One of the most basic discovery requests in insurance coverage litigation is for the insurer’s claims-handling documents and coverage analysis. A policyholder suing for insurance coverage is entitled to understand the insurer’s pre-denial coverage analysis, which is after all one of the core business functions of an insurance company along with marketing and selling policies.
Simply put, an insured must be allowed access to all documents held by the insurer, including communications and claim files that might speak to why the insurer denied the claim. In recent years, however, insurers have begun to involve both in-house and outside counsel in these deliberations, and have consequently asserted the protections of the attorney-client privilege and the work product doctrine to shield these critical business documents from discovery.
Fortunately, New York courts are developing a body of case law that properly treats such communications as discoverable. When an insurer communicates with counsel to assist in determining whether a claim is covered in the first instance, such communications are made primarily in furtherance of the insurer’s business function, as opposed to legal advice, and therefore are not immune from discovery. Any resulting memoranda simply reflects the same work that claims handlers have been performing since the establishment of the insurance industry. That the analysis was undertaken by an attorney rather than a non-attorney has no significance in the nature and purpose of the work being performed and the discoverability of the resulting analysis and documents.
Insurers are, of course, equally entitled to the attorney-client privilege as any other litigant, which applies where the communication at issue is made “for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship.” Otsuka America, Inc. v Crum & Forster Specialty Ins. Co., No. 650463/2018, 2019 WL 4131024, at *2 (N.Y. Sup. Ct. Aug. 30, 2019) (quoting Spectrum Systems International Corp. v. Chemical Bank, 78 N.Y.2d 371, 377 (1991)). But “a lawyer’s communication is not cloaked with privilege when the lawyer is hired for business or personal advice, or to do the work of a nonlawyer.” Otsuka America, Inc., 2019 WL 4131024, at *2. In circumstances where the insurer has effectively outsourced all or part of its claim analysis—a core business function of an insurance company—to outside counsel, documents reflecting that claims analysis are business documents and cannot be withheld in discovery. See Bombard v. Amica Mut. Ins. Co., 783 N.Y.S.2d 85–86 (2d Dep’t 2004).
In other words, an insurer’s claim investigation is not protected, even if it is undertaken by outside counsel and even if there may be a legal, anticipation-of-litigation component to such analysis. See Lalka v. ACA Ins. Co., 9 N.Y.S.3d 504, 505 (4th Dep’t 2015) (“the documents . . . constitute multipurpose reports motivated in part by the potential for litigation with plaintiff, but also prepared in the regular course of defendant’s business in deciding whether to pay or reject plaintiff’s claim, and thus plaintiff is entitled to disclosure of those documents”) abrogated on other grounds by Rickard v. New York Cent. Mut. Fire Ins. Co., 84 N.Y.S.3d 619 (4th Dep’t 2018).
Indeed, New York case law has shown a concerted shift over time to a more restrictive application of privilege and work product protection to documents reflecting an insurer’s pre-denial claim analysis. Compare Karta Indus., Inc. v. Ins. Co. of State of Pennsylvania, 685 N.Y.S.2d 685, 685 (1st Dep’t 1999) (“Reports prepared by or for an insurer before its insured’s direct claim is either paid or rejected are discoverable as having been made in the regular course of the insurer’s business” (internal quotation marks and alterations omitted)), with Brooklyn Union Gas Co. v. American Home Assur. Co., 803 N.Y.S.2d 532, 534 (1st Dep’t 2005) (holding where “attorneys were acting as claims investigators, not attorneys, and were investigating the issue of whether coverage should be provided” their reports were “prepared in the ordinary course of the insurance companies’ business of evaluating claims,” and the documents revealed “no legal advice, no legal recommendations or attorney thought processes”), and TransCanada Energy, 990 N.Y.S.2d at 511 (holding that a lawyer’s investigation reports used to determine coverage were “prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim” and thus not privileged). Otsuka America, Inc., cited above, is simply the latest example of this shift towards greater transparency of an insurer’s pre-denial business records. See Otsuka America, Inc., 2019 WL 4131024, at *2.
The key to whether a lawyer’s analysis of the insurance claim is immune from discovery is the purpose for which the analysis was commissioned. Even when counsel explicitly bases their opinion on an analysis of the law, the analysis and opinion are not protected if they were rendered as part of the claim adjustment process. See Otsuka America, Inc., 2019 WL 4131024, at *2 (N.Y. Sup. Ct. Aug. 30, 2019) (“Counsel specifically states, ‘Based on the current state of the law, and our policy language, it[’]s my opinion that we can maintain our position that there is no actual contamination that could be considered to have resulted in, or would result in bodily injury.’ Because the payment or rejection of claims is a part of the regular business of an insurance company, reports, such as this, are made in the regular course of business and are discoverable”).
The attorney-client privilege and work product doctrine in claims handling are not as expansive as they may be in other areas given the unusually litigious nature of the insurance business. In New York, a lawyer’s analysis commissioned for the purpose of determining whether to cover or deny an insurance claim should not be privileged, even where the analysis includes a lawyer’s case analysis, mental impressions, and advice. Accordingly, policyholders should pursue all available and relevant discovery, and evaluate any claims of privilege in light of the recent case law in their jurisdiction.
