ABA Section of Litigation Insurance Coverage Litigation Committee CLE Seminar, March 3-5, 2011: Demystifying the Discovery Process in the Modern Coverage Action

Demystifying the Discovery Process in the Modern Coverage Action*

Shaun H. Crosner Dickstein Shapiro LLP Los Angeles, CA Rahul Karnani Weissman, Nowack, Curry & Wilco, P.C. Atlanta, GA Parker J. Lavin Wiley Rein LLP Washington, DC Meghan Anderson Roth Cooper & Walinski LPA Toledo, OH

I) INTRODUCTION Discovery disputes in modern insurance coverage litigation are not only complex, but they are costly as well. Therefore, in insurance coverage litigation, policyholders and insurers alike must be aware of how to best deal with novel legal questions that may arise as they navigate though the discovery process. This paper examines some of the many complications that may arise during discovery. Specifically, it discusses myriad issues concerning the function of the attorney-client privilege and work product doctrine in insurance coverage litigation. It also examines the disputes that may arise regarding discovery of reserve and reinsurance information. * The views expressed in this article are solely those of the authors and do not necessarily reflect the views of their respective law firms or their law firms’ clients. This article also does not replace, and should not be relied on instead of, legal advice.

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II) THE ATTORNEY-CLIENT PRIVILEGE AND WORK PRODUCT IN INSURANCE COVERAGE DISPUTES

Discovery disputes in insurance coverage litigation frequently involve questions surrounding the related concepts of attorney-client privilege and work product. The purpose of the attorney-client privilege “is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”1 Therefore, in order to protect communications from discovery in litigation under the attorney-client privilege, the party seeking protection must demonstrate the following elements of the privilege:

1) the communication involves the seeking or giving of legal advice; 2) the communication is between an attorney, acting in his or her capacity as such, and a

client or a person who is seeking to become a client; 3) the communication was made in confidence; 4) there is no waiver of the privilege.2

The work-product doctrine “protects the work of the attorney done in preparation for litigation.”3 The doctrine therefore applies not only to work done by the attorney during the litigation itself, but also in preparation for any anticipated litigation.4 The doctrine generally protects two types of work product: actual, tangible work product such as memoranda, notes, letters, e-mails, and the like, and “opinion” work product, which refers to an attorney’s mental opinions, impressions, or theories regarding a particular case.5 In this section, the authors focus on questions involving application of the attorney-client privilege and work product doctrine in insurance coverage litigation. The insurer’s prospective is offered first, followed by the policyholder’s.

A) Understanding the Attorney-Client Privilege and Work Product Doctrine: An Insurer’s Prospective

Given the expanded role of in-house and outside counsel, not only during the litigation phase of the coverage dispute, but also during the pre-suit claims investigation stage, an attorney representing an insurance company must be vigilant in determining which internal communications are privileged, and to maintain the privilege in his or her own communications with the client. Attorneys representing insurance companies in coverage disputes often face reoccurring issues in determining whether certain communications are privileged. The following issues must be kept in mind in order to both determine whether a privilege exists and to maintain the privilege.

1 Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). 2 See United States v. United Shoe Mach. Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950); 8 John. H. Wigmore, Evidence § 2292 (J. McNaughton rev. 1961). 3 In re Grand Jury Proceedings, Thursday Special Grand Jury Sept. Term, 1991, 33 F.3d 342, 348 (4th Cir. 1994). 4 See Holland v. Island Creek Corp., 885 F. Supp. 4, 7 (D.D.C. 1995). 5 Fed. R. Civ. P. 26(b)(3) (2010 rev. ed.).

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i) Who is the Client?

In cases where an individual is seeking to assert the privilege with respect to communications with legal counsel, it is not difficult to determine whether the individual is or was seeking to be a client. The issue becomes more complicated, however, when a large, multi-departmental organization, such as an insurance company, is seeking to assert the privilege. When an organization can contain literally thousands of members, all with different roles to play, which of those members should be considered a “client”? Historically, courts applied a “control group” test to determine whether a particular member or employee of the organization could be considered to be a client. Under the test, only those members of the group who controlled the acts of the organization were considered to be clients. This resulted in a bright-line determination in which only the upper-level management and directors of an organization were considered clients, because, in the view of the courts, those were the people who were most likely to seek legal advice and put that advice into action.6 The United States Supreme Court, however, rejected the “control group” test in the Upjohn case, instead adopting a more fluid test to determine whether a member of an organization could be considered a “client.” Instead of establishing a bright-line rule based upon the member’s position within the organization, the Supreme Court established the following criteria for determining whether the member is a client:

1. The information communicated is necessary to supply the basis for legal advice to the corporation or was ordered to be communicated by superior officers;

2. The information was not available from the “control group” management; 3. The communications concerned matters within the scope of the employees’ duties; 4. The employees were aware that they were involved in obtaining legal advice for the

corporation; 5. The communications were considered confidential when made and kept confidential.7

Therefore, in the insurance coverage context, a claims handler who may not be a part of the upper management of the insurance company could nevertheless be considered a “client” if he or she seeks legal advice from either in-house or outside coverage counsel as to the application of the law or legal principles to a specific claim, as long as all of the above criteria is met.

ii) Is a Former Employee a Client? Often, the employee with the most knowledge of an insurance claim is no longer with the company. For instance, it is a common occurrence that the claim handler involved in investigating a claim is no longer with the insurance company when the coverage dispute regarding that claim is actually litigated. It often is important for the insurer’s in-house and outside lawyers handling the coverage dispute to communicate with those former employees in

6 See, e.g., Natta v. Hogan, 392 F.2d 686, 692 (10th Cir. 1968). 7 Upjohn, 449 U.S. at 394-95.

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order to properly litigate the case. Are such communications considered protected under the attorney-client privilege? The courts are in disagreement. For example, in Upjohn, the Supreme Court held that the communication is privileged if a former employee speaks with the company’s attorney at the direction of management and the communication regards conduct or proposed conduct within the scope of employment.8 Other courts have refused to apply the privilege to communications with former employees.9 These courts often reason that, upon termination of the employment relationship, the former employee no longer has any common interest with the employer in the outcome of the litigation, and is thus the same as any other third party witness.10 It is important for an insurer counsel to be aware of the particular law in the applicable jurisdiction. Furthermore, no matter what the law, the prudent insurer’s counsel should proceed with extreme caution when communicating with a former employee, and should likewise advise former employees that their communications with the attorney may not be subject to the privilege.

iii) Are Communications with In-House Counsel Protected?

In the abstract, the courts have established that the attorney-client privilege applies equally to communications with both outside and in-house counsel.11 Recently, however, courts have recognized that the application of the attorney-client privilege to communications with in-house counsel has become far more complicated, mainly because of the expanded role of modern in-house counsel within most corporations. No longer are in-house counsel involved solely in providing legal advice to their employers. Instead, in many corporations, in-house counsel are also involved in making business decisions.12 Generally, courts determining whether communications with in-house counsel are privileged will try to establish whether the in-house counsel was engaged in a professional legal capacity when making the communication.13 However, even this test can be complicated in the context of insurance coverage disputes, especially with respect to internal communications between employees of an insurance company and the insurance company’s in-house counsel. As courts have recognized, the business of an insurance company includes investigation of claims that may result in litigation between the insurer and its policyholder.14 Typically, the courts have frowned on insurers assigning those investigative duties to attorneys, holding that, as a bright-line rule “no privilege attaches when an

8 Upjohn, 449 U.S. at 402-03; see also Better Gov’t Bureau, Inc. v. McGraw (In re Allen), 106 F.3d 582, 606 (4th Cir. 1997); In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 658 F.2d 1355 (9th Cir. 1981). 9 See United States ex rel. Hunt v. Merck-Medco Managed Care, LLC, 340 F. Supp. 2d 554, 557-58 (E.D. Pa. 2004). 10 See Clark Equip. Co. v. Lift Parts Mfg. Co., No. 82 C 4585, 1985 U.S. Dist. LEXIS 15457 (N.D. Ill. Sept. 30, 1985). 11 See, e.g., Natta, 392 F.2d at 692. 12 See In re Vioxx Prods. Liab. Litig., 501 F. Supp. 2d 789 (E.D. La. 2007). 13 Id. 14 Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 190 F.R.D. 532 (S.D. Ind. 1999).

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attorney performs investigative work in the capacity of an insurance claims adjuster, rather than as a lawyer.”15 Recently, however, as insurance disputes and insurance products themselves have become more complex and specialized, insurance companies are tending to consult with both in-house and outside counsel both earlier and more often during the claims investigation process, in order to avoid errors and potential bad faith. In fact, most large insurers have populated their claims departments with in-house counsel who are available for consultation with claims professionals on an as-needed basis.16 This would suggest that a bright-line rule is no longer appropriate when determining whether internal communications between an insurer employee and coverage counsel during the claims investigation process should be protected under the privilege.17 As one court has reasoned: “‘The relevant question is not whether [the attorney] was retained to conduct an investigation, . . . but rather, whether this investigation was ”related to the rendition of legal services.”’”18 Therefore, rather than simply refusing to apply the privilege where the attorney was performing an investigation, the courts should determine whether the investigation included analysis of “complex issues of . . . law, which, intrinsically, required sophisticated legal appraisements.”19

iv) Implied Waiver of the Privilege: Does the Privilege Exist in Bad Faith

Litigation?

There are many different ways to waive the attorney-client privilege. The most obvious way is to expressly waive the privilege by revealing a communication to an adverse or third party, or making an otherwise-privileged communication in the presence of an adverse or third party. There are, however, ways that the attorney-client privilege can be impliedly waived without expressly revealing communications to other parties. In the context of insurance coverage litigation, these implied waivers most often come into play in bad faith litigation. One way that the attorney-client privilege can be waived is if the communication is made in furtherance of a crime or fraud.20 Policyholder counsel will often argue that the policyholder’s own assertion of bad faith, in and of itself, vitiates the privilege because the claim of bad faith demonstrates that communications may have been made in furtherance of a fraud. Policyholders argue that, in order to prove bad faith, they must see all the communications between an insurer and its counsel to be able to uncover any nefarious dealings. Most courts, however, have refused to allow the policyholder to engage in such fishing expeditions by merely asserting bad faith.21

15 In re Allen, 106 F.3d at 603. 16 See Edward F. Donohue III, Detective or Advisor-The Attorney-Client Privilege in the Coverage Evaluation, XI Fidelity L. Ass’n J., Oct. 2005, at 76. 17 Id. at 76-77. 18 McCafferty’s, Inc. v. Bank of Glen Burnie, No. MJG-96-3656, 1998 U.S. Dist. LEXIS 12859, at *5 (D. Md. Jan. 26, 1998) (brackets in original) (citation omitted). 19 Id. at *6. 20 See In re Grand Jury Proceedings (Gregory P. Violette), 183 F.3d 71, 75-76 (1st Cir. 1999). 21 See Steven Plitt, The Elastic Contours of Attorney-Client Privilege and Waiver in the Context of Insurance Company Bad Faith: There’s a Chill in the Air, 34 Seton Hall L. Rev. 513, 530 (2004); see also, e.g., Gagne v. Ralph Pill Elec. Supply Co., 114 F.R.D. 22, 25 (D. Me. 1987). But see Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001) (determining that insurer must produce entire claim file based on allegation of bad faith).

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Many courts do, however, allow discovery of otherwise-privileged material if the policyholder can make a prima facie showing of bad faith.22 It should be noted, however, that some courts refuse to abrogate the privilege based on even a prima facie showing of bad faith, holding that allegations of bad faith do not equate to allegations of fraud.23 Another way that the attorney-client privilege can be waived is if the party asserting the privilege has made the communications a subject of a particular claim or defense. In other words, where the party asserting the privilege has put the communications “at issue” in the litigation, fairness requires that the opposing party be able to discover those communications, even if they would otherwise be privileged.24 In the context of bad faith, the insurer can put attorney-client privileged communications “at issue” by asserting the defense that it relied on the advice of counsel.25 In fact, some courts have even gone so far as to hold that even if the insurer does not explicitly assert a defense of reliance on advice of counsel, the attorney-client privilege can be waived if the insurer relies upon the knowledge of its claim handlers as to the state of the law, the insurer has nevertheless asserted the issue of legal knowledge as a defense to the bad faith action, and the policyholder is therefore entitled to discovery as to the source of that legal knowledge, including advice of counsel.26

v) Responding to a Policyholder’s Claim of Privilege: Does the Cooperation Clause Constitute a Waiver of the Attorney-Client Privilege?

The insurer counsel must also determine how to respond to the policyholder’s assertions of privilege. In most cases, the analytical framework to determine whether an assertion of privilege by a policyholder can be attacked consists of issues similar to those discussed above. However, does an insurer counsel have an additional arrow in her quiver by which she can attack the privilege? In recent years, some insurer counsel have asserted that the cooperation clause contained in most insurance policies can, in some instances, pierce the policyholder’s claims of privilege. Most insurance policies, especially commercial general liability policies, require the insured to cooperate with the insurer’s investigation of a claim. Where the insurer and insured are or may become adverse, can an insurer require the insured to divulge attorney-client privileged communications under the cooperation clause? Most courts have held that it cannot. For example, in Eastern Air Lines, Inc. v. United States Aviation Underwriters, Inc.,27 the insured filed a declaratory judgment action against its insurer seeking coverage for a settlement in which the insured agreed to clean up soil and groundwater contamination caused as a result of its business. In the declaratory judgment action, the insurer moved to compel production of documents that contained attorney-client privileged communications, citing the cooperation clause of the policy. The trial court granted the motion. The Third District Court of Appeals

22 Plitt, 34 Seton Hall L. Rev. at 530 n.60; see also, e.g., Silva v. Fire Ins. Exch., 112 F.R.D. 699, 700 (D. Mont. 1986). 23 See Freedom Trust v. Chubb Group of Ins. Cos., 38 F. Supp. 2d 1170, 1174 (C.D. Cal. 1999). 24 See Plitt, 34 Seton Hall L. Rev. at 535-36. 25 See Vicinanzo v. Brunschwig & Fils, Inc., 739 F. Supp. 891, 894 (S.D.N.Y. 1990). 26 See Plitt, 34 Seton Hall L. Rev. at 552-63 (discussing State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169 (Ariz. 2000)). 27 716 So. 2d 340 (Fla. Dist. Ct. App. 1998).

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reversed that decision, holding that the cooperation clause only applied where the insured and insurer are in a fiduciary relationship, and since the insured and insurer were in adversarial positions, there was no fiduciary relationship and thus no duty to cooperate. However, at least one state, Illinois, has held that the cooperation clause in an insurance policy requires the production of communications that would normally fall within the protection of the privilege. In Waste Management, Inc. v. International Surplus Lines Insurance Co., the court ruled:

Here, the cooperation clause imposes a broad duty of cooperation and is without limitation or qualification. It represents the contractual obligations imposed upon and accepted by insureds at the time they entered into the agreement with insurers. In light of the plain language of the cooperation clause in particular, and language in the policy as a whole, it cannot seriously be contended that insureds would not be required to disclose contents of any communications they had with defense counsel representing them on a claim for which insurers had the ultimate duty to satisfy.28

vi) Special Considerations Regarding the Work Product Doctrine

In the typical case, it is usually quite easy to determine when there is anticipation of litigation so that an attorney’s work product will be protected from discovery—usually, the hiring or consulting of a lawyer clearly demonstrates that litigation is anticipated. However, in the insurance coverage arena, it is often quite difficult to determine when the work product doctrine is triggered. This is because, as stated above, the normal business of an insurance company includes investigation of claims that may result in litigation between the insurer and its policyholder.29 In order to determine whether the doctrine is triggered, the courts have to determine when the investigation or handling of a claim “shifts” from the normal, everyday investigative functions of the insurance company to the actual anticipation of litigation of an insurance coverage dispute. The courts have, understandably, struggled with this question. Some courts have held that this shift occurs only when the insurer has denied the claim, thus putting the insurer and its insured in a potentially adverse position.30 Other courts have held that the protection applies if the insurer has simply become aware of facts that could form the basis of a denial.31 Yet other courts have held that even a denial of coverage is not enough to trigger the protection.32 The variance of court opinions on when the work product protection is triggered goes to show that there is no hard and fast test. Insurers and their counsel would be wise to document not only their decision to deny a claim, but also any discovery of facts that could form a basis for a denial, or for that matter, even a reservation of rights. In other words, when and if the issue of work

28 579 N.E.2d 322, 328 (Ill. 1991). 29 Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 190 F.R.D. 532 (S.D. Ind. 1999). 30 See Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991). 31 See Conn. Indem. Co. v. Carrier Haulers, Inc., 197 F.R.D. 564, 570-71 (W.D.N.C. 2000). 32 St. Paul Reins. Co. v. Commercial Fin. Corp., 197 F.R.D. 620, 637-38 (N.D. Iowa 2000).

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product protection is litigated, the insurer and its counsel should be prepared to demonstrate with clear evidence when it first became aware of a potentially adverse relationship between itself and its insured. It should go without saying that any threat by the insured of litigation or demand for relief should be documented in the claim file.

B) Understanding the Attorney-Client Privilege and Work Product Doctrine:

Keeping Shared Information Confidential i) When the Insurer has Denied its Duty to Defend

During coverage litigation, the insurer and the policyholder use the attorney client privilege and the work product doctrine to prevent disclosure of documents to one another. But, where the policyholder and the insured have entered into a coverage in place agreement or the insurer has agreed to defend the policyholder, both parties share a common interest- defending the underlying case and preventing the disclosure of confidential documents to third parties such as tort plaintiffs. Both policyholders and insurers must be vigilant in understanding what materials can be exchanged between them without waiving the attorney-client or work product privilege. Both the policyholder and the insurer in a coverage dispute have a strong interest in keeping certain information confidential. Various documents may be covered under the attorney client or work product privileges, including: 1) communications between the policyholder an counsel that his hired to defend it; 2) defense counsel’s assessment of the risks and potential liabilities of the insured in the underlying cases; 3) information gathered by defense counsel in investigating the underlying cases (i.e., work product); 4) any analysis of the prioritization of such information by defense counsel. The policyholder therefore not only consider whether the insurer can compel the policyholder to produce privileged documents relating to the underlying cases, but it must also be cognizant of whether these documents can be shared, even voluntarily, with the insurer, without waiving the attorney-client or work product privilege. A waiver of the privilege may render the information discoverable by third parties, including the tort adversary in the underlying case. As the court in Metropolitan Life Insurance Co. v. Aetna Casualty & Surety Co.33 explained, a waiver of the attorney-client privilege does not only affect the jurisdiction in which the coverage action is pending, but can subject a policyholder or an insurer to discovery requests from tort plaintiffs nationwide. Even if documents are submitted under a protective order, a third party may still be able to obtain the documents. 34

ii) When the Insurer has Denied its Duty to Defend

33 730 A.2d 51 (Conn. 1999). 34 “The court’s protective order over the privileged documents governs only cases within Connecticut. Consequently, it is possible that a foreign court could indeed require the plaintiff to disclose the documents, based on their disclosure in the present case.” Id. at 58. “If the appeal were dismissed and the relevant documents were disclosed in the present case, the claimants in asbestos tort actions brought in foreign jurisdictions would be likely to seek discovery orders forcing the plaintiff to disclose the documents it had disclosed to the defendants in the present coverage dispute.” Id. (citing Baker v. Gen. Motors Corp., 522 U.S. 222 (1998) (full faith and credit given to Michigan decision did not bar testimony in Missouri, even though Michigan court enjoined such testimony)).

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When an insurer refuses to defend and coverage litigation is necessary, the insurer may demand the above-described four categories of information in order to determine coverage. Such a request may be made pursuant to the cooperation clause in the policy. Many courts have held that the insurer is not necessarily entitled to discover the insured’s privileged information.35 But, at least one court has held that the insurer may be able to compel some documents and information because of the cooperation clause in the policies, as described in the previous section.36 Where an insurer is paying the defense bills or is actively involved in the defense of the underlying case however, privilege considerations are different. The below sections describe how the relationship between the insurer and the policyholder affects whether documents are considered privileged and whether they can be kept confidential from third parties.

iii) When the Insurer Agrees to Defend Without a Reservation of Rights Where the insurer cooperates with the policyholder to defend a case, the line as to what is and what is not privileged and what does and does not constitute a waiver of the privilege is somewhat blurry. When an insurer agrees to defend a case or a group of cases, the insurer and the insured may begin negotiating a coverage-in-place agreement. An insurer may reserve its rights or it may not. Regardless of the stage of negotiations, the insurer and the insured continue to maintain an on-going relationship in defending the underlying claims. Both parties must be aware that, even after an agreement is reached, it is still possible to waive the attorney-client privilege. They must therefore consider different measures to safeguard information they wish to keep confidential as to third parties. Where an insurer agrees to defend the policyholder and does not reserve its rights, the insurer will typically request certain information from the policyholder regarding the underlying cases in order to properly defend the claims. In most instances, the policyholder will be required to disclose even privileged information because of the cooperation clause contained in their policy. 37 Does this disclosure, however, waive the attorney-client privilege as it relates to third parties that may wish to discover the information, including tort plaintiffs? Information that a policyholder discloses to an insurer will likely remain confidential as to third parties because courts have held that where an insured and an insurer share a “common interest” in formulating defense strategy, they share the attorney-client privilege.38 Thus, the insured and 35 Eastern Air Lines, Inc. v. U.S. Aviation Underwriters, Inc., 716 So. 2d 340 (Fla. Dist. Ct. App. 1998). 36 See supra section II.A.v. 37 Nationwide Mut. Fire Ins. Co. v. Bourlon, 617 S.E.2d 40, 45-46 (N.C. Ct. App. 2005) (finding that an attorney may enter into a dual representation of both an insurer and an insured, in which case the insured cannot withhold documents from the insurer on the basis of attorney-client privilege: “‘work product would be shared with the insurance company [as well as the insured] so that both clients are fully informed of their lawyer’s opinion.’” (alteration in original)). 38 Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 579 N.E.2d 322 (Ill. 1991); see also Kingsway Fin. Servs., Inc. v. Pricewaterhouse-Coopers LLP, No. 03 Civ. 5560 (RMB)(HBP), 2008 U.S. Dist. LEXIS 77018, at *22-23 (S.D.N.Y. Oct. 2, 2008) (The common interest rule is “a limited exception to the general rule that the attorney-client privilege is waived when a protected communication is disclosed to a third party outside the attorney-client relationship. The common interest rule may also apply where multiple parties are represented by multiple counsel so long as the parties share a common interest in a legal matter.” (citations omitted)).

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the insurer can both assert the attorney-client privilege if a tort plaintiff in an underlying case requests or subpoenas information that has been shared between the insurer and the insured.39 In Metropolitan Life Insurance Co. v. Aetna Casualty & Surety Co.,40 the court held that once a policyholder produces privileged documents to a primary insurer, the insurer is under an obligation to keep that information confidential. Metropolitan Life involved a policyholder that had been sued over 200,000 times by claimants alleging asbestos related injury. The excess insurers failed to participate in the defense of the cases, either by denying coverage or reserving their right to deny it in the future. The policyholder brought a declaratory judgment action and the excess insurers requested various documents, including voluminous records relating to the defense and settlement of the asbestos tort actions. The policyholder claimed that these documents were privileged, but the excess insurer claimed that the policyholder had waived the privilege by disclosing the documents to the primary insurer. The court held, however, that “any such disclosures made to [the primary insurer] pursuant to defending the asbestos tort actions only waived privileges as to [the primary insurer], who now has an obligation to keep those disclosures confidential.”41

iv) When the Insurer Defends With a Reservation of Rights Where an insurer defends a claim subject to a reservation of rights, some coverage disputes may remain, and the cooperative nature of the insurer/insured relationship is not entirely clear cut. Where an insurer reserves its rights, the cooperation clause in the policy and “common interest” doctrines may not apply.42

(a) Attorney-Client Privilege Typically, in this situation, the policyholder hires counsel to defend the action.43 Courts have found that the attorney-client relationship is between the policyholder and its counsel, and does

But, policyholders must be careful to whom they disclose information. Some courts have held that the common interest doctrine does not protect information that is disclosed to brokers because an insured does not share a common interest with a broker that is not “playing any role in the development or presentation of [the insured’s] defense.” Cigna Ins. Co. v. Cooper Tires & Rubber, Inc., No. 3:99CV7397, 2001 U.S. Dist. LEXIS 7546, at *7 (N.D. Ohio May 24, 2001). But see Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 409 F. Supp. 2d 1180 (N.D. Cal. 2005) (finding that the attorney-client privilege extends to communications with brokers because brokers work to further the insured’s interests and disclosure to a broker is reasonably necessary in providing information to an insurer, with whom the attorney-client privilege clearly applies). 39 The privilege that both parties can assert is only as to information that was disclosed “in furtherance of their joint defense,” which would include any information that would be necessary in defending and settling the underlying claims. But, any communications related to the parties’ ongoing dispute regarding coverage will not be privileged. Kingsway, 2008 U.S. Dist. LEXIS 77018, at *27. It is not necessary that litigation actually be in progress for the common interest rule to apply. Id. at *23. 40 730 A.2d 51 (Conn. 1999). 41 Id. at 65-66. 42 See San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358 (1984). 43 In California, this type of counsel is generally referred to as Cumis counsel, as established in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App.3d 358 (1984).

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not encompass the insurer.44 Communications and work product between the policyholder and counsel are therefore privileged and protected from disclosure to the insurer. Since courts have found that a privilege exists in this situation, the privilege can presumably be waived by disclosing information to the insurer. In some jurisdictions, courts have found that the “common interest” doctrine does not prevent the waiver of the attorney client privilege because the insurer is merely paying the defense costs and the insurer and the policyholder are not cooperating in formulating a common legal strategy.45 Courts have also held that acting pursuant to the cooperation clause in the policy does not necessarily prevent a waiver of the privilege: “[a]n insurer’s contractual obligation to pay its insured’s litigation expenses does not, by itself, create a common interest between the insurer and the insured that is sufficient to warrant application of the common interest rule of the attorney client privilege.”46 Even a confidentiality agreement between the policyholder and the insurer may not prevent a waiver.47 Other jurisdictions have been more reluctant to find wavier. In American Automobile Insurance Co. v. J.P. Noonan Transportation, Inc.,48 for example, the court found that the privilege was not waived and a common interest remained, even though the parties still had some disputes regarding coverage, as long as the insurer was at least paying a portion of the defense.49

(b) Work Product

Attorney work product, as distinguished from the attorney-client privilege, has been given greater protection by the courts. The work product doctrine protects documents that are prepared

44 Higgins v. Karp, 687 A.2d 539, 543 (Conn. 1997) (“[E]ven when an attorney is compensated or expects to be compensated by a liability insurer, his or her duty of loyalty and representation nonetheless remains exclusively with the insured.”). 45 Go Med. Indus. Pty., Ltd. v. C.R. Bard, Inc., No. 3:95 MC 522 (DJS), 1998 U.S. Dist. LEXIS 22919, at *9-10 (D. Conn. Aug. 14, 1998). 46 Id. 47 See, e.g., Tenn. Laborers Health & Welfare Fund v. Columbia/HCA Healthcare Corp. (In re Columbia/HCA Healthcare Corp. Billing Practices Litig.), 293 F.3d 289, 303 (6th Cir. 2002) (“‘The client cannot be permitted to pick and choose among his opponents, waiving the privilege for some and resurrecting the claim of confidentiality as to others, or to invoke the privilege as to communications whose confidentiality he has already compromised for his own benefit.’ [The attorney-client privilege] is not a creature of contract, arranged between parties to suit the whim of the moment.” (citations omitted)). 48 No. 97-0325, 2000 Mass. Super. LEXIS 548 (Mass. Nov. 8, 2000). 49 Id. (holding that the insurer was entitled to the joint defense or common interest privilege for communications that occurred after it began paying for a portion of the defense, but not before); see also Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567 (E.D. Cal. 2002) (protecting communications between an insured and its insurer due to the parties’ common interest in the underlying lawsuit despite the fact that the insurer was proceeding under a reservation of rights). If the parties’ interests are common but later diverge, and an insurer becomes adverse to an insured, the court will look to the parties’ interest at the time the communication was made to determine whether or not the privilege was waived; if there was a common interest at the time, the privilege will not be waived. Kingsway, 2008 U.S. Dist. LEXIS 77018, at *25.

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in anticipation of litigation. A document is prepared in anticipation of litigation if it was “‘prepared or obtained because of the prospect of litigation.’”50 Ordinary work product can only be discovered upon a showing of substantial need and the inability to obtain the substantial equivalent without undue hardship.51 Opinion work product, which shows the mental impressions, conclusions or opinions of an attorney can only be discovered on a far stronger showing of necessity and unavailability.52 Typically, if a policyholder prepares information regarding an underlying claim for the purposes of submitting it to its insurer to obtain coverage, courts have determined that this is “prepared in anticipation of litigation” and have protected the information.53 But, once a court determines that a work product privilege exists between parties, it also must determine whether that privilege has been waived. Unlike the attorney-client privilege, the work product protection is not automatically waived by disclosure to third persons.54 Further, “[t]he work product privilege should not be deemed waived unless the disclosure is inconsistent with maintaining secrecy from possible adversaries.”55 Where a policyholder has submitted work product documents to its insured for the purposes of obtaining coverage, it has not disclosed information in a way that is inconsistent with maintaining secrecy and therefore has not waived the privilege.56 Even though the work product privilege likely protects information that a policyholder prepares and shares with its insurer for the purposes of defending the underlying claim or claims, insurers and policyholders should consider entering into a confidentiality agreement if only to show that

50 Go Med., 1998 U.S. Dist. LEXIS 22919, at *14 (quoting United States v. Adlman, 134 F.3d 1194, 1202 (2d Cir. 1998)). In Go Medical, the insured submitted certain documents to its insurer, seeking permission under its policy to file a patent infringement action against a third party. When eventually sued, the third party subpoenaed documents that the insured had provided to the insurer, including 1) communications from the insured’s attorneys to the insurer; 2) communications from insurer attorneys to insured attorneys, 3) insured attorney notes, 4) communications between insured and medical employees. The court found that the “common interest” rule did not apply to prevent waiver where the insurer was merely paying for the defense and not cooperating with the insured to formulate a common legal strategy. But, the court found that the insured did have a work product privilege claim as to the documents and had not waived this privilege. The court first found that the documents were in fact prepared in anticipation of litigation because they were submitted to the insurer because of the prospect of litigation and included, for example, counsel’s strategies for the manner in which to bring a suit and other legal impressions. The documents were created as part of the insured’s claim for coverage of litigation expenses that it expected to incur by brining suit against the third party. 51 Fed. R. Civ. P. 26(b)(3) (2010 rev. ed.). 52 Upjohn Co. v. United States, 449 U.S. 383, 401-02 (1981). 53 Go Med., 1998 U.S. Dist. LEXIS 22919, at *20-21. 54 In re Pfizer Inc. Sec. Litig., No. 90 Civ. 1260 (SS), 1993 U.S. Dist. LEXIS 18215 (S.D.N.Y. Dec. 22, 1993). 55 Stix Prods., Inc. v. United Merchs. Mfrs., Inc., 47 F.R.D. 334, 338 (S.D.N.Y. 1969); see also Permian Corp. v. United States, 665 F.2d 1214, 1219 (D.C. Cir. 1981) (“[W]hile the mere showing of a voluntary disclosure to a third person will generally suffice to show waiver of the attorney-client privilege, it should not suffice in itself for waiver of the work product privilege.”). 56 Go Med., 1998 U.S. Dist. LEXIS 22919, at *21-22.

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the disclosure of the information was done with a mind toward maintaining secrecy of the documents.57

(c) Special Considerations when the Parties are Negotiating a CIP Agreement

When a CIP agreement is being negotiated and the insurers have not yet agreed to assume the defense or pay the underlying claims, the situation is analogous to the situation in which an insurer defends under a reservation of rights. If the policyholder discloses information to the insurer, it risks waiving the attorney-client privilege. Whether or not a waiver occurs may be determined by whether or not the insurer is paying for defense while the parties are in negotiations. As explained above, some courts have found that the privilege is not waived, even if the parties still have some disputes regarding privilege, as long as the insurer is at least paying a portion of the defense or actively participating in the defense.58 Similar to the situation in which an insurer reserves its rights, work product will be given greater protection where an insurer and a policyholder are negotiating a CIP agreement- regardless of whether or not the insurer is paying for the defense.

v) When the Insurer Defends under a CIP Agreement In the typical CIP agreement, the insurer agrees to defend the case and to indemnify the policyholder in the event of a judgment. There may or may not be a reservation of rights as to coverage in such an agreement. There may be little, if any tension or dispute between the insurer and the insured with respect to coverage, as the coverage disputes have been resolved. Thus, the situation may be analogous to the situation in which an insurer agrees to defend without reserving its rights. There may be provisions in the CIP agreement requiring that documents be considered work product and privileged. For example, provisions requiring the insurer’s consent for settlement necessarily contemplate the disclosure of sensitive information from the insured to the insurer. Some provisions require that the insured to report certain sensitive information to the insurer on a quarterly basis, such as estimated exposure to the defendants and factors impacting the estimated exposure; provisions by which the parties agree that disclosure from the insured to the insurer’s representatives will be treated as confidential and will not result in a waiver of the attorney-client privilege or work product immunity of the insured. However, as discussed above, a confidentiality provision may not be enough of to ensure that the attorney-client privilege is not waived.59

57 See In re Subpoenas Duces Tecum, 738 F.2d 1367 (D.C. Cir. 1984) (finding that a party waives work product unless it insists on a promise of confidentiality before disclosure). 58 Am. Auto. Ins. Co. v. J.P. Noonan Transp., Inc., No. 97-0325, 2000 Mass. Super. LEXIS 548 (Mass. Nov. 8, 2000). 59 In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289.

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To the extent that this situation is similar to the non-reservation of rights situation above, the insured and the insurer will likely share the attorney-client privilege with respect to outside third parties such as tort plaintiffs. A separate confidentiality agreement may be included in the CIP agreement.

vi) Conclusion In any of the situations mentioned above, a confidentiality agreement may be beneficial, even though it may not entirely prevent the waiver of the attorney client privilege. It may protect unprivileged, but confidential documents that an insurer and an insured share with one another and may help to show that disclosure of the documents was done with a mind toward maintaining secrecy of the documents. Regardless of whether the policyholder and the insurer enter into a confidentiality agreement, they must be vigilant in determining what the privilege law is in their respective jurisdiction and the likelihood that production or sharing of information would waive the privilege.

III) RESERVE INFORMATION AND DOCUMENTS When a policyholder makes a claim under an insurance policy, the insurer typically establishes a loss reserve that reflects its estimated exposure for the claim. Reserves, which are frequently governed by state statute or regulatory code,60 have been defined as “the amount anticipated to be sufficient to pay all obligations for which the insurer may be responsible under the policy with respect to a particular claim.”61 Reserve information and documents are the frequent subject of discovery disputes in coverage litigation. Insurers typically object to the discovery of reserve information and documents on two primary grounds: 1) relevance, and 2) privilege and work product protection. Each objection is discussed below.

A) Relevance Relevance of reserve information and documents is, of course, a threshold issue. On this point, policyholders and insurers alike must distinguish between relevance for discovery purposes and relevance at trial. Trial relevance generally refers to the requirement that a piece of offered evidence have some tendency to prove or disprove a material fact in dispute.62 With respect to discovery, however, relevance is judged by whether the discovery sought appears reasonably calculated to lead to the discovery of admissible evidence.63 Thus, the test for discoverability of

60 See, e.g., Cal. Ins. Code § 923.5 (2010) (insurers must “at all times maintain reserves in an amount estimated in the aggregate to provide for the payment of all losses and claims for which the insurer may be liable, and to provide for the expense of adjustment or settlement of losses and claims”); N.Y. Ins. Law §1303 (2010) (requiring insurers to maintain reserves “in an amount estimated to provide for the expenses of adjustment or settlement” of all claims or losses for which it is responsible). 61 Lipton v. Superior Court, 48 Cal. App. 4th 1599, 1613 (1996). 62 Fed. R. Evid. 401 (2010 rev. ed.) (defining “relevant evidence” as “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence”). 63 Fed. R. Civ. P. 26(b)(1) (2010 rev. ed.).

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reserve information and documents is more lenient than the test for admissibility of such evidence. Addressing the relevancy of reserve information in a coverage litigation discovery dispute, courts across the country have reached mixed conclusions. A number of courts have held that discovery of reserve information from an insurer in coverage litigation is not relevant, and thus, not discoverable, generally finding that whether a reserve has been set and the amount of such reserve is not relevant to the interpretation of the policies at issue or whether coverage is provided under such policies.64 Numerous courts have found that reserve information and documents are discoverable, especially when a policyholder asserts a bad faith or failure to settle claim against an insurer.65 The

64 See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Stauffer Chem. Co., 558 A.2d 1091, 1097-98 (Del. Super. Ct. 1989) (“The reasoning to support the exclusion of reserves information from discovery is that it relates to internal opinions and conclusions of the insurer which are largely hypothetical in nature. In essence, reserves are general estimates of potential liability which may not involve a detailed factual and legal basis. Moreover, reserves information may have limited relevance and little probability of leading to admissible evidence. . . . The fact that reserves were established does not necessarily mean that the insurers believed that such claims would be covered by the policies.” and finding that the “request for reserves information is not reasonably calculated to lead to the discovery of admissible evidence” (citations omitted)); Hoechst Celanese Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 623 A.2d 1099, 1109-10 (Del. Super. Ct. 1991) (“Reserves are accounting entries which an insurance company regularly uses to set aside sufficient funds in the event of policyholder liability. The Court finds unpersuasive [the policyholders’] claim that the establishment of reserves evidences an acknowledgement by the insurers of their liability for [their] claims. Rather, the establishment of reserves is an appropriate business decision justified by the necessity of preserving financial stability in the event of liabilities which cannot be predicted with any degree of certainty. [The policyholders] themselves might choose to set aside funds for the purpose of paying for the underlying . . . claims without acknowledging the validity of those claims. Reserves do not represent an admission or evaluation of liability and are irrelevant to the issues between insurer and insured.”); Indep. Petrochem. Corp. v. Aetna Cas. & Sur. Co., 117 F.R.D. 283, 288 (D.D.C. 1986) (denying motion to compel production of reserve information because of the “very tenuous relevance, if any relevance at all” of that information); Fid. & Deposit Co. of Md. v. McCulloch, 168 F.R.D. 516, 525 (E.D. Pa. 1996) (rejecting the notion that an insurer increasing its reserves over time helps prove that the insurer acted in bad faith; according to the court, such evidence would “merely [show] . . . that the cost of defending the [underlying litigation] increased over time”); Sundance Cruises Corp. v. Am. Bureau of Shipping, No. 87 Civ. 0819 (WK), 1992 WL 75097, at *1 (S.D.N.Y. Mar. 31, 1992) (“[R]eserves are, simply, not relevant. Defendant’s assessment or its underwriter’s assessment or its counsel’s assessment of exposure to liability in this or prior cases has nothing to do with whether here there is liability.”). 65 See, e.g., Kabatoff v. Safeco Ins. Co. of Am., 627 F.2d 207, 208, 210 (9th Cir. 1980) (upholding a jury verdict finding that insurer acted in bad faith because it refused to settle insured’s claim within policy limit, court discussed evidence presented to jury that included fact that insurer set $22,500 reserve for underlying claims, but never offered to settle for more than $6,500); Kirchoff v. Am. Cas. Co., of Reading, Pa., 997 F.2d 401, 405 (8th Cir. 1993) (“Clearly, if [the insurer’s claims handler] valued [the insured’s] claim at $300,000 (and [the insurer] concedes for purposes of this appeal that she did) but offered only $8000 to settle [the insured’s] claim, evidence of that valuation was relevant to the issue of whether [the insurer’s] settlement offers were made in good faith. The District Court did not abuse its discretion in receiving such evidence.”); Jefferson Davis Cnty. Sch. Dist. v. RSUI Indem. Co., No. 2:08-cv-190-KS-MTP, 2009 WL 1658478, at *3 (S.D. Miss. June 11, 2009) (finding insurer’s reserves to be discoverable, “especially where a plaintiff has asserted a bad faith claim”); Lexington Ins. Co. v. Swanson, 240 F.R.D. 662, 667-68 (W.D. Wash. 2007) (reserve information was relevant as to bad faith claims); Bernstein v. Travelers Ins. Co., 447 F. Supp. 2d 1100, 1114-15 (N.D. Cal. 2006) (finding reserve information to be discoverable because it sheds “probative light on what [the insurer] actually thought about the merits and values of the various components of [the insured’s] claim”); Culbertson v. Shelter Mut. Ins. Co., Nos. CIV.A. 97-1609, CIV.A. 97-1969, 1998 WL 743592, at *1 (E.D. La. Oct. 21, 1998) (“[R]eserve information is discoverable where a claim of bad faith is asserted.”); N. River Ins. Co. v. Greater New York Mut. Ins. Co., 872 F. Supp. 1411, 1412 (E.D. Pa. 1995) (“[T]he amount at which

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rationale is that reserve levels reflect an insurer’s internal evaluation of a claim, thereby providing evidence of an insurer’s state of mind—a key issue in bad faith cases. That said, certain courts that have permitted discovery into an insurer’s setting of a reserve have limited the discovery to the fact of whether the insurer set a reserve at all, holding that the specific amount of the reserve is not discoverable.66 Finally, policyholders often argue that relevance of reserve information and documents is particularly high when a liability insurer has refused to defend its policyholder in underlying litigation. In such instances, as a number of courts have acknowledged,67 the mere fact that an insurer has set a reserve may suggest that the insurer internally recognized the potential for coverage, raising considerable doubt as to whether its refusal to defend was in good faith. Insurers frequently counter this argument by noting that many states statutorily require insurers to set a reserve for each claim, in which case the fact that a reserve was set or the amount of such a reserve is irrelevant to whether a claim was properly denied.68

[the insurer] set its reserves for the [underlying] case is certainly germane to any analysis [the insurer] made of its settlement value. This information, in turn, is relevant to the question of whether or not [insurer] acted in bad faith during the pretrial settlement negotiations.”); First Nat’l Bank of Louisville v. Lustig, Nos. 87-5488, 88-1682, 1993 WL 411377, at *1 (E.D. La. Oct. 5, 1993) (“[R]eserve information is relevant and has probative value regarding the bad faith claim because is [sic] tends to elucidate the [insurer’s] state of mind.” (citing Groben v. Travelers Indem. Co., 266 N.Y.S.2d 616, 619 (Sup. Ct. 1965), aff’d, 282 N.Y.S.2d 214 (App. Div. 1967))). 66 See, e.g., Schierenberg v. Howell-Baldwin, 571 N.E.2d 335, 337-38 (Ind. Ct. App. 1991) (holding that memoranda produced by insurer in tort case properly redacted, inter alia, statements regarding amounts of reserves, and that trial court erred in ordering production of the memoranda in their entirety), overruled on other grounds by Richey v. Chappell, 594 N.E.2d 443, 445 (Ind. 1992); Curtiss-Wright Corp. v. Aetna Cas. & Sur. Co., No. Ber-L-5305-92, slip op. at 3-4 (N.J. Super. Ct. ___ Div. Jan. 3 and 6, 1995) (as modified Mar. 31, 1995) (special discovery master ordering defendant insurers to provide policyholder with representation specifying whether it set a reserve for policyholder’s claims but ordering that “[t]he amount of loss reserves shall not be discoverable”); Ford Motor Co. v. Certain Underwriters at Lloyd’s, London & Mkt. Ins. Cos., No. L-1143-92, slip op. at 76 (N.J. Super. Ct. ___ Div. Sept. 24, 1994) (holding that documents relating to the establishment of reserves were discoverable, but that reserve amounts were not); Occidental Chem. Corp. v. Hartford Accident & Indem. Co., No. 41009/8D, slip op. at 8 (N.Y. Sup. Ct. Nov. 30, 1990) (referee decision reflecting parties’ agreement that information concerning loss reserves would be provided by insurers that had asserted a late notice defense or for whom lost policies were at issue, but noting that, by agreement, insurers could redact dollar amount of any particular reserve). 67 See, e.g., Lipton, 48 Cal. App. 4th at 1614 (“[I]n a case where the insurer has denied coverage and refused a defense, the fact that a reserve had been set by the insurer might well be relevant to show that the insurer must have had some knowledge that a potential for coverage existed.”); Shade Foods, Inc. v. Innovative Prods. Sales & Mktg., Inc., 78 Cal. App. 4th 847, 883-84 (2000) (insurer that set high reserve “could not reasonably maintain that there was no potential for coverage under the policy”); Samson v. Transam. Ins. Co., 30 Cal. 3d 220, 240 (1981) (“The mere fact that an insurance company established a reserve fund for defense of a case, as [insurer] did in this case, has been held to be an indication that the company was aware of its responsibility to defend its insured.”); see also 17A Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 251:29, at 251-49 (2000) (“The general relevance of loss reserves is highest in cases involving alleged bad faith on the part of the insurer in denying coverage, especially when the insurer also disclaims any duty to defend its insured against a third-party claim, in which the amount of the reserve and the date the reserve was set or adjusted could well belie a later claim that the insurer thought in good faith that there was no possibility of the claim falling within coverage.”). 68 See, e.g., Taxel v. Equity Gen. Ins. Co. (In re Couch), 80 B.R. 512, 517 (S.D. Cal. 1987) (reversing bankruptcy court’s order permitting discovery of loss reserve information because “reserve requirements are grounded in statutory and regulatory language and are only partially within the control of the insurer”); Silva v. Basin W., Inc., 47 P.3d 1184, 1189-90 (Colo. 2002) (“The reserve requirement therefore reflects a desire on the part of the states and the insurance companies themselves to ensure that resources are available to cover the insurer’s future liabilities. Thus, a particular reserve amount does not necessarily reflect the insurer’s valuation of a particular claim. . . . Neither reserves nor settlement authority reflect an admission by the insurance company that a claim is worth a

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B) Attorney-Client Privilege and Work Product Doctrine

In addition to relevancy considerations, another frequent topic of debate concerning the discoverability of reserve information is whether such information is protected by the attorney-client privilege or constitutes attorney work product. As with all discovery-related disputes, this issue is extremely fact-intensive. Where an attorney was involved in the establishing of the reserve by preparing liability or other reports used by the insurer to set the reserve or where the attorneys made the reserve recommendation, insurers contend that the reserve information is protected by the attorney-client privilege and/or work product doctrine on the basis that reserves “reveal the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal claim.”69 In addition, insurers argue that reserve information, from the process of setting the reserve to the actual amount of the reserve, is proprietary, competitive information and that production of such information would harm its business and competitive practices. In countering this argument, policyholders will frequently note that reserves are set in the regular course of an insurer’s business. Accordingly, policyholders often argue that an insurer’s reserve levels merely reflect its business judgment as to its estimated potential claims exposure. As one federal court put it, “a business action taken on the advice of counsel is not immune from discovery merely because it reveals the thoughts of counsel.”70 Under this rationale, even if the

particular amount of money. Statutory requirements, limitations in the evaluation, and bargaining tactics limit the usefulness of reserves and settlement authority as valuations of a claim.”); J.C. Assocs. v. Fid. & Guar. Ins. Co., No. Civ. A. 01-2437 RJL1M, 2003 WL 1889015, at *2 (D.D.C. Apr. 15, 2003) (“[A] reserve figure is not an admission unless it is in fact an assessment of liability rather than the product of state law or regulation or driven by tax or other financial considerations.”); Exec. Risk Indem., Inc. v. Cigna Corp., No. 1495, 2006 WL 2439733, at *5 (Pa. Com. Pl. Aug. 18, 2006) (“The amount established as reserves does not demonstrate that the insurers expected such claims to be covered by the policy. Reserves are required both by statute and responsible insurance practice and are independent of litigation strategy. The reserve information requested is neither relevant nor reasonably calculated to lead to the discovery of admissible evidence.”). 69 See, e.g., Simon v. G.D. Searle & Co., 816 F.2d 397, 401-02 (8th Cir. 1987) (“individual case reserve figures reveal the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal claim” and are protected opinion work product; however, aggregate reserves figure is discoverable); Sundance Cruises, 1992 WL 75097, at *1 (“[T]o the extent reserves are ‘an indication of potential liability’ by insurers, as argued by plaintiffs, they might be based in large part upon the opinions of counsel and would, therefore, be protected from disclosure.”); Spirco Envtl., Inc. v. Am. Int’l Specialty Lines Ins. Co., No. 4:05 CV 1437 DDN, 2006 WL 2521618 (E.D. Mo. Aug. 30, 2006) (holding that reserve information was protected by the work product doctrine); Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 139 F.R.D. 609, 614 (E.D. Pa. 1991) (“The individual case reserve figures reveal the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal claim. By their very nature they are prepared in preparation of litigation, and consequently, they are protected from discovery as opinion work-product.”). 70 Nat’l Union Fire Ins. Co. v. Cont’l Ill. Group, Nos. 85 C 7080, 85 C 7081, 1988 WL 79513, at *2 (N.D. Ill. July 22, 1988) (emphasis added) (permitting discovery of reserves information and rejecting insurer’s contention that reserve information constituted attorney work product); see also Champion Int’l Corp. v. Liberty Mut. Ins. Co., No. 87 Civ. 1634 (WCC), 1989 WL 299156, at *2 (S.D.N.Y. Oct. 31, 1989) (The insurers “have not shown that the reserve documents reflect attorney-client privileged communications or that they were prepared principally to assist in litigation. Indeed, quite to the contrary, it appears that such documents are prepared in the ordinary course of the business of the insurers and for business purposes.”); Loyal Order of Moose, Lodge 1392 v. Int’l Fid. Ins. Co., 797

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attorney-client privilege or the work product doctrine could arguably preclude discovery into some aspects of the rationale for setting reserves, the reserve levels themselves would nonetheless be potentially discoverable. In other words, if a court views the setting of reserves as a business decision, then the attorney-client privilege and the work product doctrine would likely not operate to bar discovery of an insurer’s reserve levels and other related information. Furthermore, as noted above, many states regulate the setting of reserves, meaning that an insurer’s reserve-related decisions may be subject to regulatory scrutiny.71 To the extent that an insurer must make its reserve levels available to state regulators, any claim of privilege or work product would arguably be eroded. After all, state regulatory bodies are third parties that do not share any attorney-client privilege with insurers. For this reason, policyholders often argue they are entitled to discover whatever reserve information would otherwise be available to regulators. However, insurers may maintain that because disclosure of reserve information is required by statute, such disclosure should not constitute a waiver of any privilege.72 IV) REINSURANCE DOCUMENTS AND RELATED INFORMATION Reinsurance is a means for an insurer to spread the costs of insuring all or part of an underlying risk by buying its own insurance from another insurance company.73 Just as a policyholder must notify its insurer of a claim, an insurer must typically put its reinsurer on notice of an insured’s claim that may trigger its reinsurance policy. Furthermore, to obtain reinsurance, an insurer must establish that the insured’s claim is covered under both the policy sold to the insured and the reinsurance policy in question. Because of these obligations, communications between an insurer and its reinsurers can contain candid admissions or statements by the insurer regarding key policy provisions, the availability of coverage for the policyholder’s claims, factual circumstances of the claims, and other relevant coverage information. In coverage litigation, policyholders often seek to discover documents exchanged between insurers and their reinsurers. By and large, insurers argue that such discovery is irrelevant,

P.2d 622, 628 n.14 (Alaska 1990) (neither attorney-client privilege nor work product doctrine apply to loss reserves because reserves are “established in the ‘ordinary course of business’” of the insurer). 71 See, e.g., Cal. Code Regs. tit. 10, § 2319.4 (2008) (“All records of the reserve method including reserve tests and reports shall be retained and made available for examiners of the Commissioner, and copies thereof shall also be furnished to the Commissioner on request.”); Fla. Admin. Code Ann. r. 69O-170.031(4) (2010) (“An actuarial report or work papers supporting the loss reserve opinion shall be maintained by the insurer and available to the Office on request for seven years.”); Ill. Admin. Code tit. 50, § 1404.10 (2010) (reserve levels will be evaluated annually “to such an extent as may be found necessary to establish the accuracy of the valuation”). 72 See, e.g., U.S. Real Estate Ltd. P’ship v. Colonial Am. Cas. & Sur. Co., No. 08-301ML, 2010 WL 1904271, at *3-5 (D.R.I. May 11, 2010) (concluding that an insurer’s disclosure of information to the New Hampshire Department of Insurance did not result in a waiver of privilege where a statute provided that documents furnished by an insurer in an insurance department’s investigation “shall be confidential by law and privileged . . . [and] shall not be subject to subpoena, and shall not be subject to discovery or admissible in evidence in any private civil action”). 73 See generally 1A Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 9:1 (2003); Lipton, 48 Cal. App. 4th at 1616-17 (“A reinsurance agreement is . . . a contract by which one insurer transfers a risk (and a right to receive the related premium) to another insurer willing to accept both.”).

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privileged, and protected by the work product doctrine. Some of the common arguments made by both policyholders and insurers are discussed below.

A) Relevance

Case law is unsettled as to whether discovery of reinsurance information is relevant in a coverage dispute. Numerous courts throughout the country have recognized that reinsurance documents, including communications with reinsurers, are generally relevant and discoverable.74 Depending on the nature of a particular coverage action, reinsurance information and documents could potentially be relevant for a number of reasons. For instance, a number of courts have found such information relevant to the interpretation of ambiguous policy language.75 Other courts, however, have explicitly held that reinsurance information is not relevant, and not discoverable, in a coverage dispute, finding that reinsurance information is not relevant to issues raised in a coverage dispute involving a policyholder and insurer because: (1) a policyholder is not a party to the reinsurance contract; (2) the policyholder does not have any rights under that reinsurance contract; and (3) the insurance policy between the policyholder and insurer may have different terms and conditions.76

74 See, e.g., Regence Group v. TIG Specialty Ins. Co., No. 07-1337-HA, 2010 WL 476646, at *3 (D. Or. Feb. 4, 2010) (compelling production of “[d]ocuments exchanged between [the insurer] and its reinsurers about th[e] underlying litigation” and “reinsurance policies that [the insurer] purchased covering the [insured’s] policy at issue or underlying litigation that is at issue,” among other documents exchanged with reinsurers); Cigna Ins. Co. v. Cooper Tire & Rubber, Inc., 180 F. Supp. 2d 933, 936 (N.D. Ohio 2001) (discovery relating to reinsurance is relevant and discoverable); Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 139 (N.D. Ill. 1993) (insurer’s claim that reinsurance documents are irrelevant “is simply not credible, and borders on the frivolous”); Stonewall Ins. Co. v. Nat’l Gypsum Co., No. 86 CIV. 9671 (SWK), 1988 WL 96159, at *5-6 (S.D.N.Y. Sept. 6, 1988) (holding that magistrate’s order to produce reinsurance communications was not clearly erroneous, because such communications could reflect insurer’s understanding of the risk it underwrote); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cont’l Ill. Corp., 116 F.R.D. 78, 83 (N.D. Ill. 1987) (“Insurers may well have discussed their positions on the proposed settlements, or their positions in general in the underlying securities litigation, with some or all of their reinsurers. Any such discussions would obviously be relevant to the issues raised by” the insureds’ claims.); Clark v. Interstate Nat’l Corp., 486 F. Supp. 145, 146 n.1 (E.D. Pa. 1980) (“[T]he reinsurance agreement to which [the insurer] was a party was plainly relevant to what [the insurer’s] agents perceived and to how they evaluated the case.”). 75 U.S. Fire Ins. Co. v. Bunge N. Am., Inc., 244 F.R.D. 638, 643 (D. Kan. 2007) (noting that courts are generally willing to permit discovery of reinsurance information and documents “‘as extrinsic evidence of an ambiguous policy provision’” (quoting Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., No. CIV A 01 CV 2394, 2002 WL 1870452, at *4 (E.D. Pa. July 29, 2002))). 76 Potomac Elec.Power Co. v. Cal. Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1990) (“[W]e conclude that the correspondence [relating to reinsurance agreements]—if it exists—lacks sufficient indicia of relevance. . . . In addition, the correspondence may well constitute proprietary information or be protected by the attorney-client privilege or the work product doctrine. Therefore, the discovery . . . does not appear ‘reasonably calculated to lead to the discovery of admissible evidence.’”); Leksi, Inc. v. Fed. Ins. Co., 129 F.R.D. 99, 106 (D.N.J. 1989) (concluding that reinsurance “is a decision based on business considerations and not questions of policy interpretation,” and that “its relevance is very tenuous and its production is not compelled”); Rhone-Poulenc Rorer, 139 F.R.D. at 613 (denying request for reinsurance information where “vague and limited monetary demands are insufficient to bring the reinsurance agreements” within the scope of discovery); Green Constr. Co. v. Kan. Power & Light Co., 732 F. Supp. 1550, 1554 (D. Kan. 1990) (finding request for the production of reinsurance file was “not relevant to the present litigation” and finding that reinsurance materials did not need to be produced).

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Consistent with policyholder arguments concerning reserve information and documents, policyholders also maintain that communications with reinsurers could be relevant to a policyholder’s bad faith claim because they reveal an insurer’s internal evaluation of a claim.77 For instance, policyholders contend that an insurer’s reinsurance documents could potentially reveal that it has taken inconsistent positions with its insured and its reinsurer, which may provide support for a claim of bad faith. Thus, when a policyholder alleges bad faith claims handling, reinsurance documents and related information may very well be deemed relevant and, therefore, discoverable. By contrast, insurers argue that interactions with reinsurers are distinct, irrelevant and commercially sensitive, and some courts have agreed with this view, holding that discovery of reinsurance information in a bad faith or failure to settle case “may be irrelevant or entirely innocuous.”78 Policyholders have also argued that reinsurance documents are relevant in cases involving so-called “lost” policies. As a number of courts have acknowledged, communications with reinsurers may help parties to a coverage lawsuit reconstruct the terms and conditions of lost or incomplete policies.79 It is also worth noting that many courts have found reinsurance agreements, in and of themselves, to be both relevant and discoverable. For instance, numerous federal courts have found such agreements discoverable under Rule 26(a)(1)(A)(iv) of the Federal Rules of Civil Procedure, which states that a party must provide, “for inspection and copying as under Rule 34, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the

77 See, e.g., Imperial Trading Co. v. Travelers Prop. Cas. Co. of Am., No. 06-4262, 2009 WL 1247122, at *3 (E.D. La. May 5, 2009) (reinsurance information and documents relevant to insurer’s “good faith to the extent that [the insurer] explained its reasons for granting or denying portions of plaintiffs’ claims or otherwise described or explained its handling of plaintiffs’ claims”); U.S. Fire, 244 F.R.D. at 642 (finding insurers’ communications with their reinsurers to be relevant and subject to production in suit in which insured asserted coverage and bad faith claims); Lipton, 48 Cal. App. 4th at 1617-18 (“[C]orrespondence between the insurer and reinsurer, not otherwise privileged, which discusses liability, exposure, . . . or coverage issues may well be relevant in discovery for the same reasons reserve information may be discoverable.”); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Stauffer Chem. Co. (“Stauffer”), 558 A.2d 1091, 1096-97 (Del. Super. Ct. 1989) (“[T]he discovery of reinsurance agreements and communications between the carriers and their reinsurers is relevant to the issue of whether the insurers believed that [the policies that they issued] covered the claims against [the insured].”). 78 See, e.g., Fireman’s Fund Ins. Co. v. Superior Court, 233 Cal. App. 3d 1138, 1141 (1991) (“[C]ommunications between the reinsurers and [the insurer] about the [underlying] claim may be relevant to the bad faith cause of action. But they may be irrelevant or entirely innocuous, and they may contain sensitive commercial information. The court abused its discretion in ordering disclosure of these and other reinsurance documents without first reviewing them in camera . . . .”). 79 See, e.g., Leksi, 129 F.R.D. at 106) (“[I]nformation concerning reinsurance should be discoverable in order to attempt to reassemble the terms of the original contract which is now unavailable.”); U.S. Fire, 244 F.R.D. at 643 (reinsurance information is relevant and discoverable for purposes of reconstructing the terms of any lost policies, even if exchanged with reinsurers); Medmarc, 2002 WL 1870452, at *4 (finding reinsurance agreements relevant in lost policy case because they may help parties reconstruct terms of lost policies); Emp’rs Commercial Union Ins. Co. of Am. v. Browning-Ferris Indus. of Kansas City, Inc., No. 91-2161-JWL, 1993 WL 210012, at *4 (D. Kan. Apr. 5, 1993) (finding reinsurance information “reasonably calculated to lead to the discovery of admissible evidence” because the “parties have not found the policies in question”).

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judgment.”80 Some state courts with similar procedural rules have come to the same conclusion.81 Other courts, however, have flatly refused to hold that a reinsurance agreement is relevant to a coverage dispute between the insurer and the policyholder.82 Moreover, while certain courts have found the existence and terms of reinsurance contracts to be discoverable, some courts have explicitly limited the production to just the agreements themselves and precluded the production of other reinsurance information or communications under Rule 26.83

B) Attorney-Client Privilege and Work Product Doctrine Another frequent objection by insurers to policyholder’s expansive discovery requests concerning reinsurance documents and related information is that such information is privileged or otherwise protected under the attorney work product doctrine. A number of courts have rejected the notion that the exchange of information between an insurer and its reinsurer acts as a waiver of privilege or work product protection.84 However, some

80 Fed. R. Civ. P. 26(a)(1)(A)(iv) (2010 rev. ed.); see also Imperial Trading, 2009 WL 1247122, at *2 (“As a number of courts have held, reinsurance agreements fit within the plain language of [Rule 26(a)(1)(A)(iv)] when the primary insurer is named as a party.”); Heights at Issaquah Ridge Owners Ass’n v. Steadfast Ins. Co., No. C07-1045RSM, 2007 WL 4410260, at *4 (W.D. Wash. Dec. 13, 2007) (reinsurance agreements discoverable under Rule 26); U.S. Fire, 244 F.R.D. at 641-42 (same); Allendale, 152 F.R.D. at 139 (noting that reinsurance agreements are “clearly relevant as a matter of law” and “an entirely proper subject of discovery”); Potomac Elec. Power Co. v. Cal. Union Ins. Co., 136 F.R.D. 1, 2 (D.D.C. 1990) (reinsurance agreements discoverable under Rule 26); Stonewall, 1988 WL 96159, at *6 (rejecting insurers’ arguments that reinsurance is not covered by Rule 26). 81 See, e.g., Anderson v. House of Good Samaritan Hosp., 767 N.Y.S.2d 330, 331 (App. Div. 2003) (finding reinsurance policies to be discoverable under New York C.P.L.R. 3101(f), New York’s equivalent of Rule 26(a)(1)(A)); Stauffer, 558 A.2d at 1096-97 (finding reinsurance policies to be discoverable under Delaware Superior Court Rule 26(b)(2)). 82 See, e.g., Fireman's Fund, 233 Cal. App. 3d at 1141 (“The court . . . erred in ordering production of the reinsurance agreements. [The policyholder’s] desire to review them for ‘context’ is a patently insufficient ground for production of highly sensitive commercial information.”); Great Lakes Dredge & Dock Co. v. Commercial Union Assurance Co., 159 F.R.D. 502, 504 & n.1 (N.D. Ill. 1995) (holding that “the relevance of ‘all documents’ relating to reinsurance is too attenuated to be discoverable under the relevant evidence standard of Rule 26” and that “[r]einsurance agreements, which at best reflect an undisclosed unilateral intention, are irrelevant to determining the intent of the parties to the primary insurance contract. Thus, they would be non-discoverable even were a finding of ambiguity made.”). 83 See, e.g., Potomac Elec. Power, 136 F.R.D. at 3 (Reinsurance “correspondence—if it exists—lacks sufficient indicia of relevance. This Court will not authorize a fishing expedition. In addition, the correspondence may well constitute proprietary information or be protected by the attorney-client privilege or the work product doctrine. Therefore, the discovery [the policyholder] seeks does not appear ‘reasonably calculated to lead to the discovery of admissible evidence.’”). 84 See, e.g., Minn. Sch. Bds. Ass’n Ins. Trust v. Emp’rs Ins. Co. of Wausau, 183 F.R.D. 627, 631-32 (N.D. Ill. 1999) (holding that an insurer did not waive any privilege by sending confidential documents to its reinsurer and reinsurance broker because the insurer “always intended and expected that their communications would remain confidential and protected from common adversaries”); Emp’r Reins. Corp. v. Laurier Indem. Co., No. 8:03CV1650T26MSS, 2006 WL 532113 (M.D. Fla. Mar. 3, 2006) (holding that communications between insurer and reinsurer are protected by the common interest doctrine unless their interests actually, rather than hypothetically, diverge); U.S. Fire Ins. Co. v. Gen. Reins. Corp., No. 88 Civ. 6457 (JFK), 1989 WL 82415, at *3 (S.D.N.Y. July 20, 1989) (“There can be little doubt that [the insurer’s] reinsurers and the broker/intermediary which served as a conduit between [the insurer] and its reinsurers were and remain in a community of interest regarding this lawsuit.

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courts have held otherwise, finding that there is no privilege between insurers and their reinsurers.85 Those courts reaching this conclusion have typically pointed to the nature of reinsurance agreements, which differ from traditional insurance policies in that they (at least in many cases) provide only indemnity coverage. For this reason, unlike the traditional relationship between an insurer and its insured, reinsurers and insurers generally do not formulate a joint defense with their reinsureds or otherwise coordinate their strategy. Accordingly, policyholders may argue that—notwithstanding a common commercial interest—no common legal interest exists between insurers and reinsurers that justifies a finding of privilege.86 To the contrary, though, other courts clearly have recognized that insurers and reinsurers do share common interests sufficient to protect the attorney-client privilege.87 Furthermore, a number of courts have noted that communications between insurers and reinsurers typically occur “in the ordinary course of business under the contractual obligations between insurer and reinsurer.”88 In light of this fact, policyholders will frequently argue that documents provided to reinsurers are, by and large, not prepared in anticipation of litigation—and, thus, not subject to protection under the work product doctrine. However, some insurers have successfully overcome this argument. These insurers have contended that the information provided to the reinsurer is in fact protected work product as the information often reflects the insurer’s evaluation of the claim.89

As such, shared communications among these entities retain their privileged status under the work product doctrine.”); Gulf Ins. Co. v. Transatl. Reins. Co., 788 N.Y.S.2d 44, 45-46 (App. Div. 2004) (“Access to records provisions in standard reinsurance agreements, no matter how broadly phrased, are not intended to act as a per se waiver of the attorney-client or attorney work product privileges.”); N. River Ins. Co. v. Phila. Reins. Corp., 797 F. Supp. 363, 369 (D.N.J. 1992) (“Although a reinsured may contractually be bound to provide its reinsurer with all documents or information in its possession that may be relevant to the underlying claim . . . , it does not through a cooperation clause give up wholesale its right to preserve the confidentiality of any consultation it may have with its attorney concerning the underlying claim and its coverage determination.”). 85 See, e.g., Allendale, 152 F.R.D. at 140 (“Assuming arguendo that some privilege does shelter the documents, we find that any privilege has been waived by disclosure of the communications to the reinsurers . . . .”); Mass. Bay Ins. Co. v. Stamm, 700 N.Y.S.2d 707, 707 (App. Div. 2000) (“[T]he insurers waived any attorney-client privilege with respect to documents transmitted to the reinsurers.”). 86 See, e.g., Allendale, 152 F.R.D. at 140-41. 87 See, e.g., Great Am. Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533 (E.D. Cal. 1988) (rejecting policyholder’s argument that privilege had been waived when the insurer transmitted certain privileged documents to its reinsurer and finding that under California law, reinsurer’s business interest in the claim was sufficient to prevent waiver); Hartford Steam Boiler Inspection & Ins. Co. v. Stauffer Chem. Co., Nos. 701223, 701224, 1991 Conn. Super. LEXIS 2527, at *4-5 (Conn. Super. Ct. Nov. 4, 1991) (denying a motion to compel privileged reinsurance communications and holding that “[t]he legal and economic interests of [the insurer] and [the reinsurer] in the EIL insurance claims and lawsuits are inextricably linked by the reinsurance treaty. The fact that [the reinsurer] is not a party defendant in those lawsuits is of little significance because [the reinsurer] will automatically share in any liability suffered by [the insurer]. . . . The Court holds, under all of these circumstances, that the privilege is not waived but rather continues to protect the confidentiality of the communications.”). 88 Front Royal Ins. Co. v. Gold Players, Inc., 187 F.R.D. 252, 258 (W.D. Va. 1999); see also Allendale, 152 F.R.D. at 141. 89 See, e.g., Primerica Holdings, Inc. v. Emp’rs Ins. of Wausau, No. L-12342-90, slip op. at 5 (N.J. Super. Ct. ___ Div. Nov. 9, 1993) (holding that reinsurance information is protected by the work product doctrine because “to the

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V) CONCLUSION Although costly and time-consuming, discovery disputes can swing the tide of momentum in modern litigation. Therefore, it is important for practitioners to understand the myriad legal theories at their disposal and make the appropriate arguments effectively. Making the right arguments can go a long way towards advancing the client’s objectives.

extent information is given by a primary insurer to a reinsurer and involves the evaluation of existing claims, it may very well include that insurer’s work product prepared for litigation”).