2.  Two Privileges; Different Purposes ◦ Attorney-Client Privilege ◦ Attorney Work Product Privilege ◦ Implicit assumption: “privilege and work product are very narrowly construed” in the insurance context

3.  Attorney-Client Privilege ◦ Protects oral and written confidential communications between an attorney and the client ◦ The attorney must be acting as an lawyer and not in some other role ◦ The communication must be “confidential” and not ordinary

4.  Attorney-Client Privilege ◦ Role of attorney: the courts use the “dominant purpose” test for attorney-client relationship; McAdam v. State National Ins. Co. (California)

5.  Work Product Doctrine ◦ Protects documents prepared in anticipation of litigation ◦ Attorneys’ preparation, although sometimes adjusters ◦ Mental impressions and evaluations of counsel “shall” be absolutely privileged

6.  Work Product Doctrine ◦ Some Federal courts do not extend absolute privilege to attorney work product, permitting a “necessity” exception. Holmgren v. State Farm (Ninth Circuit)

7.  Know Your Court’s Rules on Privilege ◦ Rules vary significantly from jurisdiction to jurisdiction ◦ Some States codify privilege; others rely on case law ◦ Federal work product doctrine may differ from State rules

8.  The Importance of Knowing the Local Rules, e.g.: ◦ Cedell v. Farmers (Washington): Court must conduct in camera review ◦ McAdam v. State National (California): Court cannot conduct in camera review unless privilege-holder requests

9. Cedell holds that if an insurer is sued for bad faith for denying first-party (property) coverage, the insurer’s entire file is discoverable, including investigation and advice from its own lawyer

10. Cedell sets up a two-step process: ◦ First, the claims file is presumed discoverable, so that the insurer has the responsibility of seeking court approval to withhold documents. ◦ If the documents involve the investigation, evaluation or processing of a claim, they are not privileged.

11. The second step in Cedell: ◦ If any documents remain privileged, the insured can ask the court to release them. ◦ The insured only has to allege (not prove) facts that show that the insured has a reasonable belief that an act of bad faith tantamount to fraud has occurred.

12. Recent Cases Have Expanded Cedell  Third-party (liability) lawsuits  Where counsel does not investigate  Where insurer not relying on “advice of counsel”  Insurer vs. insurer disputes

13. 1. Investigation, coverage determinations, and negotiations are the “business of insurance”: ◦ “The payment or rejection of claims is part of the regular business of an insurance company … Reports prepared by insurance investigators, adjusters or attorneys before the decision is made to pay or reject a claim are thus not privileged.” Bombard v. Atica Mutual (New York)

14. Responses to the “Business of Insurance” Rationale: ◦ Insurance is not the only business involving contract interpretation – others include construction, sales, employment; private advice regarding the validity of the contract should be available to all

15. Responses to the “Business of Insurance” Rationale: ◦ Insurers are not fiduciaries – no requirement that they place insureds’ interests “higher” than their own, just on a par (no uberrimmae fidae)

16. Responses to the “Business of Insurance” Rationale: ◦ Pre-denial legal advice may not be in “anticipation of litigation” (work product protection) but it remains confidential attorney client communication (attorney- client privilege); don’t confuse the two

17. 2. The attorney’s advice is “at issue” ◦ “Advice of counsel” is asserted as an affirmative defense, or ◦ Attorney advice implicitly needed to fulfill insurer’s requirement of “reasonableness” (even if advice of counsel not pled), or ◦ Attorney’s advice is contrary to insurer’s position, and therefore needed to show bad faith, or ◦ All denials of coverage place attorney’s advice at issue

18. Responses to the “At Issue” Rationale: ◦ A claim of bad faith or the denial of coverage does not place the attorney’s advice at issue; waiver only applies if insurer is relying on “advice of counsel” as a defense

19. Responses to the “At Issue” Rationale: ◦ Insurers entitled to seek counsel; the attorney-client privilege should “facilitate the uninhibited flow of information between lawyer and client” Aetna v. Superior Court (California)

20. 3. The attorney is acting as an adjuster ◦ Attorney retained to conduct investigation, or ◦ Attorney further investigates facts in reaching coverage determination, or ◦ Company adjusters have law degrees

21. Responses to the “Attorney as Adjuster” Rationale: ◦ Insurer may need to hire outside counsel to assist with legal advice, particularly in first-party matters with public adjustors and EUOs

22. Responses to the “Attorney as Adjuster” Rationale: ◦ “Predominant purpose” test difficult to apply; assumes that all negotiation and investigation are nonlegal

23. Responses to the “Attorney as Adjuster” Rationale: ◦ If in-house counsel advising insurer on legal matters, communications should be protected

24. Responses to the “Attorney as Adjuster” Rationale: ◦ Counsel doing a coverage analysis has an obligation to the client to perform work diligently and thoroughly, including investigating facts

25. 4. The “Joint Privilege” Exception ◦ In states that recognize the “tripartite relationship,” the defense counsel has two clients – the insured and the insurance company ◦ Bad faith cases place the insurer and the insured at odds, waiving the privilege as to defense counsel’s file ◦ Bad faith litigation also waives privilege as to coverage counsel’s file

26. Responses to the “Joint Privilege” Exception ◦ Not every state recognizes the tripartite relationship ◦ The joint privilege applies only to defense counsel’s file, not the file of coverage counsel ◦ Insured is not a joint client of coverage counsel; usually has its own counsel

27. 5. The Crime/Fraud Exception ◦ Attorney-client privilege does not apply if the services of the attorney are used to perpetrate a crime or a fraud ◦ Bad faith is a species of fraud

28. Responses to the Crime/Fraud Exception ◦ Bad faith can be ordinary negligence – not a crime and not a fraud; the mere allegation of bad faith should be insufficient to invoke the exception

29. Responses to the Crime/Fraud Exception ◦ Crime/fraud only applies when attorney perpetrates or abets crime or fraud, not when she advises against it; coverage counsel’s advice should not be used to prove that bad faith has occurred in the first instance

30.  Define the Role of Counsel ◦ Retention letters for attorneys ◦ Clear directives as to the engagement ◦ Consideration of use of investigators and field adjusters

31.  Separate Files between Coverage and Defense ◦ Attorney files between factual investigation and coverage ◦ Claims files – separate out attorney recommendations

32.  Limit the Use of “Advice of Counsel” Defense ◦ In most jurisdictions, does not affect the outcome ◦ “Advice of counsel” will eliminate attorney-client privilege for all of the attorney’s file, including communications from insurer

33.  Avoid Inadvertent Disclosure ◦ Limit communications with others that are not necessary to the client’s defense ◦ Break up e-mail chains; hesitate before hitting “reply all”; know what is transmitted and to whom

34.  Consider Using “Common Interest” Agreements ◦ Reinsurance and excess reports, or joint defense communications, may or may not be privileged unless there is an agreement expressly stating

35.  Litigate the issues clearly and forcefully ◦ Educate the courts regarding the business of insurance and the differences between work product and attorney-client privilege

36.  Embrace the Lack of Privilege ◦ Consider using attorney as expert witness in first party cases and plan accordingly

37. Trends in Canadian Law