Confidentiality in the Tripartite Relationship
Confidentiality in the Tripartite Relationship
By David A. Gauntlett*
Introduction
The protections offered by attorney-client privilege are, in most areas of law, rather straightforward. In the context of insurance coverage, the concept can quickly grow complicated. Full disclosure is essential to obtaining quality legal counsel, and frank discussion of a case’s merits is necessary for an insurer to analyze settlement options. But what happens when an insurer uses information gathered during these necessary discussions as the basis to deny a claim? This blog examines cases addressing the nuances of insurer-insured communications and the privilege that may attach.
Lack of Attorney-Client Privilege Does Not Remove All Protection
In Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc.,[1] the court determined that an insurer defending subject to a reservation of rights does not create a true attorney-client privilege to protect communications between the insurer and the insured. Because an attorney defending under such circumstances would face an inherent conflict of interest in trying to represent both parties,[2] the only genuine attorney-client privilege is between the defending attorney and the insured.
[W]here, as here, the insurer defends under a reservation of rights, denying the duty to indemnify on some or all claims, the attorney represents only the insured on the denied claims. In such a situation, Cumis counsel is retained by the insured, not the insurer and no attorney client relationship exists between the insurer and Cumis counsel. There exists in this situation an inherent tension between the carrier's interests and the interests of the insured. Thus, the attorney client relationship, the first and most important element of the attorney client privilege, is missing between Cumis counsel and the insurer.[3]
That said, the court acknowledged the necessity for frank communication between insurer and insured. Specifically, it ruled that such communications between Pelco and its insurer fell within the scope of the “common defense doctrine” or “joint defense privilege.” As the names imply, this legal theory prevents waiver of attorney-client protect for communications with a third-party if that party is represented by separate counsel but engages in a common legal enterprise.
The court’s rationale distinguished the facts of Pelco from those of First Pac. Networks, Inc. v. Atl. Mut. Ins. Co.[4] The latter case was a coverage dispute between the insured and a non-defending insurer. The court granted discovery requests for communications between the insured and a defending insurer, concluding that no common interest existed between the insured and the defending insurer vis-à-vis the insured’s claims against the non-defending insurer.[5]
Defending Lawyers Must Not Reveal Coverage-Related Information
Because Pelco leaves open the possibility of communications being revealed in a subsequent coverage action, defending attorneys must be careful not to reveal coverage-related facts or analysis to any third party, including a defending insurer paying the bills. This is a tricky line to walk due to an insurance policy’s requirement of cooperation, and the potential pitfalls are not always obvious.
Consider the following example. A corporate insured is sued for injuries incurred during a workplace accident. During a deposition, the corporation’s representative is asked about prior accidents and discusses several past incidents. Depending on the circumstances, those prior accidents may be relevant to the defense’s likelihood of success, making them essential for an insurer to make an informed decision on whether to settle the case. But what if the corporation did not did not list one of those prior accidents on the insurance application, thereby opening the door to rescission of the insurance policy?
As illustrated, seemingly innocuous details could have major implications on coverage. An attorney in the unfortunate situation of dual representation would have no choice but to withdraw. Unless the corporate client agrees to a waiver, the duty of confidentiality under Model Rule 1.6(a)[6] does not allow disclosure of such information, even if it is technically in the public domain or otherwise accessible.[7]
Communication Limitations on Appointed Counsel
In Cosgrove v. Nat'l Fire & Marine Ins. Co.,[8] the court broadly interpreted the protections under Arizona law for information gathered by an insurer-appointed attorney. In the underlying case, a construction company and its owners were sued for poor work performed in the remodeling of a home.[9] The insurer retained an attorney to oversee the defense but reserved its rights to assert a Subcontractor Exclusion for “operations performed for you by independent contractors or subcontractors.”[10]
The appointed attorney maintained frequent communication with the insurer and confided that “[a]ll construction work was done by sub-contractors except for the framing.”[11] Later, the attorney stated that he believed he learned this information both directly from the insured and from examining the remodel’s job file.[12] The insurance company used this information to lowball its settlement offers based on the adjustor’s estimation that the Subcontractor Exclusion gave the company an 80% chance of defeating any coverage claims.[13] The parties eventually settled with a non-execution agreement that led to the subsequent action by the underlying plaintiff against the insurer as a judgment-creditor.
The court’s ruling was primarily based on Parsons v. Continental National American Group,[14] which held that:
When an attorney who is an insurance company's agent uses the confidential relationship between attorney and a client to gather information so as to deny the insured coverage under the policy ... such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under an exclusionary clause in the policy.
. . .
[An insurance carrier does not have] the right to engage an attorney to act on behalf of the insured to defend a claim against the insured while at the same time build a defense against the insured on behalf of the insurer.[15]
The parties offered conflicting interpretations of the Parsons decision. The plaintiff argued that there was a violation because the appointed attorney disclosed information that he obtained from the insured during the course of the attorney-client relationship and the insurer then relied on that information to deny coverage. The insurer argued that Parsons has no application because it only applies if the attorney representing the insured discloses confidential or privileged information, which the subcontractor information was not.
The court concluded the insurer’s view of Parsons was too narrow. It noted the absence of any requirement that the information in question be independently confidential. Parsons only requires that the information have been obtained via the attorney-client relationship and that the disclosure of the information be to the detriment of the insured.
Here, Mr. Righi used the attorney-client relationship with WTM to gather information that he gave to defendant, which defendant then used to the detriment of WTM and now wants to use to deny coverage. At the point Mr. Righi disclosed the subcontractor information to defendant, he knew, or had reason to know, that WTM's policy contained the Subcontractors Exclusion and that defendant may attempt to deny coverage based on this exclusion. Yet despite this knowledge, Mr. Righi communicated to defendant the very information that defendant would need to deny coverage based on the Subcontractors Exclusion.[16]
Conclusion
While Pelco makes clear that the scope of attorney-client privilege is not infinite in the complicated mess of insurance disputes, strong protections still exist to prevent insurers abusing information gathered under the pretext of cooperation. Attorneys should be independently vigilant for ethical reasons embodied by Model Rule 1.6(a), but Cosgrove makes clear that insurers cannot take advantage of a loose-lipped attorney who mistakenly confides information detrimental to the insured’s coverage prospects.
*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1] Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567, 571–72 (E.D. Cal. 2002).
[2] See David A. Gauntlett, Disputes Over Control of Counsel Between Policyholders and Insurers, https://www.gauntlettlaw.com/news/disputes-over-control-of-counsel-between-policyholders-and-insurers (May 12, 2024).
[3] Pelco Sales, 212 F.R.D. at 571–72.
[4] First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 163 F.R.D. 574, 581 (N.D. Cal. 1995).
[5] Subsequent cases have limited the effect of this case by narrowly interpreting what information Cumis counsel is obligated share with an insurer (and therefore could be obtained in discovery by a second, non-defending insured as in First Pacific Networks). See, e.g., Cont'l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 528, n.17 (E.D. Cal. 2010) (“A carrier has no ability to penetrate privileged communications between insured and its counsel, and that an insured is under no duty to share any such communications with a carrier that is funding a defense under a reservation of rights.”)
[6] Model Rule 1.6(a) (“A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).”)
[7] See People v. Braham, 470 P.3d 1031, 1044 (Colo. 2017) (stating that Rule 1.6 “contains no exception permitting the disclosure of previously disclosed or publicly available information”).
[8] Cosgrove v. Nat'l Fire & Marine Ins. Co., No. 2:14-CV-2229-HRH, 2017 WL 11437374 (D. Ariz. Apr. 10, 2017), vacated due to settlement, No. 2:14-CV-2229-HRH, 2017 WL 11490239 (D. Ariz. May 5, 2017).
[9] Id. at *1.
[10] Id.
[11] Id. at *2.
[12] Id.
[13] Id. at *4.
[14] Parsons v. Continental National American Group, 550 P.2d 94 (Ariz. 1976).
[15] Id. at 99.
[16] Cosgrove v. Nat'l Fire & Marine Ins. Co., 2017 WL 11437374 at *7.