Member Article

Loose lips sink ships.  They also can sink the protections of the attorney-client privilege.  A case in point is a recent decision from the Southern District of Florida.  Guarantee Insurance Co. v. Heffernan Insurance Brokers, Inc., Case No. 13-23881-CIV (S.D. Fla. June 13, 2014).  In that case, Guarantee Insurance had been sued for the alleged bad faith handling of a worker’s compensation insurance claim.  The worker’s compensation insurer had its own errors and omissions coverage in two layers.  The underlying layer was provided by XL, and the excess layer was provided by Catlin.  The underlying insurer was promptly notified and participated in the settlement.  The current lawsuit arose from the errors and omissions broker’s alleged failure to report the underlying bad faith claim to Catlin. 

During the underlying tort litigation, Guarantee Insurance’s counsel wrote a detailed analysis of its exposure and alternatives.  Its notification to XL of the claim included the counsel’s analysis letter.  Since the attorney’s analysis letter had been provided to XL through the broker that allegedly failed to notify Catlin, it was undisputed that the letter could be used in the litigation.  However, the broker argued that, by providing the letter to XL before XL had accepted coverage, Guarantee Insurance had waived the privilege as to all communications on that subject matter.

Guarantee Insurance argued that it had a common interest with XL, because both would want to defeat the underlying tort claim.  That position has legal support. Guarantee Insurance was the “insured” in this context, and courts routinely recognize a common interest between an insured and its liability insurer sufficient to avoid the waiver of a privilege via disclosures between them or their counsel.  See Nationwide Mut. Ins. Co. v. Bourlon, 617 S.E.2d 40 (N.C. App. 2005); Woodruff v. Am. Fam. Mut. Ins. Co., 291 F.R.D. 239 (S.D. Ind. 2013); State, ex rel., U.S. Fidel. And Guaranty Co. v. Montana Second Jud. Dist., 783 P.2d 911 (Mont. 1989).  Conversely, courts typically reject common interest protections where the liability insurer has denied coverage.  See Metropolitan Life Ins. Co. v. Aetna Cas. and Sur. Co., 730 A.2d 51 (Conn. 1999); Northwood Nursing & Convalescent Home, Inc. v. Continental Ins. Co., 161 F.R.D. 293 (E.D.Pa. 1995); Milinazzo v. State Farm Ins. Co., 247 F.R.D. 691 (S.D.Fla. 2007).  Courts are split on whether common interest protections attach after an insurer agrees to defend under a reservation of rights.  Compare Vicor Corp. v. Vigilant Ins. Co., 674 F.3d 1, 19-20, (1st Cir. 2012) (common interest applicable even where insurer has reserved rights), with Rockwell Int’l Corp. v. Superior Court, 32 Cal. Rptr. 2d 153 (Cal. App. 1994) (no common interest where insurer defends under reservation of rights).

In Guarantee Insurance, the question was whether the common interest protections applied where, at the time of the disclosure the insurer had neither accepted nor rejected coverage.  The court found that a “common interest” had not yet arisen, even though the insurer later accepted coverage, and found that the privilege had been waived.  

At least one case supports the Court’s decision where the insurer ultimately rejects coverage.  See Northwood Nursing, 161 F.R.D. at 297 (no common interest protection before adjudication of coverage).  Conversely, other courts have protected communications to an insurer as privileged even where coverage was contested or later denied.  Taylor v. Temple & Cutler, 192 F.R.D. 552 (E.D. Mich. 1999) (insured’s communications to insurer protected, even if insurer contests coverage for some period); State, ex rel., L.Y. v. Davis, 723 S.W.2d 74 (Mo. App. 1986) (pre-denial communications to insurer protected, notwithstanding subsequent denial of coverage).

The Guarantee Insurance court took a unique step in finding a waiver of the privilege, notwithstanding the insurer’s acknowledgement of coverage, just because the communication preceded the insurer’s coverage determination.  As explained in Davis, 723 S.W.2d at 74-75:

If communications between insured and insurer are to be privileged only if the insurer ultimately admits coverage, there is no incentive for the insured to make full disclosure to his insurer.  In fact, it may be impossible and, at best, difficult for the insurer to determine whether coverage exists without the insured making a full explanation of the circumstances surrounding the claim.

The Davis court had it right, and the Guarantee Insurance court has it wrong.  Policyholders expect their insurer to be on their side, until informed otherwise, and both insureds and insurers benefit from candid communications until coverage is denied.