Why it matters

These cases confirm that insurers cannot hide claims-handling and similar documents and information from production by using lawyers in an attempt to recharacterize normal business functions as legal functions. In one case, a Wisconsin federal district court rejected several insurers’ blanket assertion of privilege and/or work product over their factual investigations when acting as a subrogation plaintiff. The insurers asserted that their factual investigations of claims in fact was conducted in anticipation of subrogation litigation, but Manatt partners Robert Shulman and David Killalea successfully argued that such investigations are a central part of an insurer’s claims-adjustment process. Involving lawyers or renaming claims investigators “subrogation adjusters” does not shield that basic business function from discovery.

Similarly, a New York appellate court held that documents “prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

Detailed Discussion

In the Wisconsin federal district court case, Manatt partners Robert Shulman and David Killalea successfully argued that insurance companies are required to produce documents that are prepared in the ordinary course of the insurers’ investigation of their insured’s claims, notwithstanding the insurers’ efforts to involve lawyers and self-classify the information as having been prepared “in anticipation of litigation.” Specifically, several insurers brought subrogation claims against an appliance manufacturer arising from fires allegedly caused by defectively designed appliances. The manufacturer has successfully defended past cases by proving, among other things, that the fires had different causes, such as improper installation and user neglect (as well as by showing that the products were not defectively designed). Consequently, the manufacturer sought discovery of the insurers’ investigation into the origin and cause of each fire.

The insurers refused to produce documents generated in the investigation of their insureds’ claims, arguing that such information is protected work product. The insurers went so far as to argue that they were already anticipating litigation against the appliance manufacturer as early as the same day the fire was reported, before the insurers had investigated the origin and cause of the fire. The insurers in some instances attempted to buttress this argument by denominating their fact investigators as “subrogation adjusters” and by involving lawyers. The insurers also asserted that if the documents were created with a “dual purpose” – claims adjustment and subrogation litigation – they were protected from discovery.

The court rejected the insurers’ position that documents generated during the investigation of the claim are, as a matter of course, covered by the attorney-client privilege or work product doctrine. The court concluded that such factual investigations are a standard part of evaluating and paying claims. As such, even assuming that the documents were generated with a dual purpose when the insurers anticipated subrogation litigation against the manufacturer, the documents were discoverable and must be produced. The court further admonished that “just putting an attorney into the email string is not enough” to justify a claim of work product or attorney-client privilege. The court agreed to review documents in camera in the event there were particular instances of a legitimate claim of privilege or work product, but warned that if the insurers were relying on a blanket assertion, “there will be consequences.”

To read the decision in American Family Mutual Insurance Company et al. v. Electrolux Home Products, Inc., click here.

In the case before the New York appellate court, the insured, TransCanada, maintained a steam turbine power-generating facility in Queens, New York. A cracked generator had to be shut down for several months, leading TransCanada to file claims for repair costs and business-interruption losses with four of its property insurers.

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 coverage action against TransCanada.

As part of discovery, TransCanada sought to obtain reports and related materials prepared by the insurers prior to the insurers’ denial of coverage. The insurers refused, arguing that the documents were protected by the attorney work product doctrine, the attorney-client privilege, and the common-interest privilege.

A special referee conducted an in camera review and ruled that the reports should be produced. A trial court judge upheld the decision last August.

The insurers appealed, and the appellate court again agreed with TransCanada, finding that the documents were business documents relating to a normal insurer business function.

The court relied on the general rule that “[d]ocuments prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

The appellate panel also rejected the insurers’ common-interest argument. Because “there was no pending or reasonably anticipated litigation in which the insurance companies had a common legal interest,” the common-interest doctrine did not apply.

To read the decision in National Union Fire Insurance Co. v. TransCanada Energy, click here.