Confidentiality and Privilege in the Insurer–Policyholder–Defense Counsel Relationship
By Richard C. Giller 
In most jurisdictions, evidentiary privileges are creatures of statute, and courts are generally powerless to either create new ones or carve out exceptions to statutorily created ones. Neither federal common law nor the vast majority of states recognize any type of insurer-insured privilege. As a result, communications between an insurance company and its policyholder or with the insured’s defense counsel are not inherently protected from disclosure to third parties. For such communications to be protected, some other privilege must apply.
The attorney-client privilege has been described as the “oldest rule of privilege known to the common law.” The privilege is designed to allow clients to be candid with their attorneys without fear that the information might be discovered by others. The privilege recognizes that public policy is best served when an attorney provides sound legal advice and zealous representation, which depends on the attorney being fully informed by his or her client of the facts and circumstances surrounding the case.
However, the attorney-client relationship in the insurance setting is more complex than in other litigation scenarios because it involves the sharing of information by the lawyer or client with a third party (an insurance company) and protects only those communications between a client and an attorney for the purpose of obtaining legal advice. As noted below, some communications with an insurer fall outside this protection because they are not made for the purpose of obtaining legal advice. As a general rule, the privilege is waived when otherwise confidential information is shared with third parties outside the attorney-client relationship. The injection of an insurance company into this relationship complicates application of the privilege.
In addition to the attorney-client privilege, the “joint defense” or “common interest” doctrine protects information shared among parties involved in litigation who are represented by separate counsel but who are engaged in the joint defense of a claim. The doctrine is not technically a privilege in and of itself;instead, it creates an exception to the general rule that the attorney-client privilege is waived when privileged information is voluntarily disclosed to a third party. It was established to facilitate communications between aligned parties to protect their common interests in a litigated matter with respect to communications designed to further that joint legal effort. The execution of a joint defense or common interest agreement allows the parties and their counsel to disclose privileged information to one another without destroying the privileged nature of those communications. The joint defense doctrine is often discussed in cases involving the tripartite insurer-insured-counsel relationship.
A question that routinely arises in the insurance context is whether the attorney-client privilege or the joint defense doctrine applies to shield from disclosure those communications within the tripartite relationship. Many practitioners may be surprised to learn that such communications are not always protected and, in fact, are routinely deemed to be discoverable. Whether a tripartite communication is protected from disclosure to a third party appears to turn on whether the insurer had the right and is exercising control over the defense of the underlying litigation. If it is controlling the litigation without reservation, then tripartite communications will most likely be protected. On the other hand, if an insurer never had a right to control the defense or if, for whatever reason, it abdicated that control to the insured, courts appear reticent to shield from production those communications between an insured or its counsel and the insurer. This article examines the case law establishing the rules concerning when and under what circumstances tripartite communications are protected from discovery. 
A determination of whether a tripartite communication is protected from disclosure depends, in large part, on the following factors: whether the insurance policy at issue imposes a duty on the part of the insurer to provide the policyholder with a defense in the underlying litigation; which party—insurer or policyholder— selects and pays for counsel; and whether the insurer provides a defense with or without reservation. These situations are discussed in more detail below.
A. Defense Counsel Selected and Paid for by Carrier
Most standard liability insurance policies include a provision indicating that the insurance company has the “right and duty” to defend lawsuits seeking damages covered by the policy. When triggered, the duty-to-defend provision also allows the insurer to select and retain counsel, pay the costs of that defense up front, and control the litigation. In instances where an insurance company accepts without reservation its duty to provide the policyholder with a defense in a litigated matter and the insurer selects and pays for counsel, courts generally acknowledge that tripartite communications are protected from disclosure by the attorney-client privilege. In that situation, both the insurer and the insured are “considered the clients of the defense counsel, and an attorney-client privilege is shared among all of them.”
It has been held that “so long as the interests of the insurer and the insured coincide, they are both the clients of the defense attorney and the defense attorney’s fiduciary duty runs to both the insurer and the insured.” Similarly, courts recognize that “when an insurer, as required by its contract of insurance, employs counsel to defend its insured, any communication with the lawyer concerning the handling of the claim against the insured, is necessarily a matter of common interest to both the insured and the insurer.”
When an insurer accepts a tender of defense without reservation, a circumstance that is relatively rare in today’s insurance setting, most jurisdictions hold that tripartite communications are protected from disclosure to third parties. However, not all communications within the tripartite relationship fall within the joint defense or common interest doctrines. As one court noted, an insured may communicate with its insurer for a variety of reasons, many of which have little to do with the pursuit of legal representation or the procurement of legal advice.
In some jurisdictions, courts conclude that, even though an insured and an insurer would have a common interest in defeating or minimizing claims against the insured and the insurer retains counsel for the insured, “the attorney’s only allegiance is to the client, the insured.” Other jurisdictions recognize that an insurer’s contractual obligation to pay its insured’s litigation expenses does not, by itself, create a common interest between the insurer and the insured that is sufficient to warrant application of the common interest exception to the attorney-client privilege. When there is no clear joint representation, courts are reluctant to insulate tripartite communications.
B. Defense Counsel Selected and Paid for by Carrier
As noted above, in situations where the insurer has agreed that it has a duty to defend and indemnify the insured, courts generally conclude that both the insured and the insurer are clients of defense counsel selected and paid for by the insurer. However, where the insurer defends under a reservation of rights, denying the duty to indemnify on some or all of the claims, a number of courts hold that appointed defense counsel represents only the insured and not the insurance company. In addition, when a reservation of rights creates a conflict of interest between the insurer and the policyholder, some states require the appointment of independent counsel paid for by the insurer. In those situations, independent counsel represents only the policyholder, and no attorney-client relationship exists between the insurer and independent counsel.
C. Insurer Denies Defense Obligation; Insured Retains Counsel
Courts uniformly conclude that where the policy at issue includes a duty to defend but the insurer denies or rejects that duty, requiring the insured to retain its own counsel wholly independent from the insurer, communications between that counsel and the insurer are generally not protected from disclosure under either the attorney-client privilege or the joint defense doctrine. The common thread of these cases is that actual joint representation and cooperation toward a common legal goal, as opposed to some theoretical common interest, is required.
Under these circumstances there is clearly no joint representation and therefore no shared privilege. While an insurer may share the same desire as the insured to limit or escape liability in the underlying action, this does not qualify as an “identical legal interest” sufficient to trigger the joint defense doctrine. In situations where an insurance policy includes a defense obligation and the insurer refuses to acknowledge or accept the tendered defense of an insured, the insurer’s legal interest directly conflicts with that of the insured; therefore, the joint defense doctrine does not apply.
D. Defense Counsel Selected and Paid for by Policyholder
Another setting in which courts refuse to protect tripartite communications is when the insurance policy at issue does not include a defense obligation and the insured retains and pays for defense counsel. Some insurance policies, like standard directors and officers (D&O) policies, expressly disavow any duty to provide a defense. For example, a typical defense clause in a D&O policy provides:
[T]he Insurer does not . . . under this policy, assume any duty to defend. The Insureds shall defend and contest any Claim made against them. The Insureds shall not admit or assume any liability, enter into any settlement agreement, or incur any Defense Costs without the prior written consent of the Insurer.
With these types of policies, the duty falls upon the policyholder (rather than the insurer) to select and retain defense counsel, and to front the costs of that defense, with the carrier reimbursing the policyholder for defense costs pursuant to the terms of the policy. Under a typical D&O policy, unlike standard liability policies, it is the insured that controls the defense of the underlying litigation. In these situations, courts generally refuse to recognize either the attorney-client privilege or the joint defense doctrine as protecting tripartite communication. Two California cases illustrate this approach.
In Continental Casualty Co. v. St. Paul Surplus Lines Insurance Co., the court applied California law in a wrongful death lawsuit arising from a fatal forklift accident. Continental agreed to defend the policyholder under a reservation of rights and agreed to pay for independent counsel because a conflict was created by virtue of the reservation. In contrast, St. Paul refused to participate in the insured’s defense under a policy that did not contain a duty-to-defend provision.
In related cross-claims to determine the respective liability of the two insurers, Continental sought discovery of communications between St. Paul, the insured, and its independent counsel. St. Paul refused to produce the communications on the grounds that the joint defense doctrine protected from disclosure the tripartite communications. The court rejected this argument, concluding that, because St. Paul did not provide a defense for its insured, it was not part of a protected tripartite relationship. The court further noted that the attorney-client privilege does not extend to communications between an insured, an attorney, and insurer who is defending with a reservation of rights, let alone to an insurer that is not defending at all.
Similarly, the court in Imperial Corp. of America determined that two status letters written by counsel for the insured to an insurer that issued a D&O policy were discoverable by a litigant opponent in an ongoing case. In those letters, counsel analyzed the allegations of the underlying litigation and provided his “candid analysis of the risk of exposure presented by the underlying action and further addresse[d] a settlement demand made by plaintiffs in the underlying action.” The second letter, which was more detailed than the first, also sought to persuade the D&O carrier to contribute to a settlement of the case. The court determined that the letters were not written by or to clients of counsel selected and paid for by the insureds. Instead, according to the court, the letters were written for the express purpose of apprising the insurer of the status of the case and seeking contribution towards a settlement, not for seeking or imparting legal advice. Accordingly, the letters were not protected from disclosure by the attorney-client privilege.
These status letters were discoverable by the litigant opponent despite the fact that the parties had executed two joint defense agreements, the stated purpose of which was to enable the defendants to share confidential information in order to facilitate their defense of the litigation and to maintain the confidentiality of the shared information. The agreements also barred disclosure by the signatories of confidential client communications, work product, discovery, and strategy. Both agreements were signed by in-house and outside counsel for the insureds and one of them was also signed by the insurer.
In concluding that the letters were not protected from disclosure, the court relied heavily on the fact that under the terms of the policy, the insurer did not have a duty to defend the director defendants; it played no role in the selection, retention, or payment of the legal fees incurred by counsel for the directors; and the insurer was represented by its own counsel, separate from the directors’ counsel. The holdings in In re Imperial Corp. and Continental Casualty v. St. Paul are not anomalies but rather the majority rule. In the D&O insurance setting, communications between defense counsel and the insurance company are generally not protected from disclosure by the doctrines of attorney-client privilege or joint defense.
As detailed in this article, the issue of whether communications between an insurance company, its policyholder, and/or the insured’s defense counsel are protected from disclosure to third parties depends upon a variety of factors including the type of insurance policy at issue and the insurer’s coverage position. It is abundantly clear that practitioners should not assume that communications shared with an insurer will not fall into the hands of a litigant opponent and that they should remain vigilant as to how best to balance the obligation to share information with an insurer, with the risk that such communications might be discovered in the underlying litigation, possibly by litigant opponents.
Keywords: insurance, litigation, tripartite, attorney-client privilege, joint-defense doctrine, reservation of rights
Richard Giller is insurance coverage counsel at Alston & Bird LLP, Los Angeles, California.
 Richard Giller is Insurance Coverage Counsel in the Los Angeles Ooffice of Alston & Bird LLP.
 See Zurich American Insurance Co. v. Superior Court of Los Angeles County, 155 Cal. App. 4th 1485, 1494 (Cal. Ct. App. 2007), a case in which the author was one of the attorneys of record at both the trial and appellate court levels.
 See Pearson v. Miller, 211 F.3d 57, 67 (3d Cir. 2000) (“Federal courts have never recognized an insured-insurer privilege as such.”) (quoting Linde Thomson Langworthy Kohn & VanDyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508 (D.C. Cir. 1993) (internal quotations omitted)).
Only Illinois, Indiana, and Missouri recognize an insurer-insured privilege. People v. Ryan, 30 Ill.2d 456, 461, 197 N.E.2d 15 (Ill. 1964) (privilege applies where insurer is defending or participating in the defense of the insured); Richey v. Chappell, 594 N.E.2d 443, 447 (Ind. 1992); State ex rel. Cain v. Barker, 540 S.W.2d 50 (Mo. 1976) (privilege applies where the insured has a contractual obligation to promptly report incidents and the insurer is obligated to defend).
 Go Med. Indus. Pty., Ltd. v. C.R. Bard, Inc., No. 3:95MC522 (DJS), 1998 U.S. Dist. LEXIS 22919, at *6 (D. Conn. Aug. 14,1998).
 For example, courts have concluded that disclosure of confidential information contained in billing invoices to third-party auditors may result in waiver of attorney-client privilege or work-product protection. United States v. Mass. Inst. of Tech., 129 F.3d 681 (1st Cir. 1997); In re Rules of Prof’l Conduct & Insurer Imposed Billing Rules and Procedures, 299 Mont. 321 (Mont. 2000).
 “The concept of a joint defense is not technically a privilege in and of itself but instead constitutes an exception to the rule on waiver where communications are disclosed to third parties.” Holmes v. Collection Bureau of Am., Ltd., 2010 U.S. Dist. LEXIS 4253, at *6 (N.D. Cal. 2010).
 It is well established that, in insurance coverage litigation between an insured and its carrier or carriers, the joint defense doctrine generally does not protect from disclosure communications between an insured and counsel supplied by the insurer, and this article does not analyze that scenario. See Goldberg v. Am. Home Assurance Co., 80 A.D.2d 409, 413, 439 N.Y.S.2d 2, 5 (N.Y. 1981).
 Cont’l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 519 (E.D. Cal. 2010).
 Nat’l Union Fire Ins. Co. v. Stites Prof’l Law Corp., 235 Cal. App. 3d 1718, 1727 (Cal. Ct. App. 1991). See also N. River Ins. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366 (D.N.J. 1992) (“The [joint defense] doctrine has been recognized in the insured/insurer context when counsel has been retained or paid for by the insurer, and allows either party to obtain attorney-client communications related to the underlying facts giving rise to the claims, because the interests of the insured and insurer in defeating the third-party claim against the insured are so close that ‘no reasonable expectation of confidentiality is said to exist.’”) (citations omitted)); Goldberg, 80 A.D.2d at 413 (joint defense doctrine “especially” applies “where an insured and his insurer initially have a common interest in defending an action against the former”); 81 Am. Jur. 2d Witnesses § 434 (2004) (“When an insurer, as required by its contract of insurance, employs counsel to defend its insured, any communication with the lawyer concerning the handling of the claim against the insured is necessarily a matter of common interest to both the insured and the insurer, and the attorney-client privilege is inapplicable.”).
 Glacier Gen. Assurance Co. v. Super. Ct. of L.A. Cnty., 95 Cal. App. 3d 836, 842 (Cal. Ct. App. 1979); Nationwide Mut. Ins. Co. v. Bourlon, 617 S.E.2d 40, 46 (N.C. Ct. App. 2005) (concluding that a tripartite attorney-client relationship existed whereby an attorney provided joint representation to both the insurer and the insured).
 It is clearly the exception, rather than the rule, when an insurance company accepts its defense and indemnity obligations without reserving any rights to later challenge that the underlying case presented either the potential for coverage or actual coverage under the terms of a policy. In so doing, an insurer would be relinquishing all of its rights to rely on any of the conditions or exclusions in a policy to limit its liability.
 Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1515 (D.C. Cir. 1993) (“Certainly, where the insured communicates with the insurer for the express purpose of seeking legal advice with respect to a concrete claim, or for the purpose of aiding an insurer-provided attorney in preparing a specific legal case, the law would exalt form over substance if it were to deny application of the attorney-client privilege. However, a statement betraying neither interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the attorney-client relationship and thus does not come within the ambit of the privilege.”).
 Metro. Life Ins. Co. v. Aetna Cas. & Sur. Co., 249 Conn. 36, 730 A.2d 51 (Conn. 1999); Novella v. Hartford Accident & Indem. Co., 163 Conn. 552, 573, 316 A.2d 394, 405 (Conn. 1972); Higgins v. Karp, 239 Conn. 802, 810, 687 A.2d 539, 543 (Conn. 1997) (“[E]ven when an attorney is compensated or expects to be compensated by a liability insurer, [his or] her duty of loyalty and representation nonetheless remains exclusively with the insured.”).
 In re Pfizer Inc. Secs. Litig., No. 90 Civ. 1260 (ss),1993 U.S. Dist. LEXIS 18215 (S.D.N.Y. Dec. 23, 1993) (rejecting the argument that an insured and its insurer share common interest about a legal matter and holding that disclosure by insured to insurer waived the attorney-client privilege).
 Lectrolarm Customs Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567 (E.D. Cal. 2002).
 The court in Lectrolarm concluded that the “first and most important element of the attorney client privilege” (i.e., a relationship between an attorney and a client) is missing when a conflict of interest regarding coverage requires the appointment of independent counsel by the insured. The court held: “Nor can it be accurately said that the insurer is a necessary party to communications between [independent] counsel and the insured. Finally, in general, it is not likely that communications between the insurer and [independent] counsel would be for the purpose of giving or receiving legal advice because in such a case (where coverage is disputed) each is likely to have their own attorney.” Some states, such as California, have statutory provisions relating to application of the privilege to independent counsel. Pursuant to California Civil Code section 2860(d), any non-privileged insurance coverage information disclosed by the insured or independent counsel to the insurer is “not a waiver of the privilege as to any other party.”
 See N. River Ins. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 367 (D.N.J. 1992) (concluding that when the insurer does not appoint counsel for the insured, the common interest theory breaks down). See also Vt. Gas Sys., Inc. v. U.S. Fed. & Guar. Co., 151 F.R.D. 268, 277 (D. Vt. 1993); Remington Arms Co. v. Liberty Mut. Ins. Co., 142 F.R.D. 408, 417–18 (D. Del. 1992); Bituminous Cas. Corp. v. Tonka Corp., 140 F.R.D. 381, 386–87 (D. Minn. 1992).
 Int’l Ins. Co. v. Newmont Mining Corp., 800 F. Supp. 1195, 1196 (S.D.N.Y. 1992).
 Cont’l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510 (E.D. Cal. 2010).
 Imperial Corp. of Am. v. Shields, 167 F.R.D. 447 (S.D. Cal. 1995).