Sharing secrets: the 'common interest' doctrine is the key to whether an insurer is entitled to receive privileged communications between a policyholder and defense counsel.

Yogi Berra of Yankees baseball fame is credited with saying, "It was impossible to get a conversation going; everybody was talking too much." This sentiment seems strangely appropriate in the context of communications among policyholder, defense counsel and insurer.

In some instances, the flow of information in this "tripartite" relationship is accomplished with seamless efficiency, like Berra catching Don Larsen's historic perfect game in the 1956 World Series against the Brooklyn Dodgers. At its worst, it's the legal equivalent of Abbott and Costello's "Who's on First," which can seriously impede the insurer's ability to bring the litigation to a successful resolution. Baseball analogies aside, the importance of proper communication among policyholder, assigned defense counsel and insurer cannot be overstated. Such communication is absolutely essential in order for the policyholder to be provided with an effective defense and for the insurer to be in a position to realistically evaluate possible settlement opportunities.

The pivotal issue in this area is whether an insurer is entitled to receive attorney-client privileged communications between a policyholder and defense counsel. Examining this issue requires an understanding of the so-called "common interest" doctrine. In theory, the common interest doctrine is simple. It provides that the attorney-client privilege is not waived when privileged information is disclosed to third parties with a community of interest. However, applying this general principle to communications among policyholder, assigned defense counsel and insurer can be somewhat more challenging.

In general, when an insurance company retains defense counsel to represent a policyholder pursuant to the insurer's duty to defend, defense counsel's primary allegiance is to the insured. As one federal judge in Michigan bluntly put it, "The primary duty of the attorney is always to the client, not to the entity who happens to be paying the bill." See Central Michigan Board of Trustees, Michigan University's Self-Insurance Corp. vs. Employers Reinsurance Corp. Yet, it is important to recognize that the insurance company funding the defense is not merely a "cash machine" for defense counsel. As the entity that may, at the end of the day, be responsible for paying the settlement or judgment, the insurer has substantial rights to control the defense and to access information concerning the conduct of the litigation. These rights are rooted in the policy's grant of the right to settle to the insurer, the policy's "cooperation clause" and, in certain instances, the insurer's litigation management guidelines, which defense counsel are often required to follow.

Whether an insured and its insurer share a "community of interest" such that privileged communications shared with the insurer will retain their privileged status is not easily resolved in all cases. That being said, a better understanding of the common interest doctrine will inevitably serve to facilitate the flow of communication among policyholders, assigned defense counsel and insurers and lead to better outcomes for all concerned.

Common Interest Doctrine

Courts have generally found that the common interest doctrine does not itself give rise to a separate privilege. Rather, it 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. Federal courts have never recognized an insured-insurer privilege as such as noted in Bovis Lend Lease vs. Seasons Contracting Corp.; Mount Vernon Fire Insurance Co. vs. Try 3 Building Services Inc.; Linde Thomson Langworthy Kohn & Van Dyke P.C. vs. Resolution Trust Corp.

The common interest doctrine exists not only in common law, but also has been codified in the evidentiary rules of numerous states. For example, Texas Rule of Evidence 503 dealing with the attorney-client privilege specifically includes an exception for "communication relevant to a matter of common interest between or among two or more clients if the communication was made by any of them to a lawyer retained or consulted in common, when offered in an action between or among any of the clients." As found in California Evid. Code [section] 962, "Where two or more clients have retained or consulted a lawyer upon a matter of common interest, none of them, nor the successor in interest of any of them, may claim a privilege under this article as to a communication made in the course of that relationship when such communication is offered in a civil proceeding between one of such clients ... and another of such clients ... "

The common interest doctrine also has been recognized in the 3rd Restatement of the Law Governing Lawyers, [section] 76, which states, in part, "If two or more clients with a common interest in a litigated or nonlitigated matter are represented by separate lawyers and they agree to exchange information concerning the matter, a communication of any such client that otherwise qualifies as privileged ... that relates to the matter is privileged as against third persons ... "

Insurance Implications

Generally, in the insurance defense arena, courts have decided that communications between a policyholder and its attorney connected with the defense of an underlying litigation are normally not privileged vis-a-vis the insured's carriers. See Vermont Gas Systems Inc. vs. USF&G; Northwood Nursing & Convalescent Home Inc. vs. The Continental Insurance Co., and Bovis Lend Lease. The common-sense rationale behind this general rule was explained by one court as follows:

"It is essential, however, to recognize that defendants are obligated at this time to defend plaintiffs in the underlying dioxin-related cases. To do this, access to documents prepared in anticipation of those claims are essential, and while those documents may be privileged from discovery by party opponents in the underlying claims, they cannot be privileged from carriers obligated to shoulder the burden of defending against those claims. There is no showing by plaintiffs that plaintiffs generated the documents expecting that they would be concealed from their insurance carriers. The documents were generated in anticipation of minimizing something of common interest to both parties in this suit: exposure to liability from tort claimants. In short, plaintiffs had no reasonable expectations of confidentiality with regard to these documents." See Independent Petrochemical Corp. vs. Aetna Casually and Surely Co.; and Bovis Lend Lease (noting that courts in the 2nd Circuit have applied the common interest rule to allow an insurer aligned in interest with the insured to have access to privileged communications between the insured and its counsel, without breach of the privilege).

The situation is not as clear when the insurer is defending the insured under a reservation of rights. While there is little case law exploring the contours of the common interest doctrine under these circumstances, it is apparent that a court would need to consider the unique facts of each particular case, including the course of dealing between the carrier and the insured as well as the nature of the documents or information at issue.

Court rulings addressing the common interest doctrine often arise in the context of a declaratory judgment action between the policyholder and the insurer. Typically, the insurer will seek discovery of attorney-client communications from an underlying action on the basis that the policyholder and insurer shared a common interest in defeating the claims of the tort plaintiff. The outcome usually depends on whether the carrier agreed to provide the defense. The majority of courts have concluded that the common interest doctrine does not apply in situations in which the carrier has denied a defense and the policyholder has retained independent counsel, as detailed in N.L. Industries Inc. vs. Commercial Union Insurance Co. The minority view is represented by the Illinois Supreme Court's decision in Waste Management Inc. vs. Int'l Surplus Lines Insurance Co., in which the court stated that the common interest doctrine " ... may properly be applied where the attorney, though neither retained by nor in direct communication with the insurer, acts for the mutual benefit of both the insured and the insurer."

The Doctrine and Reinsurance

The case law is far from uniform on the applicability of the common interest doctrine to communications among insurers and their reinsurers. There is authority from the Southern District of New York suggesting that insurer-reinsurer communications are subject to a somewhat different analysis than insured-insurer communications. For example, in North River Insurance Co. vs. Columbia Casualty Co., Judge Lowe of the Southern District upheld a magistrate judge's ruling that the common interest doctrine did not apply as between an insurer and reinsurer.The magistrate judge had reasoned that no common interest existed because the insurer and reinsurer "were not represented by the same counsel, and Columbia Casualty [the reinsurer] did not contribute to North River's legal expenses nor exercise any control over its conduct of the [ADR] proceedings [and] there [is no] evidence that the two coordinated litigation strategy in any way." See also Reliance Insurance Co. vs. American Lintex Corp., which found the existence of insurer-reinsurer relationship alone is not sufficient basis for application of common interest doctrine.

Other jurisdictions have taken a contrary view concerning the common interest doctrine as it relates to insurer-reinsurer communications. The Eastern District of California has taken the position that documents provided to a reinsurer by the insurer's agent in response to a request for information on certain claims did not waive attorney-client privilege. See Great American Surplus Lines Insurance Co. vs. ACE Oil Co. The Northern District of Illinois has similarly recognized the applicability of the common interest doctrine as between insurer and reinsurer. Minnesota School Boards Association Insurance Trust vs. Employers Insurance Co. of Wausau found, "There has been no waiver herein, since Wausau, as seen, always intended and expected that their communications would remain confidential and protected from common adversaries ... " Finally, a Connecticut state court denied a motion to compel privileged correspondence provided by an insurer to its reinsurer and reasoned persuasively as follows:

"The insureds contend that (the insurer) has waived the attorney-client privilege because it disclosed the communications to a third party. The Court disagrees. The legal and economic interest 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." See Hartford Steam Boiler Inspection and Insurance Co. vs. Stauffer Chem. Co.

Given this sprit in authority, insurers and reinsurers should not take for granted that their communications will be shielded by the common interest doctrine. Depending upon which state's law controls, the level of protection afforded to privileged communications by this doctrine can vary widely.

There is no question that defense counsel must be vigilant in protecting his or her privileged communications with the policyholder. At the same time, both defense counsel and the policyholder must be cognizant of the insurer's vital role in the defense. In furtherance of its duty to cooperate, the policyholder must be prepared to furnish the carrier with the information it needs to make informed decisions concerning the defense and settlement of the claim.

While reinsurers likewise need information to evaluate their exposure, the law governing whether insurer-reinsurer communications are subject to the common interest doctrine is not well-settled and may vary from jurisdiction to jurisdiction. Nevertheless, this much is clear--without the common interest doctrine, a carrier may not be able to know whether a particular claim is a home run or an easy out at first.

Key Points

* Common interest doctrine provides that the attorney-client privilege is not waived when privileged information is disclosed to third parties with a community of interest.

* Generally, courts have decided that communications between a policy-holder and its attorney connected with the defense of an underlying litigation are normally not privileged vis-a-vis the insured's carriers.

* The law governing whether insurerreinsurer communications are subject to the common interest doctrine may vary from jurisdiction to jurisdiction.

Contributor Ira S. Bergman is an attorney with White and Williams LLP, Philadelphia.