In National Union Fire Insurance Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 114 A.D.3d 595, 981 N.Y.S.2d 68 (N.Y. App. Div. 1st Dep’t Feb. 25, 2014), the Appellate Division in Manhattan upheld the lower court’s rejection of the insurers’ claims of privilege for documents generated by outside counsel involved in the insurers’ pre-denial claim investigation. Instead, the court compelled production of all such documents, finding that they constituted part of the insurers’ ordinary business activities, despite the attorneys’ involvement.
This case arose out of a 2008 failure of a generator turbine at a Ravenswood power plant in Queens, New York. TransCanada sought insurance coverage from three first-party property insurers for resulting repair costs and business interruption losses. Following the loss, the three insurers hired attorneys to investigate the claims and assist them in their coverage determination. The insurers ultimately denied coverage in June and July 2010. Prior to the denial, the attorneys prepared reports summarizing the results of their claims investigation.
The insurers objected to production of communications among the insurers and their joint counsel prior to the denial, on the grounds that they contained attorney-client privileged legal advice and were protected from disclosure under the common interest doctrine.
The lower court reviewed the documents in camera, and concluded that the documents that pre-dated the insurers’ decision to deny coverage were not privileged, as the attorneys were coordinating the insurers’ investigation and were involved in core investigative activities, including retaining expert consultants to evaluate the claim. The court found that work product immunity did not apply to such documents, as that protection relates to documents prepared in anticipation of litigation, but an insurer “cannot claim documents are prepared in anticipation of litigation until it makes a firm decision to deny coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., Nos. 650515/10, 400759/11, 2013 NY Slip Op 31967(U), at 11 (Sup. Ct. N.Y. Cty., Aug. 15, 2013). Additionally, the court explained that attorney-client privilege is limited to communications made “primarily for the purpose of furnishing legal advice.” Id. at 7. Documents that pertained solely to gathering factual material about the loss prior to the denial of coverage were ordinary claims adjustment activities, rather than legal work. On the other hand, the court acknowledged that “[d]ocuments may constitute privileged attorney-client communications, even if made before the insurance company decides to deny coverage, provided that they are primarily of a legal character, and not related to an insurance company’s ordinary business activities.” Id. at 8 (emphasis added).
The lower court also rejected the common interest doctrine claim, as it found that “insurance companies must decide to deny coverage before they may invoke the common interest privilege and protect their communications with third parties from disclosure.” Id. at 10. Again, the court concluded there can be no reasonable anticipation of litigation until an insurer makes a “firm decision to deny coverage.” Id.
On appeal, the First Department affirmed the lower court’s decision, finding “[d]ocuments 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.” Id. at 596 (quoting Brooklyn Union Gas Co. v. Am. Home Assur. Co., 23 A.D.3d 190, 191, 803 N.Y.S.2d 532 (N.Y. App. Div. 1st Dep’t 2005)) (quotations omitted). Further, the First Department agreed that the common interest doctrine was not applicable “since there was no pending or reasonably anticipated litigation in which the insurance companies had a common legal interest.” TransCanada, 114 A.D.3d at 595-96. (Of note, the court issued a revised opinion on July 31, 2014, removing its discussion of the common interest doctrine, and noting that it need not reach that question because the documents were not privileged in the first instance, so it was irrelevant whether disclosure was made pursuant to a common interest. National Union Fire Ins. Co. of Pittsburgh, Pa. v TransCanada Energy USA, Inc., 119 A.D.3d 492, 493, 990 N.Y.S.2d 150 (N.Y. App. Div. 1st Dep’t July 31, 2014)).
TransCanada is generally in keeping with New York’s position that an insurer’s investigation and determination as to whether to pay or deny a claim is a part of the insurer’s ordinary-course business activities. Melworm v. Encompass Indem. Co., 112 A.D.3d 794, 794 (N.Y. App. Div. 2d Dep’t 2013). As such, documents generated by attorneys in the course of the claims adjustment process, which aid the insurer in determining coverage, are not considered privileged unless they are “primarily and predominantly of a legal character.” Id.; see also Belfer v. Travelers Ins. Co., No. No. 100603/11, 2014 NY Slip Op 31980(U), at 2-3 (Sup. Ct. N.Y. Cty., July 25, 2014) (citing TransCanada and noting that “documents prepared in ordinary course of insurer’s investigation of whether to pay or deny claim not privileged, even if investigation conducted by attorney”).
Significantly, while insureds may see the TransCanada decision as creating a bright-line rule, the New York courts placed considerable emphasis on both the nature of the documents involved and the insurers’ reasonable expectation of litigation, carefully analyzing the facts of the case and undertaking an in camera review to assess the documents involved. Therefore, to the extent attorneys are providing legal advice to insurers, or to the extent an insurer reasonably anticipates litigation will result from its coverage determination, documents prepared by counsel and communications between insurers and their attorneys will continue to be protected.