August 15, 2013
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES LIMITED, ACE INA INSURANCE COMPANY, and ARCH INSURANCE COMPANY, Plaintiffs,
TRANSCANADA ENERGY USA, INC. and TC RAVENSWOOD SERVICES CORP., Defendants. TC RAVENSWOOD, LLC, Plaintiff,
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH PENNSYLVANIA (a/k/a AIG, n/k/a Chartis), ASSOCIATED ELECTRIC & GAS INSURANCE SERVICES LIMITED, ACE INA INSURANCE, AND ARCH INSURANCE COMPANY, and FACTORY MUTUAL INSURANCE COMPANY, Defendants. Index Nos. 650515/2010, 400759/2011
For TransCanada: John G. Nevius, Esq. John M. O'Connor, Esq. Kathleen Donovan, Esq. Anderson Kill & Olick, P.C
For the market insurers: Charles J. Rocco, Esq. Malcolm J. Reilly, Esq. Mara Hsiung, Esq. Foran Glennon, et al.
For FMIC: Henry J. Catenacci, Esq. H. Richard Chattmen, Esq. Gregory D. Miller, Esq. Podvey, Meanor, et al.
DECISION AND ORDER
BARBARA JAFFE, J.S.C.:
By notice of motion dated May 11, 2012, Factory Mutual Insurance Company ("FMIC") and Chartis, Ace INA Insurance, and Arch Insurance Company (collectively, the "market insurers", with FMIC, the "insurance companies") move to partially confirm and partially reject the special referee's report entered on April 20, 2012. TransCanada Energy USA, Inc., TC Ravenswood Services Corp., and TC Ravenswood, LLC (collectively, "TransCanada") oppose. By notice of motion dated May 11, 2012, TransCanada moves to confirm the special referee's report entered on April 20, 2012. The insurance companies oppose.
On September 12, 2008, Unit 30, a steam turbine power generator at Ravenswood Generating Station in Queens, NY, shook violently, and was shut down. There was a crack in the generator's rotor. Unit 30 remained out of service until May 11, 2009. On September 16, 2008, TransCanada gave the insurance companies notice of the loss, making claims for repair costs and business interruption losses under its insurance policy.
To investigate the claims, the insurance companies hired experts, including insurance adjusters from Crawford Global Technical Services, and attorneys at firms Clausen Miller and Podvey Meanor to assist in the investigation and coverage determination. All of the insurance companies except FMIC denied coverage on June 2, 2010 and together filed a declaratory judgment action that same day. FMIC denied coverage on July 2, 2010 and was sued by TransCanada soon after.
II. PROCEDURAL BACKGROUND
On January 6, 2012, TransCanada moved to compel the production of documents that the insurance companies claimed were protected work product and attorney-client privileged communications. Almost all of the documents were created before coverage was denied. On February 1, 2012, the insurance companies cross-moved for a protective order, and on March 14, 2012, the dispute was referred to a special referee to hear and report who, on April 18, 2012, conducted a hearing, reviewed a selection of the disputed documents in camera, considered the parties's legal arguments, and recommended that "any documents that pre-date the rejection of the claim are not subject to the privilege." (April 18, 2012 Hearing Tr. at 54 [Doc 60 NYSCEF]). The referee also recommended that all deposition questions related to reserves and reinsurance be barred, and that any dollar amounts and hours be redacted from the billing records.
On May 11, 2012, the insurance companies moved to reject and confirm partially confirm the referee's recommendations, and TransCanada moved to confirm them. Soon thereafter, the parties submitted oppositions and replies. On April 19, 2013, TransCanada sought to supplement their briefing with additional information. On June 7, 2013, this court issued an interim order directing the parties to submit the disputed documents for an in camera review, and at a June 12, 2013 conference, TransCanada indicated that the insurance companies had added approximately 140 documents to the privilege log, each dated before the denial and subject to the same issues presented in the motion. The parties were instructed to provide these documents for in camera review, and to submit any additional arguments by letter. TransCanada submitted their letter motion on June 26, 2013. The insurance companies opposed on July 10, 2013, and TransCanada submitted a reply on July 17, 2013. The documents were provided for in camera review in letters dated June 19, 2013, June 20, 2013, and July 17, 2013.
TransCanada contends that the referee's recommendation is correct in that all documents are pre-denial, that documents created before an insurance company denies coverage are never protected attorney-client communications or work product, and that even if the documents were protected, the protection was waived when the insurance companies disclosed the documents to each other.
Although the insurance companies contend that the recommendation should be disregarded because the referee applied the wrong legal standard and failed to review all the documents, they ask that the recommendation be confirmed to the extent that he recommended redacting billing records and barring deposition questions on reinsurance and reserves. TransCanada asserts that as it withdrew the requests for reinsurance and reserve information, the issue is moot and the recommendation need not be confirmed. It asks that I consider the supplemental briefs it submitted. The insurance companies ask that I disregard them.
IV. LEGAL STANDARD
There are three categories of protected materials in the CPLR: attorney-client communications, attorney's work product, and trial preparation materials. (CPLR 3101 [b], [c], [d]; Spectrum Sys. Intl. Corp. v Chem. Bank, 78 N.Y.2d 371, 376-77 ). "The burden of establishing any right to protection is on the party asserting it; the protection claimed must be narrowly construed, and its application must be consistent with the purposes underlying the immunity." (Id.).
a. Work product and trial preparation materials
To be protected work product or trial preparation materials, documents must be prepared for, or in anticipation of, litigation. (See Millen, 37 A.D.2d 817, 817 [insurers documents are not protected work product or trial preparation materials until insurer makes firm decision to deny coverage]; see also MBIA Ins. Corp. v Countrywide Home Loans, Inc., 93 A.D.3d 574, 574 [1st Dept 2012] [work product applies to documents prepared in anticipation of litigation]; Plimpton v Mass. Mut. Life Ins. Co., 50 A.D.3d 532, 533 [1st Dept 2008] [documents prepared to determine whether to litigate are not trial preparation materials]; Rosario v N. Gen. Hosp, 40 A.D.3d 323, 323-24 [1st Dept 2007] [trial preparation materials only protected if created solely for litigation]; Mahoney v Staffa, 184 A.D.2d 886, 887 [3d Dept 1992] [work product only applies if there is a specific litigation at issue]). An insurance company cannot claim documents are prepared in anticipation of litigation until it makes a firm decision to deny coverage. (See Brooklyn Union Gas Co. v Am. Home Assurance Co., 23 A.D.3d 190, 191 [1st Dept 2005] [insurer cannot anticipate litigation until it makes a coverage decision]; Landmark Ins. Co. v Beau Rivage Rest., 121 A.D.2d 98, 99-100 [2d Dept 1986] [same]; Millen Indus, v Am. Mut. Liab. Ins. Co., 37 A.D.2d 817, 817 [1st Dept 1971] [same]). The insurance company has the burden of demonstrating when it decided to deny coverage. (Landmark, 121 A.D.2d at 100-102). Therefore, CPLR 3101 [c] and [d] do not bar the disclosure of materials prepared before the insurance companies made a firm decision to deny coverage.
b. Attorney-client privilege
The attorney-client privilege "is not tied to the contemplation of litigation." (Spectrum, 78 N.Y.2d at 380; CPLR 3101 [b] [attorney-client privilege communications are not obtainable]). In order to claim the privilege, the party seeking to withhold a document must show that it is a confidential communication between the attorney and the client, made in the context of legal advice or services. (Id.; Matter of Priest v Hennessy, 51 N.Y.2d 62, 68-69 ). However, "the privilege is not narrowly confined to the repetition of confidences that were supplied to the lawyer by the client." (Spectrum, 78 N.Y.2d at 380). For example, an attorney-authored memorandum collecting information from third-parties, as well as the client, could be privileged if drafted to communicate legal advice. (Id.). An investigative report by a non-attorney, however, does not become privileged upon being sent to an attorney, although such a report may be deemed trial preparation materials. (Id.; MBIA, 93 A.D.3d at 574 [consultants' litigation materials protected]).
Similarly, documents prepared in the ordinary course of business are not privileged, even if drafted by an attorney. Rather, for the privilege to attach, the communication must be made primarily for the purpose of furnishing legal advice, although the privilege does not disappear merely because the communication includes non-legal matters. (See Brooklyn, 23 A.D.3d at 191). Insurance companies investigate claims and decide whether to accept or deny coverage as part of their regular business activities, and consequently, courts have consistently held that the use of attorneys to perform such work does not cloak the documents in privilege. (See id. [insurance coverage investigation not privileged even if performed by attorney]; Westhampton Adult Home v Natl. Union Fire Ins. Co of Pittsburgh Pa., 105 A.D.2d 627 [1st Dept 1984] [examining witnesses under oath and supervising the investigation is part of insurance company's ordinary business and not privileged]; see also Rosario, 40 A.D.3d at 323-24 [documentation regarding insurance disclaimer is part of insurance company's ordinary business]; Millen, 37 A.D.2d at 817 ["(T)he payment or rejection of claims is a part of the regular business of an insurance company."]).
Documents may constitute privileged attorney-client communications, even if made before the insurance company decides to deny coverage, provided that they are primarily of a legal character, and not related to an insurance company's ordinary business activities. (See All Waste Sys. v Gulf Ins. Co., 295 A.D.2d 379, 380 [2d Dept 2002] [finding that coverage legal opinions and draft disclaimer letters are attorney-client privileged communications]). Determining whether documents fall within this limited exception is factual, and requires in camera review of the documents. (Spectrum, 78 N.Y.2d at 378).
c. Common interest privilege
The attorney-client privilege has been extended to cover some communications disclosed to third parties because "[t]he Courts of this State have recognized that the public interest is served by shielding certain communications from litigation, rather than risk stifling them altogether, and have afforded a conditional, or qualified, privilege to a communication made by one person to another upon a subject in which both have an interest, known as a common interest privilege." (GUS Consulting GmbH v Chadbourne & Parke LLP, 20 Misc.3d 539, 540 [Sup Ct, NY County 2008] [ellipsis omitted], quoting Liberman v Gelstein, 80 N.Y.2d 429, 437 ). The common interest privilege is not a separate privilege, but an exception to the usual rule that disclosure to a third party waives privilege. (See Hyatt v State of California Franchise Tax Bd., 105 A.D.3d 186, 205 [2d Dept 2013]). To avoid waiver, the parties must have a common interest that is primarily legal rather than commercial. (Id. at 205-06; U.S. Bank Natl Assn v APP Intern. Finance Co., 33 A.D.3d 430, 431 [1st Dept 2006]). "The clearest indication of common interest is dual representation." (Am. Re-Ins. Co. v U.S. Fid. Guar. Co., 40 A.D.3d 486, 491 [1st Dept 2007]). The privilege also extends "where there is a joint defense or strategy, but separate representation." (Id.).
Moreover, "[l]ike all privileges, the common interest rule is narrowly construed." (GUS 20 Misc.3d at 451; see also Aetna Cas. And Sur. Co. v Certain Underwriters at Lloyd's London, 176 Misc.2d 605, 612 [Sup Ct, NY County 1998], aff'd 263 A.D.2d 367 [1st Dept 1999]). New York courts have consistently found that it is limited to where the parties reasonably anticipate, or are currently engaged, in litigation. (See Hyatt, 105 A.D.3d at 205; Aetna Cas., 176 Misc.2d at 611-12; Hudson Val. Mar., Inc. v Town of Cortlandt, 30 A.D.3d 377, 378 [2d Dept 2006]; Yemini v Goldberg, 12 Misc.3d 1141, 1144 [Sup Ct, Nassau County 2006]; Matter of Stenovich v Wachtell, Lipton, Rosen & Katz, 195 Misc.2d 99, 108 [Sup Ct, NY County 2003]; Brooklyn Navy Yard Cogeneration Ptners v PMNC, 194 Misc.2d 331, 334 [Sup Ct, Kings County 2002]; Parisi v Leppard, 172 Misc.2d 951, 956 [Sup Ct, Nassau County 1997]; see also Allied Irish Banks, PLC v Bank of Am, NA, 252 FRD 163, 171 [SD NY 2008] [reviewing New York law and finding that common interest exception does not apply until litigation reasonably anticipated]). Consequently, while the common interest privilege is an extension of the attorney-client privilege, it follows the contours of the trial preparation materials and work product protections in that it requires litigation or its anticipation. And, an insurance company cannot claim that it anticipates litigation until it makes a firm decision to deny coverage. (See Brooklyn, 23 A.D.3d at 191).
Therefore, although no court has addressed this specific issue, it logically follows that insurance companies must decide to deny coverage before they may invoke the common interest privilege and protect their communications with third parties from disclosure.
V. IN CAMERA REVIEW
a. FMIC documents
The documents reviewed in camera primarily relate to FMIC's, and the market insurers', investigation of Ravenswood and the turbine. They reflect that the attorneys were supervising, coordinating, and directing the investigation, including collecting documents and hiring investigators, such as Crawford. The attorneys also prepared reports summarizing the results of the investigation. None of these documents are privileged. Many are not attorney-client communications, and those that involve the investigation of claims do not constitute legal advice. The attorneys were primarily working to determine whether to deny coverage, an ordinary business activity for an insurance company. Moreover, most of these documents pre-date the decision to deny coverage, so they are not protected work product or trial preparation materials.
Some of the documents, however, contain privileged material that need not be disclosed. FMPRIV-002018, FMPRIV-002019, FMPRIV-002153, and FMPRIV-002166 through FMPRIV-002168 contain communications between an attorney and client to obtain legal advice, and thus are protected. FMPRIV-002131 through FMPRIV-002142, FMPRIV-002154 and FMPRIV-002160 are draft denial letters, which are protected trial preparation materials because FMIC decided to deny coverage before they were drafted, as evidenced by the documents reviewed. Similarly, FMPRIV-002121 through FMPRIV-002130, FMPRIV-002146, and FMPRIV-002147 were created after coverage was denied, and constitute protected trial preparation materials.
b. Market insurer documents
The market insurers collectively hired the same attorneys to both handle the investigation and assist with the coverage determination. The market insurers are independent from each other. Each has a separate percentage of the insurance coverage at issue and is a separate company. Notably, one of the market insurers chose to settle while the others continue to litigate. The market insurers are, therefore, third parties to each other.
Before denying TransCanada's claim, the market insurers' counsel communicated freely and jointly with all of the market insurers. No attempt was made to segregate the communications or keep them confidential from each other, and they produced no joint defense agreement, or similar evidence, that explains the terms and conditions of this joint representation. The market insurers also disclosed documents to FMIC, who has separate counsel.
The documents show that the market insurers conflated the decision to file a declaratory judgment action and the decision to deny coverage, and that they were considering coverage until just before the denial letter was issued and lawsuit filed. It is the market insurer's burden to prove when they decided to deny coverage. They have not submitted evidence stating that a firm decision to deny coverage was made earlier, and the documents submitted for review do not clarify the issue. Therefore, any documents created before the denial letter was sent are not protected work product or trial preparation materials, and any attorney-client privilege was waived when the documents were disclosed to third parties because the common interest privilege exemption does not apply. The market insurers have not met their burden of proving that any of the documents they submitted for in camera review are protected from disclosure.
It is thus,
ORDERED, that TransCanada's motion for leave to file supplemental papers is denied; it is further
ORDERED, that the special referee's recommendation to bar deposition questions regarding reserves and reinsurance is confirmed; it is further
ORDERED, that the special referee's recommendation that the parties redact hour and rate information from billing records is confirmed; it is further
ORDERED, that the insurance companies produce to TransCanada all documents not protected from disclosure in accordance with the decision above within 5 days of this order.