Advisories & Insights

California Court Permits Policyholder to Sue Insurer's Coverage Counsel for Invasion of Privacy

January, 2019
By Andrew B. Downs

One of the modern trends in insurance litigation is the expansion of claims-related liability of those who serve the insurance industry, be they employee claims handlers or attorneys. Last week, the California Court of Appeal concluded an insurer's coverage counsel could be sued by the policyholder for invasion of privacy because he shared information with his client, the insurer.

Strawn v. Morris, Polich & Purdy, LLP, 2019 WL 102092 (2019) involved the inadvertent disclosure of tax returns by the policyholder's accountant to the insurer's coverage counsel. Coverage counsel then shared them with the insurer and its accountants. The policyholder sued the insurer and its attorneys, including the individual attorney acting as coverage counsel. The Court of Appeal held the attorneys could not be sued for elder abuse, but they could be sued for invasion of privacy. In so doing, it also further limited the scope of the statutory litigation privilege.

After the policyholder's home and truck burned, he was prosecuted for arson. Eventually, the criminal charges were dismissed. Meanwhile the insurer denied coverage on the ground the policyholder had intentionally set the fire. During the investigation the insurer, as is common in arson investigations, demanded production of the policyholder's financial records. In California, income tax returns are privileged. Although insurers are entitled to ask for voluntary production of tax returns, Insurance Code § 2071 (the codification of the statutory fire policy) requires insurers to inform policyholders "that tax returns are privileged against disclosure under applicable law but may be necessary to process or determine the claim." Here, the policyholder refused to produce his tax returns and objected to production, but his accountant inadvertently produced them along with other financial records. The coverage attorney then provided those returns to the insurer and its accountants.

The policyholder sued the insurer, the law firm and the individual attorney. Only the claims against the law firm and attorney were at issue in this appeal. The Court of Appeal made three noteworthy decisions:

  • It found the statutory litigation privilege (Civil Code § 47) did not apply because the conduct was too remote from the eventual litigation.
  • It found the law firm and attorney could be sued for invasion of privacy.
  • It found the law firm and attorney could not be sued for elder abuse because they were acting solely as the representatives of the insurer.

Litigation Privilege

California has a broad statutory litigation privilege. Conduct protected by the litigation privilege cannot be the basis of a lawsuit. The litigation privilege applies to certain pre-litigation conduct, for example the transmission of a demand letter.

Here, the Court of Appeal found the litigation privilege did not apply. It rejected the argument that an insurer's request through counsel for financial information in a case of suspected fraud necessarily was in anticipation of litigation so as to make the privilege apply. Instead, it held the allegations in the complaint raised a factual question as to whether when coverage counsel forwarded the tax returns to his client, the insurer was "in good faith seriously considering litigation."

Invasion of Privacy

The case came before the Court of Appeal on an appeal from a judgment following a demurrer (the California equivalent of a motion to dismiss), so the issue was whether the invasion of privacy claim was alleged adequately, not whether it could be proven. The court concluded the claim was adequately alleged and focused on the allegation that the coverage attorney knew when he forwarded the returns to his client that the policyholder had objected to production.

Elder Abuse

California has a broad elder abuse statute which creates additional statutory liability when the victim of certain types of tortious conduct is elderly, including financial abuse. Here, the Court of Appeal held the law firm's and individual attorney's work for the insurer could not be held liable (although the insurer itself could be) for their participation in the insurer's conduct. Following the rule that individual adjusters and other agents of the insurer cannot be held liable for breach of contract or common law bad faith, and as agents and employees cannot be held liable for conspiracy, the Court of Appeal concluded the same reasoning applied to statutory elder abuse claims.

Commentary

If bad facts make bad law, it is equally the case that unusual facts can make bad law. A scenario in which a policyholder expressly objects to disclosure of his tax return, and his accountant (who apparently wasn't sued) turns it over anyway, is rare. Although the court did not make the analogy express, it appears it was treating the case as similar to the situation where an attorney receives the inadvertent disclosure of privileged information, an area where the courts have held the attorney has an obligation to return that information and not distribute it further.

The broader problem Strawn creates is it gives policyholders another tool to join in a coverage lawsuit non-diverse defendants who serve the insurance industry, thus driving a wedge into what should be a close relationship between insurers and their coverage counsel. While the facts of Strawn may be relatively rare, the next court might take the analysis a step farther.

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