Is The Attorney-Client Privilege Bulletproof When Insurance Companies Use It To Disguise Bad Faith Claim-Handling?

Originally published in Corporate Counsel, March 2010.

When policyholders challenge their insurance companies' claims handling practices, insurance companies often play a game of Russian Roulette, using attorneyclient privilege to shield their factual claim investigations from disclosure and policyholder criticism. By claiming that an attorney performed the claims-handling function, the insurance company may waive the privilege and blow the top off its putative protection, exposing the facts (good and bad) underlying a coverage denial to the cold light of day.

Insurance companies take another deadly spin in the game of chance when they invoke the advice of counsel defense. This occurs when an insurance company – usually unwillingly – claims that its coverage denial was based on the advice of coverage counsel and therefore reasonable, for purposes of defending against allegations of bad faith. Once the insurance company places its attorney's advice at issue, however, the privilege may be waived.

When conducting discovery in coverage litigation, a policyholder should not be deterred when the denial letter was written by John Doe, Esq. instead of John Doe, Claims Department Representative. Nor should a policyholder assume that attorney activity on a privilege log, claims log, or involvement of an attorney in internal communications regarding coverage, will automatically be protected from disclosure. Determining whether an attorney is acting as a claims handler or legal advisor is a fact inquiry that looks to the dominant purpose of the attorney's function.

There are many reasons why an insurance company would pass off its claims handling function to an attorney: experience, knowledge, the desire to protect sensitive information, reliance on the advice of counsel defense in bad faith litigation, or simply protecting a claims employee from being deposed. Indeed, a recent insurance industry publication tailored to claims adjusters characterized a deposition as a "Maalox moment that may be about as much fun as a root canal."

The Lawyer in The Claims Handling Function

Insurers cannot shield claims files from disclosure on the basis of the work-product privilege by having lawyers handle claims. For the workproduct doctrine to apply, the investigation must be outside of standard claims handling process. For attorney-client privilege to apply, the attorney must provide legal advice and not conduct a factual investigation.

Insurance companies commonly...

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