In Zurich American Ins. Co. v. The Superior Court of Los Angeles County, et al., No. B194793 (Cal. App., 2nd Dist., Oct. 11, 2007), an appellate panel reversed a lower court's order and held that the attorney-client privilege extends to communications between an insurer's employees regarding legal advice and strategy, even if such communications do not contain advice directly from counsel, when disclosure is reasonably necessary for the transmission of that information or to further the purpose of the legal consultation.
Watts Industries, Inc. and James Jones Co. asserted a bad faith action against Zurich seeking coverage for lawsuits arising from their alleged defective manufacturing of pipes that serviced a public utility. Watts requested production of several thousand documents from Zurich's claims files, which Zurich objected to based on the attorney-client privilege and work product doctrine. The parties eventually agreed to limit the number of contested documents to several hundred, many of which contained reserve or reinsurance information, and submitted them to a retired California Superior Court judge for in camera review. The referee concluded that only documents created by counsel or involving direct communications between Zurich and its counsel were protected from disclosure. Notably, the referee found that documents circulated amongst Zurich's employees that discussed legal issues, strategy and the status of the bad faith litigation did not fall within the scope of the attorney-client privilege or the work product doctrine. After the lower court adopted the referee's discovery recommendations, Zurich sought a writ of mandate from the appellate court to compel the lower court to vacate its discovery order.
The appellate court held that communications between Zurich's employees that discussed legal advice or strategy were protected by the attorney-client privilege, even if such communications did not directly involve counsel, so long as the information was transmitted to persons to whom disclosure was reasonably necessary for the transmission of that information or to accomplish the purpose for which the lawyer was consulted. As such, the appellate court directed the lower court to vacate its prior order concerning discovery and to conduct a new review of the disputed documents applying this standard.