The other thing more unexciting than a discovery dispute is reading about someone else’s discovery dispute.

But the Washington federal court’s decision in Canyon Estates Condo. Association v. Atain Specialty Ins. Co., No. 18-1761 (W.D. Wash. Jan. 22, 2020) is no snoozer.  The decision is brief -- but has a lot to say. 

The past few years have seen attempts by policyholders, in coverage litigation, to obtain claim file documents from insurers that include communications with their outside coverage counsel.  Needless to say, insurers fight these attempts with vigor, arguing that the documents are undiscoverable, based on attorney-client privilege.  The results have been mixed.   

In Canyon Estates Condo. Association, the court addressed a unique argument by the policyholder in an attempt to obtain unredacted copies of an insurer’s claim file documents: because outside counsel authored draft coverage letters, signed by the insurer, attorney-client privilege was waived. 

Given that insurers often use outside coverage counsel to draft letters, that are then sent by their clients, Canyon Estates Condo. Association is a decision that could prove influential in other cases.  Even if other courts do not follow it, the issue may now be raised by policyholders and need to be addressed as part of a discovery dispute. 

Further, this year’s Top 10 coverage cases includes the Mississippi Supreme Court’s decision in Travelers Property Cas. Co. v. 100 Renaissance, LLC, where the court addressed whether attorney-client privilege is waived when a disclaimer was drafted by the insurer’s in-house counsel and sent from the adjuster. Answer - yes.

In Canyon Estates Condo. Association, a condominium association was seeking unredacted copies of its insurer’s claims file documents and invoices for activities performed by its outside coverage counsel, Michael Hooks.  The insurer maintained that the documents were precluded from discovery on account of attorney-client privilege.

The court set out the rules concerning attorney-client privilege in the context of a coverage dispute.  As a starting point, “there is a presumption of no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process.”

However, the court noted that the presumption can be overcome “by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”

So the question was this – Was Mr. Hooks, as outside coverage counsel, engaged in evaluating or processing the claim OR was he providing the insurer with counsel as to whether or not coverage exists under the law?

The insurer, seemingly prepared for this issue, maintained that it “consciously chose to keep [Michael] Hooks, its outside counsel, separate from the claim investigation, and he did not participate in the investigation or otherwise perform claim handling functions.” 

But the court concluded that such declarations, about Mr. Hooks's role, were “pure amphigory.”  [If you have to look that up, you are not alone.] 

As the court saw it, Hooks “clearly—and arguably, knowingly—engaged in at least some quasi-fiduciary activities.”

A significant aspect of the court’s decision was that Mr. Hooks authored draft letters signed by the insurer and sent to the insured related to coverage and claims processing.  As the court put it: “Assisting an adjustor in writing a denial letter is not a privileged task.” 

What about if the outside counsel engages in what the court believes is claim investigation and also provides advice on whether or not coverage exists under the law.  Here, “waiver of the attorney-client privilege is likely since ‘counsel’s legal analysis and recommendations to the insurer regarding liability generally or coverage in particular will very likely implicate the work performed and information obtained in his or her quasi-fiduciary capacity.” (citation omitted). 

The court concluded that very few of the documents at issue are covered by attorney-client privilege.  In addition, following an in camera review, the court noted that counsel has discoverable information related to the drafting of the letters that is relevant to the claims.

The decision stands as a reminder that attorney-client privilege may be waived when outside counsel is engaged in investigating and evaluating or processing a claim, and not in providing the insurer with counsel whether or not coverage exists under the policy and law.

If that’s the test for maintaining attorney-client privilege, then the decision in Canyon Estates is unquestionably wrong.  There is nothing routine about drafting a denial or reservation of rights letter, which is what the court seems to be suggesting.  The task clearly involves addressing whether there is coverage under the policy.  It requires assessing which policy provisions may apply and identifying the facts to support that decision. 

And there is clearly knowledge of the law required as well when drafting a reservation of rights letter.  Is independent counsel owed?  That is clearly tied to the state’s case law?  Is coverage owed for pre-tender defense costs?  Absolutely based on case law.  Does “any insured” in a policy really mean “any insured,” or is that not so, based on how case law treats the severability of interest clause.  Does the pollution exclusion apply narrowly or broadly based on the state’s case law treatment of that issue?  This list could go on and on and on of legal and case law-dictated issues that must addressed when drafting a denial or reservation of rights letter.