Recently, the California Court of Appeal decided County of Los Angeles Board of Supervisors v. Superior Court, 235 Cal. App. 4th 1154 (2015), a case considering whether the Los Angeles County Sheriff's Department could be required to produce legal defense bills in response to a California Public Records Act request. While not an insurance case, the case could have implications for a common practice in the insurance context: submitting defense bills to the insurer.
The Board of Supervisors court held that attorney billing statements are “confidential communications” within the meaning of California Evidence Code Section 952, and therefore their production could not be compelled. Significantly, the court held that the LA County Sheriff could not be required to simply redact portions of the attorney time descriptions that reflected attorney opinions or advice. Indeed, the court concluded that a communication between attorney and client, arising in the course of representation for which the client sought legal advice, need not include “legal opinion or advice” at all in order to qualify as a privileged communication. Because the bills were, by definition, an attorney-client communication, they were privileged in their entirety.
This new ruling presents a conundrum for California insureds. An insurance company that is footing the bill for the defense of a lawsuit will of course demand to see the bills, and as a practical matter it is unrealistic to expect that the insurer will pay them without being able to review the descriptions. In situations where the insurer is defending without a reservation of rights, the insured's and the insurer's interests are completely aligned and the two are effectively joint clients. But by providing the defense bills to an insurer who has reserved its right to deny coverage – or who has not yet taken a coverage position at all – is the insured waiving privilege? If the plaintiff in the underlying lawsuit demands that the insured produce “all communications with its insurer,” could the insured then be required to produce its legal bills to plaintiff?
Insurers will often argue that the sharing of privileged communications between an insurer and its insured is protected by a “common interest” or “joint defense” privilege – even where the insurer has reserved its rights to deny coverage. The proposition is questionable; California law is strict when it comes to the recognition of a “common interest” privilege, and courts may not recognize the existence of such a privilege two parties' interests diverge in some ways. See OXY Resources California LLC. v. Superior Court, 115 Cal. App. 4th 874 (2004). The partial divergence of interest created by an insurer's reservation of rights may ruin any purported “common interest” privilege.
Insureds do have some statutory protection if their policy imposes a “duty to defend” upon the insurer. California Civil Code Section 2860 (“Section 2860”), subsection (d), states: “When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes…Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.” Thus, after redacting information relevant to coverage disputes, the insured's defense counsel could provide his or her bills to the insurance company, without fear that by doing so he or she is effecting a waiver of the attorney-client privilege.
The protections of Section 2860 clearly apply to insurance policies that use the precise words “duty to defend.” However, Section 2860 may not apply to insurance policies providing for a “duty to pay” or a “duty to advance” defense costs. Yet many insurance policies are written on a “duty to pay” basis, including directors' and officers' liability, management liability, employment practices liability, and professional liability/errors and omissions, among others.
The question becomes how to handle defense costs submissions, particularly in the “duty to pay” context, knowing that the bills are afforded protection as privileged communications. Certainly, the insured should not provide defense bills until the insurer has taken a formal, written position on coverage. If the insurer acknowledges its obligations but reserves rights, then the bills will have to be submitted – but the insured should proceed with extraordinary caution. The insured should provide the bills with a cover letter stating that the billing statements are being provided to the insurer alone, and that no broad waiver of privilege is intended. The insured may want to request a formal joint defense agreement from the insurer. And to eliminate the risk that a court could find “divergent interests” between the insured and the insurer, the insured should still redact sensitive information, especially information bearing on coverage issues.