OUTSIDE PERSPECTIVES
Is The Attorney-Client Privilege Bulletproof
When Insurance Companies Use It To Disguise
Bad Faith Claim-Handling?
When policyholders challenge their insurance companies’ claims handling practices, insurance companies often play a game of
Russian Roulette, using attor-
ney-client privilege to shield
their factual claim investigations
from disclosure and policyhold-
er criticism. By claiming that an
attorney performed the claims-
handling function, the insurance
company may waive the privi-
lege and blow the top off its
putative protection, exposing
the facts (good and bad) under-
lying 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
CAROLINE R. HURTADO
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 work-product 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 use lawyers for two
primary purposes (1) to perform the business function
of addressing coverage issues (adjusting claims, supervising the claims process, or monitoring the investigation of
claims), or ( 2) to be the litigator litigating a coverage
dispute. Before the coverage dispute, the lawyer is
acting as claims adjuster that investigates the claims,
analyzes them, and determines whether payment should
be made and if so, at what amount. At some point, the
lawyer turns into a coverage lawyer that does not make
such business decisions. If the matter could be handled
by a layman just as easily as a lawyer, the matter may
not be privileged.
Under the same rationale, documents in a claims
file created by or for an insurance company as part of
its ordinary course of business, are not afforded work-product protection, even if prepared by a lawyer.
Courts often presume that documents prepared by
or for an insurer prior to a coverage determination
are prepared in the ordinary course of the insurer’s
business and are not afforded work-product protection.
Similarly, documents created after the insurance
company’s retention of counsel are not necessarily
afforded work-product protection where the insurance
company continues to investigate the claim without
denying coverage. The hiring of outside counsel does
