Typically, insurers will send periodic reports to their insureds regarding the status of pending workers compensation bodily injury claims and other, insured matters. Such reports may contain frank assessments of the strengths and weaknesses of the claim. If written by counsel, insurers and their insureds usually assume that the reports are privileged from disclosure to the claimant. However, in In re XL Specialty Insurance Company and Cambridge Integrated Services Group, Inc., Realtors, Case No. 10-0960, 2012 Tex. LEXIS 568 (Tex. June 29, 2012), the Texas Supreme Court ruled that reports from counsel for the carrier to the insured are not privileged from discovery in a subsequent case that the injured worker filed against the insurer for unfair and deceptive practices. The court did not discuss whether the reports also might be discoverable in the underlying workers compensation proceeding.
In Texas, the insurance carrier, rather than the insured employer, is the named party to the workers compensation claim. As a result, the XL Specialty court had to decide whether or not the so called “common interest” privilege applied to protect the insurer’s reports from discovery. The court distinguished the commonly invoked “joint interest” privilege, which the court characterized as an “allied litigant” privilege that applies when all parties to the privileged communications are actively engaged in the litigation, from the “common interest” privilege, which some courts apply to protect communications with non-parties who have common interests in the litigation. The court ruled that the common interest privilege did not apply because the Texas privilege rule only protected communications between parties to a “pending action.” Because the insured was not a party to the workers’ compensation case, the allied litigant privilege did not bar discovery of the insurance carrier’s reports.
What are the ramifications of this ruling? Certainly, in Texas, even if limited to workers’ compensation proceedings under the somewhat unique Texas workers compensation scheme, the ruling could open the door to discovery of a broad range of insurer-insured communications in any subsequent case against the insurer, if those communications were made to an insured who was not or is not a party to pending litigation. Alternatively, what if the insured is sued by the injured worker for an intentional tort, as recognized in an increasing number of states, or by a non-worker, third party injured in the same accident? Would adjuster or lawyer status reports and other communications exchanged in the underlying workers compensation matter be discoverable in a subsequent case in which the insured, but not the insurer, is the defendant?
The XL Specialty court decided that in “certain circumstances,” such as when the communications at issue relate to potential litigation and are transmitted to a lawyer retained to represent the insured, that the privilege would apply. No privilege applies, however, if the insured “was not a party to the litigation or any other related pending action.” In light of the “substantial” deductible in the XL policy, the court noted that the policyholder “may have shared a joint interest with the XL….,” but held that “no matter how common… [those] interests might have been, our rule requires that the communication be made to a lawyer or her representative representing another party in a pending action.” (emphasis in original). In other words, in Texas, there is no, general “insurer/insured” common interest privilege. As a result, if the communications sought to be protected are not made to insurance defense counsel retained to represent the insured; and if the insured is not a party to the pending action, the communications are not privileged from disclosure.
It is uncertain whether or not the outcome in the XL Specialty case will be followed in other jurisdictions where the “joint defense” and “common interest” privileges are subject to a “pending litigation” requirement (the Texas court identified at least five other states with similar privilege rules). When faced with the threat of potential litigation arising out of workers compensation or perhaps other, administrative proceedings, insurance carriers and their insureds should be cautious when exchanging confidential information that might later be discoverable in subsequent litigation. Consideration should be given to whether or not execution of a confidentiality agreement documenting the community of interest/ joint interest in minimizing the threat of such potential litigation may assist in protecting information exchanges from future discovery. See E. Kneisel and J. Hannah, “Using the Common Interest Doctrine to Protect Insured-Insurer and Insured-Broker Communications,” 2003 Construction Law Update (N. Sweeney, ed. 2003).