In nearly every bad faith case filed against an insurance company, the policyholder serves the insurer with discovery requests demanding a copy of the claims adjustment file. Often, the insurer’s lawyers produce some of the claims file, but object to disclosure of any documents, emails, etc., that were sent to or from an attorney. In many cases, insurers hire attorneys to perform portions of the investigation and adjustment, so they can argue that they do not have to disclose these claims file documents. However, Colorado courts have held that no work product or attorney client privilege applies where a lawyer performs adjustment activities related to the policyholder’s claim.
An adjuster is commonly known as the person who investigates a claim and assists the insurer in determining amounts owed to the insured. In addition, the definition of “adjuster” is usually contained in the insurer’s claims handling practices manual. Prior to litigation, insurance companies may attempt to have an attorney wear two hats: investigator AND counselor. To the extent an attorney was giving legal advice or creating legal work product for specific litigation, those portions of the attorneys file are privileged and the objections are appropriate. However, some insurers also redact adjusters’ and attorneys’ files—even when the communications contain evidence as to how the insurer processed the claim, how thoroughly it was considered, and why the company took the action it did, as well as amounts the insurer may believe it still owes under the policy. This information, even if communicated by or to an attorney, is not privileged and is essential to policyholders’ ability to prosecute bad faith and statutory claims.
A. Work Product
Where an attorney performs adjustment or investigation activities, the attorney files are not protected from disclosure because insurance carriers investigate and compile records and statements in the ordinary course of business. Hawkins v. Dist. Court In & For Fourth Judicial Dist., 638 P.2d 1372, 1379 (Colo. 1982) (“a showing that a claims adjuster, or even a lawyer not acting as a legal counselor for the insurer, conducted an investigation of a claim, during which he compiled various reports and statements, would not be sufficient by itself to overcome the presumption of an ordinary business activity.”).
In Hawkins the Colorado Supreme Court determined that the insurance company has the burden of demonstrating that a document was prepared or obtained in order to defend a specific claim which already had arisen and, when the documents were prepared or obtained, there was a substantial probability of imminent litigation over the claim or a lawsuit had already been filed. Thus, the party asserting work product as a bar to discovery must prove the doctrine is applicable. A mere allegation that the protection applies is insufficient. RTC v. Dabney, 73 F.3d 262 (10th Cir. 1995) (construing identical federal rule 26(b)(3)).
B. Attorney-Client Privilege
No attorney-client privilege applies when a lawyer performs the activities of an adjuster, or participates in the investigation or adjustment of the claims. National Farmers Union Property and Cas. Co. v. District Court for City and County of Denver, 718 P.2d 1044, 1047 (Colo. 1986) (insurer may not avail itself of the protection “simply because it hired attorneys to perform the factual investigation into whether the claim should be paid. The attorneys were performing the same function a claims adjuster would perform, and the resulting report is an ordinary business record of the insurance company.”). The National Farmers Union Court specifically noted,
Because a substantial part of an insurance company’s business is to investigate claims it must be presumed that [an insurer’s] investigations are part of the normal business activity of the company.
When attorneys act “more in the role of claims investigators than legal counsel” for an insurer, the attorney-client privilege does not apply.
Policyholders prevented from obtaining discovery of these adjustment activities should, at a minimum, ask the court to review the file in camera to determine which portions of the attorney’s file are business records or reflect any information that is relevant to the policyholder’s bad faith and statutory claims, including all documents that indicate how thoroughly the claim was considered and why the company took the action it did.
Next week, I will discuss additional legal arguments to assist policyholders in obtaining this essential litigation discovery and provide tips that may help insureds win this discovery battle.
For further discussion and related Florida case law on this topic, please see Chip Merlin‘s post: Insurer’s Attorney Client Communications Not Discoverable in First Party Bad Faith Actions.