Insurers increasingly are using law firms rather than traditional in-house personnel as claim handlers, particularly on major claims by business insureds. Insureds are negatively impacted in two significant ways.
First, law firms tend to be very aggressive about denying coverage claims, which is perhaps not surprising given their ethical obligation to be “zealous advocates.”
Second, in the event of coverage litigation, insurers argue that the activities of their law-firm claim handlers are immune from discovery based on the attorney-client privilege or the work-product doctrine.
Insurers’ increasing use of law firms as claim handlers represents an intentional strategy to stack the deck in the insurers’ favor at the point of claim. It dramatically undercuts the value of the insurance that businesses rely on to protect themselves from claims and losses. It results in unfair denials of covered claims. It imposes enormous unjustified costs on insureds. It shields insurer business decisions from proper scrutiny.
A federal magistrate judge in a case I handled for an insured got it right in requiring an insurer’s outside counsel to turn over her work files. He concluded that “opinion work product is discoverable in this case because [the insured] has demonstrated that the mental impressions and opinions of [the attorney claim handlers] are at issue and the need for the material is compelling.” Perhaps not coincidentally, soon after this ruling, the case settled.
Insurers should not be permitted to shield their ordinary business functions from scrutiny in this fashion. Insurer claim handling should always be conducted in the sunshine, regardless of the fact that attorneys may have performed it.
Here are some key reasons why:
Claim handling is a business function that insurers owe to their insureds, not a legal function for the benefit of the insurers. The business function includes investigating claims and losses, defending the insured against potentially covered third-party claims, evaluating the scope of potentially applicable coverage, and the like. Claim handling under insurance policies is distinct from representing insurers’ legal interests in eliminating or minimizing their coverage obligations. Insureds pay premiums to buy insurance protection, not disputes or even lawsuits with their insurers.
Attorneys’ ethical obligations to their insurer clients are incompatible with insurers’ claim-handling obligations to their insureds. Attorneys are obligated under rules of professional conduct to “zealously” represent their clients’ interests. Insurance claim handlers, in contrast, are legally obligated to carry out their duties in good faith. They must act, not with an eye to denying every claim possible or seeking advantage for the insurer, but rather in a fair and evenhanded manner. It is a fundamental principle that in handling claims for coverage, insurers must place their insureds’ interests at least on a par with their own.
Insurers cannot have it both ways: If attorney claim handlers are acting in a legal capacity on behalf of insurers, the insurers are in breach of their fundamental contractual and claim-handling obligations and are subject to substantial damages for bad faith. If attorney claim handlers are not acting in a legal capacity but are merely performing the insurers’ business obligations, there is no basis for insurers to argue that the attorney-client privilege or the work-product doctrine apply.
Understanding how insurers handled claims is relevant to rebutting the insurers’ denials of coverage, and thus insurers’ claim-handling practices are fully discoverable and admissible in coverage litigation. In the event of coverage disputes, determining the what, when, where, why, and how of insurer claim-handling is crucial to the insureds’ ability to fairly rebut insurer coverage positions and defenses. It is beyond dispute that insurer claim handling is at least potentially relevant to insureds’ claims for coverage. That is the standard test of discoverability. And to the extent that insurers’ claim-handling practices are inconsistent with their coverage obligations or positions, evidence of those practices is admissible as well.
Claim handling has traditionally been performed by non-legal personnel and shouldn’t be rendered confidential just because insurers are willing to pay law firms’ substantial hourly rates to perform it. Claim handling traditionally has been performed by in-house claim personnel who are not necessarily lawyers. Since being a lawyer is not a necessary qualification for a claim handler, insurers should not be permitted to shield claim handling from discovery merely because the insurer is willing to pay law firms’ substantial hourly rates to perform it. Allowing such a shield would impermissibly empower insurers to decide the scope of discovery against them.
Insurers retain lawyers as claim handlers before there is any dispute. Insurers increasingly are retaining lawyers as claim handlers immediately upon receiving notice of claims, before they have conducted any investigation or analysis of the claims. They have no basis at that stage to believe that the claims are not covered or that legal disputes will ensue. They may even be acting in bad faith by assuming claims are not covered before they have investigated the relevant facts in light of the coverage at issue. In any event, they cannot preclude discovery merely because disputes or litigation could or later do occur.
Insurers say their policies are clear, so they don’t need attorney claim handlers. Insurers contend that their policies are clear to avoid the universal rule that ambiguous policy language drafted by insurers must be construed in favor of coverage. If insurers contend that only lawyers can evaluate coverage under policies the insurers drafted, they effectively admit that the policies are inherently ambiguous and must be construed against them. Put simply, either the policies are clear, in which case insurers don’t need lawyers to construe and apply them; or the policies are (at best for the insurers) ambiguous, in which case they must be construed against the insurers and in favor of coverage. Again, insurers cannot have it both ways.
Insurers can obtain separate counsel to represent their legal interests. It is a red herring for insurers to argue that permitting discovery of the activities of attorney claim handlers interferes with insurers’ ability to obtain confidential legal advice and analysis. Nothing prevents insurers from hiring separate counsel to provide them with legal advice and analysis. But they cannot hide their ordinary business activities behind a veil of secrecy simply because they are willing to pay attorneys to perform those business activities.
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To sum up, no party to an ordinary contract can shield its business activities from scrutiny by the simple expedient of hiring lawyers to perform them. Because fairly construing and applying insurance policies is the essence of insurers’ business obligations to their insureds, insurers have even less claim to confidentiality than other parties to commercial disputes.
Insurer claim-handling activities, whether performed by lawyers or non-lawyers, should be fully transparent. In the event of coverage litigation, insureds should be granted full access to claim-handling documents, communications, and information generated by their insurers. Insurers should not be permitted to invoke the attorney-client privilege or the work-product doctrine as both a sword and a shield to gain unfair business and litigation advantages over their insureds.