Why it matters: In a cautionary case for policyholders, a federal court in Florida found that an insured waived the attorney-client privilege and work product protections for certain communications with its defense counsel and insurance broker. In a coverage lawsuit between Sun Capital Partners, Inc., and Twin City Fire Insurance, Twin City sought to compel the production of communications between Sun Capital and its defense counsel and broker during the course of underlying litigation. Sun Capital objected to producing these communications, relying on the work product doctrine and attorney-client privilege. While acknowledging that such communications normally would be protected, a federal district court ordered production in this case because Sun Capital had placed the communications “at issue” in the coverage dispute. Upholding the attorney-client privileges in such circumstances would, the court held, deny Twin City access to information vital to its defense.

Detailed discussion: Sun Capital Partners, Inc., and Twin City Fire Insurance Company were engaged in a lawsuit involving coverage for an underlying claim. In the course of defending the lawsuit, Twin City filed a motion to compel Sun Capital’s communications with its insurance broker about its claims for coverage arising from the underlying litigation, as well as insurance coverage analyses contained in case status reports sent to Sun Capital by its defense counsel in the underlying litigation. After an in camera review of the documents, the court ordered the production of many of these documents.

U.S. District Court Judge William Matthewman first considered the application of the work product doctrine. Noting that the burden is on the party withholding discovery to show the documents are protected, the court explained that a rebuttable presumption exists that all documents prepared before the final decision on an insured’s claim are not work product, while documents prepared after the final decision are considered work product.

Sun Capital told the court that it reasonably anticipated litigation with Twin City on September 2, 2010, based on an e-mail from defense counsel summarizing a call with Twin City about “two battlegrounds going forward.” However, as Sun Capital did not file suit against the insurer for another two years and the e-mail suggested the parties were still “actively working together towards a resolution to the coverage disagreements,” the court held that Sun Capital’s proposed date was too early. Ultimately, the court settled on November 2, 2012—the date of Twin City’s final denial letter—as the date on which Sun Capital reasonably anticipated litigation. Therefore, the policyholder could only claim work product protection for documents prepared on or after that date.

The attorney-client privilege consideration was a bit more complicated. The court said it was “unclear” whether Twin City could be considered a joint client of Sun Capital’s defense attorney in the underlying litigation brought against Sun Capital and declined to make a finding on the issue. “The Court does find, however, that at a minimum the parties had a ‘common legal interest’ in minimizing Sun Capital’s liability in the underlying litigation, until the point that the parties reasonably anticipated litigation against each other (November 2, 2012),” the court wrote. “Even though the parties disagreed early on as to what underlying claims were to be covered and the proper allocation of reimbursement for covered and non-covered claims, Sun Capital and Twin City appeared to be working towards a resolution of these issues and both parties had a common interest in minimizing Sun Capital’s total liability.”

Given this “common legal interest,” the court determined that “those communications exchanged between Sun Capital and its defense counsel and/or [broker] ‘for the limited purpose of assisting’ in the parties’ common litigation-related cause shall be disclosed to Twin City, including those documents relating to calculation of settlement value, evaluations of the strength of the individual claims, and any other litigation outcomes in the underlying litigation.” However, the court limited production to communications prior to November 2, 2012. Notably, the court also held that that Sun Capital’s communications with its coverage counsel regarding the current suit with Twin City were not discoverable.

The court further found that Sun Capital waived its privileges under the “at issue” doctrine because the policyholder affirmatively injected a privileged communication necessary to prove an element of its claims into the coverage litigation. Specifically, Sun Capital’s coverage complaint alleged that Twin City had breached its fiduciary duty by denying coverage for the underlying litigation and limiting its payment under an allocation provision in the policy. “[I]t appears that one of the primary disputes between the parties relates to the allocation clause of the subject policy, which allows Twin City to allocate reimbursement between any covered claims and any non-covered claims based on the relative exposure of the underlying defendants, including the relative exposure to each individual claim and as to each individual defendant,” the court explained. “While Sun Capital has not spelled out in detail what work-product communications it will rely on to prove its allegations, it will likely need to rely on attorney work-product materials from the underlying claims to show that the allocation between the covered claims and non-covered claims was proper and supported by its defense counsel’s evaluation(s).”

In addition, the court opined that upholding the privileges in the situation at issue “would deny Twin City access to information that would be vital to its defense. Sun Capital is claiming that the allocation between the covered claims and non-covered claims was proper, whereas Twin City disagrees. Defense counsel’s evaluation of the underlying claims weighs on the allocation between the covered claims and non-covered claims, and thus are vital to Twin City’s defense.”

Although communications between a policyholder and its defense counsel on such issues—the defensibility of the underlying claims, the allocation of reimbursement for covered and non-covered losses, and communications regarding the settlement of the underlying claims—ordinarily would be protected by the work product doctrine and attorney-client privileges, “because Sun Capital has placed these items ‘at issue’ in this case and these items are vital to Twin City’s defense,” the privileges are waived, the court opined. “The court finds that this provides a limited intrusion into the work-product privilege and the attorney-client privilege between Sun Capital and its defense attorneys in the underlying litigation, and strikes a careful balance between Twin City’s need to defend the allegations involved in the current litigation and Sun Capital’s right to prevent truly privileged materials from being disclosed,” the court concluded.

To read the order in Sun Capital Partners, Inc. v. Twin City Fire Insurance Company, click here.