In a matter of first impression, the Ninth Circuit recently held that the attorney-client privilege does not apply to communications between an insurer and counsel before a claims decision is made. Creating a split with the Third Circuit, the Ninth Circuit held that the “fiduciary exception” to the attorney-client privilege should be extended to insurers that administer benefit plans governed by ERISA, and acting in a fiduciary capacity. See Stephan v. Unum Life Ins. Co. of Am., No. 10-16840l, --- F.3d ----, 2012 WL 3983767 (9th Cir. Sept. 12, 2012). This is a chilling decision for all practitioners who advise insurers of ERISA plans.

Mr. Stephan was a participant in a long-term disability plan (the “Plan”) sponsored by his employer by Thomas Weisel Partners (“TWP”), and insured by Unum Life Insurance Company (“Unum”). Mr. Stephan had a bicycling accident that resulted in a spinal cord injury, rendering him a quadriplegic and, therefore, permanently disabled. Though there was no dispute over his eligibility to receive benefits under the Plan, Mr. Stephan disputed Unum’s calculation of his pre-disability earnings, upon which his disability benefits were based. In calculating his earnings, Unum included only Mr. Stephan's monthly salary but not his annual bonus; Mr. Stephan's earnings, and therefore his disability benefits, would be much higher if the bonus were included.

At the heart of this case was the discovery of internal memoranda between Unum’s claims analyst and its in-house counsel regarding Stephan’s claim, and whether to include the annual bonus in the calculations. Though such internal memoranda would ordinarily be protected by the attorney-client privilege, Mr. Stephan argued that the “fiduciary exception” to the privilege permitted discovery of the memoranda because Unum is a fiduciary of the Plan. The “fiduciary exception” to the attorney-client privilege generally provides that an “ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.” United States v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999).

Judge Patel of the Northern District Court of California assumed that the “fiduciary exception” applied to fully-insured plans like the one at issue in this case, and then held that the internal correspondence was protected by the attorney-client privilege, and the fiduciary exception to the attorney-client privilege did not apply in this case.

The Ninth Circuit agreed that the “fiduciary exception” applies to wholly-insured ERISA plans but disagreed with the District Court’s holding that it is inapplicable in this case. The Court held that the justifications for excepting ERISA fiduciaries from attorney-client privilege apply equally to insurance companies. Stephan, 2012 WL 3983767, at *11. The Court noted that there are two rationales for applying an exception to the attorney-client privilege to ERISA fiduciaries. Id. First, some courts “have held that the exception derives from an ERISA trustee’s duty to disclose to plan beneficiaries all information regarding plan administration.” Id. The Court noted that, on this view, “the attorney-client privilege is subordinated to the fiduciary’s disclosure obligation.” Id. Second, other courts have reasoned that “because the ERISA fiduciary is ‘a representative for the beneficiaries of the trust which he is administering,’ it is not the fiduciary, but rather the plan beneficiary that is the ‘real client.’” Id. On this view, the Court reasoned, the fiduciary exception “is not really an exception at all.” Id. Rather, “the attorney-client privilege is maintained; there is only a different understanding of the identity of the client.” Id.

Thus, the Court held that “[n]either of these theories provides any basis for distinguishing ERISA trustees, to whom the Ninth Circuit has already extended the fiduciary exception, from insurance companies also serving in the role of ERISA fiduciary. The duty of an ERISA fiduciary to disclose all information regarding plan administration applies equally to insurance companies as to trustees.” Id. The Court went on to hold that “the obligation that an ERISA fiduciary act in the interest of the plan beneficiary does not differ depending on whether that fiduciary is a trustee or an insurer.” Id. at * 12. Therefore, the Court held there is “no principled basis for excluding insurers from the fiduciary exception.” Id.

Unum then argued that even if the exception applies to insurance companies, the documents requested do not fall within the exception because they were created after an adversarial relationship had begun. The Court reviewed the documents and noted that the communications at issue clearly related to the calculation of benefits (which was a matter of plan administration) and were not prepared in anticipation of litigation, therefore, the exception applied. Id. at *13. In sum, advice on the amount of benefits owed under the Plan, given before Unum had made any final determination on his claim, constituted advice on plan administration and, therefore, was discoverable. Id.

In so holding, the Ninth Circuit acknowledged – but did not distinguish – the Third Circuit’s contrary decision in Wachtel, holding that the fiduciary exception was not applicable to insurance companies. See Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). In light of this Circuit split, other circuits will likely follow suit in opining on this distinction. In the meantime, practitioners advising insurers of ERISA plans acting as fiduciaries should exercise caution with communications to clients, in the event the fiduciary exception is found to apply to such communications in that jurisdiction.