There is a common misconception that any and all communications between a client and their attorney are protected from disclosure by the attorney-client privilege. However, this is not always the case
In Melworm v. Encompass Indemnity Company, the insured plaintiffs, the Melworms, filed a lawsuit against their insurer due to the denial of a claim for vandalism to the Melworms' boat. Prior to investigating the claim, the insurance company retained an attorney, who was to advise the insurance company of its rights under the policy and conduct an examination of the Melworms.
During discovery, the insurance company provided a redacted electronic claims diary and redacted letters to the Melworms' counsel. The Melworms moved to compel the insurance company's production of the redacted portions of the documents. The insurance company opposed the motion on the ground that the redacted portions were subject to the attorney-client privilege, as they entailed internal discovery conducted by counsel, and therefore were subject to the privilege (including the examination). The Melworms argued that the privilege did not apply for two reasons: 1) the investigation of their claim is itself not subject to the privilege; and 2) the privilege is exercised by the insured, and not the insurer.
The Nassau County Supreme Court granted the Melworms' motion to compel based upon their first argument. New York law generally provides that in an insured versus insurer dispute pertaining to a claim, the claims file is generally not privileged. The basis for this is that the payment or rejection of claims is a part of the regular course of business of an insurance company. Therefore, reports that aid the insurer in this decision are likewise made in the regular course of business, even if the report is by an attorney. Furthermore, evaluating the extent of potential liability of the insured is also within the ordinary course of business, and therefore, the examination of the Melworms is not privileged either.
However, the Court disagreed with the Melworms' second argument that the privilege is only exercised by the insured. This is only true in a situation where the insurance company is under a duty to defend the insured, and the insured later brings an action against the insurance company relating to the denial of the claim. Here, if the insurance company tries to invoke privilege, they will be unsuccessful because the privilege lies with the insured.
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