I spoke recently on a Webinar sponsored by Strafford Publications, entitled "Attorney-Client Privilege in Jeopardy in Insurance Litigation."  One issue addressed was whether communications between the policyholder counsel and the carrier are privileged when the insured has independent Cumis counsel. In the Cumis setting, the insured hires its own independent defense counsel, which represents only the insured and has no attorney-client relationship with the insurer.

If Cumis counsel provides the insurer with information or an assessment of the merits and risks of the litigation, is that communication privileged, or may it be discovered by the opposing party in the litigation? One recent district court case (Lectrolarm), holds that if disclosure to the insurer is to further a "common interest" of the policyholder and carrier, such as the shared interest in the defense of the case, the document remains privileged despite disclosure to the carrier. Other federal district court cases such as In re Imperial Corporation, however, have held that communications between Cumis counsel and an insurer are not privileged where the purpose of the communication is to "seek coverage." In Imperial, the insured’s counsel wrote a letter to the carriers with a candid assessment of the risks and exposures to the insureds, as well as letters asking the carriers to contribute to the settlement of the case. The Court overruled both privilege and work-product arguments and ordered production to the underlying plaintiffs, reasoning that such communications were made to obtain coverage and not part of a developing a common defense strategy. Thus, these kinds of communications, while common, are at risk of production to the opposing party in the underlying litigation.

As these two cases show, the rule is easy to articulate, but very difficult to apply. Many communications between the insured and insurer actually serve both purposes, and as the existing case law shows, the insured is at risk that a Court will focus on the "coverage" purpose. At the same time, there are many practical reasons why it is beneficial to communicate with the carrier despite the risk.

There are no easy answers to this problem, but you may be able to improve your privilege argument by establishing a foundation for the "common purpose" in the letter itself, and by entering a confidentiality agreement with the carrier articulating the common purpose, and precluding use of shared information by the carrier in later coverage litigation. The claim may be strengthened if the carrier creates an "ethical wall" and divides the claims handling function into "defense" and "coverage" sides and walls the communication off from the coverage side.. None of these steps assure privilege, but improve your argument in favor of it. Another approach some parties have used is to conduct such discussions solely in the context of a pending mediation, to take advantage of the very strong mediation privilege which exists under California law.