This is the second article of a three-part series about the decision of a New York appellate court in National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, Inc., 119 A.D.3d 492 (2014). The first article discussed the legal background against which the case was decided. This article will discuss the decision itself. A final article will consider the implications of the case for insurers.
The Investigation and Denial of the TransCanada Claim
On August 26, 2008, TransCanada acquired TC Ravenswood, LLC, which owned the Ravenswood Generating Station in Long Island City, Queens. The station is a power plant, capable of generating up to 21% of New York City’s peak load for electricity. It consists of 21 units, one of which, Unit 30, is also known as “Big Allis.” (When built by Allis-Chalmers in 1965, it was publicized as the “world’s first MILLION-KILOWATT unit.”)
On the same day it acquired Ravenswood, TransCanada purchased combined All-Risk and Business Interruption insurance policies from a consortium of insurers that included National Union Fire Insurance Company of Pittsburgh, ACE INA, Arch Insurance Company (collectively, the “market insurers”), Associated Electric & Gas Insurance Services (“Aegis”) and Factory Mutual Insurance Company. Each carrier sold a percentage of the total coverage, issuing its own policy on the same Factory Mutual form.
Three days after it closed on both the power plant and the All-Risk policies, TransCanada observed excess vibrations in Big Allis. Two weeks later, on September 12, 2008, the vibrations had increased to a level at which the unit had to be shut down, and an investigation disclosed a crack in the rotor. The crack would end up keeping Big Allis out of service for the next eight months, until May 2009.
TransCanada sent a Notice of Loss to its insurers on September 16. That month, the market insurers retained an independent adjustor to help investigate and process the claim. As part of the investigation, the cracked rotor was shipped to North Carolina for examination by Siemens, the prominent engineering firm.
The following month, October 2008, the market insurers also hired a single law firm to assist all of them with coverage issues. Factory Mutual hired separate coverage counsel for its deliberations. A court would later find that counsel for the market insurers “communicated freely and jointly with all of” them; they made “[n]o attempt … to segregate the communications or keep them confidential from each other, and they produced no joint defense agreement, or similar evidence, that explains the terms and conditions of this joint representation.” National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, Inc., 2013 WL 4446917, at *5 (N.Y. Sup. Ct. Aug. 15, 2013).
In June 2009, with Big Allis running again, TransCanada submitted preliminary calculations of its claim: about $7 million in property damage and another $65 million in loss of gross earnings. The insurers stated that their liability for these losses would depend on the results of the Siemens analysis; TransCanada stated that it considered a determination of the date on which the crack had originated in the rotor to be irrelevant to coverage.
In January 2010, Siemens issued a report, concluding that the crack had occurred at least 24 to 37 days before the inception of the All-Risk Policy. The insurers then submitted the finding to review and analysis by a second expert, which estimated that the damage had occurred at least five months earlier.
On June 2, 2010, the market insurers denied TransCanada’s claim and, on the same day, filed a declaratory judgment action in Manhattan. Factory Mutual denied coverage a month later. The market insurers’ suit alleged that the “occurrence” on which TransCanada’s claim was based had taken place before the inception of the All-Risk Policy. The insurers also contended that one element of TransCanada’s business interruption claim is barred by an exclusion in the policies, and, further, that the loss may have been caused by an excluded peril.
On June 29, TransCanada filed its own suit for breach of contract against Factory Mutual and the market insurers in Queens; the two lawsuits were later consolidated for purposes of discovery. TransCanada also negotiated a settlement with Aegis.
TransCanada’s Motion to Compel
In January 2012, TransCanada moved to compel the production of documents that were created during the 20-month period preceding the denial of its claim, and with respect to which the insurers had invoked the attorney-client privilege, the work product doctrine and the common interest privilege. The documents included communications among the insurers, their attorneys and personnel of the independent claims adjustors. The motion resulted in four separate rulings over the next two years.
The Special Referee
In March 2012, the trial court sent the motion to a Special Referee, and it was assigned to a retired (and famously outspoken) trial judge, Hon. Ira Gammerman. Justice Gammerman’s ruling did not enrich the literature on the attorney-client privilege. As far as probing the “full content and context” of the disputed documents went, see Nicastro v. N.Y. Central Mut. Fire Ins. Co., 985 N.Y.S.2d 806, 808 (4th Dep’t 2014), Justice Gammerman declared, “I’m not going to look at a thousand documents.” That process was unnecessary, he held, because of the decision of the Second Department Appellate Division in Bertalo’s Rest. Inc. v. Exchange Ins. Co., 658 N.Y.S.2d 656 (2d Dep’t 1997), which was discussed in detail in the first part of this series. (The insurers’ declaratory judgment action was filed in New York County, where Justice Gammerman sits, and which is in the First Judicial Department; but TransCanada’s breach of contract suit, which was consolidated with the insurer’s case for pre-trial purposes, was filed in a court in the Second Department.)
According to Justice Gammerman, Bertalo’s makes it “very clear” that if a document is “pre-denial, it’s discoverable.”
[A]nything that was done, anything, any communication with the lawyers that preceded the institution of the [declaratory judgment] action is discoverable in my opinion.
Justice Gammerman also ruled that certain disclosures to the independent adjusters hired by the insurers had resulted in waiver of the privilege, but he does not appear specifically to have addressed the common interest doctrine.
The Trial Court’s Decision
TransCanada moved to confirm Justice Gammerman’s Report, and the insurers moved to confirm in part and reject in part. In response to those motions, Justice Barbara Jaffe conducted the in camera review Justice Gammerman had refused to perform. For the most part, the result was the same—but the legal reasoning was very different.
Most importantly, Justice Jaffe expressly rejected the suggestion that pre-denial communications could not be privileged. National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, Inc., 2013 WL 4446917 (N.Y. Sup. Aug. 15, 2013). The test, the court held, is whether the communication was “made primarily for the purpose of furnishing legal advice,” regardless of when the communication was made. Consequently, even “an attorney-authored memorandum collecting information … could be privileged if drafted to communicate legal advice.”
On review, Justice Jaffe found that most of the disputed documents Factory Mutual sought to protect failed to pass this test; they indicated that the attorneys supervised and coordinated the investigation—activities that are part of the regular business of an insurer—and they related to that investigation, rather than to legal issues. But somedocuments reflected “communications … to obtain legal advice,” and they retained the privilege. The court did not describe the specific features of the documents that made them qualify as legal advice.
In connection with Factory Mutual documents dealing purely with the investigation, Justice Jaffe also noted that “most of these documents pre-date the decision to deny coverage, so they were not protected [as] work product… .” That is, the court acknowledged the Appellate Division rule that pre-denial documents, per se, are not prepared in “anticipation of litigation.” See, e.g., Bonbard v. Amica Mut. Ins. Co., 783 N.Y.S.2d 85 (2d Dep’t 2004).
In this case, the insurers informed TransCanada in June 2009—nearly a year before the market insurers issued their denial letter—that they believed they would deny the claim (which TransCanada had just calculated at over $70 million), if the technical analyses showed that the crack in Big Allis predated the inception of the policies. TransCanada responded by arguing that the date when the crack appeared was irrelevant to coverage. On these facts, it seems reasonable to believe that the insurers actually “anticipated litigation” a year before the date recognized by the court. Justice Jaffe’s opinion did not consider, or even acknowledge, this possibility.
Justice Jaffe conducted an entirely different analysis for the documents being withheld by the market insurers (National Union, ACE and Arch). Although the three companies had hired a single law firm to advise them with respect to coverage, the court found that they were “third parties to each other,” because “[e]ach has a separate percentage of the insurance coverage at issue and is a separate company.” Accordingly, the court held that any protection for these documents had been waived, unless the market insurers were entitled to rely on the common interest privilege.
On this issue, Justice Jaffe cited cases (which were discussed in the first part of this series) holding that the privilege applies only to communications made in “anticipation of litigation.” E.g., Hyatt v. State of Cal. Franchise Tax Board, 962 N.Y.S.2d 282 (2d Dep’t 2013). Following the logic of cases holding that an insurer does not anticipate litigation, for purposes of the work product doctrine, before it makes a final decision to deny a claim, Justice Jaffe further ruled, as a matter of first impression, that the common interest privilege does not apply to communications that an insurer conducts before deciding to deny coverage. Because the court found that the market insurers had failed to establish an earlier date for their decision, it ruled that the privilege did not apply to any documents prepared before the date of the denial letter—which was also the date on which the declaratory judgment action had been filed.
This ruling is open to several objections. First, the conclusion that the market insurers were “third parties to each other” is a questionable one. TransCanada was asserting a claim against each of the insurers under an identical policy, and based on the same occurrence. The market insurers hired a single law firm to provide coverage advice in connection with those identical claims. This appears, in other words, to have been a joint representation—a situation in which communications involving the jointly-represented clients remain privileged as against third parties. See, e.g., Arkin Kaplan Rice LLP v. Kaplan, 988 N.Y.S.2d 22 (1st Dep’t 2014). By contrast, the common interest doctrine applies to communications among parties that are separately represented. E.g., Bank of America, N.A. v. Terra Nova Ins. Co. Ltd., 211 F.Supp.2d 493, 496 (S.D.N.Y. 2002). Even if, as Justice Jaffe pointed out, “one of the … insurers [Aegis] chose to settle while the others continued to litigate,” that difference in strategy does not necessarily establish a conflict of interest that would prevent multiple parties from continuing to be represented by a single lawyer. See, e.g., Alter v. Oppenheimer & Co. Inc., 875 N.Y.S.2d 818 (N.Y. Sup. Ct. 2008) (denying motion to withdraw as counsel based on settlement by one client in a joint representation).
Moreover, even if the common interest privilege were the proper starting point for the court’s analysis, the facts of this case call into question the wisdom of New York’s “anticipation of litigation” requirement—which, in any event, has not yet been recognized by all of New York’s appellate courts. As the discussion in our first article detailed, even before the denial of a claim, it is generally recognized that insurers may conduct privileged conversations about whether they are legally obligated to provide coverage (although the language of some Second Department cases suggests otherwise). Nicastro, 985 N.Y.S.2d at 808 (privilege applies where a lawyer “advise[s] [an insurer] of its legal responsibilities”); Reliance Ins. Co. v. American Lintex Corp., 2001 WL 604080, at *2 (S.D.N.Y. June 1, 2001) (“legal advice regarding the extent … to which the … claim was covered by the … policy” was privileged). But seeMelworm v. Encompass Indemn. Co., 977 N.Y.S.2d 321 (2d Dep’t 2013) (“Reports prepared by … attorneys before the decision is made to pay or reject a claim are … not privileged and are discoverable”). There seems to be no compelling reason that a group of insurers, confronted with claims under identical policies, and arising under a single occurrence, do not share an interest that is sufficiently “legal” and “identical” to warrant application of the common interest doctrine—especially since (as discussed in the first part of this series) their communications would almost certainly be protected in other jurisdictions. See Bank of America, 211 F.Supp.2d at 498 (noting that New York law, but not federal law, imposes “anticipation of litigation” requirement); O’Boyle v. Borough of Longport, 94 A.3d 299, 310 (N.J. 2014) (privilege applies to parties with “a common interest in a litigated or non-litigated matter”).
Finally, even if the litigation requirement should be preserved, the notion that the market insurers did not “anticipate litigation” a year before they denied the claim—when their disagreement with TransCanada about the possible significance of the Siemens report came out in the open—does not seem to fit the facts of this case.
The First First Department Decision
The insurers appealed, and the Appellate Division for the First Department issued an opinion affirming Justice Jaffe’s decision in February 2014. National Union Fire Ins. Co. of Pittsburgh v. TransCanada Energy USA, Inc., 981 N.Y.S.2d 68 (1st Dep’t 2014), recalled and withdrawn, 119 A.D.3d 492 (1st Dep’t July 31, 2014). The court began by ruling, without discussion, that the trial court had “properly found” the work product doctrine to be inapplicable. The court then went on to affirm Justice Jaffe’s rulings on privilege, but its explanation betrayed some confusion (citation omitted):
The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether … [they] should pay or deny the claims. 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.”
This passage fails to acknowledge what Justice Jaffe had expressly recognized: even communications that relate to investigations and/or payment decisions may be privileged, if they were nevertheless “made primarily for the purpose of furnishing legal advice.” 2013 WL 4446917, at *3. It therefore left room for doubt about whether the court merely endorsed Justice Jaffe’s application of that rule to the facts of this case, or whether it intended to impose a more sweeping rule against application of the privilege—one that would have been more in line with the language of opinions from the Second Department. E.g., Melworm v. Encompass Indemn. Co., 977 N.Y.S.2d 321 (2d Dep’t 2013) (“Reports prepared by … attorneys before the decision is made to pay or reject a claim are … not privileged and are discoverable”). Since the court was also affirming (albeit tacitly) Justice Jaffe’s decision that some of the disputed documents were privileged, the first alternative was more likely, but by no means certain.
The First Department also held that the common interest doctrine did not apply, because “there was no pending or reasonably anticipated litigation.” That statement represented the first occasion on which this court had expressly adopted that requirement.
The Second First Department Decision
On July 31, 2014, the First Department recalled and vacated its February Decision and Order and replaced it with another one.
Like the first opinion, the July Decision approved the trial court’s ruling on work product without explanation. With respect to privilege, the new decision expressly noted the trial court’s finding that “certain documents were privileged because they contained legal advice.” Then, with respect to the other disputed documents, the court added a sentence to its earlier analysis:
The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether … [they] should pay or deny the claims. Further, the record shows that counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company. 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.”
These changes further support the conclusion that Justice Jaffe’s privilege analysis was correct. That is, although investigating a claim and deciding whether to pay are regular business activities for insurers, lawyers engaged in those activities are still capable of providing privileged legal advice. Whether the privilege applies depends on the legal or non-legal character of each communication.
Next, the court withdrew its previous statement about the common interest privilege entirely:
We need not reach the question of whether the common interest exception to the attorney client privilege applies, because the documents at issue are not privileged.
This returned the common interest doctrine to the status quo ante. The “anticipation of litigation” requirement has not yet been adopted expressly by any appellate court outside the Second Department—but it clearly could happen at any time.
The third and final part of this series will consider the implications of these rulings.