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Insurance 101 – Insights for Young Lawyers: Can You Keep a Secret? Privileged Communications Between The Policyholder And Its Broker

August 1, 2006, John E. James

This article was published in the July/August 2006 issue of Coverage,
which is published by the Insurance Coverage Litigation Committee
of the Litigation Section of the American Bar Association

INTRODUCTION

Insurance coverage litigation always involves disputes in discovery or at trial concerning privileged communications.  From the perspective of many courts that do not want to be burdened with discovery disputes of any sort, the privilege disputes in insurance coverage litigation are often viewed as much sound and fury signifying nothing.  However, from the perspective of the parties, especially the corporate policyholder, which usually faces the greatest exposure to attacks on its attorney-client and work product privileges, such disputes are of substantial importance.  For instance, the disputes in insurance coverage cases frequently have collateral effects on pending or prospective underlying actions filed against the policyholder.  Lawyers for plaintiffs in underlying actions would like nothing more than to obtain access to the privileged communications relating to the merits of their cases, that might not otherwise be available to them.

In that respect, there is an unacknowledged but de facto alliance between the interests of a policyholder’s insurers, which are seeking the production of privileged documents in a coverage action in order to assist them in resisting the policyholders’ claims for coverage, and the underlying plaintiffs.  The single-minded goal of the insurers is to defeat a policyholder’s coverage demands.  This goal is often pursued with the recognition that the disclosure of privileged information might become available to underlying plaintiffs, notwithstanding confidentiality agreements designed to protect such disclosures from such plaintiffs.  However, from the insurer’s perspective, the policyholders’ potential exposure to damages, allegedly not covered by the insurers’ policies, is of lesser moment to them than their own self-interests in avoiding the payment of an alleged windfall to a policyholder with no legitimate coverage claim.

THE BROKER’S AMBIGUOUS POSITION

For the most part, the privilege battlefield is one that involves only the policyholder and its insurers.  However, not infrequently, third parties are numbered among the combatants and the most likely third party to be involved in these debacles is the insurance broker.  The focus of this article is the practical issue of understanding how the courts have addressed disputed privileged communications involving brokers and policyholders so that counsel for policyholders can better protect those confidences.

The position of the broker in the business relationship between the policyholder and its insurers has been murky in spite of efforts by the courts, legislatures, and learned treatises to delineate the inter-relationship.  In part, this lack of clarity is a function of the efforts, by the policyholder and the insurer, to keep the broker relationship at arm’s length.  Policyholders take this position largely to avoid ill consequences that might result if the broker is viewed as the agent of the policyholder.  The policyholder prefers to identify its broker as an “intermediary,” even though the facts frequently belie such an arm’s length relationship.  Historically, this has primarily been a policyholder dilemma because the insurance broker (as opposed to an insurance “agent” for an insurer) has traditionally been more closely associated with the policyholder.  The ambiguity of the broker’s role in the procurement of insurance and in the handling of policyholder claims recently has reached a high level of public awareness in the wake of the scandals involving Marsh and Aon and their contingent fee relationships with certain preferred insurance companies, a relationship that in many cases was not fully disclosed to policyholders.

Nevertheless, from a privilege perspective, it is important that the policyholder demonstrate a close relationship with the broker whether that reaches the threshold of the legal definition of an “agent” or not.  In practice, such a close relationship is real and substantial.  While corporate policyholders have risk management departments to a greater or lesser degree, there is no company, whether in the Fortune 500 or not, that can procure insurance without the active involvement of an insurance broker.  To a great extent, the playing field in the insurance broker arena has come to resemble that of the major corporate accounting firms, with a few mega-firms such as Marsh, Willis and Aon dominating the field.

Apart from the sheer economic leverage of these mega-brokers, they bring special expertise to the insurance procurement process and to claims-handling as well.  Insurance brokers have also capitalized, as have the large accounting firms, on the desire and need of corporations to outsource certain professional services to third parties with greater efficiencies of scale and expertise.  Even the General Motors and Exxons of the world -- with incredibly complex insurance needs and sophisticated risk managers -- are generally familiar only with their own corporate experience, while national insurance brokers gain insights and experience by representing thousands of policyholders and dealing with a wider spectrum of insurers.

The confidential communications between policyholders and their brokers in the insurance procurement context, while substantially business related, can involve discussions that relate to the giving of legal advice by the corporation’s in-house or outside counsel to corporate management regarding, inter alia, general policy interpretation, the operation of deductibles or self-retentions, the effects of aggregate limits on coverage attachment, etc.  Of course, to the extent any of these communications are considered privileged, they would come within the ambit of the attorney-client privilege rather than the work product doctrine, although even work product protection may come into play in some situations, such as in the purchase of loss mitigation coverage above already purchased coverage with litigation pending that will affect such coverage.

The close relationship between the corporate policyholder and its insurance broker is equally manifest with respect to claims-handling.  One of the most common features of the outsourcing relationship between corporate policyholders and brokers is the insurance broker’s responsibility for handling the administrative portion of claims-handling, especially in areas where a substantial number of claims are not unusual for a large corporate policyholder such as workers’ compensation and auto coverage.  The broker’s administration of claims-handling also includes, of course, much larger group and individual claims, such as the virtual plague of product liability claims litigation involving directors’ and officers’ coverage in the post-Enron era, and even first-party coverage such as the September 11 and Katrina disasters.  It is with respect to these larger ticket items that the claims-handling activities of the broker and its communications with the policyholder become very sensitive and can implicate the attorney-client and work product privileges to a great extent.  It is in these areas, more than any, as reflected in the case law discussed below, that disputes arise as to the extent that the policyholder can assert privilege as to its communications with its broker.

After the commencement of coverage litigation, not only will counsel for insurers seek the production of documents in the files of the policyholder that relate to communications with its broker, but subpoenas will be directed to the brokers as well.  In many instances the hard copy and electronic documents of the broker will be more extensive than those of the policyholder.  Policyholder counsel will, accordingly, be required to take the initiative in seeking to work with the broker in responding to such discovery requests, including a privilege review, before production to any insurer.  Depending on the nature of the policyholder’s relationship with its broker, counsel for the broker may also take an active role in seeking to protect privileged communications with its principal.  Indeed, to the extent that the broker’s own attorneys contributed to the communications or the broker is a party in the coverage litigation, it may have its own separate basis for asserting privilege.

LEGAL DEFINITIONS OF THE BROKER RELATIONSHIP

Apart from what the real world relationship between insurance brokers and corporate policyholders may be, as discussed above, legal scholars have attempted to articulate the circumstances under which a broker acts in the capacity solely as an intermediary between policyholder and insurer, as an agent of either the policyholder or the insurer, or in some unusual cases as the agent of both.  As one leading treatise states:  “Whether a person acts as a broker or agent is not determined by what he or she is called but is to be determined from what he or she does.[1]”  Another leading authority on this point of law states that:

A “broker” by conventional legal definition is an independent contractor.  He arranges insurance coverage for a person who is presumably his client, but receives his commission from the insurer.  Today, some brokers act as insurance advisors and receive consulting fees from their clients for advice or services.  Some people operating on this basis place no commissionable business, or sometimes place insurance with insurers who offer insurance only directly to customers without sales commission.[2]

One leading commentator, Couch, indicates that, in determining whether an independent insurance broker is acting as the policyholder, the insurer or both, four factors need to be analyzed:

(1)        Who first set agent in motion;

(2)        Who controlled agent’s actions;

(3)        Who paid agent; and

(4)        Whose interest agent was attempting to protect.[3]

Many states have adopted statutory definitions of the role of the broker, vis-à-vis the policyholder and insurer.  However, such statutes are written in such a manner that a broker can be viewed as the agent of the policyholder, the insurer, or both.[4]  These efforts to define the broker relationship are sufficiently broad and malleable to reflect the many and varied circumstances in which brokers act.  Whether a broker operates as an agent or an independent contractor, as to the policyholder, depends greatly on the four  factors identified by Couch.  Each case is very fact-specific.

Not surprisingly, in the context of privileged communications, the determination of whether communications between the policyholder and the broker are privileged will vary with the facts in each case.  However, as the discussion below indicates, and as the experience of most coverage lawyers reflects, there is an expectation among policyholders that their communications with brokers, in which legal advice is rendered, should be protected as a matter of law and public policy.

PRIVILEGE ISSUES RAISED IN THE BROKER CONTEXT

As a general matter, the legal basis for privilege disputes that arise in the context of the broker relationship with the policyholder are the same or very similar as those raised in direct conflicts between policyholder and insurer.  These disputes include, inter alia, whether:  (1) the communications are privileged (i.e., involve the rendition of legal advice); (2) the communications only contain factual (non-privileged) statements; (3) there is a privileged common interest between the affected parties; (4) the confidential nature of the communications has been maintained; (5) there is work product protection; and (6) waiver has occurred by placing certain matters “at issue.”

Most frequently, the insurer will argue that a policyholder’s communications with the broker are not privileged because the communications simply relate to a business relationship and do not involve the rendition of legal services.  In a similar vein, insurers often contend that the communications between policyholder and broker are not privileged because the communications simply involve the transmission of facts and facts are not privileged, whether they are communicated in some fashion that involves an attorney or not.  To the extent that the policyholder can survive these threshold attacks on the existence of a privilege, then the issue of the waiver of the attorney/client privilege or the protection afforded by the work product doctrine is the next chapter to be litigated.  In that vein, the insurer will contend that a privilege has been waived by reason of the fact that privileged communications have been disclosed to a third party which is not the client or that privileged communications have been placed “at issue” because the policyholder has injected an issue into the case that allegedly can only be resolved by disclosure of privileged communications.  Lastly, insurers have sought to abrogate the policyholder’s work product protection by asserting that communications were not prepared in anticipation of litigation and, even if they were, the insurers have a substantial need and face undue hardship without access to such materials.

DECISIONS REJECTING PRIVILEGE PROTECTION
FOR POLICYHOLDER/BROKER COMMUNICATIONS

A study of the law of privileged communications in general does not lend itself to neat compartmentalization and certainly not in the context of communications between policyholders and brokers.  One reason for this is that in most cases involving allegedly privileged policyholder communications with brokers, almost all of the typical grounds for and against asserting the attorney-client and work product privileges are raised.  Second, and perhaps more importantly, is that the case law in the area of privileged communications always is fact-driven, almost always unique to each case.  Therefore, the simplest and most practical method to use the teaching of the courts must necessarily involve a case by case analysis with the advocate looking for factual affinities with his or her case in order to draw the proper legal conclusion.

The Policyholder/Broker Relationship is Just a Business Relationship

Insurance brokers are obviously not trained as attorneys and do not provide legal advice as part of their professional services, although the large multi-national brokers do have their own legal staffs and outside counsel.  Therefore, it is not surprising that courts are asked not to protect communications between a policyholder and its insurance broker because the engagement is simply one involving a normal business relationship that does not involve the rendition of legal advice protected by the attorney-client or work product privileges.

A case that addresses the issue of whether the communications between counsel for a policyholder and its broker in a coverage action fall within the exception of communications that only involve business discussions is the decision in SR Int’l Business Ins. Co. Ltd. v. World Trade Center Properties, LLC (“World Trade Center I”)[5] from the Southern District of New York.  The World Trade Center I decision, of course, was a product of the extensive litigation relating to insurance coverage for the Silverstein parties who were the leaseholders of the World Trade Center complex at the time of the September 11 attacks.  The broker discovery issue came before the court because of a motion filed by Travelers, and a number of other insurers, seeking to compel testimony regarding post-9/11 communications between attorneys for the Silverstein parties and employees of Willis of New York, the insurance broker that obtained insurance coverage for the World Trade Center.[6]  The Silverstein parties objected to the insurers’ discovery on three grounds:  (1) the communications between its law firm (“the Wachtell firm”) and Willis employees were protected attorney-client communications because the Willis employees were acting as agents of the Silverstein parties when placing insurance for the World Trade Center; (2) the Silverstein parties and Willis shared a “common interest” privilege; and, (3) the communications were protected by the work product doctrine.[7]

The World Trade Center I court stated that if the Willis employees were not clients of the Wachtell firm, the traditional attorney-client privilege would not apply to them unless Willis was an agent of the Silverstein parties or shared a common interest with them.  In addressing this issue, the court followed a very narrow construction of privileged communications and stated that the attorney-client privilege “‘stands in derogation of the public’s right to every man’s evidence, . . . [and] it ought to be strictly confined within the narrowest possible limits consistent with the logic of its principle.”[8]  However, it did recognize that case law supported the application of the attorney-client privilege to communications between a corporation’s attorney and outside agents or consultants who acted in a role, “the functional equivalent to that of a corporate employee.”[9]  The Court’s quoted language clearly indicates the direction it was taking because an agent is not often the functional equivalent of an employee.

In any event, even though conversations between counsel for the Silverstein parties and their broker, Willis, were made in the context of ongoing litigation involving billions of dollars of insurance coverage, the court simply ignored the admitted agency relationship between the policyholder and broker, holding that it was not logical to extend the attorney-client privilege to communications “which were between Willis, a multi national corporation with its own retained counsel, and the lawyers for one of its many clients.”[10]  The court went on to reason that the Wachtell firm had no ethical obligation to maintain the confidentiality of the information that it had obtained from Willis’ employees and Willis’ lawyers, and similarly the Court held that Willis and its lawyers recognized that what they said to the Wachtell attorneys had no effect on Willis’ interests.  In a curious twist of logic, the court held that a joint defense agreement, a customary method to preserve privileged communications among different parties, among the Silverstein parties and Willis was evidence of the fact that the Silverstein parties and Willis understood that their communications were not privileged.[11]

For similar reasons, the World Trade Center I court also rejected the application of the common interest doctrine as a basis for protecting the communications between Willis and the Silverstein parties.  In this regard, the court found that a predicate to invoking the common interest doctrine is that the common interests at issue must be identical, not similar, and must be legal in nature, not simply commercial.[12]  The court held:  “A business strategy, which happens to include a concern about litigation, is not a ground for invoking the common interest rule.”[13]

The World Trade Center I court’s analysis of whether the attorney-client privilege alone or in concert with a subset of that privilege, the common interest doctrine, should apply is facile and flawed.  It demonstrates a fundamental lack of understanding as to how policyholders and brokers work together as principal and agent in discussing issues that must be considered in rendering legal advice in a coverage action.  The World Trade Center I opinion does not specifically address the type of information that was being transmitted between the attorneys for the Silverstein parties and Willis.  It is inconceivable in the time period after 9/11 that the communications at issue would not have been made for the reason of providing legal advice.  There is no hint in the facts of the case that the communications at issue between counsel for the Wachtell firm and Willis took place before 9/11, and it is extremely doubtful that Wachtell had any involvement in the procurement of the insurance before the destruction of the World Trade Center.

The World Trade Center I court was in theory more sympathetic to the work product argument made by counsel for the Silverstein parties, recognizing that work product protection is not necessarily lost merely because it is intended to assist in the making of a business decision influenced by the likely outcome of anticipated litigation.[14]  Thus the court did rule that all documents prepared by the Wachtell firm and their clients after 9/11 were protected by the work product privilege.[15]  However, the court then vitiated that protection by holding that oral communications between employees of Willis and Wachtell were not protected from disclosure under the work product doctrine.[16]  It reached this conclusion notwithstanding its recognition that it accepted the proposition that the questioning of witnesses in order to discover an attorney’s work product should not be permitted.[17]  The core rationale for the court’s view on this issue was that the work product doctrine could not be used to prevent the insurers from questioning Willis representatives as to statements of fact that they made to counsel for the Silverstein parties.[18]  Applying this legal construction of the work product doctrine, the court held that this doctrine did not preclude:

1) questioning of the Willis witnesses about any of their conversations with the attorneys for the Silverstein parties prior to the sessions at which the witnesses were being prepared for their depositions; 2) questioning of those witnesses concerning what they said to lawyers for the Silverstein parties during the preparation of their depositions; and 3) questions concerning what the lawyers for the Silverstein parties said to these witnesses during their preparation sessions to the extent that statements of the lawyers are necessary to provide an understanding of what the witness was saying to the lawyer.  For example, if a witness testified that he said “Yes” in answer to a lawyer’s question, one would have to know what the question was in order to understand the answer.[19]

Based on the above guidelines, while the insurers might not have been able to obtain every piece of work product that was in written form prepared by the Wachtell firm in anticipation of litigation, the insurers would obtain a substantial portion of the thought processes of the Wachtell lawyers reflected in such documents, because those same thought processes would have undoubtedly been restated in the context of the deposition preparation of the Willis and Silverstein deponents.

The court went on to add that the insurers had demonstrated a substantial need for the materials in question, in part because the Willis witnesses may have felt an obligation to protect the interests of their clients, the Silverstein parties.[20]  That statement again defies logic.  One would expect as a matter of course that an agent should desire to protect the interests of its principal, just as an employee, trustee, or other corporate fiduciary would have a similar interest as to its respective employer, beneficiary, or shareholder.  Those relationships support the application of the attorney-client and work product privileges vis-à-vis third parties rather than abrogation.  In this case, the Silverstein parties made it clear that Willis, their broker, was acting on their behalf as an agent and should therefore share in both the attorney-client privilege and the work product protection that would normally be afforded in such a close relationship.  The court’s suggestion that there was “very little danger that the lawyers’ eventual litigation strategy and tactics will be disclosed by testimony regarding their questioning of witnesses immediately after the crucial events, and months before litigation was commenced,” is simply unrealistic.[21]

Court Rejects Grounds for Work Product Protection

Another similarly restrictive analysis (by the same court) of communications between a policyholder and its broker also was rendered in SR Int’l Business Ins. Co. Ltd. v. World Trade Center Properties LLC (“World Trade Center II”).[22]  The principal focus of this decision related to communications between lawyers and non-lawyers of GMAC Commercial Mortgage Corporation (“GMAC”) and the insurance advisors that GMAC retained almost immediately after the terrorist attack on September 11.  The discovery dispute in World Trade Center II  involved efforts by plaintiff SR International Business Insurance Co. Ltd. (“Swiss Re”) to discover communications between GMAC and its insurance consultant/broker that took place shortly after September 11.  GMAC had loaned hundreds of millions of dollars to the Silverstein parties to finance the World Trade Center leasehold and had securitized that loan through the issuance of mortgage backed securities to a number of institutional investors.[23]  On September 11, GMAC’s in-house counsel immediately recognized the impact of the disaster on GMAC’s investment.  In order to address concerns of investors and anticipated litigation by investors, GMAC sought immediate feedback from its insurance consultant, The Harbor Group, which had been retained by GMAC as a litigation consultant.  This process included numerous meetings and communications between GMAC and Harbor Group, as well as the Silverstein parties and their counsel.  GMAC argued this material was protected by the work product doctrine.[24]

The court rejected GMAC’s work product argument on a number of grounds.  First, it indicated that the mere avoidance of litigation is not the equivalent of “in anticipation of litigation” and that the actions taken by GMAC immediately after September 11 were more in the nature of routine business planning rather than an actual belief that litigation would arise from what happened to the World Trade Center on that day.[25]  For example, the court held that there was no basis for protecting documents generated before 9/11 or immediately after that were used by GMAC in concert with Harbor Consulting to prepare answers to anticipated questions from investors concerning the effect of the destruction of the World Trade Center on investments.  The court considered that to be simply a necessary business function associated with the investment activities of GMAC, whether attorneys were involved or not.[26]  The court was not persuaded that the retention agreement between GMAC and the Harbor Group, by which GMAC characterized the Harbor Group as litigation consultants, changed the analysis of the privilege dispute:

In short, the [GMAC retention letter with the Harbor Group], which confirms nothing more than that GMAC agreed to pay the Harbor Group for consulting on insurance matters related to the World Trade Center, is consistent with the view that the Harbor Group’s role in the period immediately after September 11th was simply to provide information to respond to investor’s inquiries.  Thus, documents and communications between GMAC attorneys or employees and Harbor Group employees during the period immediately after September 11th are not protected by either the attorney-client privilege or the work product privilege.[27]

Furthermore, the court, as it did in World Trade Center I, opined that neither the attorney-client privilege nor the work product doctrine protected mere facts, whether they were communicated by attorneys or not, and that there was no question that a substantial part of the communications between GMAC and the Harbor Group were facts relating to the insurance coverage at issue that could not be shielded from discovery.[28]

GMAC also sought to protect its communications with the Harbor Group by invoking the common interest doctrine.  The court recognized that internal communications among GMAC lawyers and employees in which legal advice was sought or given was protected under the attorney-client privilege.[29]  However, demonstrating the same narrow construction of the common interest doctrine as in World Trade Center I, the court rejected the protection of otherwise privileged communications that passed between GMAC and the Harbor Group.  In the court’s view, the absence of anticipated litigation during the period when the communications at issue were generated supported its conclusion that neither the attorney-client privilege alone or in tandem with the common interest analysis could apply.  Also, the court, based on the record before it, decided that GMAC had failed to establish that its communications with the Harbor Group involved anything more than discussions concerning business issues rather than legal concerns.

Finally, the court addressed the question of whether communications among GMAC, the Harbor Group, Willis, the Silverstein parties, the Wachtell firm, and others with interests adverse to the insurers were protected by the attorney-client privilege or the work product doctrine.  Predictably, the court rejected any privilege protection for such communications, most of which took place in one meeting on September 14, 2001.  The court stated that because it had already decided in World Trade Center I  that communications between the Silverstein parties and Willis were not protected, it followed, a fortiori, that there was no privilege that protected communications among this larger group.  Further, the court reasoned that because GMAC did not care whether the September 11 attacks constituted one or more occurrences -- the critical issue for the Silverstein parties -- there was no basis for an assertion of common interest between the Silverstein parties and GMAC.[30]

GMAC also sought to protect notes taken by two non-lawyers for the benefit of GMAC counsel who did not attend the September 14 meeting.  The court summarily rejected protection for these notes because the notes reflected only factual information, did not disclose counsel’s opinions, and were not prepared in anticipation of litigation.[31]

No Common Interest Protection

The rejection of a privilege defense is again reflected in Sony Computer Entertainment America, Inc. v. Great American Ins. Co.[32]  In Sony, the insurer defendants sought to compel two in-house attorneys for Sony to disclose their communications with an insurance broker working with Sony.  California recognizes the common interest doctrine by statute.  In Cal. Civ. Proc. Code, § 952, California law protects the disclosure of information to third parties who are “present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted.”[33]  In this case, the federal court rejected Sony’s contention that its communications with the broker were privileged based on Sony’s failure to show how the insurance broker’s involvement assisted the legal analysis of the Sony attorneys as to the claims against Sony’s insurers.  Thus, the insurers were successful in obtaining the right to further depose the Sony attorneys with respect to their communications with the insurance broker.[34]

Rejection of Work Product Protection

Another example of how the courts have failed to understand the nature of the close relationship between policyholders and their insurance brokers, not only with respect to the procurement of insurance but also with respect to the subsequent handling of claims, is reflected in Cigna Insurance Company v. Cooper Tires and Rubber, Inc. (“Cooper”)[35]  The object of Cigna’s interest in this case was an investigative report prepared on behalf of the policyholder, Cooper, with respect to an accident that was the subject of underlying litigation.  The report was clearly work product, as recognized by the court, in that it was prepared for Cooper’s counsel in anticipation of litigation.  The basis on which Cigna sought the production of the document was that its privileged character had been waived after Cooper’s counsel shared the document with Cooper’s insurance broker, Marsh.[36]  Marsh was responsible for processing all claims submitted against Cooper.

In analyzing the privilege issue, the court recognized the common interest doctrine as an exception to a privilege waiver contention.[37]  The court’s articulation of the elements of the common interest doctrine proved to be determinative in its decision:

[C]onfidential communications can be shared only if both parties have more than “merely concurrent legal interests.”  Instead, the parties must have “a common legal, as opposed to commercial, interest.”  Thus, the parties must show that the disclosures are made in the course of “formulating a common legal strategy.”

Under this approach, communications shared during a business undertaking lose their privileged status, even though such sharing helped address or ameliorate bona fide concerns about the legal implications of some aspect of the business venture.  [Thus], “the common interest doctrine does not encompass a joint business strategy, which happens to include, as one of its elements, a concern about litigation.”[38]

On the other hand, the court recognized that the investigative report at issue was clearly work product because it had been generated in anticipation of litigation.  The disclosure of the investigative report to Marsh occurred after the underlying action had been filed.  Thus, the transmission of the investigative report to Marsh by Cooper’s counsel was made in the context of litigation that was in progress.  Notwithstanding that fact, the court rejected work product protection for this document because it could not see how the disclosure of the document to Marsh, once litigation had been instituted, could have resulted in any assistance to the defense of the underlying action by Cooper’s counsel.  The court concluded:

In any event, even if Marsh did something more with the report, there is no reason to believe that Marsh at that point was playing any role in the development or presentation of Cooper’s defense.  Marsh had no control over how the report was used.  It was not a party to the suit, and stood neither to gain nor lose anything by its outcome.  Cooper likewise appears to have gained nothing vis-à-vis the progress of the litigation by sending a copy of the report to Marsh.  It was not calling on Marsh to assist in formulating a common defense strategy.  Sending the report simply does not appear to have furthered Cooper’s defense or assisted its lawyers in the California case.[39]

This decision demonstrates the failure of the policyholder to explain adequately to the court the symbiotic relation between policyholders and brokers.  Insurance brokers representing commercial clients have developed substantial expertise in assisting the policyholder and its lawyers in analyzing the legal implications of claims.  Counsel for policyholders often rely upon brokers to provide them with information concerning a full spectrum of issues from changes in policy forms to historical claims-handling practices of insurers.  This information is significant to policyholder counsel when making legal decisions as to how to respond to the denial of coverage by their insurers.  Yet, as discussed above, policyholders are still reluctant to embrace brokers as agents for fear of collateral damage to their case.  The decision in Cooper reflects that this strategy will not work to protect privileged communications, even when the record was clear that Cooper and Marsh had a very close relationship with respect to the handling of Cooper’s insurance program.

Ignoring Common Interests as to Some Matters But Not as to Others

Finally, in a ruling issued recently, the court in J.E. Dunn Construction Company v. Underwriters at Lloyd’s[40] rejected a policyholder’s attempt to shield privileged communications with its broker by holding that not only did the policyholder and broker not have a common interest, but their interests were adverse.  The touchstone for the court’s decision was its acceptance of the insurers’ argument that while J.E. Dunn and its broker may have had arguably the same commercial interests, their legal interests were not identical.

This decision is particularly perverse from the policyholder perspective because the counsel for the policyholder also represented the broker (even though the broker was not a party to the action) and the counsel was paid for his representation of both clients by the broker.  This unusual arrangement arose from the fact that the policyholder reserved its rights to seek recovery from its broker, of a premium that had allegedly been paid improperly to the insurers, although there was no question from the policyholder’s and broker’s perspectives that the insurers were primarily liable for the improvident payment.[41]

The court ruled that there was no attorney-client privilege as to the policyholder/broker’s attorney’s communications with his clients under the common interest privilege because (1) if the broker were a party, it would have been aligned as a defendant with the insurers, and (2) the broker’s primary interest was to avoid legal liability to the plaintiff policyholder.  The court’s conclusion ignores the fact that at the time the privileged communications were communicated, the policyholder and broker had a common legal interest in recovery against the primary cause of the policyholder’s injury, its insurers.

This situation is similar to the many cases in which privileged communications between a policyholder and its insurer, with different counsel, are protected under the common interest doctrine until such time as the cooperation between the policyholder and insurer ends and their interests become clearly adverse because of litigation or other disputes.  The common interest doctrine has been applied to such circumstances even though insurers have issued reservation of rights, similar to the reservation of rights arrangement between J.E. Dunn and its broker.  Finally, this decision is particularly egregious because J.E. Dunn and its broker were represented by the same counsel.  There could be no more effective demonstration of their common legal interest than that fact.

DECISIONS PROTECTING PRIVILEGED
POLICYHOLDER/BROKER COMMUNICATIONS

In contrast to the decisions above, other courts have protected, as privileged, communications between a policyholder and its insurance broker.  To some extent, these decisions reflect facts that demonstrate a more compelling nexus between the broker’s communications and legal advice provided to the policyholder.  In other cases, the courts have employed a broader and more realistic articulation of the common interest and work product doctrines.  And, finally, in some of the cases discussed below, policyholders were more skillful in educating the court as to the nature of the policyholder/broker relationship.

Recognition of Insurance Brokers’ Contributions to Legal Analysis

The court in Home Depot U.S.A., Inc. v. G&S Investors/Willow Park, L.P.[42] provides an insightful and realistic treatment of privileged policyholder and broker communications.  In that coverage action, the policyholder had incurred damages as a result of improper site work done by an underlying party in connection with the construction of a Home Depot store.[43]  Home Depot was forced to abandon its store and sued the lessor of the property, as well as its insurance companies which denied coverage for the loss of use of the store.[44]

With respect to its prospective litigation with its insurers, Home Depot consulted with two employees of Home Depot’s insurance broker, Marsh, regarding its legal strategies with respect to insurance recovery.[45]  In the subsequent litigation between Home Depot and its insurers, the insurers sought to depose Marsh and issued a subpoena demanding from Marsh documents that Home Depot believed implicated its privilege rights with respect to its communications with Marsh.[46]  Home Depot moved to quash the subpoena.[47]

The insurer contended that the attorney-client privilege did not apply to the communications between Home Depot’s attorneys and the Marsh employees because those communications were not rendered in connection with the performance of legal services.[48]  The court disagreed.  It noted that the attorney-client privilege can be extended to third parties who are employed as consultants or otherwise to assist a lawyer in the rendition of legal services.[49]  The court was convinced by the assertions of Home Depot that it relied upon the expertise of Marsh employees, who were familiar with Home Depot’s insurance program, for the express purpose of forming a legal strategy to maximize recovery against its insurer.  In the court’s view, this was not simply a business decision.[50]  Thus, the court concluded that “though Marsh is an independent contractor and not employed directly by Home Depot as counsel, communications between [Home Depot’s] in-house team and Marsh employees for the purpose of forming legal strategies are protected by the attorney-client privilege.”[51]

The court went on to hold that even if the attorney-client privilege did not apply, the communications were protected by the work product doctrine as well.  One of the arguments made by the insurer was that most of the documents as to which work product protection had been asserted were transmitted between non-lawyers at Home Depot and at Marsh.[52]  Home Depot argued in response that its in-house counsel was orchestrating the communications with Marsh and notwithstanding the fact that the day-to-day communications may have been with or among non-lawyers, the work product protection still applied because of the active involvement of Home Depot’s counsel.[53]  Ultimately, the court held that the documents were prepared in anticipation of litigation because the communications with Marsh began in earnest after Home Depot’s insurers reserved their rights as to the Home Depot coverage claim.  Furthermore, and importantly in the context of insurance coverage, the court agreed with Home Depot’s position that it would have been difficult for in-house counsel to prepare a case against its insurance companies without input from the broker.  The court stated that to “separate these communications from those covered by the work product privilege, therefore, would defeat the purpose of the privilege and would stifle valuable communications between these entities [the policyholder and the broker].”[54]

The Home Depot court’s analysis serves as a paradigm for policyholders who seek to protect communications with brokers that involve the rendition of legal advice by the policyholder’s counsel to the client.  The policyholder’s lawyers educated the court as to the nature of the relationship between a policyholder and its broker, because the court understood that the expertise provided by Marsh to Home Depot’s counsel would be used in framing the policyholder’s legal strategy against its insurers.  The court also understood that communications among non-lawyers of Home Depot and Marsh should be protected to the extent that such communications were conducted for the benefit of legal analysis under the work product doctrine or the attorney-client privilege.

The Application of the Crime Fraud Exception
to the Policyholder/Broker Relationship

In the case of Royal Surplus Lines Ins. Co. v. Sofamore Danek Group, Inc.,[55] the court focused on the communications between the policyholder, SDG, and its broker, Sedgwick James of Tennessee, Inc., in connection with the procurement of the policies sold to SDG by Royal Surplus Lines, the plaintiff.[56]  The coverage dispute between Royal and SDG centered on defense costs and liabilities incurred by SDG in connection with the sale of its orthopedic bone screws.  In defense to these claims, Royal contended that SDG and Sedgwick concealed material information or provided false information in connection with the underwriting of the coverage.[57]

Because of Royal’s position that the policy sold to SDG was secured through misrepresentations by either SDG or Sedgwick, the principal basis for Royal’s attack on the privileged character of the communications between SDG and Sedgwick was based upon the crime-fraud exception to the attorney-client privilege.  In determining whether there was any basis to Royal’s contention, the court applied the Sixth Circuit’s guidelines for the application of the crime fraud exception.[58]

In that regard, Royal had the burden of making a prima facie showing that a sufficiently serious crime or fraud had occurred in order to defeat the privilege.  Secondly, Royal had to establish some relationship between the privileged communications at issue and the prima facie fraudulent or criminal act.  After a review of the documents at issue, the court did not find that any document’s privileged character had been lost because of the crime fraud exception.[59]

Common Interest Based on Broker Expertise

The most recent decision to sustain the protection of a policyholder’s privileged communications with its broker is Atmel Corp. v. St. Paul Fire & Marine Ins. Co.[60]  Atmel opposed the effort of its insurers to compel the production of communications between it and its broker.  The insurers argued that because insurance brokers are “independent contractors,” there was a waiver of any attorney-client or work product protection by Atmel when it communicated with its broker, a third party.[61]

The court rejected this argument, first by pointing out that the fact that a privileged communication is provided to a third party is not an automatic waiver of privilege, relying on California’s statutory recognition of the common interest doctrine:  “Disclosure of an attorney-client communication to a third party does not automatically waive privilege.  Instead, the privilege remains intact if disclosure occurs to ‘no third persons other than those who are present to further the interests of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information. . . .’”[62]

The court also understood the importance of Atmel’s reliance on its broker in addressing general coverage questions as well as the specific claims that were at issue in Atmel’s coverage action.  As in Home Depot, the policyholder had properly educated the court on the importance of broker expertise with respect to the enhancement of the policyholder’s lawyers’ ability to understand the documents in dispute, i.e. the insurance policies.  Because of the broker insights, privileged communications often are products of non-legal insights provided by specialists in a business such as insurance.  The court observed that the common interest doctrine “clearly recognizes a third-party exception, and this exception includes ‘business associates,’ along the lines of Atmel and [its broker’s] relationship.”[63]  Therefore, the court held that all the documents in question were protected by the attorney-client privilege or work product doctrine.[64]

Broker Communications Prepared in Anticipation of Litigation

In a slight departure from the customary litigation posture in these privilege disputes, in Gulf Insurance Company v. Alliance Steel LLC,[65] the broker, Willis, took the initiative in arguing that certain of its communications with the policyholder, Alliance Steel, were protected by the work product doctrine in response to a subpoena from Gulf.  The sole issue addressed by the court concerned whether the documents in question, notes of discussions and draft letters between Willis and Alliance Steel’s counsel, were prepared in anticipation of litigation.[66]  The court resolved this issue by holding that a document can be protected by the work product doctrine without being “prepared primarily or exclusively to assist at trial . . . .”[67]  Instead, the critical test is whether litigation is a real possibility at the time of preparation of the work product and whether it is prepared with an eye to specific litigation.[68]

On the facts before it, the court ruled that this test was met because the documents were prepared either shortly before or after Willis and Alliance Steel had discussed the need to retain counsel because of the impending coverage dispute with Gulf.  Thus, the court concluded that the work product requirements were satisfied:

I observe the withheld materials include letters discussing retention of an attorney to litigate the coverage dispute, specific discussions with respect to issues of contract interpretation, multiple drafts of the formal claim letter and e-mail communications regarding revisions of said letter.  The bulk of these documents were prepared after the first letter discussing retention of an attorney to litigate this insurance dispute.  These documents memorialize Willis’ role in assisting Alliance’s preparation for litigation and their contents reflect that they were prepared with an eye to this specific litigation.  Thus, the fourteen documents come within the protection of the work-product doctrine because they were prepared “in anticipation of litigation by . . . a party’s representative.”[69]

CONCLUSION

The above decisional law reflects that policyholder lawyers have a challenge in educating courts on the relationship between policyholder and broker, especially with respect to communications that occur shortly before or after the commencement of coverage litigation.  The form of such evaluation may differ depending on the size and sophistication of the policyholder and the broker.  However, even the most sophisticated policyholders rely to a much greater extent now than in the past on the specialized advice from brokers that can inform and shape legal decisions.  Those communications should and need to be protected by the attorney-client privilege and work product doctrine.

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[1]    L. Russ & T. Segalla, Couch on Insurance 3d, § 45:4, p. 45-9 (2005) (“Couch”).

[2]    B. Harnett, Responsibilities of Insurance Agents and Brokers, § 2.02[1][a] (2004).

[3]     Couch, § 45:4 at p. 45-9.

[4]     Couch, § 45.2 at pp. 45-5 through 45-7.

[5]     SR Int’l Business Ins. Co. Ltd. V. World Trade Center Properties LLC, C.A. No. 01 Civ. 9291 (JSM), 2002 U.S. Dist. LEXIS 10919 (S.D.N.Y. June 19, 2002) (“World Trade Center I”).

[6]     World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *4-5. 

[7]     World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *5.

[8]     World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *8, quoting In re Horowitz, 482 F.2d 72, 81 (2d Cir.), cert. den., 414 U.S. 867 (1973).

[9]     World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *7.

[10]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *8.

[11]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *10-11.

[12]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *12.

[13]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *13-14, quoting In re FTC, 2001 U.S. Dist. LEXIS 5059.

[14]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *15-16.

[15]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *16.

[16]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *16.

[17]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *17.

[18]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *18-19.

[19]    World Trade Center I, 2002 U.S. Dist. LEXIS 10919 at *20.

[20]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *20.

[21]    World Trade Center I, 2002 U. S. Dist. LEXIS 10919 at *20, n. 2.

[22]    SR Int’l Ins. Co. v. World Trade Center Properties LLC, C.A. No. 01 Civ. 9291 (JSM), 2002 U.S. Dist. LEXIS 11949 (S.D.N.Y. July 3, 2002) (“World Trade Center II”).

[23]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *1-2

[24]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *5-6.

[25]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *8-9.

[26]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at 10

[27]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *16

[28]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *10-11

[29]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *12

[30]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *19-20

[31]    World Trade Center II, 2002 U. S. Dist. LEXIS 11949 at *21-24

[32]    Sony Computer Entertainment America, Inc. v. Great American Ins. Co., 229 F.R.D. 632 (N.D. Cal. 2005) (“Sony”).

[33]    Sony, 229 F.R.D. at 633.

[34]    Sony, 229 F.R.D. at 634.

[35]    Cigna Ins. Co. v. Cooper Tires and Rubber, Inc., C.A. No. 3-99-CV-7397, 2001 U.S. Dist. LEXIS 7546 (N.D. Ohio May 24, 2001) (“Cooper”).

[36]    Cooper, 2001 U.S. Dist. LEXIS 7546 at *2-3.

[37]    Cooper, 2001 U.S. Dist. LEXIS 7546 at *4.

[38]    Cooper, 2001 U.S. Dist. LEXIS 7546 at *5, quoting Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, 348 (N.D. Ohio 1999) (citations omitted).

[39]    Cooper, 2001 U.S. Dist. LEXIS 7546 at *7.

[40]    J.E. Dunn Constr. Co. v. Underwriters at Lloyd’s, C.A. No. 05-0092-CV-W-FJG, 2006 U. S. Dist. LEXIS 26694 (W.D. Mo. Apr. 25, 2006) (“Dunn”).

[41]    Dunn, 2006 U. S. Dist. LEXIS 26694 at *3-5.

[42]    Home Depot U.S.A., Inc. v. G&S Investors/Willow Park, L.P., C.A. No. 1:01-CV-1119-WBH, slip op. (N.D. Ga. Sept. 27, 2001) (“Home Depot”).

[43]    Home Depot, slip op. at 1-2.

[44]    Home Depot, slip op. at 2-3.

[45]    Home Depot, slip op. at 2-3.

[46]    Home Depot, slip op. at 3-4.

[47]    Home Depot, slip op. at 4.

[48]    Home Depot, slip op. at 7.

[49]    Home Depot, slip op. at 7.

[50]    Home Depot, slip op. at 7-8.

[51]    Home Depot, slip op. at 8

[52]    Home Depot, slip op. at 9.

[53]    Home Depot, slip op. at 9.

[54]    Home Depot, slip op. at 10-11.

[55]    Royal Surplus Lines Ins. Co. v. Sofamore Danek Group, Inc., 190 F.R.D. 505 (W.D. Tenn. 1999) (“SDG”).

[56]    SDG, 190 F.R.D. at 508.

[57]    SDG, 190 F.R.D. at 508.

[58]    SDG, 190 F.R.D. at 510.

[59]    SDG, 190 F.R.D. at 510.

[60]    Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 409 F.Supp.2d 1180 (N.D. Cal. 2005) (“Atmel”).

[61]    Atmel, 409 F.Supp.2d at 1181.

[62]    Atmel, 409 F.Supp.2d at 1181-82 (quoting Cal. Evid. Code § 952).

[63]    Atmel, 409 F.Supp.2d at 1182 (citing Cal. Evid. Code § 952).  See also American Colloid Co. v. Old Republic Ins. Co., C.A. No. 93 C 0665, 1993 U.S. Dist. LEXIS 7619 (N.D. Ill. June 7, 1993).

[64]    Atmel, 409 F.Supp.2d at 1182.  In rendering its decision, the Atmel court relied on the reasoning in SDG and rejected the rationale in World Trade Center II.

[65]    Gulf Ins. Co. v. Alliance Steel LLC, C.A. No. 00 Civ. 2611 (RO), 2001 U.S. Dist. LEXIS 992 (S.D.N.Y. Feb. 8, 2001) (“Alliance Steel”).

[66]    Alliance Steel, 2001 U.S. Dist. LEXIS 992 at *1-2.

[67]    Alliance Steel, 2001 U.S. Dist. LEXIS 992 at *3.

[68]    Alliance Steel, 2001 U.S. Dist. LEXIS 992 at *3.

[69]    Alliance Steel, 2001 U.S. Dist. LEXIS 992 at *4.