moreover, in order for attorney-client communications to be privileged, the document must be primarily or predominantly a communication of a legal character. See Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 378 (1991). It is also important to consider that the burden of establishing any right to protection is on the party asserting it, and the protection claimed must be narrowly construed. See Spectrum Sys. Intl. Corp., 78 N.Y.2d at 377.
New York is in line with courts across the country that recognize insurers cannot shield their claims handling activities from discovery merely by involving attorneys in routine business functions. See, e.g., HSS Enterprises, LCC v. Amco Ins. Co., No. C06-1485-JPD, 2008 WL 163669, at *3 (W.D. Wash. Jan. 14, 2008) (“The public policy reason behind this conclusion is that insurance companies should not be permitted to insulate the factual findings of a claims investigation by the involvement of an attorney to perform, or help perform, such work.”); Evanston Ins. Co. v. OEA, Inc., No. CIV-02-1505, 006 U.S. Dist. LEXIS 26330, at * 11 (S.D. Cal. May 4, 2006) (“An insurer cannot shield such documents from discovery by using the same lawyer to handle the coverage decision and any ensuing coverage litigation.”).
Courts recognize that “[i]t would not be fair to allow the insurer’s decision in this regard to create a blanket obstruction to discovery of its claims investigation.” Mission Nat’l Ins. Co. v. Lilly, 112 F .R.D. 160, 163 (D. Minn. 1986) (finding that “[a]ttorneys that act as claims adjusters or claims managers cannot later claim attorney-client privilege for that work”); see also, e.g., St. Paul Reins. Co. v. Comm. Fin. Corp., 197 F.R.D. 620, 637, 641-42 (N.D. Iowa 2000) (an insurer’s investigation in order to determine coverage is not “in anticipation of litigation” for purposes of the work product doctrine because such an investigation is part of the routine business of an insurance company).
In coverage cases alleging insurer bad faith, courts are even more disinclined to uphold an insurer’s attempt to shield claims handling documents and testimony from production solely because an attorney is involved. Although a high degree of protection is accorded to “opinion work product” under Rule 26(b)(3), protection of these materials is not absolute. Discovery of opinion work product is permitted in insurance “bad faith” cases because the mental impressions of the insurer’s representatives in handling the claim and making coverage decisions are directly at issue and the insured’s need for the materials is compelling. E.g., Brown v. Superior Court, 137 Ariz. 327, 670 P.2d 725 (1983) (“the reasons the insurance company denied the claim or the manner in which it dealt with it are central issues to [the policyholder’s] claim of bad faith. Thus, the strategy, theories, mental impressions and opinions of [the insurer’s] agents concerning the loss of earnings claim are directly at issue. When mental impressions and the like are directly at issue in a case, courts have permitted an exception to the strict protection of Rule 26(b)(3) and allowed discovery.”); see also Holmgren v. State Farm Mutual Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992); Reavis v. Metropolitan Prop. & Liability Ins. Co., 117 F.R.D. 160 (S.D. Cal. 1987); APL Corp. v. Aetna Cas. & Sur. Co., 91 F.R.D. 10 (D.Md. 1980).
When reviewing an insurer’s privilege log, policyholder counsel should keep in mind that an attorney’s involvement may not end the inquiry. Frequently, the fact that “attorneys” allegedly performed, supervised, or blessed each aspect of a claims investigation is immaterial under the applicable case law.