Protecting the Attorney Client Privilege with Cumis Counsel

By
Owen M. Praskievicz, Esq.
Schwartz Semerdjian Ballard & Cauley, LLP
Published:  01.01.2015

In cases when a reservation of rights letter has been issued and coverage of a claim is in dispute, most litigators are cognizant of the tension between insurers and policyholders as a case moves forward.  Indeed, the very presence of independent counsel—or Cumis counsel, as they’re more commonly known in California—will provide a very tangible reminder that not everyone’s interests are aligned.

What may not be clear in such situations, however, is the minefield of compromises such tensions create.  This article addresses one such tension—the preservation of the attorney-client privilege—and provides some reassurances and potential pitfalls for California attorneys.   

In most situations, California law protects information disclosed between a policyholder and its insurance company, and limits what a policyholder has to provide to its insurers in subsequent coverage disputes.  Yet not every state provides such protections, and California’s protections are not exhaustive.    

Why Privileges Are At Risk With a Reservation of Rights 

To fully appreciate the concerns surrounding the protection of privileges between independent counsel and an insurer, it helps to assess why a tension exists in the first place.  

In reservation of rights situations, an insurer will ask the policyholder or its defense counsel for work product or privileged information about the underlying case, and there are numerous reasons the policyholder will be inclined to provide it.  First, the policyholder will want to get its defense costs paid.  Second, the policyholder will want to elicit the insurer’s expertise in defending the claim.  Finally, the policyholder will want to avoid the risk of motivating the insurer to assert a new coverage defense alleging breach of the “cooperation clause” in its policy. 

The insurer, of course, has its own reasons for wanting such information.  From an insured’s duty to pay reasonable defense costs, to advising on settlement evaluation, to setting its own reserves, the insurance company will want to work closely with the policyholder and its independent counsel throughout the proceedings.  Nor should the insurer’s motivation to beef up its coverage defenses be overlooked.

All of this comes in the face of the one existential threat the policyholder may not be conscious of; the underlying plaintiff might seize upon any release of a defense counsel’s work product to successfully claim that when the policyholder disclosed such documents to an insurer that disputes coverage, it waived all attorney-client privilege and work product protection attaching to them.

What does this mean?  It means the policyholder and its counsel must on the one hand battle the risk of hurting their coverage by not fully cooperating with their insurer while simultaneously risking the waiver of privilege for cooperating too much with the insurer.  This issue is covered in-depth in an American Bar Association paper titled Between a Rock and a Hard Place: Protecting the Privilege While Preserving the Coverage by John Buchanan and Wendy Feng on March 8, 2012.

California’s Protections and Pitfalls for Cumis Counsel

In California, thankfully, the legislature has provided protections for Cumis counsel, the name given to independent counsel after the seminal case San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 208 Cal. Rptr. 494 (Cal. Ct. App. 1984).  California Civil Code section 2860 regulates the right to independent counsel, and also provides a statutory basis for limited discovery of the defense counsel’s files by an insurer.  California Civil Code section 2860(d) states:

When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court. Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.

The statute makes clear that a policyholder is not required to disclose privileged, coverage-relevant information to the insurer.  Nor can an insurance company require an insured to provide privileged documents pursuant to “cooperation clauses” found in most insurance policies. Rockwell International Corporation v. Superior Court, 32 Cal. Rptr. 2d 153 (Cal. Ct. App.1994) (also rejecting arguments against maintaining the privilege under the “at issue” and “common interest” doctrines.)  The statute also protects information that is disclosed between the insured and insurer from automatic waiver as to other parties.  

In fact, subsequent case law has extended the protections to reservation of rights situations even absent Cumis counsel.  In Bank of America, N.A. v. Superior Court, 212 Cal. App. 4th 1076 (2013), the underlying plaintiff tried to seek communications between an insured and its insurer because the insurer had reserved its rights and the insured did not hire Cumis counsel.  Regardless, the court held that the attorney-client relationship existed, holding that “[a] reservation of rights in itself does not create a disqualifying conflict requiring the appointment of Cumis counsel.”  The court explained that even if the insurer's reservation of rights created a disqualifying conflict of interest, “the right to invoke the conflict would belong solely” to the insured, and that the adversary plaintiff “cannot assert [the insured's] right to Cumis counsel in order to create a waiver of the attorney-client privilege and attorney work product doctrine as to communications between [counsel] and the insurer.”

But be careful.  Other courts have not extended the privileges in situations absent a duty to defend by the insurer.  In Durkin v. Shields (In re Imperial Corp. of America), 167 F.R.D. 447 (S.D. Cal. 1995), the insured's defense counsel provided the directors and officers liability insurer with letters assessing the insureds' risk in the underlying litigation and settlement demands. The underlying plaintiffs contended that these letters were not privileged or subject to work product protection. The insureds argued that even though the insurer did not have a duty to defend (it only had a duty to indemnify for defense costs), it shared a “common interest” in the ultimate outcome of the lawsuit so that the privilege should attach to their communications.  

The Durkin court denied the privilege and held that the disclosure of the letters waived the work product protection under the theory that the insurers, even though the insurer had signed joint defense agreements with the insureds and their co-defendants.  It stated: “[The insureds' defense counsel] did not have an attorney-client relationship with [the insurer]. The [counsel's] letters were not written by or to clients of [the defense counsel] and do not reveal any directors' or officers' communications to [defense counsel]. The letters were written for the purpose of apprising [the insurer] of the status of the case, not for seeking or imparting legal advice. [The insurer] did not have a duty to defend the [insureds] and did not defend the [insureds], nor pay their legal expenses. Finally, [theinsurer] and the [insureds] did not share common legal representation; rather, [the insurer] had separate representation.”

Likewise, when a policyholder shares mediation communications with insurers that do not have a duty to defend—and the insurer does not participate in the mediation—the mediation confidentiality privilege won’t apply.  Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 525 (E.D. Cal. 2010)  ”[W]hile the conflict of interest is explicit between an insured and a defending insurer that reserved its rights, such a conflict is also objectively manifested between an insured and a non-defending insurer that retains its own interests in the outcome of the litigation while sitting on the sidelines.”  Id.

Thus, while California law provides protections for insured and insurers even in the face of a potential coverage dispute, not all communications and work product will be protected, especially when there is no duty to defend.  

Not Every State Protects Independent Counsel Communications Like California

Although California’s laws allow for the protection of independent counsel’s work product and attorney-client communications from disclosure with an insurer during a coverage dispute, other states have reached polar opposite conclusions.  

In particular, the Supreme Court of Illinois held that under the cooperation clause, the “common interest” doctrine and the “at issue doctrine,” a defense counsel’s work product was discoverable by the insurer.  See Waste Management, Inc. v. International Surplus Lines Insurance Company, 579 N.E.2d 322 (Ill. 1991).  This ruling essentially means that under Illinois law, the insured and insurer are deemed to share in the attorney-client privilege and work product protections relating to the underlying litigation, and that in a coverage dispute the insured cannot rely on the privileges as a shield.  

In other words, when not working in California, maintain vigilance when communicating with your insurers until you fully understand what set of privilege rules you are operating under.  And, as always, be sure to investigate how the privileges may be waived in various situations and research how to limit the scope of such potential waiver.