Insurers retain outside counsel during claim investigations for a variety of reasons, including, among others, providing coverage advice, assisting in reviewing and responding to communications with insureds that have legal implications, and providing settlement recommendations. When coverage disputes arise, policyholders often seek the production of these pre-suit communications, arguing that outside counsel was merely performing an investigation that the company was required to conduct as part of the ordinary course of its business, and that such communications are therefore not privileged. These arguments have routinely been rejected by courts.
The U.S. District Court for the Eastern District of New York recently addressed this issue in a dispute concerning the alleged improper withholding of communications between an insurer and its outside counsel during a claim investigation. In Harding v. State Farm Fire & Cas. Co., 2018 U.S. Dist. LEXIS 43588 (E.D.N.Y. Mar. 16, 2018), the plaintiffs sued their insurer for breach of contract after the insurer denied their homeowner’s insurance claim on the basis that the plaintiffs were no longer residing in the home at the time of the loss. Following a discovery dispute concerning the withholding of communications between State Farm’s claim adjuster and outside counsel, the parties submitted to the court for in camera review four documents, two of which were emails concerning the potential for subrogation against negligent third parties and two of which were letters concerning outside counsel’s legal opinions as to State Farm’s obligations under the policy.
With regard to the emails, the plaintiffs argued that, while such communications may not be discoverable by a defendant sued in a subrogation action (as the documents were prepared in anticipation of that litigation), the privilege does not apply in a first-party action commenced by the policyholders. The court rejected this argument, finding that the emails were “made for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship.” (quoting Rossi v. Blue Cross & Blue Shield, 540 N.E.2d 703, 706 (N.Y. 1989)). The court also found that it appeared the communications were intended to be confidential and were actually confidential, as only the insurer and counsel were copied on the messages. As such, the court found that the communications were protected from disclosure by the attorney- client privilege.
With regard to the letters, the plaintiffs contended that outside counsel was retained to conduct an examination under oath of the plaintiffs and that the attorney was therefore conducting an investigative function that was part of the ordinary course of business of the insurer. Essentially, the plaintiffs argued that “because counsel’s work was that of a non-lawyer, it is not privileged . . .” Following an in camera review of the letters, the court found that the scope of counsel’s work went well beyond that of a non-lawyer investigator. While the letters apparently referenced statements made in the course of the EUO, they also provided “extensive legal analysis, advice, and recommendations regarding the issues at the heart of this case.” The court therefore concluded that these letters were privileged attorney-client communications.
The Harding decision reiterates well-established case law finding that when in-house or outside counsel is called upon to assist with legal advice during the adjustment of a claim, communications between counsel and the insurer should be protected and not discoverable.