[authors: Lynda A. Bennett, Esq. and Andrew S. Zimmerman, Esq.]
In the wake of Superstorm Sandy, many businesses and organizations have turned to their insurance brokers for assistance with the difficult process of identifying causes of loss, documenting loss amounts, reviewing available coverages, notifying insurers, and preparing insurance claims. This is not surprising as brokers can be a tremendous resource – particularly in the wake of a disaster of Sandy’s magnitude. However, communications with brokers are often not legally privileged and the same is true with respect to insurance brokers’ analyses, mental impressions, and other work product. As such, policyholders must tread very carefully when dealing with brokers who are assisting them with claims. By following certain “best practices,” policyholders can improve their chances of preserving privilege while getting maximum value from their broker relationship.
Brokers and Privilege: Legal Precedent
Two federal court opinions illustrate the pitfalls of attempting to maintain privilege with insurance brokers. In Cellco Partnership v. Certain Underwriters at Lloyd’s London, 2006 WL 1320067 *1, *3 (D.N.J. 2006), the court ruled that an insurance broker’s communications with its policyholder-client were not protected by the attorney-client privilege despite the fact that the policyholder argued that the broker provided “legal counsel” through an employee who was “a licensed attorney.” Similarly, in a New York federal case involving losses stemming from the September 11th terrorist attacks, the court held that conversations between a broker’s employees and lawyers for the policyholder were not privileged. SR Int’l Business Ins. Co. v. World Trade Center Prop’s. LLC, 2002 WL 1334821 *1, *1 (S.D.N.Y. 2002). In that case, the court held that the attorney-client privilege did not apply because the broker was not the “functional equivalent to that of a corporate employee” and because the lawyers “had no ethical obligation ‘to hold inviolate’ any information they obtained.” Id. at *2-*3.
The SR Int’l case is also notable for its historical context in the aftermath of September 11th. Like the post-Sandy cleanup, after 9/11 there existed a general atmosphere of urgency, and many policyholders acted quickly without regard to the importance of privilege. While policyholders are understandably anxious to have their insurance claims prepared and submitted, rushing forward without regard to preserving privilege can seriously undermine a policyholder’s position should a claim result in litigation.
Best Practices in Maintaining Privilege With Brokers
Brokers have learned lessons from the rulings in SR Int’l and Cellco and now often develop separate agreements for their claims assistance services. Policyholders should be aware that such agreements do not guarantee that privilege will be preserved. Moreover, claims assistance agreements are often one-sided and fraught with pitfalls.
Policyholders who make the informed choice to proceed with a broker’s assistance under a separate claims assistance agreement can reduce the chance that sensitive information may be discoverable by ensuring that such agreements meet the following criteria:
The claims assistance agreement should be separate from any prior agreement that may have existed.
The agreement should specify that the broker is being retained by the policyholder’s counsel in anticipation of litigation over a disputed insurance claim. Doing so will not guarantee that the broker’s activities are protected by privilege, but it may lead to the development of a factual record that demonstrates that the broker was taking direction from counsel and assisting with the provision of legal advice to the mutual client.
The agreement should specify that the broker will maintain all information and communications in confidence unless disclosure is specifically authorized by the policyholder.
Any indemnification clauses ideally should be eliminated but, at a minimum, should be carefully scrutinized. Policyholders should also be sure that indemnification clauses protect them from the broker’s negligence.
Policyholders should avoid any caps on the broker’s liability for negligence and/or the broker’s duty to indemnify the policyholder in the event of a third-party claim against the policyholder relating to the broker’s services.
Policyholders should avoid clauses requiring them to “cooperate” with the broker.
Because the insurance broker may itself be liable to the policyholder, the agreement should be drafted to preserve such claims.1
The agreement should clearly specify the duties of the broker and should couch those duties in terms of the anticipated areas of dispute with the insurer.
The agreement should clearly specify that the broker will act only in ways that further the policyholder’s interests and will put the policyholder’s interests ahead of its own interests with respect to the claim.
Policyholders should be on the lookout for asymmetrical or one-sided obligations.
While these terms are no guarantee that the relationship will be protected by privilege, they will make the policyholder’s arguments stronger. In addition, they have the added benefit of clarifying the broker’s purpose, duties, and constraints.
Please contact either of the attorneys listed for further information.
1Indeed, on November 19, 2012, the New York Court of Appeal issued an opinion expanding the scope of broker liability in circumstances where the policyholder requested but the broker failed to procure a particular type of coverage.