1999 Fall - Insurance Newsletter
October 1, 1999

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PREPARING TO BE DEPOSED: ATTORNEYCLIENT PRIVILEGE CONSIDERATIONS FOR IN-HOUSE COUNSEL AT INSURANCE AND REINSURANCE COMPANIES 1

I. The Privilege

The attorney-client privilege has been succinctly described as follows: (1) Where legal advice of any kind is sought, (2) from a professional legal adviser is his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are at his insistence permanently protected, (7) from disclosure by himself or by the legal adviser, (8) except where the protection be waived.

8 John Henry Wigmore, Evidence in Trials at Common Law § 2292 (McNaughton rev. 1961). In other words, attorney-client privilege protects information communicated confidentially by the client to an attorney “for the purpose of securing primarily an opinion of law or legal services or assistance in a legal proceeding.” Hydraflow, Inc. v. Enidine Inc., 145 F.R.D. 626, 630 (W.D.N.Y. 1993); see United States Postal Service v. Phelps Dodge Refining Corp., 852 F. Supp. 156, 159 (E.D.N.Y. 1994) (“The attorney-client privilege protects confidential disclosures by a client to an attorney made in order to obtain legal assistance”) (quoting Fisher v. United States, 425 U.S. 391, 403 (1976)). Generally, it also protects “communications from the attorney to the client which include legal advice or reflect information provided by the client in confidence.” Fine v. Facet Aerospace Products Co., 133 F.R.D. 439, 444 (S.D.N.Y 1990) (emphasis added). 2

It does not, however, “protect either the client’s knowledge of relevant facts or facts learned by the attorney from independent sources.” Asset Value Fund Limited Partnership v. The Care Group, Inc., No. 97 Civ. 1487 (DLC) (JCF), 1997 WL 706320, at *1 (S.D.N.Y. Nov. 12, 1997) (citing Upjohn Co. v. United States, 449 U.S. 383, 395-96 (1981); Spectrum Systems International Corp. v. Chemical Bank, 78 N.Y.2d 371, 377, 581 N.E.2d 1055, 575 N.Y.S.2d 809, 814 (1991)). “Nor does the privilege extend to business advice, even if provided by an attorney.” Id. at *1. As discussed by Judge Friendly, in his opinion in United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961), “[w]hat is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer”. (emphasis in original).

II. Applicability to In-House Counsel

While issues often arise during questioning of in-house counsel with regard to the capacity in which he/she may have acted for purposes of determining whether his/her communications with other corporate employees are privileged, or whether the privilege has been waived, the law is clear that the attorney-client privilege protects communications between corporate employees and in-house counsel. Upjohn Co. v. United States, 449 U.S. 383, 390-91 (1981). “It has been emphasized, however, that ë[t]he attorney-client privilege attaches only when the attorney acts in that capacity’.” Borase v. M/A COM, Inc., 171 F.R.D. 10, 14 (D. Mass. 1997) (quoting Texaco Puerto Rico v. Department of Consumer Affairs, 60 F.3d 867, 884 (1st Cir. 1995)).

III. Burden of Establishing Existence of Privilege

A fundamental tenet of the attorney-client privilege is the belief that its existence encourages observance of the law and aids in the administration of justice “[b]y promoting full and frank communications between attorneys and their clients.” Montgomery v. Leftwich, Moore & Douglas, 161 F.R.D. 224, 225 (D.D.C. 1995) (citing Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 348 (1985)). However, because it “'has the effect of withholding relevant information from the fact-finder'” and thereby obstructing the truth finding process, the courts have held that it should be narrowly construed. United States v. Zolin, 491 U.S. 554, 562 (1989) (quoting Fisher v. United States, 425 U.S. 391, 403 (1976)). See Fine v. Facet Aerospace Products Co., 133 F.R.D. 439, 443 (S.D.N.Y. 1990) (“the New York courts recognize that the attorneyclient privilege obstructs the truth finding process . . . .”). The burden of proving the elements necessary to sustain invocation of the privilege thus falls upon the party seeking to invoke it. Bowne of New York City, Inc. v. AmBase Corp., 150 F.R.D. 465, 470 (S.D.N.Y. 1993).

“Accordingly, if an in-house counsel has other nonlegal responsibilities, the party invoking the privilege has the burden of producing evidence in support of its contention that in-house counsel was engaged in giving legal advice and not in some other capacity at the time of the disputed conversations.” Borase v. M/A COM, Inc., 171 F.R.D. 10, 14 (D. Mass. 1997). And to do so, the party asserting the privilege must make a “clear showing” that “precise facts” exist to support the claim of privilege. See In re Sealed Case, 737 F.2d 94, 99 (D.C. Cir. 1984) (“The Company can shelter C’s advice only upon a clear showing that C gave it in a professional legal capacity”); Ames v. Black Entertainment Television, No. 98 Civ. 0226 (LMM) (AJP) 1998 WL 812051, at *8 (S.D.N.Y. Nov. 18, 1998), (“Because an in-house attorney, particularly one who holds an executive position in the company, often is involved in business matters, in order to demonstrate that the communication in question is privileged, the company bears the burden of ëclearly showing’ that the inhouse attorney gave her advise in her legal capacity, not in her capacity as a business advisor”); North Carolina Electric Membership Corp. v. Carolina Power & Light Co., 110 F.R.D. 511, 515 (M.D.N.C. 1986) (party invoking privilege “must provide the court with enough information to enable the court to determine privilege, and the proponent must show by affidavit that precise facts exist to support the claim of privilege”) (citations omitted).

Questioning of in-house counsel is thus focused in great detail upon the factual circumstances surrounding the in-house counsel’s non-legal job responsibilities and the communications at issue to enable the questioner to contest the assertions of privilege made. See Protective National Ins. Co. Of Omaha v. Commonwealth Ins. Co., 137 F.R.D. 267, 280 (D. Neb. 1989) ( recognizing the right to examine underlying facts, while protecting thought process under the privilege).

IV. Bases for Avoiding Invocation of Attorney- Client Privilege

A. Waiver

The first area of questioning with regard to purportedly privileged communications often addresses the issue of confidentiality. If a third party is present, or if the communications have been disclosed to third parties, that will not necessarily vitiate the privilege, as there are individuals the court considers agents of the attorney in certain circumstances, or individuals or entities who reasonably should be expected to maintain the confidentiality of the communication. See United States v. Schwimmer, 892 F.2d 237, 243 (2d Cir. 1989), cert denied, 502 U.S. 810 (1991) (noting that the attorney-client privilege extends to “communications made to certain agents of an attorney . . . hired to assist in the rendition of legal services”). 3

The privilege also is not waived by disclosure to third parties with a “common interest.” See. e.g., Rayman v. American Charter Federal Savings & Loan Association, 148 F.R.D. 647, 654 (D. Neb. 1993) (holding that disclosure of attorney-client privileged litigation reports to planned merger partner when litigation was anticipated did not constitute waiver as planned merger partner had “common interest”). As discussed in Allendale Mut. Ins. Co. v. Bull Data Systems, Inc., 152 F.R.D. 132, 140 (N.D. Ill. 1993), “where the third-party shares a common interest with the disclosing party which is adverse to that of the party seeking discovery, any existing privilege is not waived.” It has been recognized that “a common interest can exist between entities in a variety of circumstances, including that of an insurer and its reinsurers”. Id. The key consideration is that the nature of the legal interest be identical, not similar, and be legal, not solely commercial.” Rayman v. American Charter Federal Savings & Loan Association, supra, 148 F.R.D. at 654. However, where the individual is not part of the attorney’s “team”, or otherwise someone who would be expected to maintain the confidentiality of the communication, the communication will not be viewed as “confidential”, any privilege that otherwise would have attached will be deemed “waived”, and the communication may be explored in full. ECDC Environmental, L.C. v. New York Marine and General Ins. Co., No. 96 Civ. 6033 (BSJ)(HBP), 1998 WL 614478, * (S.D.N.Y. June 4, 1998) (“Voluntary disclosure to a party outside the privilege destroys the attorney-client privilege because it destroys the confidentiality of the communication”); Westinghouse Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414, 1424 (3d Cir. 1991) (accord); United States v. South Chicago Bank, Nos. 97 CR 849-1, 97 CR 849-2, 1998 WL 774001, at * 3 (N.D. Ill. Oct. 30, 1998)(accord).

An example of where this issue can come into play is Aetna Casualty and Surety Co. v. Certain Underwriters at Lloyds’ of London, 176 Misc.2d 605, 676 NY.S.2d 797 (Sup. Ct., N.Y. County, 1998), affirmed, 1999 WL 447522 (N.Y. App. Div., 1st Dep’t, July 1, 1999). In that case, Aetna, the plaintiff, had written general liability policies, faced substantial environmental claims losses from one of its insureds, and after initially disclaiming, settled . Aetna then sought to recover from its reinsurers, certain Lloyd’s underwriters. In the suit with its reinsurers, Aetna sought to review minutes in their possession of meetings of the “ECRG,” the Environmental Claims Reinsurance Group, which consisted of various Lloyd’s Underwriters, some of which included the Lloyd’s reinsurers being sued by Aetna. Each of the meetings was attended by an American attorney or English solicitor, and was clearly intended to be privileged and confidential. And each dealt with the problems at issue with Aetna, namely the problems created by potentially huge losses to direct insurers in the United States which had ceded policies pursuant to blanket reinsurance treaties.

Although the subject of most of the meetings was the interpretation of the various treaty clauses that might be invoked by the primary insurers, the Court found nevertheless that the purpose of the meetings was predominantly to find business solutions to the problems, and there was “little if any legal advice” sought or given. Accordingly, the court refused to apply the “common interest” privilege to protect the minutes of the ECRG meeting from disclosure.

Questioning of in-house counsel thus focuses upon not only conversations which may have taken place concerning the communication in question and who was present during the communications, but also upon reports regarding the communication, or notes or summaries of the meeting at which the communication took place, and circulation of such reports to third parties. Questioning also focuses upon these reports for another purpose, because they can create a possible back door into exploring the communication. Generally, documents reviewed by the witness prior to his/her deposition to “refresh the witness’ recollection” can be examined by the questioner 4, and courts have held that review of the document to refresh the witness’ recollection prior to deposition constitutes a waiver of any privilege otherwise protecting the document from disclosure. See, e.g., McDonough v. Pinsley, 239 A.D.2d 109, 657 N.Y.S.2d 33 (1st Dep’t 1997); Timm v. The Mead Corp., No. 91 C 5648, 1992 WL 32280 (N.D. Ill. Feb. 7, 1992); Samaritan Health Services, Inc. v. Superior Court of Arizona, 142 Ariz. 435, 690 P.2d 154 (Arizona Ct. Apps., Div. 1, Dep’t A 1984); Bailey v. Meister Brau, Inc., 57 F.R.D. 11, 13 (N.D. Ill. 1972).

B. Implied Waiver by Placing Communication “At Issue”

In addition to “voluntary” waiver, “implied” waiver has been found where a party places the communication in question “at issue” by asserting a position “'the truth of which can only be assessed by examination of the privileged communication'.” Liberty Environmental Sys., Inc. v. County of Westchester, No. 94 Civ. 7431 (WK) (MHD), 1997 WL 471053, at *3 (S.D.N.Y. Aug. 18, 1997) (quoting In re Kidder Peabody Secs. Litig., 168 F.R.D. 459, 470 (S.D.N.Y. 1996)). See In re Pfohl Bros. Landfill Litigation, 175 F.R.D. 13, 24 (W.D.N.Y. 1997) (“[W]hen a party to a litigation takes an action which places information that is otherwise protected by the attorney-client or work product privilege ëat issue’, the asserted privilege is impliedly waived”). 5 Thus, for example, to the extent the “good faith” of the company is at issue, questions will be formulated for the purpose of exploring the role attorney-client communications and legal advice given may have played in the company’s decision making with regard to the actions at issue. Although efforts to apply “the at issue” waiver merely because the client’s state of mind is at issue will likely fail, when the client’s state of mind is at issue and reliance upon legal advice is claimed as a basis for the client’s state of mind, “at issue” waiver may be found. 6

C. Business v. Legal Advice Capacity

Lastly, the purpose of the communication will be explored, and whether it can properly be characterized a legal communication or if it was, instead, rendered predominantly for a business purpose or rendered by in-house counsel while functioning in a nonlegal capacity.

In-house counsel typically wears many hats. It is not in the least uncommon to find that general counsel Smith’s full title is “General Counsel, Executive Vice President and Secretary.” He /she also typically undertakes many roles and has numerous responsibilities, including both legal and business responsibilities. 7 Because, as discussed above, the attorney-client privilege does not protect “business advice,” questioning of in-house counsel will explore all of the witness’ job titles and responsibilities, including any committees served upon or directorships held, and the specific involvement of the witness in the company’s business operations, in great detail. It is this detail which will provide opportunities for the questioner to challenge, or avoid entirely, privilege objections made notwithstanding the fact that in-house counsel’s communications involved what the witness personally considered to be in the nature of “legal advice.”

The prevailing test applied in determining whether in-house counsel’s communications are privileged has been referred to as the “predominant purpose” test. Under this test, courts look to the predominant purpose of the communication, and weigh whether the advice in issue was given predominantly for a legal or a business purpose. 8 Where the purpose of the advice is predominantly grounded in a business purpose, the privilege will not apply. See ABB Kent-Taylor, Inc. v. Stallings & Co., Inc., 172 F.R.D. 53, 57-58 (W.D.N.Y. 1996) (“[T]here is no privilege for corporate counsel who is giving, or corporate employees who are seeking, predominantly business advice as opposed to legal advice”); Salstone v. General Felt Industries, No. 84 C 9976, 1986 WL 13738, at * 3 (N.D. Ill. Dec 4, 1986) (holding that document in which corporate secretary was also a lawyer gave “legal” advice was not privileged because “the predominant nature of the consultation in this memorandum is business oriented”); Durham Indus. Inc. v. North River Ins. Co., No. 79 Civ. 1705 (RWS), 1980 WL 112701, at *3 (S.D.N.Y. 1980) (“The test is whether the legal advice element predominates; even legal advice is unprivileged if it is incidental to business advice”). 9

In determining the purpose of the advice, the courts also look to the capacity within which the inhouse counsel is functioning. See Interphase Corp. v. Rockwell Int’l Corp., No. 3-96-CV-0290-L, 1998 WL 664969, at * 2 (N.D. Tex. Sept. 22, 1998) (“the attorney- client privilege does not apply when the attorney merely serves as a negotiator for the client, gives business advice, or acts as a business agent”) (applying California law); Texaco Puerto Rico, Inc. v. Dept. of Consumer Affairs, 60 F.3d 867, 884 (1st Cir. 1995) (“The attorney-client privilege attaches only when the attorney acts in that capacity”); North Carolina Elec. Membership Corp. v. Carolina Power & Light Co., 110 F.R.D. 511, 517 (M.D.N.C. 1986) (party seeking to assert privilege must show advice was given “in a legal, rather than business, capacity”); North Shore Gas Co. v. Elgin, Joliet & Eastern Railway Co., 164 F.R.D. 59, 61 (N.D. Ill. 1995) (“For the privilege to apply, however, the attorney must be involved in a legal, rather than a business, capacity . . . .”). Again, to the extent that he/she is seen to have acted in a nonlegal capacity, or predominantly in a business capacity, courts have concluded that the communications at issue cannot be deemed privileged. See, e.g., Georgia-Pacific Corp. v. GAF Roofing Manufacturing Corp., No. 93 Civ. 5125 (RAP), 1996 WL 29392 (S.D.N.Y. Jan. 25, 1996) (holding that in-house counsel’s involvement in transaction as “negotiator” for company placed him in a business capacity, and subjected his communications with management concerning his recommendations to disclosure); National Union Fire Ins. Co. v. Continental Illinois Group, Nos. 85 C 7080, 85 C 7081, 1988 WL 79513 (N.D. Ill. July 22, 1988) (requiring corporation’s General Counsel and Executive Vice President (“Brennan”) to testify about discussions at a Board of Director’s Meeting concerning the reasons why the Board decided to settle two securities fraud suits, why the Board chose not to allocate the settlement between the two claims, and why the Board consented to certification of the class in one of the suits, because the settlement was negotiated by outside counsel and the evidence indicated that “when Brennan met with the Board, he recommended a business decision (to settle and on certain terms) based on the advice of counsel”).

An examination of what underlying business or legal purposes may be involved is critical. In a decision by Magistrate Judge Peck last year in Ames v. Black Entertainment Television, No. 98 Civ. 0226 (LLM) (AJP), 1998 WL 812051 (S.D.N.Y. Nov. 18, 1998), the Court carefully considered not only the fact that there were business purposes to the inhouse counsel/executive’s conduct, but that the purposes could logically be distinguished, even in the course of what the witness herself viewed as overlapping inquiries. Thus, even though in-house counsel was also publisher of the company’s magazine, even though she testified to “investigating” claims of mismanagement of the magazine’s sales staff by an executive as well as rumors of an affair he was having with a sales employee, and even though she admitted that her investigation of the alleged mismanagement was undertaken in her role of publisher, the court found that her credible testimony that investigation of rumors of the affair were undertaken in her capacity as the company’s general counsel (to determine the company’s potential exposure to a sexual harassment suit) rendered her communications with corporate employees in this regard subject to (and protected by) the attorney-client privilege.

Similarly, In re Pfizer Inc. Securities Litig., No. 90 Civ. 1260 (SS), 1993 WL 561125, at * 3 (S.D.N.Y. Dec. 23, 1993), the court, in considering the applicability of the privilege to certain documents provided by Pfizer’s legal department in response to requests from the company’s controller, noted that “[t]he determination of whether a given document constitutes legal or business advice does not lend itself to a bright-line test for the two are often ëinextricably interwoven’” (quoting Hercules v. Exxon, 434 F. Supp. 136, 147 (D. Del. 1977)), and considered the purposes behind the request for the information— both express and implied. Holding that the absence of “explicit legal questions” posed by the controller division to the legal department did not necessarily result in a finding that the information provided in response was not privileged, the court noted that certain communications may contain an “implied request for legal advice based thereon.” Id. at * 6. Because the information requested sought information concerning prior Pfizer litigations—which the court found “could be valuable in rendering legal advice as to appropriate strategy for similar suits in the future”—the court concluded that documents containing specific information of this type (as opposed to aggregate data) would be privileged. Id.

V. Conclusion

In preparing to be deposed, in-house counsel must be careful to understand and articulate the delineation between what aspects of his/her work involve purely legal advice, and what aspects drift into the realm of business functions. Counsel must also give attention to possible waiver issues, and understand the potential ramifications of imprecision in testifying, and lack of preparationó which may lead to disclosure of matters that really should be privileged.

RECENT CASES OF NOTE BAD FAITH SUIT IS ALLOWED TO CONTINUE AGAINST INSURERS

In a strongly worded opinion, in 1999 WL 384197 (1st Dep’t, May 25, 1999), a unanimous four-judge panel of New York’s Appellate Division, First Department in Ansonia Associates L.P. v. Public Service Mutual Insurance Company, held that two insurers may have acted in bad faith when they refused to settle a case within the policy limits so as to expose their insured to punitive damages and thereby avoid paying anything on the claim. The court affirmed the lower court’s refusal to dismiss the bad faith claim.

The bad faith action had its underpinnings in a personal injury and wrongful death action arising from a roof collapse in a building in which Ansonia Associates was part owner. Ansonia Associates had a general liability insurance policy in the amount of $1 million with Public Service Mutual Insurance Company and excess coverage of $20 million under a policy issued by Federal Insurance Company. The parties in the underlying suit proposed a settlement which required contribution of $375,000 on behalf of Ansonia Associates. The insurers, however refused to pay and the remaining defendants settled without Ansonia Associates. During the liability trial, the jury found Ansonia Associates to be 80% responsible for the injuries for punitive damages. Ansonia Associates then settled the case for $1.5 million.

Subsequently, Ansonia Associates commenced a bad-faith action against the insurers seeking reimbursement in the amount of $1.5 million.

The insurers moved to dismiss, arguing that they could not have acted in bad faith since public policy precluded the recovery from them of a punitive damages award. Referring to this argument as “backwards logic,” the court noted that “there was only one wrong and it is entirely attributable to the misconduct of the insurer.” The court then upheld the New York rule that “where an insurer unjustifiably refuses to defend a suit, the insured may make a reasonable settlement or compromise of the injured party’s claim, and is then entitled to reimbursement from the insurer, even though the policy purports to avoid liability for settlements made without the insurer’s consent.” The court strongly criticized the insurers, stating that an insurer cannot place its financial interest above that of the insured and that an insurer’s “cavalier indifference to a potentially ruinous punitive damages award” could operate to destroy the insured’s right to receive the “fruits” of its insurance contract. –Jung Park

NEGLIGENT BROKER NOT LIABLE FOR COST OF DETERMINING COVERAGE

In Chase Manhattan Bank v. Kuh, 1999 WL 357504 (1st Dep’t, June 3, 1999), New York’s Appellate Division, First Department was asked to determine whether, in an action against an insurance broker whose negligence leads to a lack of coverage, an insured is entitled to recover attorneys’ fees expended in seeking a determination of coverage. Reversing the lower court’s denial of the broker’s motion to dismiss, the court answered the question in the negative.

Chase Manhattan Bank and Archer Motor Services entered into a service agreement in which Archer was to obtain insurance for all of Chase’s items in Archer’s possession. Pursuant to this agreement, Archer arranged for Chase to be named as an additional insured on an insurance policy procured through Archers broker; but the broker undervalued the property. When Chase submitted claims under the policy, the insurer refused to pay because of this material misrepresentation. Chase and Archer stated that the broker was not authorized to make such a statement undervaluing the property and both claimed that they were not aware of the misrepresentation until after the losses were incurred.

Subsequently, Chase commenced an action against the insurer for breach of contract and The insurer joined Archer as a party and counterclaimed against Chase and Archer for rescission due to the material misrepresentation. Chase then commenced a third-party action against the broker seeking the legal fees and expenses that Chase had incurred and would continue to incur in the litigation to determine coverage.

The lower court rejected the broker’s motion to dismiss Chase’s complaint to the extent that it sought legal fees and expenses incurred in the litigation. The Appellate Division, however, reversed and held that since the broker “stands in the shoes of the insurer as concerns liability to the insured,” the well settled “American Rule” that a successful party cannot recover legal fees unless authorized by parties’ agreement, statute or court rule, applies in the same manner as it would apply to an insurer. The court noted that although an insured can recover legal fees from the insurer if the insured is forced to defend a suit by the insurer to establish the insurer’s non-liability, here, the insured had commenced the action against the insurer. As such, legal fees were not recoverable

The dissent disagreed and argued that the case fell within the exception, as set forth in Schindler v. Lamb, 25 Misc.2d 810, 812, N.Y.S.2d 762 (N.Y.Sup. 1959), aff’d, 10 A.D.2d 826, 200 N.Y.S.2d 346 (1st Dept, 1960), aff’d, 9 N.Y.2d 621, 210 N.Y.S.2d 226 (1961), which provides that “[i]f, through the wrongful act of his present adversary, a person is involved in earlier litigation with a third person in bringing or defending an action to protect his interests, he is entitled to recover the reasonable value of attorneys’ fees and other expenses thereby suffered or incurred.” Thus, since the broker’s negligence led to the litigation between Chase and Archer, Chase was entitled to legal fees. The majority countered this reasoning by simply referring to the principle that a “broker stands in the shoes of the insurer as concerns liability to the insured” and therefore, the insurer was not a third party. –Jung Park