Reports and related materials prepared by outside counsel for their insurer clients in investigation of a claim or determination of coverage are not protected by the attorney work product doctrine, the attorney-client privilege, or the common interest privilege, a New York trial court recently held.

The insured, TransCanada, maintained a steam turbine power generating facility in Queens, New York. When one of the generators cracked and had to be shut down for several months, TransCanada filed claims for repair costs and business interruption losses with four of its property insurers (collectively part of a “quota share” program). Working together, the insurers hired experts – including attorneys and adjustors – to investigate the claim and determine the extent of coverage. All of the insurers ultimately denied coverage and jointly filed a declaratory judgment action against TransCanada.

TransCanada then sought to obtain reports and related materials prepared by the insurers prior to their denial of coverage. The insurers objected, arguing that the documents were protected by the attorney work product doctrine, the attorney-client privilege, and the common interest privilege. After an in camera review, a special referee ruled that the reports must be produced. The insurers appealed to the trial court.

As to the attorney work product doctrine, the court noted that the doctrine applies only to documents prepared in anticipation of litigation. Most of the reports the insurers sought to protect, the court opined, were prepared prior to any “firm decision” by the insurers to deny coverage, and therefore could not have been prepared in anticipation of litigation. Indeed, the evidence demonstrated that the insurers were considering coverage until just before they issued their denial and filed their declaratory judgment action. Moreover, the court held, the insurers bore the burden of proof on the timing of the “firm decision.”

As to the common interest privilege, the court held that this privilege also does not apply until there has been a “firm decision” by the insurer regarding the extent of coverage.

As to the attorney-client privilege, the court noted that attorneys supervised, coordinated, and directed investigation of the TransCanada’s claims, and then summarized the findings in reports. However, the court opined, the mere use of attorneys to generate the reports did not render them protected by the attorney-client privilege. Indeed, “[t]he attorneys were primarily working to determine whether to deny coverage, an ordinary business activity for an insurance company,” the court held, as opposed to providing legal advice to their clients. Because “[i]nsurance companies investigate claims and decide whether to accept or deny coverage as part of their regular business activities,” the court held, “courts have consistently held that the use of attorneys to perform such work does not cloak the documents in privilege.”

The court did note, however, that a handful of the materials at issue contained legal advice, and certain draft denial letters constituted attorney work product because the decision to deny coverage had been made prior to their creation. These materials, the court held, would not have to be produced.

To read the opinion in National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, click here.

Why it matters: The issue of whether materials related to an insurer’s claim investigation and coverage determination are protected from discovery is litigated frequently. This decision has a lot to like for policyholders. Drawing a bright line, the court ruled that insurance companies must make a “firm decision” to deny coverage before they can invoke the attorney work product doctrine (or the common interest privilege), and the insurer bears the burden of proof on the timing of the decision. Application of the attorney-client privilege turns on whether the materials at issue were prepared as part of an insurer’s ordinary course of business. Because investigating claims and making coverage determinations are part of an insurer’s ordinary course of business, they were held not to be privileged.