A recurring issue in coverage litigation is the extent to which insurers are entitled to obtain the file of defense counsel in cases where the insurer has either denied coverage or is at least reserving rights with respect to whether certain claims are covered.

This is an issue of particular consequence in cases involving intellectual property, products liability claims and other cases where the insured settles for a large gross sum without any allocation between those amounts that are covered and other categories of damages that are not. Absent an express allocation that could be relied on in the underlying settlement (or one that is not completely self-serving) insurers have sought access to the reports and analyses of defense counsel in an effort to determine what portions of such settlements may be covered or excluded.

Policyholders have argued with considerable success that insurers are not entitled to such information and that such communications are privileged. A singular exception to this rule has been the opinion of the Illinois Supreme Court in Waste Management, Inc. v. International Surplus Lines Ins. Co., 579 N.E.2d 322 (Ill. 1991), in which the court ruled that under the common interest doctrine, “when an attorney acts for two different parties who each have a common interest, communications by either party to the attorney are not necessarily privileged in a subsequent controversy between the two parties.” As a result, in Illinois, policyholders are required to turn over communications from defense counsel even if the dispute involves excess insurers that are disputing coverage. In a new opinion from the U.S. Court of Appeals for the First Circuit, Massachusetts has joined Illinois in adopting this expansive view of the common interest doctrine in coverage disputes.

In Vicor Corp. v. Vigilant Ins. Co., No. 09-1470 (1st Cir. March 16, 2012), a power converter manufacturer sought reimbursement from its liability insurers for $50 million that it had paid to resolve claims by cellular network operators that their networks had failed owing to a defect in the component manufactured by the insured. There was a significant dispute with respect to what portions of the settlement might be recoverable as “loss of use” damages insured under the various policies at issue. When the insurers deposed Vicor’s point man on the settlements, he claimed that the entire $50 million was covered as loss of use damages.

Vicor’s  insurers, being skeptical of this assertion, sought discovery of all reports from defense counsel which the insured had previously withheld on the basis of the attorney/client privilege and work product doctrine. Although the District Court (Young, J.) quashed these requests, the First Circuit has ruled, in remanding the case for further proceedings, that the insurers were entitled to this information.

As a preliminary matter, the First Circuit noted that in  Massachusetts defense counsel that has been engaged to represent a policyholder has two clients and therefore communications to either party will not be privileged as to the other.

The court rejected Vicor’s argument that the insurers’ reservations of rights defeated any claim of a common interest. Even though the insurers were reserving rights, the First Circuit noted that they had paid for the defense and had partially funded a part of its settlement. Further, the court took note of the fact that the insured had supplied the insurers with numerous letters, reports and other communications setting forth counsel’s assessment of liability, strategic litigation planning and calculations of potential damage outcomes. All these were marked as “privileged and confidential” so as to foreclose their being disclosed to third parties on the basis of a claimed waiver. The court held that in such circumstances, the insured could not have it both ways and could not “make use of the benefit of the common interest exception to avoid waiver of the attorney/client privilege as to third parties and simultaneously assert the privilege against the parties with whom they share a common interest.”

As to the work product doctrine, the First Circuit declared that documents produced while the insurers were providing a defense were unlikely to be protected whereas those produced during the periods when the insurers denied coverage or refused to provide indemnity were likely to be protected. In this case, the court declared that, “Given the fact that the precise nature of the Ericsson-Vicor settlement is crucial to a determination of which of Ericsson’s claims are covered, the record supports the insurers’ substantial need for at least some of the documents at issue. . . .”

Under the circumstances, the First Circuit found that Judge Young had abused his discretion in denying the insurers’ motion to compel in its entirety and that the district court, on remand, should tailor a discovery order consistent with the First Circuit’s analysis of the issues.

This is a ruling of enormous potential importance.  Up to this point, the common interest doctrine has only been explicitly acknowledged by Massachusetts court as applying to cases involving co-defendants with overlapping legal interests.  See Hanover Ins. Co. v. Rapo & Jepsen Ins. Services, Inc., 449 Mass. 609 (2007).  While it has been assumed to also clear apply in "full coverage" cases, this is the first Massachusetts case where it has been held to also apply in cases where the insured and insurers not only have conflicting interests but are actually in litigation against each other.   It remains to be seen, however, whether it will be given equally broad application in cases where insurers have denied coverage outright or whether the claims involve excess insurers that have not been participating in the insured’s defense.

In acknowledging the applicability of the common interest doctrine in cases where there are also conflicting interests among the parties, the First Circuit has also given a boost to efforts by insurers and reinsurers to protect shared case analyses and other privileged reports from being subject to disclosure to third parties.