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AIU Insurance Co. v. TIG Insurance Co.

Issue Discussed: At Issue Doctrine

Submitted by Michael R. Kuehn

Date Promulgated: November 25, 2008

 

 

Court:  Southern District of New York

Issues Decided: Whether a cedent-insurer waived attorney-client privilege with respect to its communications with counsel is an underlying coverage dispute where the  insurer (1) brought an action for breach of contract against a reinsurer who then asserted a late notice defense; or  (2) provided the reinsurer access to privileged communications during an audit that was subject to a confidentiality agreement with a non-waiver provision.

In an opinion and order by a Magistrate Judge dated November 25, 2008, the Southern District of New York held that AIU Insurance Company (“AIU”) had not waived the attorney-client privilege that covered its communications with its coverage counsel related to underlying asbestos claims asserted against its insured, Foster Wheeler, by bringing a breach of contract against its reinsurer – TIG Insurance Company (“TIG”).  The Court reasoned that merely bring an action was insufficient to effectuate an “at issue” waiver with respect to the privileged documents.  The Court found that AIU had not waived privilege by providing TIG access to certain privilege communications  during an audit because the confidentiality agreement execute in advance of the audit contained a non-waiver provision.

TIG reinsured four umbrella policies that AIU had issued to Foster Wheeler Corporation. AIU became involved in coverage litigation with Foster Wheeler in 2001.  AIU and Foster Wheeler settled the coverage litigation in 2006 and AIU began making payments pursuant to the Agreement.  In January of 2007, AIU submitted a reinsurance claim to TIG.

In February of 2007, TIG began an investigation into when AIU first received notice of Foster Wheeler’s claims under the umbrella policies.  AIU sent TIG an opinion it had received from coverage counsel that indicated AIU had received notice of its potential exposure in March of 1992.  TIG and AIU agreed to an audit of AIU’s files.  A confidentiality agreement was executed that provided disclosure of documents drafted by AIU’s coverage counsel would not “constitute a waiver of any applicable privilege.”

TIG audited AIU’s files for two days in July of 2007.  AIU provided TIG with access to documents prepared by AIU’s coverage counsel and a letter from Foster Wheeler to its claims broker, dated February 27, 1992, that purportedly identified the potential exposure of the AIU umbrella policies.  TIG subsequently requested copies of these documents, which AIU refused to provide.  AIU also informed TIG that it had not provided TIG access to all of AIU’s documents related to Foster Wheeler through the date of the audit.

AIU brought suit against TIG for breach of the reinsurance contracts.  TIG asserted a “prompt-notice” defense in its answer. TIG sought documents concerning (1) AIU’s historical knowledge of its exposure under the umbrella policies; (2) AIU’s notice to its other reinsurers concerning the settlement with Foster Wheeler; and (3) TIG’s July 2007 Audit. AIU objected to the document requests to the extent that the documents sought were protected from disclosure by the attorney-client, work-product or other applicable privileges.

TIG moved to compel arguing that AIU had waived privilege by (1) putting the documents “at issue” by bringing a breach of contract action and/or (2) sharing the documents with TIG during the 2007 audit.  The Court explained an “at issue” waiver of privilege occurs under New York law when a party (1) asserts privilege as a result of an affirmative act; (2) through the act, the asserting party puts the information at issue by making it relevant to the case; and (3) application of privilege would deny the opposing part of information vital to tis defense.

The Court found that none of the elements necessary to find an “at issue” waiver were present.  AIU’s act of seeking coverage did not qualify as an affirmative act.  Further, TIG’s interposition of a late notice defense could not create a waiver of the part of AIU.  Applying the next factor, the Court found that AIU had not put the contents of the privilege communications at issue by relying on them to prove the breach of contract claim by, for example, asserting that it relied on advice of counsel. Finally, the Court held that the privilege communications were not vital to TIG’s prompt notice defense because the defense could be proven through evidence other than AIU’s communications with its coverage counsel.

The Court did find a limited of waiver of privilege as to the memorandum from coverage counsel that AIU had provided to TIG prior to the audit.  The Court found that the relationship between AIU and TIG had become adversarial in nature at the time of disclosure and the typical protection from waiver of privilege for documents shared pursuant to a common interest did not apply.  However, the Court enforced the terms of the Confidentiality Agreement and did not find a waiver for documents provided during the July 2007 Audit.