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An issue that often arises in insurance coverage litigation is the extent to which an insured can shelter communications with its attorneys from an insurer which may have a defense duty or may be liable for paying a third party claim. A recent appellate decision means that insurers may not obtain attorney-client communications from their insureds that were not specifically relevant to the underlying claim for which coverage is being sought.

Attorney-Client Communications Issue Addressed Several Years Ago

Several years ago, the Illinois Supreme Court addressed this issue in Waste Management Inc. v. International Surplus Lines Ins. Co., 144 Ill. 2d 178, 579 N.E.2d 322 (1991), in which the court held that the attorney-client privilege does not protect from disclosure the documents in the underlying claim in subsequent coverage litigation, even when the insurer neither provided a defense nor participated in litigating the underlying suit. The court in Waste Management rested its decision on two separate bases. First, the court noted that the insurance contract included a cooperation clause that obligated the insured to cooperate with the insurer in the defense of the claim. The court reasoned that this clause obligated the insured to disclose all facts to the insurer that are relevant to the claim to assist it in determining coverage. The court concluded that the plain language of the cooperation clause, which obligated the insured to "give all such information and assistance as the insurers may reasonably require," obligated the insured to "disclose contents of any communications they had with defense counsel representing them on a claim for which insurers had the ultimate duty to satisfy." 144 Ill.2d at 192, 579 N.E.2d at 328.

Second, the court reasoned that the common interest doctrine rendered the attorney-client privilege unavailable to the insureds. The court explained that under the common interest doctrine, when an attorney represents two different parties who each have a common interest, "communications by either party to the attorney are not necessarily privileged in a subsequent controversy between the two parties." 144 Ill.2d at 193, 579 N.E.2d at 328. Since both the insured and the insurer had a common interest in defending the claim against the plaintiff, communications between the insured and defense counsel were not privileged as to the insurer. Id.

Attorney-Client Communications Issue Revisited

The extent of the insurer's right to obtain the insured's attorney client communications was tested recently in Motorola Solutions, Inc. v. Zurich Ins. Co., 2017 IL App (1st) 161465. In Motorola, the insured sued several insurers for breach of contract and declaratory judgment, seeking to require them to defend and indemnify the insured for four underlying personal injury actions alleging that the children of the insured's employees and contractors suffered injury due to exposure to various chemicals in the insured's "clean rooms" in its manufacturing facilities. One of the defenses to coverage asserted by the insurer was the timeliness of the insured's notice to the insurer of the claims. As a result, it sought to obtain information from the insured concerning clean room safety program, due to the fact that a competitor of the insured had defended a number of lawsuits in the 1990s concerning alleged birth defects of children whose parents had worked in the manufacturing process in clean room facilities. This caused the insured to institute a safety program and investigation at the direction of outside counsel. The insurer contended that these documents were needed to establish the insured's knowledge of the losses for purposes of the notice conditions of the policies. The insurer also sought documents concerning a sale of part of its business in 2003, which listed as a risk factor the link between clean room environments and certain illnesses.

The insured resisted the production on the basis of the attorney client privilege, while the insurer claimed that the privilege did not apply, relying on the Waste Management decision. The court in Motorola, over a vigorous dissent, ruled that the privilege applied. The court distinguished Waste Management, noting that the insurer in Waste Management had sought documents from the litigation for which the insureds were seeking indemnification, while the insurer in Motorola was seeking documents that were created years prior to any litigation. As a result, the court did not consider the cooperation clause to apply, since the cooperation clause required the insured to "cooperate with the company … in the conduct of any suits …." In Waste Management, this clause applied since the files the insurer sought concerned the suits at issue in the coverage litigation. In contrast, nothing in the cooperation clause dealt with the disclosure of documents created more than a decade before any suit was filed for which the insured sought indemnification. Likewise the court rejected the insurer's argument that the common interest doctrine applied, again because the documents had no bearing on the defense of the underlying litigation.

The dissent maintained that Waste Management controlled, arguing that the duty to cooperate underlying the Waste Management decision was not as narrow as suggested by the majority. The dissent noted that the duty to cooperate was based on the broad language in the insurance contract, "the principles of fairness and good faith, and the common interest doctrine" and rendered the attorney client privilege inapplicable. The court noted that the insured had argued that it had complied with the policies' notice provisions, thereby affirmatively placing its knowledge at issue, so the clean room litigation risk analysis was a relevant and necessary source of information for the insurers. The court also noted that in Waste Management the court had ruled that the "cooperation clause does obligate the insured to disclose all of the facts within its knowledge and otherwise to aid the insurer in its determination of coverage under the policy. The insurer is entitled … to gain as much knowledge and information as may aid in its investigation …. To hold otherwise effectively places the insurer at the mercy of the insured and severely handicaps it in contesting a claim." Motorola, 2017 IL App (1st) 161465, ¶69, citing to Waste Management, 144 Ill.2d at 204.

In the Absence of an Appeal…

It is not known whether the insurers will appeal this decision to the Illinois Supreme Court. However, in the absence of an appeal, this decision means that insurers may not obtain attorney-client communications from their insureds that were not specifically relevant to the underlying claim for which coverage is being sought.

For more information about insurance coverage issues, please contact William K. McVisk.