THE ATTORNEY’S ROLE DURING THE ADJUSTMENT OF AN INSURANCE CLAIM*

February 2018

by Christina Phillips, Merlin Law GroupJacquelyn A. Beatty, Karr Tuttle Campbell

Malena Dobal, Gladstone, WeisbergBrad Balentine, David Morse

Introduction

It is not uncommon in the first or third-party context for an insurer to retain counselearly in the claims process to assist in the in-vestigation of the claim. The attorney’s rolecan include gathering documents, conduct-ing an investigation, conducting examina-tions under oath, and issuing coverageopinions. The attorney may also activelycommunicate with the insured and the in-

1

__________*This article was originally presented at the 26th An-nual Insurance Coverage Litigation Committee Mid-Year Meeting, Phoenix, Arizona (February 2018). Itis reprinted here with permission of the American BarAssociation Tort Trial and Insurance Practice Sec-tion.

sured’s counsel to collect information.However, whether the attorney is serving aslegal counsel or as a claims adjuster is oftenblurred. As a result, questions often arise asto whether the documents created by theattorney are protected by the work-productof the attorney-client privilege.

Work Product Immunity

The concept of work-product immu-nity arises from Federal Rule of Civil Pro-cedure 26(b)(3), which limits the discoveryof documents prepared in anticipation oflitigation. Protection for work product isnot absolute, but is more accurately de-scribed as a “limited immunity” rather than

The Attorney’s Role during the Adjustment of an Insurance Claim

a privilege. Carver v. Allstate InsuranceCo., 94 F.R.D. 131, 133 (S.D. Geo. 1982).The party resisting disclosure has the bur-den of establishing the documents’ eligibili-ty for protection. Binks Manufacturing Co.v. National Presto Industries, Inc., 709 F.2d1109, 1120 (7th Cir. 1983).

The work product doctrine is intendedto prevent unwarranted inquiries into thefiles and mental impressions of an attorney(and others) when litigation is anticipated orunderway. There are two kinds of workproduct: (1) ordinary work product; and (2)opinion work product. Ordinary workproduct includes raw factual information. Itis generally not discoverable unless the partyseeking discovery has a substantial need for

2

Insurance Law Essentials Deep Dives is published in as-sociation with Insurance Law Essentials. For subscrip-tion questions or problems, contact IRMI customerservice at (800) 827–4242.

Opinions in this report on financial, tax, fiscal, and legalmatters are those of the editors and others; you shouldobtain professional counsel before taking any action onthe basis of this material.

Reproduction of this report by any means is strictly pro-hibited. Insurance Law Essentials Deep Dives and the owllogo are registered trademarks.

Published by IRMI:International Risk Management Institute, Inc.

Jack P. Gibson, PublisherBonnie Rogers, IRMI Editor

12222 Merit Drive, Suite 1600Dallas, TX 75251 • (972) 960–7693

www.IRMI.com

the materials and the party cannot obtain theinformation elsewhere. Opinion work prod-uct includes an attorney’s mental impres-sions, conclusions, opinions, and legal theo-ries, and is entitled to substantially greaterprotection than ordinary work product.More than substantial need and undue hard-ship are generally required. In re Murphy,560 F.2d 326, 336 (8th Cir. 1977). Illegality,criminal conduct, and fraud may qualify. Seealso Moe v. System Transport, Inc., 270F.R.D. 613, 622 (D. Mont. 2010) (“a partyseeking such materials must show that themental impressions are directly at issue …and the need for the material is compelling.”)However, “the insured’s right to discoverthe opinions and mental impressions of theinsurer’s claims adjusters does not mean thatshe is entitled to obtain the confidential ob-servations, mental impressions of legal theo-ries of the insurer’s attorney.” Spargo v. StateFarm Fire & Cas. Co., 2017 U.S. Dist. Lexis96823.

When determining whether work-product immunity applies, many courts ap-ply a two-prong approach. The first is whatis typically referred to as the “causation” re-quirement. This is the basic requirementthat the document in question be producedbecause of the anticipation of litigation, i.e.,prepared for trial. Harper v. Auto-OwnersIns. Co., 138 F.R.D. 655, 659 (S.D. Ind.1991). The second requirement is what istypically referred to as “reasonableness” andis applied to the party’s anticipation of liti-gation. In other words, it is more of a sub-jective test since litigation can essentially beanticipated at any time.

The Attorney’s Role during the Adjustment of an Insurance Claim

Numerous courts throughout the coun-try have addressed the issue of when the“anticipation of litigations arises”, but ingeneral most courts agree that a party mustshow more than a “remote prospect,” or a“likely chance” of litigation. Mission Na-tional Ins. Co. v. Lilly, 112 F.R.D. 160,163 (D. Minn. 1986). Rather, a party mustdemonstrate that “at the very least some ar-ticulable claim, likely to lead to litigation”has arisen. Binks, 709 F.2d at 1119.

Moreover, it is typically not enoughthat the documents merely be producedbecause of the justifiable anticipation of lit-igation, but the material must have beenproduced because of that prospect of litiga-tion and for no other purpose. Harper, 138F.R.D. at 660. Documents which are cre-ated in the ordinary course of business, arenot privileged. St. Paul Reinsurance Co.Ltd. v. Commercial Financial Corp., 197F.R.D. 620, 636 (N.D. Iowa 2000).

In the insurance context, however, de-termining the scope of work-product im-munity is more challenging because it isthe very nature of an insurer’s business toinvestigate and evaluate the claim. Thequestion therefore becomes, when an at-torney is retained to conduct an investiga-tion and advise on a coverage position, isthat the ordinary business of an insurer, oris it work product? As with most any issuein the law, whether it will be protected bywork-product privilege will depend on thespecific facts of the case.

Some courts have adopted a rebuttablepresumption based on whether a docu-

3

ment was prepared before or after the in-surer has made its claims decision. For ex-ample, in Harper, the court declared:

It is presumed that a document or thingprepared before a final decision wasreached on an insured’s claim andwhich constitutes part of the factual in-quiry into or evaluation of a claim, wasprepared in the ordinary and routinecourse of an insurer’s business and isnot work product.

Harper, 138 F.R.D. at 662-663. Con-versely, documents created after a denial isissued are presumed to be work product.Id. In order to rebutt this presumption, theinsurer must demonstrate “by specific evi-dentiary proof of objective facts” that “areasonable anticipation of litigation existedwhen the document was produced, andthat the document was prepared and usedsolely to prepare for that litigation.” Id. at663-664. This presumption was adoptedby the court in Pete Rinadli’s Fast Foods v.Great Am. Ins. Co., 123 F.R.D. 198, 202(M.D.N.C. 1988) as follows:

Because an insurance company has aduty in the ordinary course of businessto investigate and evaluate claims madeby its insureds, the claims files contain-ing such documents usually cannot beentitled to work product protection.Normally, only after the insurancecompany makes a decision with respectto the claim, will it be possible for thereto arise a reasonable threat of litigationso that information gathered thereaftermight be said to be acquired in antici-

The Attorney’s Role during the Adjustment of an Insurance Claim

pation of litigation. This is not to saythat the threat of litigation may neverarise at an earlier time. However, if theinsurer argues it acted in anticipation oflitigation before it formally denied theclaim, it bears the burden of persuasionby presenting specific evidentiary proofof objective facts demonstrating a re-solve to litigate.

But other courts have rejected the Harp-er presumption as too mechanical. For ex-ample, in Anastasi v. Fidelity National TitleInsurance Co., 137 Haw. 104, 114 (2016),the Hawaii Supreme Court declared:

the Harper presumption does not fitsquarely with the [work-product] privi-lege as laid out in HRCP Rule 26, be-cause it focuses not on whether materialwas prepared in anticipation of litigationor for trial, but on whether material wasprepared before or after a formal deter-mination has been made on a claim.Nowhere in the rule is there referenceto when a document is prepared. In-stead, the rule clearly focuses on thepurpose of the prepared material and noton when it is prepared.

Whether or not the Harper presump-tion is adopted, what remains clear is thatthe determination of whether applicationof the work-product immunity applies de-pends on the facts of the particular case.One such context where it often arises is aclaim of arson. In Harper, the defendanttook the position that it reasonably antici-pated litigation on the date of the fire and

4

that all documents were protected as workproduct. The court concluded that a find-ing that the fire was “arson” was notenough, in and of itself, to anticipate litiga-tion. The court also concluded that Auto-Owners investigation into the fire was notundertaken and used solely to prepare forlitigation, but rather that it was under a du-ty to conduct an investigation as part of itsregular business. Ultimately, the court inHarper concluded that the documents pre-pared prior to the date the insurer deniedthe claim were not protected and thoseprepared after the denial were presumed tohave been produced in reasonable antici-pation of litigation.

However, often times a question canarise if a document has a “dual-purpose”.For instance, what happens if a documentis created to both evaluate a claim and pre-pare for litigation? The most common ap-proach will be to determine if the “primarymotivating purpose” behind the creationof the document was to aid in preparationfor litigation. Stout v. Illinois Farmers Ins.Co., 150 F.R.D. 594, 601 (S.D. Ind.1993). The court in Stout concisely articu-lated the rule as follows:

If a document or thing would havebeen created for non-litigation uses re-gardless of its intended use in litigationpreparation, it should not be accordedwork product protection. Because thedocument would have been created fornon-litigation reasons anyway, disclosureof the information therein would not dis-advantage its creator, or advantage his op-

The Attorney’s Role during the Adjustment of an Insurance Claim

ponent, by revealing the creator’s legalstrategy or tactics; thus, the document’s re-lease in discovery would not contravenethe policies support the work product rule.

Thus, there is no hard and fast rule todetermine the point in time in which adocument is created which will protect itunder the work-product privilege. Rather,courts will typically look at cases on a case-by-case basis to determine factors whichinclude the nature of the document andthe purpose of the creation of the docu-ment. However, in the insurance context,it is more likely that documents createdbefore the denial of the claim will qualify asdocuments created in the ordinary courseof business and cannot be protected fromdisclosure as work-product.

In the context of bad faith insurancelitigation, there is often a “substantialneed” for discovery of the claim file. See Inre Lake Lotawana Cmty. ImprovementDist., 563 B.R. 909, 916 (W.D. Mo.2016). See also Lloyd’s Acceptance Corp.v. Affiliated FM Ins. Co., 2012 WL1389708, at *5 (E.D. Mo. April 23, 2012).Notably, the mere allegation of bad faith isinsufficient to overcome the work productimmunity. Typically, the insured mustdemonstrate some likelihood or probabili-ty that the documents sought may containevidence of bad faith. Logan v. Commeri-cal Union Ins. Co., 96 F.3d 971, 977 (7thCir. 1996). But this is not a high hurdle, asthe insured need only show the possibility,not a certainty, that the claim documentscontain evidence of bad faith. Id.

5

Additionally, experts’ knowledge may,or may not, qualify for protection fromdisclosure under the work product doc-trine. An expert must be retained or a doc-ument prepared because litigation was rea-sonably anticipated, and a court willconsider the totality of circumstances.There must be “objective facts establishingan identifiable resolve to litigate prior toinvestigative efforts before the work prod-uct doctrine becomes applicable.” Binks.Mfg. v. Nat’l Presto Indus., Inc., 709 F.2d1109, 1119 (7th Cir. 1983).

Lastly, it is important to note that workproduct protection is procedural; whereasthe attorney client privilege is a matter ofsubstantive law. As such, the application ofattorney client privilege may differ amongstates. And while federal courts will applythe applicable state’s law on privilege whena matter is pending in federal court baseddiversity jurisdiction, federal courts willapply their own law on work product im-munity.

Attorney-Client Privilege

Under Federal Rule of Civil Procedure26 and similar state equivalent rules, privi-leged material is not (generally) discover-able. What constitutes a privileged com-munication between client and attorney isa matter of state law, but generally speak-ing, a party asserting the attorney-clientprivilege must show:

(1) The asserted holder of the privilegeis or sought to become a client; (2) the

The Attorney’s Role during the Adjustment of an Insurance Claim

person to whom the communicationwas made (a) is a member of the bar ofa court, or his subordinate and (b) inconnection with this communicationis acting as a lawyer; (3) the communi-cation relates to a fact of which the at-torney was informed (a) by his client(b) without the presence of strangers(c) for the purpose of securing primar-ily either (i) an opinion on law or (ii)legal services or (iii) assistance in somelegal proceeding, and not (d) for thepurpose of committing a crime or tort;and (4) the privilege has been (a)claimed and (b) not waived by the cli-ent. Diversified Ind. Inc. v. Meredith,572 F.2d 596, 601-602 (8th Cir.1977).

Once again, the question of whetherthe attorney-client privilege applies iscomplicated in the insurance context. TheFlorida Court of Appeals in Bankers Ins.Co. v. Florida Dept. of Ins. and Treasury,755 So.2d 729 (Fla. Dist. Ct. App. 2000)held that an insurer’s communications withan attorney, who was hired as an investiga-tor for an insurance company were notprivileged because the attorney functionedas a mere “conduit.” The attorney-clientprivilege only attaches when an attorneyperforms acts for an insurer in his/her pro-fessional capacity and in anticipation of lit-igation. Milinazzo v. State Farm Ins. Co.,247 F.R.D. 691, 697 (S.D. Fla. 2007).Thus, often times the question of when theattorney-client privilege attaches goes backto the issue of when anticipation was rea-sonably anticipated. 1550 Brickell Ass’n v.

6

QBE Ins. Co., 253 F.R.D. 697, 699-700(S.D. Fla. 2008).

In Harper, the court noted that Auto-Owners hired outside counsel five days afterthe fire to monitor the progress of the claim,ensure compliance with arson reporting re-quirements, and conduct examinations un-der oath per the policy. As such, the courtnoted that to the extent that counsel acted asa claims adjuster, claims process supervisor,or claim investigation monitor, and not aslegal advisor, the attorney-client privilegewould not apply. Harper, 138 F.R.D. at671 citing Mission National, 112 F.R.D. at163. Additionally, if a document was pre-existing or otherwise not produced for thepurpose of obtaining or communicating le-gal advice, it does not become privilegedmerely because it was passed on, orthrough, an attorney in the course of repeti-tion. Stout, 150 F.R.D. at 610.

Therefore, in order to determinewhether the attorney-client privilege at-taches, the question really focuses on thepurpose of the retention and legal servicesrendered. Thus, generally speaking in theinsurance context, for the attorney-clientprivilege to apply, the attorney must be act-ing in his professional capacity as an attor-ney, and not performing an insurer’s “quasifiduciary” responsibilities to investigate aclaim or loss. So, for example, answering aclient’s question regarding the law govern-ing insurance claims and the application ofpolicy terms to a given loss or claim willqualify as acting within one’s professionalcapacity as an attorney. But gathering facts

The Attorney’s Role during the Adjustment of an Insurance Claim

from a third party regarding the loss is with-in the purview of a claim investigation.

The attorney client privilege is waivedwhen the client voluntarily reveals an at-torney client communication to a personoutside the scope of the attorney client re-lationship. Further, as a general rule, a par-ty impliedly waives the privilege when itexpressly relies on the advice of counsel asa defense to a claim against it. ChevronCorp. v. Pennzoil Co., 974 F.2d 1156,1162 (9th Cir. 1992).

In Cedell v. Farmers Ins. Co. of Wash-ington, 295 P.3d 239 (Wash. 2013), theWashington Supreme Court held that, inthe context of a lawsuit alleging bad faithhandling and processing of a “first party”claim (other than UIM):

1. There is a presumption of no attor-ney-client privilege; and

2. If the presumption is rebutted, theinsured can attempt to “pierce” theprivilege with the “civil fraud ex-ception.”

The Cedell case involved a first-partyclaim on a homeowner’s policy for a housefire, and an allegation that the insurer hadviolated its duty of good faith claims han-dling of the fire-loss claim. The insurer re-tained counsel during the claims process,and that attorney examined witnesses un-der oath, directly interacted with the in-sured during the claims process, issued acoverage position letter on behalf of the

7

insurer, and made a time-limited settle-ment offer to the insured.

Cedell was insured with Farmers forover 20 years. It appears that the insured re-ported the fire, which was caused by a can-dle, to Farmers within two days. The in-sured’s girlfriend, who was not an insured,admitted that she and others in the housemay have been using methamphetamines atthe time. However, Cedell swore underoath that he had not consumed metham-phetamines and did not know his girlfriendhad. According to the opinion, Farmers de-layed its coverage determination based uponinconsistencies in statements by the in-sured’s girlfriend (apparently regarding theuse of methamphetamines).

Although Washington courts have longheld that normal claims handling functionscannot be shielded with attorney-clientprivilege by retaining an attorney to per-form them, the Cedell court held there is a“presumption” of no attorney-client privi-lege whenever an insurer is sued for badfaith handling of a first-party claim (thecourt excepted UIM claims from this new-ly created presumption).

The court’s rationale was as follows: (1)“To permit a blanket privilege in insurancebad faith claims because of the participa-tion of lawyers hired or employed by in-surers would unreasonably obstruct dis-covery of meritorious claims and concealunwarranted practices.” And, (2) “… badfaith claims by insureds against their owninsurer are unique and founded upon two

The Attorney’s Role during the Adjustment of an Insurance Claim

important public policy pillars: that an in-surance company has a quasi-fiduciary du-ty to its insured and that insurance con-tracts, policies, and procedures are highlyregulated and of substantial public impor-tance.”

The Cedell presumption does not doanything more than implement the normalrule that a party claiming privilege has theburden of establishing the facts constitutingthe foundation for the privilege. The in-surer may overcome the presumption up-on a showing in camera that the attorneywas providing legal counsel to the insurer(e.g., a coverage opinion) and was not en-gaged in the insurer’s quasi-fiduciary func-tions, such as investigating and evaluatingthe claim. See, See Restatement (Third) ofthe Law Governing Lawyers §86(2)(2000).

If the presumption of no attorney-clientprivilege is rebutted, the insured may at-tempt to “pierce” the privilege. Historical-ly, the attorney-client privilege has not pro-tected communications wherein theattorney and client are discussing how tocommit fraud. This is known as the “civilfraud exception” to attorney-client privi-lege. In Cedell, for “first-party” insurers,the Washington Supreme Court endorsed atwo-step process to assess the civil fraud ex-ception:

1. First, upon a showing that “a rea-sonable person would have a rea-sonable belief that an act of bad faith[tantamount to civil fraud] has oc-

8

curred,” the trial court will performan in camera review of the claimedprivileged materials.

2. Second, after in camera review andupon a finding that there is “a foun-dation to permit a claim of bad faithto proceed,” the insurer’s attorney-client privilege “shall be deemed tobe waived.”

Generally speaking, the insured is enti-tled to discover the claims file, but it willnormally involve redactions of communi-cations from counsel that reflected themental impressions of the attorney to theinsurer. The insured will be required tosatisfy a much higher burden in order todiscover such mental impressions.

Conclusion

Ultimately, the application of the workproduct doctrine and attorney client privi-lege are unique in the context of an attor-ney who represents an insurer and is work-ing both as an attorney and claims adjuster.If you find yourself in such a position, orseeking to discover materials in analogoussituation, here are some strategies to con-sider:

• Understand what constitutes a privi-leged communication between at-torneys and their clients.

• Attorneys providing legal advice toinsurance companies should bemindful when timekeeping.

The Attorney’s Role during the Adjustment of an Insurance Claim

• Attorneys should not perform ‘claim’functions, even when litigating withthe insured, if they wish to maintainthe confidentiality of their work.

• ‘Claim functions’ should still be han-dled directly between insurer and in-sured, even where insurer has re-tained counsel in a matter, topreserve the privilege.

• Counsel should use appropriatelydescriptive language when provid-ing advice to insurers regarding thehandling of a claim.

• Challenge / determine the basis andscope of the bad faith claim early,before discovery becomes an issue.

• Challenge relevancy in discovery.

* * *

Christina Phillips, Esq.Merlin Law Group181 W Madison, Suite 3475Chicago, IL 60602Office: 312-260-0806

For more information on Ms. Phillips,see her profile on the Merlin Law Groupwebsite.

9

Jacquelyn A. Beatty, Esq.,CPCU, ARM, CLMP

Karr Tuttle Campbell701 Fifth Avenue, Suite 3300Seattle, WA 98104Direct: 206-224-8090

For more information on Ms. Beatty,see her profile on the KTC website.

Malena DobalGladstone, Weisberg300 Corporate Pointe, Suite 400 Culver City, CA 90230Direct: 310-821-9000

For more information on Ms. Dobal,see her profile on the Gladstone Weisbergwebsite.

Brad BalentineDavid Morse330 North Brand Boulevard, Suite 230Glendale, CA 91203Phone: 800-649-7602Email: bbalentine@davidmorse.com

CommercialLiability InsuranceThe #1 Resource for Agents, Brokers,Underwriters, Risk Managers,

and Claims Adjusters!jRight Answers. Right Now.

Request A Demo Today!IRMI.com/go/ICLC-CLI