In a decision that could have far-reaching consequences, the Ninth Circuit Court of Appeals became the first federal appellate court to find that the fiduciary exception to the attorney-client privilege applies to insurance companies as well as plan trustees. In Stephan v. Unum Life Insurance Company of America, plaintiff Mark Stephan, who was injured in a bicycle accident, challenged his disability insurer’s calculation of benefits under his ERISA longterm disability insurance policy, and brought an action in the United States District Court for the Northern District of California.

In an effort to demonstrate the insurer’s purported conflict of interest, Stephan sought in discovery a series of internal memoranda created by in-house counsel in connection with his claim. The district court assumed that the fiduciary exception to the attorney-client privilege applied, but held that “the interests of plaintiff and defendant had sufficiently diverged at the time the disputed memoranda were created,” and denied access to the material.

On appeal, the Ninth Circuit reversed and remanded, concluding, in an issue of first impression in the Circuit, that there was no principled distinction for purposes of the fiduciary exception to the attorney-client privilege between plan trustees and insurance companies also serving as ERISA fiduciaries. The court offered little analysis, but recognized that it had split with the Third Circuit, the only other appellate court to consider the issue.

The Ninth Circuit also disagreed with the district court’s holding that the fiduciary exception did not apply because the interests of the beneficiary and the insurer had “become sufficiently adverse,” observing that “it is not until after the final determination – that is, after the final administrative appeal – that the interests of the Plan fiduciary and the beneficiary diverge for purposes of application of the fiduciary exception.” In other words, insurers that also are plan fiduciaries cannot avail themselves of the attorney-client privilege to protect communications containing legal advice made in the course of benefits determinations.