On July 31, 2014, the New York Supreme Court, Appellate Division, First Department chipped away at the privilege protections available to insurers. In National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc., 119 A.D.3d 492 (1st Dept. July 31, 2014), the First Department affirmed a 2013 New York County Supreme Court ruling that documents prepared in the ordinary course of an insurer’s investigation as to whether to pay a claim are not privileged — even if these documents are prepared by an attorney.
TransCanada Energy USA, Inc. sought coverage from its insurers for losses stemming from the shut-down of a generator at a power plant in Queens, N.Y. The insurers hired experts and attorneys to assist with their coverage determinations. All of the insurance companies denied coverage, and TransCanada sued.
In discovery, TransCanada sought documents created by the insurers’ attorneys before the denial of coverage. The insurers moved for a protective order, asserting that the documents were work product and subject to the attorney-client privilege. Judge Barbara Jaffe of the Supreme Court, New York County found that most of the documents prepared by one insurer’s attorneys (who supervised, coordinated, directed and summarized the investigation) were not privileged.1 Judge Jaffe noted that documents prepared in the ordinary course of business are not privileged, even if they were drafted by an attorney.
For the privilege to attach, the documents must be used primarily for the purpose of furnishing legal advice.2 The court found that documents involving the investigation of claims did not constitute legal advice because the attorneys were determining whether to provide coverage, an ordinary business activity for an insurance company. Moreover, the fact that many documents pre-dated the decision to deny coverage prevented them from protection as work product or trial preparation materials.3 However, Judge Jaffe did recognize that documents seeking or providing legal advice were protected.
A separate group of insurers had jointly hired one firm to handle the investigation and assist in determining coverage. Judge Jaffe concluded that because each insurer had its own share of potential coverage, and one insurer settled while others litigated, the insurers were third parties with regard to each other. Judge Jaffe also noted that the insurers had made no attempt to segregate communications or keep them confidential from each other, despite the lack of a joint defense agreement. Thus, documents created before the denial letter was sent were not protected work product or trial preparation materials. Additionally, any attorney-client privilege was waived when the documents were disclosed to the other insurers because the common interest privilege exemption did not apply.4
Unanimously affirming Judge Jaffe’s order, the First Department 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.”5
The First Department’s decision arguably erodes the attorney-client privilege as it applies to insurance companies. Under this decision, investigation-related communications between insurers and their counsel may not be privileged. In other words, materials prepared in the ordinary course of an insurer’s business before a denial of coverage may be discoverable, even if written by counsel. Under the First Department’s decision, coverage opinions providing legal advice are still protected by the attorney-client privilege.
This decision should also remind insurers using joint legal representation to carefully craft joint defense agreements to clearly outline the terms and conditions of representation, in order to preserve the common interest privilege.