One Insurer Seeks To Avoid Another Insurer’s Attorney-Client Privilege

Regular readers of Coverage Opinions know that, for the past few years, I have been addressing attempts by policyholders to seek discovery from their insurers’ outside coverage counsel. In an effort to circumvent attorney-client privilege, policyholders frequently argue that outside counsel was not acting as an attorney for its insurer-client, but, rather, was investigating or handling the claim.

Many courts draw this distinction when it comes to attorney-client privilege between insurers and their outside coverage counsel. In general, to maintain privilege, there are courts that say that outside counsel must be providing legal advice to the insurer. If the court believes that counsel was investigating the claim, or acting in the role of an adjuster, privilege may be lost.

There has been a significant trend over the past few years of cases of this sort. And insurers have had a fair share of losses on this issue. Perhaps that explains why the situation keeps presenting itself.

TIG Insurance Co. v. Swiss Re took the issue in another direction – a re-insurer seeking to discover the allocation methodology used by another re-insurer to determine the extent of its obligations for a series of policies covering environmental claims.  [Insurer v. insurer – it’s the Cain and Abel of coverage disputes.] 

Given the novelty of this attorney-client privilege decision, I chose it as a Top 10 coverage case of 2023.  In addition, what was sough -- allocation methodology – is generally considered  by insurers to be highly confidential and surely subject to attorney-client privilege.  Not to mention that an insurer or re-insurer seeking such information in one case may be on the other side of such a request in another.

In TIG, a Magistrate Judge in the Southern District of New York (not in a Report and Recommendation) ruled that documents concerning the reinsurer’s allocation methodology must be turned over.

[The court also ruled that certain documents prepared by or for Swiss Re’s “Key Case Committee” were discoverable. The Key Case Committee was described as a “high-level committee . . . [that] advise[s] on legal strategies, reserve positions and other key issues raised by large and difficult claims.”  I’m focusing here on the court’s discussion of the allocation issue and not how it analyzed the various privilege issues concerning discoverability of the Key Case Committee documents. But if you have this issue, that aspect of the opinion is worth reading.]

TIG Insurance Company, successor to Ranger Insurance Company, settled certain claims against power companies, for damages incurred at fifteen combustion plants, that were covered by policies issued by Ranger. Putting aside the specifics of the reinsurance relationship, which is no doubt complex, AEGIS [Associated Electric and Gas Insurance Services Limited], as the initial reinsurer of six policies, made payment of the settlement. AEGIS then sent Swiss Re a bill for what AEGIS maintained was its share of the settlement the six policies.

Swiss Re declined to make payment for various reasons, including on the basis that “the amount sought was unreasonable and based on unilateral allocation modeling, which [Swiss Re] maintains was erroneous.” TIG and AEGIS filed suit.

At issue before the New York federal court: a protective order shielding Swiss Re from producing the following documents on the grounds that they are protected by the attorney-client privilege: “(1) communications and presentations generated by Defendant’s ‘Key Case Committee’ that analyzed potential liability on Duke Energy’s asserted claims; and (2) documents and communications regarding allocation modeling of Duke Energy’s claims across the policies issued by Ranger.”

As this was not a situation of an insurer seeking to protect communications with its outside coverage counsel, from a policyholder, the court did not look at the issue from a legal advice versus claim handling/claim investigation standpoint.

Rather, at issue was the role of attorney-client privilege in the “corporate context,” which the court noted “poses special problems,” as “in-house counsel often fulfill the dual role of legal advisor and business consultant.” The court observed that a “communication is not protected simply because it is shared with an attorney, rather it must be ‘primarily’ or ‘predominantly’ of a legal nature.”

Turing to the discoverability of the allocation modeling documents, the competing arguments of the parties were as follows:

“Defendant [Swiss Re] claims that these documents are privileged because modeling exposure involves ‘predict[ing] how the court handling the underlying coverage litigation might allocate the overall loss across Duke’s entire insurance program.’ As a result, Defendant argues that this requires ‘legal judgment.’”

AEGIS and TIG “counter that ‘allocation modeling of this type is a standard practice to help an insurer evaluate a claim,’ and that deposition testimony confirms that it is business analysis done by non-lawyers to determine how liability should be apportioned.

The Court agreed with AEGIS and TIG. Noting that there is “a dearth of caselaw on whether the attorney-client privilege applies to allocation modeling,” the court concluded that the allocation modeling documents are “business records” and not protected by attorney-client privilege:

“[T]he allocation documents [Swiss Re] submitted for in camera review are primarily for the purpose of modeling potential loss scenarios that could result from the North Carolina court’s decision regarding Plaintiffs’ liability to Duke Energy. Where a document or e-mail is generated for the purpose of obtaining or providing business advice, even if attorneys are involved, the attorney-client privilege does not apply. . . [Swiss Re’s] contention that the allocation modeling documents are privileged because they were generated with input from inside and outside counsel does not alter the purpose of the documents—to determine financial liability. Even the few communications that involve outside counsel are primarily for the purpose of analyzing claim exposure and, therefore, are not privileged.”

While the scenario does not involve the more frequent one, of a policyholder seeking to obtain communications between an insurer and its outside coverage counsel, some policyholders may try to use this decision to its benefit in that situation. And given its novelty, insurers and outside counsel, who handle these types of reinsurance-allocation situations, especially for claims that involve successive triggered policies, will no doubt give the decision much thought.