Under the common-law evidentiary rule known as the "fiduciary exception" to the attorney-client privilege, certain fiduciaries who obtain legal advice during the execution of their fiduciary obligations may not thereafter assert the attorney-client privilege against their beneficiaries. The fiduciary exception arose in American case law during the 1970s where it was adopted in two distinct contexts-trust administration and shareholder suits.
In the early 1980s, many federal courts began applying the fiduciary exception to ERISA1 fiduciaries. Under ERISA, "an entity is considered a fiduciary to the extent that, inter alia, it holds any discretionary authority or discretionary responsibility in the administration of an employee benefit plan." 29 U.S.C. § 1002(21)(A)(iii).
On April 2, 2007, the United States Court of Appeals for the Third Circuit found that the fiduciary exception to the attorney-client privilege did not apply to the legal communications between a defendant health plan insurer that administered an ERISA plan and its attorneys. See Wachtel v. Health Net Inc., 2007 WL 958572 (3d Cir. April 2, 2007) (emphasis supplied).
The underlying lawsuit, which formed the basis for this appeal, was brought against Health Net Inc., Health Net of the Northeast Inc., and Health Net of New Jersey Inc. ("Health Net companies"). The lawsuit alleged that the Health Net companies had used outdated usual, customary, and reasonable ("UCR") data when calculating health plan participants’ copayments for out-of-network services.
During discovery, the Health Net companies asserted the attorney-client privilege with respect to thousands of documents. A special master determined the documents were not protected from discovery under the fiduciary exception to the attorney-client privilege because the documents were created by the insurance companies in their capacity as plan fiduciaries.
The United States District Court of the District of New Jersey thereafter ordered production of the otherwise privileged attorney-client communications. On appeal, the Third Circuit vacated the District Court’s order because it did not believe the fiduciary exception applied to these Health Net companies. The Third Circuit found that the fiduciary exception’s application actually depends on the type of ERISA fiduciary at issue: "ERISA fiduciaries…come in many shapes and sizes, and we do not believe the logic underlying the fiduciary exception applies equally to all."
The Third Circuit noted that many federal courts had already adopted the fiduciary exception. The Third Circuit had not previously considered the existence or scope of the exception within that circuit, however. After reviewing the historical bases for the fiduciary exception to the privilege, the court described key differences between the Health Net insurance companies and other ERISA fiduciaries to whom the fiduciary exception has been applied:
1. The identity of the entity for whom legal advice is given differs. When a contractual service provider such as an insurance company obtains legal advice regarding the execution of its fiduciary obligations, the beneficiaries of the customer benefit plans are not the "real" clients obtaining legal representation.
2. A structural conflict of interest arises when an insurance company, either pursuant to contract with an employer or benefit plan, determines eligibility for benefits and pays those benefits from its own funds, which are the same funds from which it reaps profits. Consequently, the insurer’s discretionary acts are reviewed under a different, heightened standard of review than actions taken by other ERISA fiduciaries.
3. An insurer faces an additional conflict because it owes distinct duties to each of its customers, as it is often faced with managing multiple ERISA benefit plans and other non-ERISA regulated customers at once. In contrast, a corporate manager owes his fiduciary obligations to the corporation and its shareholders and a trustee owes his obligations to plan beneficiaries.
4. The Health Net companies paid for legal advice using its own assets, not the assets of its beneficiaries, thus providing further support that it is the sole client of counsel.
Despite its ruling that the fiduciary exception would not apply to these defendant-insurers, the Third Circuit was careful to state that not all communications between the Health Net companies and their counsel would necessarily be privileged, as other limitations and exceptions to the attorney-client privilege may apply. And insurers servicing ERISA plans still owe a duty of disclosure to plan beneficiaries. For example, under 29 U.S.C. § 1133(a), an insurer-fiduciary who denies a claim for benefits must disclose the specific reasons for the denial.
Footnotes
1. ERISA is short for the Employee Retirement Income Security Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.