Whose Coverage Letter Is It Anyway?

When it comes to declination of coverage or reservation of rights letters, or even responses to settlement demands, here is a question that I get a lot these days: “Who should issue the letter, Michael, you or the adjuster?”

Years ago, my answer primarily turned on which person the insurance company wanted to serve as a witness. Because a coverage letter or response to a settlement demand will likely serve as evidence in a later coverage or bad faith lawsuit, the person signing that letter may very well need to testify at deposition or trial as to the contents of that letter. If the key issues in the letter involved the insurance company’s investigation, for example, it might make more sense for the adjuster who did the investigation to sign the letter. On the other hand, if the key issues involved legal questions, such as interpretation of a case or statute, perhaps outside counsel might serve as a better witness and should issue the letter.

If outside counsel signed the letter, the plaintiff or insured then obviously would learn that the insurance company had retained or consulted coverage counsel for the claim. In any given claim, there could be advantages or disadvantages in making this retention known.

And of course, if counsel signed the letter and served as a testifying witness, that lawyer under various ethics rules likely could not represent the insurer as counsel in any later litigation. Having the lawyer issue the letter today might mean losing that lawyer as litigation counsel tomorrow.

These considerations all factored into the analysis of who should issue the letter.

Then the Washington Supreme Court issued its decision in Cedell v. Farmers Ins. Co. of Washington, 295 P.3d 239 (Wash. 2013). That case involved a claim for first-party property damage caused by a fire. The insurer hired outside counsel to advise it on insurance coverage. According to the court, however, the insurer “hired [attorney] Hall to do more than give legal opinions”:

The record suggests that Hall assisted in the investigation. Hall took sworn statements from [the insured] Cedell and a witness and corresponded with Cedell. Hall assisted in adjusting the claim by negotiating with Cedell. Seven months after the fire, Hall wrote to Cedell offering a “one time offer” of $30,000, which was open for only 10 days, and threatened denial of coverage if the offer was not accepted. It was Hall who was negotiating with Cedell on behalf of Farmers, and it was Hall who did not return his calls when Cedell was attempting to respond to the offer.

The court commented that while outside counsel may have advised the carrier on insurance coverage, “he also performed the functions of investigating, evaluating, negotiating, and processing the claim.” The court continued: “These functions and prompt and responsive communications with the insured are among the activities to which an insurer owes a quasi-fiduciary duty to Cedell.”

So where is this going? The insurance company’s attorney-client privilege.

The Washington Supreme Court noted that courts there “start from the presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant.” It continued: “However, the insurer may overcome the presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law” (emphasis added).

While many believed that the holding in Cedell was limited to Washington due to that state’s presumption against application of the attorney-client privilege in the first-party context, the decision introduced the notion that an attorney’s role in “adjusting the claim” may affect an insurer’s privilege over communications with that attorney.

It actually was not the first case to do so. A federal magistrate judge in Indiana held as early as 1991 that to “the extent that [an] attorney acted as a claims adjuster, claims process supervisor, or claim investigation monitor, and not as a legal adviser, the attorney-client privilege would not apply.” Harper v. Auto Owner's Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991).

Nevertheless, it was the Washington Supreme Court’s decision in Cedell that put this issue on the front burner. Over the years, courts from other jurisdictions have either adopted or considered this doctrine in various contexts in examining an insurer’s attorney-client privilege with its coverage counsel. See e.g. Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc., 119 A.D.3d 492 (2014) (no privilege when counsel conducted claims investigation for the insurer); State ex rel. Shelter Mut. Ins. Co. v. Wagner, 575 S.W.3d 476 (Mo. App. W.D. 2019) (privilege sustained when outside counsel merely gave insurer settlement advice); Canyon Estates Condo. Ass’n v. Atain Specialty Ins. Co., Case No. 2:18-cv-1761-RAJ (W.D. Wash. Jan. 22, 2020) (no privilege when outside counsel authored a declination letter); Travelers Prop. Cas. Co. of Am. v. 100 Renaissance, LLC, 308 So. 3d 847 (Miss. 2020) (no privilege when in-house coverage counsel drafted declination letter); Wichert v. Ohio Security Ins. Co., No. 21-976 (W.D. Okla. June 1, 2023) (privilege considered but not decided when counsel collected medical records); Cadaret Grant & Co. v. Great American Ins. Co., No. 21-6665 (E.D.N.Y. July 25, 2023) (no privilege when outside counsel drafted a claims investigation letter for the insurer).

One of the rationales behind these decisions is the (misguided, I think) notion that insurance companies try to use coverage counsel to insulate themselves from explaining their claims decisions. The Mississippi Supreme Court’s decision in 100 Renaissance is a good example. The court reasoned that the adjuster’s signature on a declination letter “was simply an effort to hide the fact that [in-house counsel], not [the adjuster], had the personal knowledge of Travelers’ reasons to deny the claim and to use the attorney-client privilege as a sword to prevent [the insured] from discovering the reasons from the person who had personal knowledge of the basis to deny the claim.” The adjuster’s deposition testimony was likely the catalyst for the court’s reasoning:

Based on [the adjuster’s] testimony, [the insured] argues that Travelers’ counsel actually made the decision to deny the claim and, as a result, that he must testify. [The adjuster’s] deposition testimony offered no information or explanation as to why the claim was denied. She failed to explain Travelers’ decision, its rationale, or how the claim would not be covered under the Mississippi UM statute. Her testimony also demonstrated a lack of knowledge of Mississippi UM law. She could not explain the origin or intended purpose of her citation of a nonexistent Mississippi statute in the denial letter. She also repeatedly testified that she was unable to answer coverage questions because she was not an attorney.

The inability of the adjuster to explain her claim decision practically forced the court’s hand in ordering coverage counsel to testify.

So, we return to our original question. Who should issue a coverage letter or settlement demand response: outside counsel or the adjuster?

The answer is it depends. Thank you very much. You will receive my bill at the end of the month.

But seriously, the decision over who should issue these letters really is a case-by-case analysis. The first step, of course, is to recognize that a decision that needs to be made. Many times insurers have their adjusters or outside counsel issue these letters simply because that is what they have always done. We need to recognize that what we have always done in the past may not be the best way to proceed in the future for a particular claim.

In making the decision over who should issue the letter, the insurer might want to consider several factors. Here are a few:

•  Are the key issues in the letter factual or legal? Would the adjuster or outside coverage counsel better address those issues at deposition or trial?
• In general, would the adjuster or outside counsel be the better witness to explain the claim decision in the letter?
• Can the letter be written in a way that the adjuster can comfortably address the claims decision at deposition or trial?
• Has the jurisdiction at issue adopted a Cedell-style view of the attorney-client privilege (or is it likely to do so)?
• What is the nature of the written communications that the insurer has exchanged with coverage counsel? Any heartburn if they are disclosed in litigation?
• Has coverage counsel drafted a written coverage opinion (or will they)? If so, can we live with its disclosure in litigation?
• What else has coverage counsel done on the file? Have they conducted an investigation or any other tasks that a court might consider traditional claims functions?
• Would making the identity of coverage counsel known to the parties help or hinder resolution of the claim?

An examination of these factors and perhaps others may help the insurance company decide who should issue this critical correspondence. If your coverage counsel recommends that a certain person issue the letter without walking through these factors with you, please do not be afraid to ask them to do so.

At the end of the day, I still think that the answer to the question of who should issue these letters comes down to which person would serve as the best witness to explain the insurance company’s claim decision as set forth in the letter. One of the reasons the Mississippi Supreme Court found no privilege in 100 Renaissance is that the adjuster’s deposition testimony “offered no information or explanation as to why the claim was denied.” The person issuing the letter needs to be able to explain it.

While the preservation of an insurer’s attorney-client privilege with its coverage counsel is a developing, important, and in many cases, decisive factor, it is still just a factor. In most cases, I lean towards the adjuster issuing a declination of coverage or reservation of rights letter or a response to a settlement demand. The idea of waiving attorney-client privilege drives me crazy. Nonetheless, the decision belongs to the insurer and should be wisely considered.

Michael L. Young is a litigation partner at Reichardt, Noce & Young LLC in St. Louis, Missouri, who focuses his practice on insurance coverage and extra-contractual matters. He represents insurer clients in Missouri and Illinois.