Policyholders provide information to their insurers all the time. That information can be highly important, sensitive, and confidential—but is the transmission of it protected from disclosure? Maybe so, maybe not. How high should you keep your fences?
The general rule is that there is no insured-insurer privilege that protects the confidentiality of communications between a policyholder and its insurer. For communications to be protected from disclosure, they must fall within the scope of the traditional privileges (the attorney-client privilege or work product protection)—or within the ambit of the "common interest" exception that applies to both. "Common interest" is recognized by courts in many jurisdictions as a limited exception to the rule that disclosure of privileged communications to a third party waives the privilege.
The common interest exception as applied in the insured-insurer context is often a gray area and varies by jurisdiction. Its application will usually be neatest where an insurer has either denied coverage of a claim, in which case there is no common interest, or the insurer has accepted coverage and is providing a defense for the insured, in which there is likely to be a common interest. However, as we all know, the insurer's position is rarely so absolute. Application of the exception becomes more complex when an insurer has issued a reservation of rights, continues to investigate a claim, or is at any other stage short of accepting coverage.
In New York state courts, application of the doctrine requires that the communication: (1) first qualifies for protection under the attorney-client privilege, and (2) is made in furtherance of a legal (as opposed to business) interest that is shared by the client and the third party. Until recently, there was traditionally a third requirement—that the communication relate to legal advice regarding pending or reasonably anticipated litigation. However, on December 4, 2014, in a landmark decision, a New York appellate court did away with this additional requirement.
The First Department in Ambac Assurance Corp. v. Countrywide Home Loans, Inc. considered and discussed the purpose of the exception and decided to adopt the federal approach, which "holds that litigation need not be actual or imminent for communications to be within the common interest doctrine." The Appellate Division concluded that "[s]o long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature, the communication will remain privileged."
In Ambac, the monoline insurer had sued Countrywide and Bank of America, alleging that Countrywide fraudulently induced it to insure several residential mortgage backed securities. Ambac sought production of documents related to Bank of America's previous merger with Countrywide. The defendants withheld the communications under the common interest privilege. The special discovery master and trial court ordered the communications—in which Countrywide and Bank of America pursued shared legal advice in connection with the merger—to be produced. Reversal of this decision provides broader protection for companies who seek shared legal advice with third parties outside the context of active litigation. This is particularly helpful for companies pursuing mergers.
While Ambac is an insurer, the privilege issue considered by the First Department was not one regarding information shared between a policyholder and an insurer. But this decision may well have a significant impact in the insurance context. Insurers may attempt to use Ambac to press policyholders into sharing additional privileged information in relation to a claim. But, given the developing law on this subject, and the case-by-case approach used by the courts when determining whether the exception applies, policyholders should be cautious when evaluating whether and what information to share. Other factors, such as claims reporting requirements and compliance with cooperation clauses, should factor into this case-by-case and policy-by-policy analysis.
For further analysis of the Ambac Assurance Corp. v. Countrywide Home Loans, Inc., decision see Orrick's December 9, 2015, client alert discussing the case.
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