When an insurer and its insured become adversarial litigants in a coverage dispute the question that often arises is whether and to what extent each party’s communications with counsel during the resolution of the underlying claim are protected from disclosure in the subsequent litigation by the attorney-client privilege. The most probative evidence an insured could offer against the insurer in an action for breach of contract or bad-faith would be the insurer’s communications with its counsel assessing whether coverage is due for the underlying claim. Conversely, the insurer’s ideal exculpatory evidence would consist of communications between the insured and its counsel revealing that during the underlying claim the insured provided inadequate notice of the claim, failed to cooperate with the insurer, or agreed to an unreasonable settlement. This evidence is equally important where the insurer is the plaintiff seeking a declaratory judgment regarding its obligation to provide coverage for the underlying claim.
When the insurer undertakes defense of the insured against a third-party claim, communications by either party regarding the claim are not privileged as to the other because the parties’ interests are aligned. See Indep. Petrochemical Corp. v. Aetna Cas. & Sur. Co., 654 F.Supp. 1334, 1365 (D.D.C. 1986) (“IPC”) (ordering insured to produce its communications with its attorneys regarding the underlying claim to insurer where insurer has a duty to defend insured). This result is based on the “common interest” doctrine, which states that while two parties share a “common interest” statements each party makes to its attorney are privileged vis-à-vis third-parties, but not protected from disclosure in a subsequent suit between the formerly jointly represented parties. Eureka Inv. Corp. v. Chicago Title Ins. Co., 743 F.2d 932, 936-37 (D.C. Cir. 1984). For a party to successfully assert the “common interest” doctrine to compel document production in subsequent adversarial litigation, it must demonstrate that both it and the communicant had an identical legal interest, not merely an identical pecuniary interest. Fed. Deposit Ins. Corp. v. Ogden Corp., 202 F.3d 454, 461 (1st Cir. 2000) (affirming order in action between former partners compelling production of communications with attorney jointly representing partners against efficacy insurer).
Communications made after the joint representation has terminated, or under circumstances where the communicant otherwise has a reasonable expectation of confidentiality are privileged. Id.; Eureka, 743 F.2d at 937-38. The joint attorney-client relationship remains intact until expressly terminated, or until circumstances arise by which it becomes clear to all the joint clients that the relationship is over. Ogden, 202 F.3d at 463. It is clear that joint representation ceases if either the insured or insurer retains separate counsel for advice in a burgeoning coverage dispute. See Int’l Ins. Co. v. Peabody Int’l Corp., 1988 WL 58611, at *3 (N.D. Ill. June 1, 1988); Nat’l Union Fire Ins. Co. v. Cont’l Ill. Group, 1987 WL 4806, at *4-5 (N.D. Ill. May 1, 1987). In such circumstances, communications with joint counsel regarding defense of the underlying claim must be produced in subsequent adversarial litigation, but communications to independent counsel regarding the scope of coverage are protected by the attorney-client privilege. Id.
In some circumstances the privilege applies although it is not outwardly apparent to all parties the joint representation has ceased. Eureka presents the interesting, and likely unethical scenario where counsel jointly representing the insurer and insured against a third-party claim provided advice to the insured regarding a potential adversarial suit against the insurer without the insurer’s knowledge. Eureka, 743 F.2d at 936. In the eventual adversarial suit, the insurer argued it was not obligated to indemnify the insured because the insured breached its duty of cooperation in defending the underlying claim.Id. To support its defense, the insurer sought all communications between the insured and joint counsel. Id. The district court ordered the insured to disclose such documents that related to the underlying claim, but allowed it to withhold communications with counsel regarding its claim against the insurer. Id. The U.S. Court of Appeals for the District of Columbia affirmed, holding that notwithstanding joint counsel’s ethically questionable behavior, the attorney-client privilege belonged to the insured, and the insured reasonably expected that its communications with counsel regarding a future suit against the insurer were confidential. Id. at 937-38.
Where the insurer refuses to provide any defense to the insured in the underlying claim, or has not made a coverage determination, the insured may assert the attorney-client privilege to withhold communications from the insurer in the subsequent suit. This view was recently confirmed by a court in the Southern District of Texas in Fugro-McClelland Marine Geosciences, Inc. v. Steadfast Ins. Co., 2008 WL 5273304 (S.D. Tex. Dec. 19, 2008) (“FMMG”). In FMGG, the insured settled the underlying claim after its insurers denied coverage. Id. at *1. One of the insurers moved to compel the insured to produce, inter alia, communications between the insured and its defense counsel and communications amongst representatives of the insured regarding the underlying claim on the ground that the insurer and insured had a common interest in minimizing exposure in the underlying claim. Id. at *1-2. The court upheld the insured’s assertion of the attorney-client privilege, ruling that throughout the defense of the underlying claim the insured was represented by separate counsel and had a reasonable expectation that its communications with counsel would remain confidential. Id. at *3.
The ruling by the Southern District of Texas is sound. An insured and its insurer do not share a “common interest” when the insurer has been provided an opportunity and has not assumed the insured’s defense against a third-party claim because “the existence of a ‘common interest’ is itself at issue.” Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66, 69 (D.N.J. 1992). Although the insured and insurer share a common pecuniary interest in limiting the damage, until and unless the insurer undertakes the insured’s defense, the insured acts alone in the underlying litigation. Id. at 70-71. While acting alone, the insured has a reasonable expectation of confidentiality in its communications with counsel regarding settlement or a potential indemnity action against the insurer. Id. See also Carey-Canada, Inc. v. Aetna Cas. and Sur. Co., 118 F.R.D. 250, 251-52 (D.D.C. 1987). Thus, it would pervert the “common interest” doctrine to allow an insurer access to its insured’s communications with counsel in defending the underlying claim for which the insurer refused coverage.Northwood Nursing & Convalescent Home, Inc. v. Cont’l Ins. Co., 161 F.R.D. 293, 297 (E.D. Pa. 1995).
Brian J. Levy is an Associate in the firm’s Insurance and Reinsurance and Litigation Practices. Mr. Levy received his bachelor’s degree from the University of Virginia and his law degree from William and Mary School of Law.