With one justice dissenting, the Supreme Court of Texas recently held that in a bad faith action brought by an injured employee against a workers’ compensation insurer, the attorney—client privilege does not protect communications between the insurer’s lawyer and the employer during the underlying administrative proceedings [In re XL Specialty Ins. Co., 2012 Tex. LEXIS 568 (June 29, 2012)]. Acknowledging that the result could be different where the underlying policy of insurance was a standard liability policy and not a workers’ compensation policy, the majority indicated the privilege could not be supported by the “Joint Client Privilege,” or the so-called “Joint Defense and Common Interest Doctrines.”
Wagner, a Cintas Corporation employee, sought workers’ compensation benefits for a work-related injury. XL Specialty Insurance Co. (XL) was the workers’ compensation insurer for Cintas. Under the standard provisions of the policy, Cintas was required to cooperate with XL in the defense of the claim. The policy also provided for a one million dollar deductible per claim.
XL contracted with Cambridge Integrated Services (Cambridge) with regard to adjustment of various workers’ compensation claims, including Wagner’s. During the course of the administrative litigation, XL’s outside counsel sent communications to both Cambridge and Cintas about the status and the evaluation of the proceedings. After the workers’ compensation dispute was resolved, Wagner sued XL, Cambridge, and Cambridge’s individual adjuster for breach of the common law duty of good faith and fair dealing and violations of the Insurance Code and Texas Deceptive Trade Practices Act. During discovery, Wagner sought the communications made between XL’s attorney and Cintas during the administrative proceedings. XL and Cambridge argued that the attorney—client privilege protected those communications. After an in-camera inspection, the trial court held that the privilege did not apply. XL and Cambridge sought mandamus relief from the court of appeals, which denied the petition. They then petitioned the Texas Supreme Court for a writ of mandamus.
The majority initially stressed that the privilege belonged to the client and must be invoked on its behalf. The majority also indicated that courts sometimes used terms such as the “joint client” privilege, the “joint defense” privilege, and the “common interest” privilege interchangeably. In doing so, the court were wrong. The majority explained, however, that no matter what theory XL and Cambridge used, the communications here were not privileged. Important to the majority’s determination was the fact that the employer was technically not a party to the workers’ compensation administrative claim. The majority observed that in Texas, workers’ compensation claims were brought directly against a workers’ compensation carrier, with limited involvement of the employer in the adjudication of the rights to benefits. The insurer, not the employer, was directly responsible for paying benefits. Thus, the insurer, not the insured, was the client and party to the pending action, and it retained counsel on its own behalf. The majority contrasted the situation to that of a lawsuit involving a standard liability insurance policy, where only the insured was a party to the case, and the insurer typically retained counsel on its insured’s behalf. In such instances, communications between the insurer’s attorney and the insured fell within one of Tex. R. Evid. 503(b)’s subsections. But in a case in which the communications were not made to the insured’s lawyer, and the insured was not a party to a pending action, as required by the rule, the allied litigant privilege did not apply.
Similar Holding in Recent Montana Case
In March, a divided Supreme Court of Montana [American Zurich Ins. Co. v. Montana Thirteenth Judicial Dist. Court, 2012 MT 61, 2012 Mont. LEXIS 67 (Mar. 13, 2012)] reached a similar result. There the majority of the Court held that in an unfair claims settlement practices law suit filed by an injured worker against the carrier and the third-party adjuster handling the actual claim file, the carrier waived the attorney-client privilege related to a confidential evaluation letter crafted by the carrier’s attorney, where the attorney forwarded a copy of the letter to the adjuster and, after making some hand-written notes thereon, the adjuster forwarded a copy on to the employer. Moreover, the majority held that in addition to waiving the privilege, the contents of the letter could not be protected by the work product rule.
The majority of the Montana court observed that in spite of their common interests in some areas, an employer and an insurer do not share a common legal interest in the adjustment of an employee’s claim for compensation for which the insurer exclusively is liable and that in evaluating and settling the employee’s benefits claim, Zurich bore direct liability to the employee.
One important difference between the Texas and Montana cases was the fact that in the latter, an adjuster disclosed the attorney’s communication to the insured employer. Given the disclosure, the majority held that the privilege had been waived.