Attorney-Client Privilege Does Not Protect Communications Between an Insurer Acting as ERISA Fiduciary and its Counsel, Says Ninth Circuit

The Ninth Circuit ruled that the attorney-client privilege does not protect communications between an insurer acting as an ERISA fiduciary and its counsel relating to the payment of benefits to a policyholder, where those communications occurred prior to a final determination on the policyholder’s claim. Stephan v. Unum Life Ins. Co. of Am., 2012 WL 3983767 (9th Cir. Sept. 12, 2012).

An employee covered by a long-term disability plan sought benefits after sustaining permanent injury. Unum Life Insurance Company, the underwriter and administrator of the plan, calculated benefits based only on the employee’s monthly salary without consideration of his annual bonus payments. In the coverage dispute that ensued, the employee sought to compel discovery of a series of internal memoranda created by Unum’s in-house counsel regarding the employee’s claim. A central issue before the court was whether those documents were protected by attorney-client privilege, or whether they fell within the “fiduciary exception” to the privilege, which is based on a fiduciary’s duty to disclose all information about plan administration to plan beneficiaries.

Finding the fiduciary exception applicable here, the Ninth Circuit reasoned that the “justifications for excepting ERISA fiduciaries from attorney-client privilege apply equally to insurance companies.” In so ruling, the court rejected Unum’s argument—which the district court had accepted—that the fiduciary exception did not apply in this case because Unum and the employee had already become adversaries at the time the memoranda were created. Noting the lack of Ninth Circuit precedent regarding “when the interests of a Plan fiduciary and its beneficiary become sufficiently adverse that the fiduciary exception no longer applies,” the court adopted the position endorsed by courts in other jurisdictions that it is not until after final determination (including final administrative appeal) that the interests of a Plan fiduciary and the beneficiary diverge for purposes of the fiduciary exception. The Ninth Circuit’s ruling in Stephan runs counter to Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007), in which the Third Circuit held that the fiduciary exception did not apply to insurance companies.