Insurance Claims Files: How Privileged Are They?

Andrea M. Alonso and Kevin G. Faley, New York Law Journal

April 29, 2016

Claims files are the hard-drive of an insurance carrier. In these files, carriers record all information about a claim: opinions, discovery, reserves, witness statements, etc. With this information, insurance adjusters evaluate claims and apply their expertise in order to pay, adjust or disclaim a claim.

When a claim turns into litigation, an insurance adjuster's claims file can be very useful to opposing parties. Insurance claims files are, in theory, protected from discovery by work-product doctrine as "material prepared in anticipation of litigation." But these protections are situational.

Generally, work product is not protected if prepared by a party in the regular course of that party's business. In cases concerning insurance companies, whether preparation of a claims file occurs in a carrier's regular course of business has been an area thoroughly explored. Historically, New York courts held that claims files were created in response to accidents and therefore were not part of a course of business considered ordinary.1

However, courts in the 1980s reconsidered, specifically in first-party and subrogation claims, determining that since evaluating damages is the foundation of the insurance business, their normal course of business included claims preparation.2 Because of this interpretation, claims files may be discoverable until litigation of particular claims is anticipated. However, the general rule in third-party claims is that the insurer's file is not discoverable as it is implicitly assumed that litigation will ensue.

First-Party Claims

Insurers might end up as plaintiffs or defendants in litigation. Commonly, insurers are defendants when they disclaim and are sued by their insureds. They are plaintiffs when they pursue subrogation claims against a third party that caused a loss to the insured.

Insurer as Defendant. In cases when insurers are sued for disclaiming, the date of the disclaimer is generally used to determine when claims file information was in anticipation of litigation.3 The reasoning is that when a carrier disclaims, it does so anticipating litigation.

Unredacted versions of claims diaries investigating whether to pay or reject an insured's claim are part of an insurance carrier's regular course of business. As such, reports made before such a decision are not privileged and are discoverable.4 In first-party claims, mixed/multi-purpose reports are not privileged when originating before decisions rejecting claims, as those documents are not primarily legal in character.5

In Bombard v. Amica Mut. Ins.,6 the Appellate Division, Second Department, reiterated that "reports prepared by insurance investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are thus not privileged and are discoverable." In Bombard, the insured sued, challenging the insurer's decision to disclaim. The Supreme Court ordered that the insurer's entire claims file be disclosed. The Appellate Division affirmed, noting that all materials prepared prior to a decision to disclaim are considered made in the ordinary course of business, but amended the order excluding those materials that were created in anticipation of litigation.

If the insurer previously provided legal assistance for that now-insured plaintiff, tripartite issues might arise. A tripartite relationship is the triangular relationship between an insurer, the lawyer that the insurer hires to defend the insured, and the insured. Tripartite relationships create joint legal interests, which can become an issue if the relationship between insurer and insured sours. The lawyer in this situation owes a contractual obligation to the carrier, but a fiduciary duty to the insured.

If litigation proceeds, the client often relies on information in the insurer's claims files. If a conflict must be resolved between insurer and insured, claims files are not considered privileged because they are treated as belonging to both parties.

When covered accidents occur, insurers appoint counsel in these third-party claims. After counsel is appointed, courts have held that the "interest of insured and insurer merge."7 For example, if a driver was sued after an accident, the insurer would appoint counsel for the insured. At this point, the interests of the insurer and insured would combine.

Courts, like the First Department in Woodson v. Am. Transit Ins. Co., have found that the attorney's client is the insured and therefore the attorney-client privilege exists between the attorney and the insured, rather than the insurer.8 The Woodson court noted further that, "materials prepared by an insurer in contemplation of defending a claim against an insured are not privileged in subsequent litigation by the insured against the insurer respecting the insurer's handling of the claim."9

Insurer as a Plaintiff (Subrogation). In Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, the First Department held, "Documents prepared in the ordinary course of an insurer's investigation of whether to pay or deny a claim are not privileged, and do not become so 'merely because [the] investigation was conducted by an attorney.'"10 In this case, an insurer attempted to protect reports by having them prepared by counsel. The court ordered the insurer to produce all claims file information not specifically providing legal advice. The court reasoned that where counsel was primarily engaged in claims handling—an ordinary business activity for an insurance company—an insurer could not claim this was a privileged activity.

When insurers are plaintiffs, most commonly in litigation involving subrogation matters, claims files are discoverable when found to be made in the regular course of the carrier's business. Because insurers choose to pursue litigation and because their business is to keep claims files on incidents involving its clients, claims files are discoverable with relative ease. It is especially important to note that in subrogation claims, insurance payments and investigations preceding the litigation are a large portion of the subject matter and, as such, the information amassed by the insurer is critical to properly resolving the case. Claims file information prior to the actual filing date of the suit is most always discoverable.11

When Insurer Is Accused of Bad Faith. The issue of bad faith was addressed in Estee Lauder v. One Beacon Ins. Group.12 One Beacon delayed paying court-ordered fees, pressuring the plaintiff to settle outstanding claims in order to expedite outstanding payments. Plaintiff filed an order to produce documents prepared after litigation commenced (and therefore prepared in anticipation of litigation) concerning the payment of these settlements. Plaintiff requested documents including recommendations and notes concerning the readjustment process. The insurer argued that the materials, being created after litigation was anticipated, were protected. However, the Supreme Court, New York County, ruled that because the issues at hand concerned bad faith, the documents were relevant and ordered them produced.

Where insurers are accused of operating in bad faith, arguments that claims files are confidential often fail. In these types of cases, the complaint usually targets how the carrier handled a specific case, and the best way to uncover whether their analysis was done in bad faith is by examining the claims file. Because protecting parties against bad faith exploitation is in the interest of justice, courts allow discovery of information produced even post-lawsuit in cases dealing with these accusations.13

And, where allegations that the insurer has breached a duty to its insured exist, the insurer may not use the attorney-client privilege to shield from disclosure material relevant to the insured's bad-faith action.14 Such a broad policy exists when a plaintiff couples a bad-faith claim with additional litigation because there is always a substantial need for this information to properly litigate the case. The production of claims files in these circumstances causes an increased burden on insurance companies that have acted in good faith.

Insurer as a Third Party

The most common area where insurance claims file requests are denied involves litigation where the insurer is a third party.

Insurance policies include an insurer's promise to defend the insured against specified claims and to be indemnified for any liability. As a result of this "duty to defend," insurers provide the insured with legal counsel when a covered incident results in litigation. Here, the insurer is not a party to litigation but, as an interested third party, is sometimes a target of discovery requests concerning its claims file.

When the insurer is not a party to litigation, claims files commonly remain protected. It is difficult to make a strong case that the protected materials of a third party are so necessary that it should be compelled to disclose them. That has not stopped plaintiff's lawyers from seeking access to claims files.

It is important to note that the referred-to course of business requires the insured to keep and investigate these records in these situations. Claims files are not discoverable when the insurer is not a party to the action unless maintenance of claims files is shown to be part of the insured's regular course of business.15 The compelling of a claims file is highly irregular in a third-party situation. However, if it is, the burden to show that files were not prepared in the regular course of business remains with the party resisting discovery.16 Seldom will businesses that are not insurers keep claims files like those in question, and so the situation allowing discoverability of these files in a third-party scenario is uncommon.

In All Waste System v. Gulf Insurance, (note 15) the Second Department reversed an order granting access to claims file information, holding that reports which outside legal counsel prepared for an insurer were privileged and therefore not subject to disclosure. The court highlighted that because the party in question was a third party, as long as the communication is primarily or predominately of a legal character, the privilege is not lost because it contains non-legal concerns. This differed from first-party situations, where multipurpose documents were ordered to be produced, because attorney-client privilege applies to legal communications, and mixed-purpose documents are not considered legal documents. In All Waste, those same multipurpose documents were deemed privileged when the insurer is not party to the litigation.

In Kin Hwa Ku v. City of New York,17 the Second Department held that "Statements given to a liability insurer's claims department which are solely 'prepared in anticipation of litigation' are entitled to qualified immunity from discovery pursuant to CPLR 3101(d)(2)." The case involved a pedestrian, hit by a city bus, and suing the city for injuries. Plaintiff was not entitled to information that the bus driver provided to the city's insurer. When an accident of this sort occurs, the insurer automatically anticipates litigation with the injured party.

Furthermore, claims files are not discoverable when the carrier is insuring a singular person as individuals rarely have a course of business.18 Accordingly, in automobile insurance cases, claims files will not be discoverable. In many personal injury cases this will also be the case, unless the insured itself is a type of business that keeps those particular types of records.

Rules like these protect the information of insurance companies from being discovered in litigation that they are technically not a part of. Though policies dictate that insurer's provide defense for the insured that does not entitle plaintiff to access a claims file.

Conclusion

Claims files are alarmingly easy to access when the insurer is involved in the litigation. The very nature of the claims file is to gather the information needed to make educated decisions regarding claims in question. In many ways, a carrier anticipates litigation as part of its regular course of business and is disadvantaged because of it. Fortunately for insurers and their attorneys, much of insurance litigation work involves third-party representation and these claims files are protected.

Endnotes:

Seaview Chef, Inc. v. Transamerica Ins. Co., 61 A.D.2d 1043, 403 N.Y.S.2d 123 (2d Dept. 1978) overruled by Landmark Ins. Co. v. Beau Rivage Rest., Inc., 121 A.D.2d 98, 509 N.Y.S.2d 819 (2d Dept. 1986).
Landmark Ins. Co. v. Beau Rivage Rest., Inc., 121 A.D.2d 98, 509 N.Y.S.2d 819 (2d Dept. 1986).
Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc., 119 A.D.3d 492, 990 N.Y.S.2d 510 leave to appeal dismissed, 24 N.Y.3d 990, 20 N.E.3d 653 (1st Dept. 2014).

4. Donohue v. Fokas, 112 A.D.3d 665, 976 N.Y.S.2d 559 (2d Dept. 2013).

5. Melworm v. Encompass Indem. Co., 37 Misc.3d 389, 951 N.Y.S.2d 829 (Sup. Ct. 2012) aff’d, 112 A.D.3d 794, 977 N.Y.S.2d 321 (2d Dept. 2013).

6. 11 A.D.3d 647, 783 N.Y.S.2d 85 (2d Dept. 2004) (emphasis added).

7. Ferreira v. Capitol Specialty Ins. Corp., 31 Misc.3d 1209(A), 929 N.Y.S.2d 199 (Sup. Ct. Kings Co. 2011). 8. 280 A.D.2d 328, 328, 720 N.Y.S.2d 467, 468 (1st Dept. 2001).

Nat'l Union Fire Ins., 119 A.D.3d 492.
Brooklyn Union Gas Co. v. American Home Assur. Co., 23 A.D.3d 190, 191, 803 N.Y.S.2d 532 (1st Dept. 2005). 12. 2013 WL 1703243 (Sup. Ct. New York Co. 2013).

13. Id.

14. Woodson, 280 A.D.2d 328.

15. All Waste Sys., Inc. v. Gulf Ins. Co., 295 A.D.2d 379, 380, 743 N.Y.S.2d 535, 536 (2d Dept. 2002).

16. A large portion of claims files ordered to be produced, are ordered because the appealing party failed to meet its burden, showing factual evidence as to why the file should not be discoverable. Id.

17. 106 A.D.3d 698, 699, 966 N.Y.S.2d 119, 120 (2d Dept. 2013).

18. Estee Lauder, 2013 WL 1703243.

Andrea M. Alonso and Kevin G. Faley are partners at Morris Duffy Alonso & Faley. Patrick Prager, a paralegal, assisted in the preparation of this article.

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