Counsel Communications Subject To Inspection
October 06, 2009
The 1st District Appellate Court recently held that communications between an insurer and its coverage counsel were subject to an in-camera inspection to determine whether they constituted communications for the common benefit of the insurer and its insured; if so, the communications would become subject to production in a coverage dispute between the insurer and insured. Illinois Emcasco Insurance Co. v. Nationwide Mutual Insurance Co., 2009 WL 2424205 (Aug. 6).
The plaintiff insurer that was the subject of the discovery request, Emcasco, was represented by Francis A. Spina and Kristina Beck of Cremer, Spina Shaughnessy, Jansen & Siegert LLC. The insured seeking discovery, Triumph Development Corporation, and its insurer, Nationwide, to which Triumph had assigned its rights, were represented by Edward M. Kay, Steven N. Novosad and Don R. Sampen of Clausen Miller P.C.
Triumph was the general contractor for construction of a commercial building in Elk Grove Village. Nationwide provided Triumph direct commercial general liability coverage under primary and umbrella policies. In addition, Triumph was an additional insured on primary and excess policies issued by Emcasco to several of Triumph's subcontractors, including Midwestern Steel Sales Inc.
In 1998, an ironworker on the construction project was injured and filed suit against Triumph and Midwestern. Triumph tendered its defense to Emcasco, which agreed to defend under a reservation of rights. Triumph subsequently asserted that the reservation created a conflict of interest, and Emcasco withdrew its reservation. Emcasco appointed separate counsel to represent Triumph and Midwestern.
In 2001, the jury returned a verdict in favor of the injured worker for over $7 million, and apportioned damages 95 percent to Triumph and 5 percent to Midwestern. Emcasco paid the 5 percent apportioned to Midwestern from its primary policy coverage. It then filed this coverage action seeking to apply the Nationwide policies to partially pay the judgment entered against Triumph.
Nationwide and Triumph counterclaimed against Emcasco alleging, among other things, that Emcasco had acted in bad faith in its conduct of the steelworker's litigation by steering liability away from Midwestern and toward Triumph.
In 2007, Nationwide filed a motion to compel Emcasco to produce documents requested in pretrial discovery, including all communications and documents bearing on the underlying case or insurance coverage or the defense of Triumph. Emcasco refused to produce its communications with its coverage counsel, Cremer, Kopon, Shaughnessy & Spina, asserting the attorney-client privilege.
Following a hearing, the trial court, relying on Western States Insurance Co. v. O'Hara, 357 Ill.App.3d 509, 828 N.E.2d 842 (4th Dist. 2005), granted the motion to compel. In doing so, however, the trial court indicated that it felt compelled to follow the majority decision in that case, even though it agreed with the dissent.
Emcasco refused to comply with the discovery order, and Nationwide filed a motion for sanctions. The trial court granted that motion, fining Emcasco $100 for contempt to facilitate an appeal pursuant to Illinois Supreme Court Rule 304(b)(5). Emcasco then took this appeal.
In an opinion by Justice John Owen Steele, the 1st District reversed and remanded. He noted at the outset that the contempt order was immediately appealable, and that since it involved the application of the attorney client privilege, a de novo standard of review would apply.
Steele then noted the parties' agreement that the 4th District's decision in Western States was on point and binding on the trial court, and turned to assess whether that case, in the 1st District's view, was correctly decided.
He observed that the court in Western States relied primarily on the Illinois Supreme Court's decision in Waste Management Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178, 579 N.E.2d 322 (1991). In Waste Management, the insurers sought the production of the files of defense counsel representing insureds in underlying litigation. The insureds produced some documents but withheld others, claiming they were protected by the attorney-client privilege and the work-product doctrine.
The Supreme Court held that the documents were not protected. It relied in part on the cooperation clause of the applicable insurance policy, which, said Steele, was not involved in the instant case. In addition, the Supreme Court relied on the common interest doctrine, finding that the insured and insurer had a common interest in defending the underlying action against the insured. The common interest doctrine, according to the Supreme Court, allowed production of communications reasonably calculated to protect or further those common interests.
The Supreme Court further stated, however, that the holding in Waste Management did not abrogate the privileged nature of communications concerning the declaratory judgment action before the court. The Supreme Court ultimately remanded the case for an in-camera inspection of all documents so as to exclude from disclosure those entitled to protection.
The Western States majority applied Waste Management at the urging of an insured, to defeat the claims of privilege with respect to communications between an insurer and its coverage counsel, which may have been relevant to the settlement of the underlying case. The dissenting justice in Western States, however, argued that the insurer should have been allowed to pursue the declaratory judgment action without risk of disclosure of communications with its coverage counsel, so long as coverage counsel was not the attorney representing the insureds.
Steele concluded that the 4th District majority's interpretation of the common-interest doctrine conflicted to some degree with Waste Management. According to Steele, the 4th District did not properly distinguish between non-privileged communications regarding the underlying litigation, and privileged communications regarding the coverage issues that could arise in a subsequent declaratory judgment action. Moreover, said Steele, the fact that the declaratory judgment action may be filed later does not mean that the coverage issues may not arise from the outset of the underlying litigation.
The dissent in Western States, however, according to Steele, might also have had an overly broad interpretation of the coverage privilege. Merely because separate coverage counsel is hired does not necessarily mean that coverage counsel will not engage in communications with the insurer regarding the issues in and the conduct of the underlying litigation. A court would be mistaken to assume that coverage counsel never makes communications in the common interest of the insurer and insured.
Steele further said that the privilege issues should be resolved by following the Supreme Court's lead in Waste Management and requiring an in camera inspection of the relevant communications, regardless whether separate coverage counsel is hired. Such an inspection is necessary because the issue is the nature of the communication, not the location of the counsel's office.
Thus, while Waste Management preserves the attorney-client privilege for communications regarding coverage issues arising in the declaratory judgment action, it also requires an in camera inspection to resolve disputes over which communications are privileged.
The court therefore remanded for an in camera inspection.
