Protecting privilege: Between a rock and a hard place

Introduction

Insurance products designed to protect policyholders against the risk of liability to third parties are a core part of most corporate insurance programmes. Some policies give the insurer total claims control in the event of a claim brought against the policyholder. In the context of financial and professional lines insurance, however, the responsibility for claims handling generally remains with the policyholder. Where that is the case, the insurer will have an interest in the management of the claim so that the overall defence cost spend and any liability exposure are kept, in so far as is reasonable, to a minimum. That interest will be protected expressly in the claims handling conditions in the policy.

Challenges may then arise when the policyholder has instructed its own defence counsel to manage the claim, and the insurer wishes to have access to the legal and strategic advice provided by that legal team. The advice in many jurisdictions will likely be protected by legal privilege (or other rules such as professional secrecy) that apply to certain communications involving lawyers and protects those communications from being disclosed in civil litigation or to regulatory authorities. The policyholder may have received advice from its legal team that sharing advice with its insurer (or broker) risks waiving this protection that would otherwise attach to that advice and thus risks prejudicing the defence of the claim made against it. The insurer on the other hand may say that failing to provide that advice is in breach of the claims handling provisions in the policy and could prejudice the insurance recovery. This can leave policyholders in a difficult position.

Which rules apply?

Different jurisdictions have different rules relating to the creation and protection of privilege or professional secrecy. The first point to consider therefore is which rules apply to the matter at hand.

Where we are considering lawyer-client communications in the context of a claim by a third party against a policyholder, it will typically be the location of the court hearing the underlying claim whose rules we must consider. The location of the policyholder or insurer will not be relevant. The position in the US can be more complex and will depend upon whether the dispute is brought in federal or state court and noting that US states follow different approaches to deciding choice of law issues. It will be important to identify the law applicable to questions of privilege and discovery as early as possible in the process.

In the context of international arbitration, tribunals have some flexibility in determining which rules should apply to the creation and protection of privilege. This can be challenging in practice, particularly where a number of different laws might apply. Where parties cannot agree on which law governs privilege, tribunals tend to take into account various factors, including not only the seat and applicable law of the arbitration agreement, but also the jurisdiction of the relevant legal advisors, the law most closely connected with the relevant legal communication and where the client is based, in order to ensure predictability and conform with parties' expectations at the time that documents were created.

Can privilege be maintained once documents are shared with insurers or brokers?

As a rule of thumb, the answer to this question depends predominantly upon whether you are looking at the position in a common law or civil law/codified jurisdiction where the rules on discovery/disclosure in the context of civil proceedings are very different. The position in the US can be more complex.

Common law jurisdictions such as England and Wales, Australia, Hong Kong and Singapore, have significant similarities. These jurisdictions tend to provide for an obligation on the parties to disclose all relevant documents in civil proceedings. As a consequence, while legal advice is more likely to fall within the remit of disclosure or discovery, common law jurisdictions also tend to provide for fairly robust rules which allow a party to claim privilege over such advice within certain parameters. The practical issue is whether and how that protection may be maintained if the privileged document is shared confidentially with a third party as we discuss below.

In contrast, in codified systems such as France, Germany and Spain, the power of one party to request the other party to disclose or produce documents in the context of legal proceedings is very restricted. As such, the concern that sharing legal advice with an insurer risks that advice falling for disclosure in the underlying proceedings is less of a practical concern. The concept of "privilege" does not exist to the same extent as in common law jurisdictions. 

English law has two mechanisms that will allow privileged material to be shared with third parties without losing privilege against the rest of the world:

1. Limited waiver

The doctrine of "limited waiver" in English law allows privileged materials to be disclosed to a third party (including either an insurer or a broker) without losing privilege against the rest of the world, provided that the documents are shared on a confidential basis. This applies regardless of whether there is a “common interest” between the parties.

Entering into a non-disclosure agreement or a confidentiality undertaking with insurers are common and effective ways of evidencing the confidential basis on which the information is being shared. Confidentiality must be maintained by the recipient for the doctrine to apply.

2. Common interest privilege

Common interest privilege allows privileged communications to be shared with others who have a common interest in the subject matter of the communication without losing privilege. The common interest must exist at the time the privileged communication is shared and confidentiality must also be maintained. The main distinction is that, where common interest privilege is available, both the original privilege holder and the party with whom the communication is shared are able to assert privilege in their own right.

The law in relation to common interest privilege is not well developed under English law its significance having been reduced because of the doctrine of "limited waiver". English law recognises that a common interest will exist between a broker and its policyholder client and will likely exist between insurer and policyholder. In the latter case, however, there must be the necessary unity of interest for common interest privilege to arise. This will not be the case, for example, where the insurer has avoided the policy and cannot legitimately be said to have a continuing “common interest” in the outcome of the underlying litigation to which the privilege applies. Where an insurer has cited other, perhaps less severe coverage defences it will be a question of degree to determine whether there is sufficient continuing common interest between the two parties to enable the privilege in shared advice to be protected.

Policyholders may look to put in place common interest privilege agreements or mark communications “subject to common interest privilege” in order to invoke this privilege. However, such agreements or labels are not conclusive evidence that a common interest exists. The parties will still have to demonstrate that the requirements of common interest privilege are satisfied.

Australian law provides two ways to share privileged material with third parties without waiving privilege.

1. Limited waiver

The doctrine of limited waiver protects privileged material shared with a third party (including an insurer / broker) if the material is shared in a way that is consistent with the communication otherwise remaining strictly confidential. The recipient of the privileged material must agree to: (i) only use the material for a limited and specific purpose; and (ii) treat the information disclosed as strictly confidential. Limited waiver does not require a “common interest”.

A policyholder should, therefore, obtain prior agreement from its insurer that the privileged material is being provided for a specific and limited purpose, that the information will be treated as strictly confidential and that the policyholder does not intend to waive privilege.

2. Common interest privilege

Common interest privilege is a defence to a claim that legal professional privilege has been waived. The defence is available where the discloser and recipient of a privileged document or communication have a commonality of interest in the subject matter. In relation to insurers, a policyholder and its liability insurer will generally have a sufficiently common interest in the defence of a third party claim. This commonality of interest will exist even before indemnity has been confirmed but will end if / when the insurer declines indemnity (and communications from that time will not benefit from the defence).

Policyholders should seek to put in place information sharing protocols, which enable sharing of information with insurers on a confidential basis for the limited purpose of their identified common interest. Marking documents and communications “confidential & privileged; subject to common interest privilege” may also practically assist in limiting the risk of inadvertent waiver. However, those words merely alert the reader to the existence of privilege, and it is still necessary for a common interest to exist for waiver to be avoided. 

In general, this situation may be covered under the broad umbrella of "common interest privilege" although it should be noted that this principle has only recently been confirmed as applicable in South African law and has not yet received extensive consideration by the South African courts.

Common interest privilege

Common interest privilege entails the preservation of legal professional privilege where the third party, recipient or creator of a communication has a common interest in the subject of the privilege with the primary holder. The key principle is that privilege is not lost where there is limited disclosure for a particular purpose or to parties with a common interest.

The principle of common interest privilege has been confirmed as applicable under South African law and has been held to apply to communications between a litigant and its insurer, or a third-party funder. However, it has not yet received extensive consideration by the Constitutional Court or the Supreme Court of Appeal and may be subject to further development.

At present, common interest privilege is applicable in South Africa where:

• there is a limited disclosure of privileged communications for a particular purpose;
• the parties have a shared interest in the outcome of the litigation; and
• the parties have a common interest in ensuring the confidentiality of communications.

It has been held in the Johannesburg High Court that "the sharing of privileged communications with [an] insurer can be added to these clear examples of common interest privilege". However, as this principle has not received extensive consideration by the Constitutional Court or the Supreme Court of Appeal, it remains advisable that caution be exercised when sharing privileged information and that each specific instance be carefully considered before the information is shared.

There is no “insurer-insured” privilege per se under US state or federal law, so the privileged status of any communications between a policyholder and insurer must fit within existing legal privileges to be afforded protection. The two key legal privileges are:

• the attorney-client privilege – which generally protects confidential communications between an attorney and a client for the purpose of giving or receiving legal advice, and
• the work-product doctrine – work product comes in two forms, “opinion” and “fact” work product. Opinion work product consists of the mental impressions, conclusions, opinions and legal theories of an attorney. It is given heightened protection and is generally not discoverable. By comparison, fact work product consists of factual material, including the results of a factual investigation, and can be subject to disclosure upon a showing of substantial need and an inability to obtain the equivalent without undue hardship by the party seeking disclosure.

These privileges exist on the federal and state levels in the United States, meaning that there is a US federal “common law” of attorney-client privilege and work product as well as the law of attorney-client privilege and work product for each US state. As US states have in some cases taken significantly different approaches on questions of privilege, strategies for preserving privilege in the context of US insurance litigation is a complex area of law.

Whilst privileged material can be shared with insurers and brokers without losing that privilege, the analysis is highly dependent on the governing state law (since different US states have approached the question in different ways) and the facts. Unlike under English law, there is no concept of “limited waiver” in US law. At the outset of any investigation regarding possible claims, the scope of the privilege under the relevant state law, as well as the risks of disclosure, should generally be considered before sharing privileged materials with a liability insurer.

1. Attorney-client privilege

As explained above, attorney-client privilege generally protects confidential communications between an attorney and a client for the purpose of giving or receiving legal advice. The traditional view in many US states is that a so-called “tripartite relationship” forms between the policyholder, the insurer, and the lawyers defending the insured when the insurer instructs lawyers on behalf of the policyholder as part of its duty to defend. The majority view under US law would therefore recognise the potential for attorney-client privilege to apply to communications between an insured and its liability insurer regarding an incident covered by the policy where, for example, the communications are intended for the insurer’s lawyers to defend the underlying claim against the insured (since the insured is contractually bound to cooperate in its defence). However, this view is not universal in the United States and in some states, the court may look to each individual communication to assess whether it meets the criteria for attorney-client privilege, including by assessing whether the dominant purpose of the communication was legal advice.   

Even in US states that recognise the tripartite relationship, there may be issues of timing to consider, e.g., when does the attorney-client relationship begin, thereby triggering the protection of privilege, and can the privilege cover communications that occur before defence counsel has been instructed. Generally speaking, US states have taken either a broad or narrow view of the timing issue. Under the broad view, communications between the policyholder and insurer that relate to the policyholder’s potential liability, for example, are considered as communications intended for counsel (even if counsel had not yet been instructed). US states taking a narrower view may deny the applicability of the privilege because the absence of a lawyer in the communications is deemed to be dispositive of the privilege analysis. If the insured has instructed external counsel but the insurer has not yet taken a position on coverage, no privileged materials should be shared with the insurer.

2. Common interest privilege

Common interest privilege is an extension of attorney-client privilege and protects communications among co-clients or parties that have common legal interests. Where, for example, external counsel is defending the insured and being instructed by the insurer, the primary basis on which communications can be shared with an insurer or broker in that scenario will be common interest privilege.

Case law in US states varies regarding what is required to demonstrate a “common” interest. In some US states, demonstrating the existence of a “common” interest requires demonstration of an “identical” interest. Other US states accept something less than an “identical” interest as qualifying for the privilege. Asserting a common interest privilege where the insurer has instructed defence counsel and the interests of the insurer and policyholder are fully aligned must therefore be distinguished from a situation where, for example, the insurer has agreed to defend under a broad reservation of rights. In the latter scenario, the availability of common interest privilege is far less straightforward and will vary depending upon the applicable US law.