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Blurred Lines: New York Supreme Court Clarifies Scope of Privileged Documents in Connection with Pre-Denial Communications Prepared by Insurer's Coverage Counsel

Insurance Coverage Alert | September 8, 2015
By: Greg Steinberg

In a recent decision, the New York Supreme Court clarified the scope of privileged documents with respect to communications prepared by an insurer’s counsel prior to issuing a denial of coverage letter. The coverage litigation at issue arose out of MF Global Inc.’s claims under fidelity bonds for losses incurred as a result of large trades made by former MF Global employee, Evan Dooley. The trades cost MF Global, Dooley’s former clearing firm, $141 million after it had to reimburse the CME Group, Inc. futures clearinghouse that handled the trade. The insurers that issued the fidelity bonds contested coverage and sued MF Global in 2009. 

The opinion underscores the fact that there is no “bright line” rule in New York with respect to disclosure of communications in the insurance context prior to the issuance of a coverage determination – the disclosure requirement will instead turn on what’s actually privileged. In addition, while retention of counsel may not serve as an automatic shield for all documents prepared prior to the coverage decision, insurers will not be required to disclose, among other things, communications which include an “indicia of the provision of legal services.”

During the course of discovery, MF Global moved to compel production of documents prepared by the insurers’ counsel primarily during the period preceding the insurers’ April 1, 2009 coverage determination, as to which the insurers asserted the attorney-client privilege. On March 20, 2015, a Special Referee issued a report and recommendation in which the Referee concluded that prior to the decision to deny coverage on April 1, 2009, the insurers’ counsel “were acting as claims investigators, not attorneys.” On this basis, the Referee recommended that the insurers be compelled to produce all documents predating the coverage decision because such documents reveal “neither legal advice, nor legal recommendations.”

On August 25, 2015, Justice Mary Friedman of the New York Supreme Court rejected “as overbroad” the Referee’s conclusion that the privilege does not apply to any document prepared prior to the coverage denial, noting that there is “no per se rule to that effect.” In reaching this conclusion, Justice Friedman cited a history of New York State law in support of the general proposition that disclosure should only be compelled when review of the record “shows that counsel were primarily engaged in claims handling – an ordinary business activity for an insurance company.” However, Justice Friedman noted that even in cases where an insurer’s counsel was primarily carrying out claims handling activities, certain documents which contain legal advice may nevertheless be privileged. Justice Friedman also noted that the Referee himself recognized that the documents at issue included attorney memoranda containing summaries of legal research, case law, discussions of the applicable law, and application of the law to the facts of the case. Thus, although the insurers’ counsel acted as claims investigators, “they also provided legal advice and legal services prior to the April 1, 2009 coverage decision.” While noting that hiring counsel to perform “ordinary business activity of claims investigation” cannot “serve to cloak the pre-denial documents with the attorney-client privilege,” the court ruled that “to the extent these documents include case law or choice of law analysis, reveal legal strategy, or contain other indicia of the provision of legal services, they must be redacted.”

For further information on this matter, please contact Greg Steinberg (212.714.3066; steinbergg@whiteandwilliams.com) or another member of our Insurance Coverage Group.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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