In recent years, attorneys have taken a more active role in investigating subrogation potential. One purpose of having attorneys involved in the investigation is to make sure that all the evidence gathered during the investigation is properly preserved and admissible at trial. It has generally been believed that the attorney's investigation is privileged from discovery. However, in a Texarkana Court of Appeals decision, this privilege has come under attack.
Attorney Communication Not Protected When Not Acting as an Attorney
In In re Texas Farmers Insurance Exchange 1999 W.L. 74099 (Tex.App.Ct Texarkana), the Court of Appeals held that when an attorney is retained by a property insurer to investigate a suspicious fire, the attorney-client privilege only applied to legal conclusions based upon the facts gathered by the attorney, but did not apply to the facts themselves. Specifically, the court said that attorney-client privilege does not apply when the attorney is acting in a capacity other than that of an attorney.
In Texas Farmers, after a fire cause and origin investigator hired by Farmers could not identify an accidental ignition source as the cause of the fire, Farmers hired an attorney to examine the insureds and investigate the matter. As a result of the attorney's investigation, Farmers denied the claim, concluding that the fire had been intentionally set by the insureds or with their knowledge.
After the insureds filed suit against Farmers for denying the claim, the insureds noticed the deposition of Farmers' attorney who investigated the claim. Farmers objected, claiming that the attorney's knowledge and involvement in the claim fell within the attorney-client privilege, attorney work-product exemptions, and that the information gained by the attorney was compiled in anticipation of litigation. The trial court ruled against Farmers, and it petitioned for writ of mandamus.
The Texarkana Court of Appeals held that the attorney was acting as an investigator for Farmers, not as an attorney, and as such, communications between Farmers and the attorney were not privileged from discovery. The Court of Appeals also held that the attorney work-product privilege was not applicable since Farmers could not reasonably anticipate litigation until the date of the denial of coverage letter.
No Attorney-Client Privilege for Underlying Facts
The Appeals Court relied on Upjohn Co. v United States (1981) 449 U.S. 383 for the proposition that the attorney-client privilege does not extend to the underlying facts, but only for the disclosure of attorney-client communications. Using this as a basis, the Court held that the privilege would apply to communications which concerned legal strategy, assessments, and conclusions, but could not be used to shield communications of bare facts.
No Work-Product Privilege if Not in Anticipation of Litigation
As to the work-product privilege, the Appeals Court held that this privilege protects documents prepared by attorneys or their agents that contain the attorney's mental processes, conclusions or legal theories in anticipation of litigation. The test for in "anticipation of litigation" must meet two criteria:
- Would the circumstances indicate to a reasonable person that litigation was likely; and
- The Party asserting the privilege had a good faith belief that litigation was would commence. [See National Tank. Henry P. Roberts Invs. v. Kelton (1994) 881 S.W.2d 952.]
Based on the findings of the trial court, the Court of Appeals noted that the investigation by the attorney was for the purpose of determining what caused the fire and whether to pay the claim. For the purpose of the investigation, the attorney was not acting in the role of an attorney, but of that as an investigator, therefore the facts developed by the attorney would not be subject to attorney-client privilege.
Further, the Court of Appeals relied on the trial court findings that litigation was not anticipated until the claim was denied by Farmers, but believed that a reasonable person could anticipate litigation well before that. However, the Court of Appeals stated that the second prong of the test of "anticipation of litigation" was never satisfied. The trial court record contained no information that Farmers held a good faith belief that a complaint would be filed.
Insurance carriers and attorneys often investigate claims prior to litigation. This case indicates that claims files will not automatically be protected by attorney-client privilege or attorney work-product without clear indications of attorney advice, assessments and an indication that the carrier or attorney believed the claim was headed for litigation. This case is a cautionary tale.