Coverage Counsel Should Not Act Outside the Obligation to Advise the Insurer Client

Neither the Attorney Client Privilege Nor the Work Product Protection Apply if Outside the Representation of the Insurer

Sep 02, 2021

FACTS

The underlying litigation is the latest episode in an unfortunate saga that began on April 28, 2012, when a large tent, which Kilroy Was Here had installed for its bar patrons near Busch Stadium in downtown St. Louis, came unmoored during a storm killing one and seriously injuring seven others. After the victims sued for damages alleging Kilroy was negligent in connection with the set up and maintenance of the tent, they offered to settle for $720,100 all claims against Kilroy and Kilroy's insurer Starr Indemnity and Liability Company, which was providing the defense through attorney Brian McBrearty.

Two days later, Kilroy, through separate counsel, demanded that Starr settle the claims for the amount the underlying plaintiffs had offered, which was within the $1 million policy limits, and advised that the failure to do so would expose Starr to liability for bad faith refusal to settle. Starr retained attorney Keith Phoenix to advise Starr with respect to its potential liability exposure for bad faith refusal to settle.

On May 15, 2015, Starr, through Mr. Phoenix and on behalf of Kilroy, communicated its rejection of the underlying plaintiffs' settlement demand by making a counteroffer of $249,999.99. No settlement was ultimately reached.

Around the same time, Phoenix also became involved in the factual and legal issues pending in the case. For instance, he prepared a legal memorandum summarizing his legal research relating to Kilroy's "duty to monitor weather."

The case proceeded to a jury trial in the Circuit Court of the City of St. Louis that resulted in a March 14, 2016, verdict in favor of the underlying plaintiffs and against Kilroy in the total amount of $5.2 million. The Court of Appeal affirmed the judgment entered on the verdict in Martinez v. Kilroy Was Here LLC, 551 S.W.3d 491 (Mo. App. E.D. 2018).

The dispute centers on a subpoena duces tecum directed to the law firm which requests "[t]he entire file, including correspondence, billing records, and any other documents, either received or generated, for the Kilroy litigation, or more specifically related to Martinez, et al., v. Kilroy was Here, LLC, 1222-CC02394." The subpoena also requested testimony relating to those matters.

Starr objected and the he trial court sustained Starr's objections and quashed the subpoena finding that Relators failed to demonstrate any applicable exception or waiver of the attorney-client privilege.

ANALYSIS

The documents and testimony sought by Relators from the SPvG law firm may be discoverable to the extent: (1) Phoenix acted outside the scope of his representation of Starr which was purportedly to assess Starr's exposure for its alleged bad faith refusal to settle; (2) Phoenix acted as de facto co-counsel along with McBrearty in Kilroy's defense to the underlying wrongful death and personal injury suit; (3) Phoenix participated in claims adjustment activities or acted as a claims adjuster; and (4) that any other exception to the attorney-client privilege applies such as communications made in the presence of a third party.

Parties may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action.

The Attorney-Client Privilege And Attorney Work Product.

Confidential communications between an attorney and his client concerning the representation of the client are protected by the attorney-client privilege. Privileged material is any professionally-oriented communication between attorney and client regardless of whether it is made in anticipation of litigation or for preparation for trial. To be privileged, the communication must be made in order to secure legal advice. Absent a waiver, such privileged communications are immune from discovery.

The party seeking discovery has the burden of establishing the relevance of the sought-after materials. If relevance has been established or is uncontested and the opposing party asserts that a privilege precludes disclosure, the opposing party bears the burden of showing the privilege applies.

Blanket assertions of work product are insufficient to invoke protection. In order to invoke work product protection, the party opposing discovery "must establish, via competent evidence, that the materials sought to be protected

are documents or tangible things,
were prepared in anticipation of litigation or for trial, and
were prepared by or for a party or a representative of that party.

Exceptions to the attorney-client privilege.

Not all communications between an attorney and client are privileged. For example, it is generally accepted that where the attorney acts as a collection agent, the communications between him and his client are not protected by the privilege. In State ex rel. Shelter Mut. Ins. Co. v. Wagner, 575 S.W.3d 476, 483 (Mo. App. W.D. 2018) the court recognized that when an "attorney acted as a claims adjuster, claims process supervisor, or claims investigation monitor, and not as a legal advisor, the attorney-client privilege would not apply.

Moreover, a party cannot claim attorney-client privilege over communications when a third person representing an adverse party was present.

In State ex rel. Great American Insurance Co. v. Smith, 574 S.W.2d 379, 386-87 (Mo. 1978). "[T]he determinative issue [is] whether the relationship of attorney and client existed between the parties at the time of the communication with reference to the subject matter of the communication."

The Subject Matter Of Phoenix's Representation Of Starr Was Starr's Bad Faith Exposure To Kilroy.

Inasmuch as Starr hired SPvG to provide legal advice with respect to Kilroy's potential bad faith claim against Starr, a review of the elements and nature of such a claim will help define the parameters and scope of SPvG's representation.

Respondent's Task Upon Remand Is To Determine To What Extent The Materials And Topics Encompassed By The Subpoena Along With Mr. Phoenix's Actions, Communications, And Mental Impressions Exceeded The Scope Of His Representation Of Starr For Its Potential Exposure For Bad Faith Refusal To Settle.

The critical point(s) in time for an insurer's liability exposure for the alleged bad faith refusal to settle is when the insurer had a chance to do so. On the limited record before us, the chance to settle on the part of Starr appears to have occurred in April 2015.

In the situation where a third party is suing an insurer's policy holder, it is the insurance company's control over the claim that creates a fiduciary relationship between insurer and insured. So, Starr continued to provide and to control the defense through Mr. McBrearty and retained its right to control settlement negotiations and ultimately whether settlement occurred. But now that Kilroy had notified Starr that Kilroy believed that Starr's failure to settle established grounds for Kilroy to sue Starr for the bad faith refusal to settle in the event of an excess verdict, Kilroy and Starr, at least in this context, were now in an adversarial posture.

On April 28, 2015, in apparent recognition of this potential conflict, Starr retained Mr. Phoenix "to provide advice and counsel. . . in connection with allegations of bad faith refusal to settle the underlying lawsuit." Starr could continue to fulfill its contractual duty to Kilroy to defend it in the underlying lawsuit. And through Mr. Phoenix, it could receive advice with respect to its potential bad faith exposure. The record shows, however, that these two tracks converged.

Phoenix appears to have acted as Kilroy's de facto co-counsel in the underlying litigation.

On the record before us summarized above, Mr. Phoenix appears to have imbedded himself as McBrearty's co-counsel in Kilroy's defense to the underlying lawsuit. Phoenix extended settlement offers, attended motion hearings, provided legal research and local rule information to lead counsel, participated in witness preparation, reviewed motions prior to filing, negotiated settlement with opposing counsel, and reviewed jury instructions. The record supports that while Phoenix was retained as bad faith counsel for Starr, he also acted with Starr's knowledge and favor in Kilroy's legal defense.

The convergence of these two tracks - what McBrearty was doing in defense of Kilroy, and what Phoenix was attempting to do on behalf of Starr in connection with its bad faith exposure - is troubling but not surprising. Thus, it would appear that to the extent Phoenix was acting as Kilroy's lawyer, Kilroy should be to know what Phoenix did on Kilroy's behalf and why.

Conclusion

Respondent erroneously quashed the subpoena at issue. Specifically, the Court of Appeal found discoverable all materials and testimony to the extent that (1) Phoenix acted as de facto co-counsel in Kilroy's defense, (2) communications claimed to be privileged were made in the presence of a third party, or (3) any other exception to the attorney-client privilege applies.

ZALMA OPINION

Insurance coverage counsel must be careful to only act as attorney for the insurer and not get involved in the underlying actions. By getting involved coverage counsel can expose his client, himself and his firm to calumny and lose the protection of his hard earned law degree and license with his work read by his client's opponents.

2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at

http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4