Client Alert: Tripartite Relationship Protecting Attorney-Client Communications Not Limited to Defense of Liability Claims

In Bank of America v. Superior Court (No. G046829, filed 1/15/13), a California Court of Appeal held that the attorney-client and work product privileges apply to the communications and work product of an attorney retained by a title insurer to prosecute an action to establish priority of liens on real property covered by a title policy, to the same extent applicable to an attorney retained by an insurer to defend its insured in a liability matter.

Bank of America (BOA) refinanced a home loan, which was to be secured by a first deed of trust. A title insurer issued a title policy insuring the priority of the BOA trust deed over any other lien or encumbrance. Unbeknownst to BOA, the homeowner had also used the property to secure a business line of credit, which was ultimately defaulted. The business lender sought to foreclose, and BOA tendered a claim to the title insurer, which retained counsel to prosecute, on behalf of BOA, an action for equitable subrogation, injunctive relief, declaratory relief and fraud.

In the ensuing litigation, the business lender served a subpoena on the title insurer, seeking all communications between the insurer and the attorney it had retained to prosecute the action. BOA moved to quash the subpoena, arguing that a tripartite relationship existed protecting communications between the insurer and retained counsel, since the attorney had been retained by the insurer to protect the insured’s interests. However, the trial court ordered production of the attorney’s communications, seeing a distinction between defense of a liability claim and prosecution of an affirmative claim on behalf of the insured. The trial court said that the attorney did not have a “favored position” or “sacred role” in the litigation. In addition, the business lender argued that because the insurer had issued a reservation of rights, any tripartite relationship had been destroyed.

The appeals court reversed, and ordered the subpoenas quashed without production of privileged documents. Discussing the tripartite relationship, the court said that conceptually, each member of the trio — attorney, client-insured, and client-insurer — has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well.

The appeals court saw no difference in the fact that the attorney was hired to prosecute a quiet title action, saying that the lender, the insurer and the attorney formed a loose partnership, coalition or alliance that was directed to the common goal of protecting the lender’s security position, such that communications exchanged among them were privileged. The court noted that under a title policy the insurer has a variety of duties, which may include either defending or prosecuting litigation. The court said that the title insurer’s duties to defend and/or to initiate a lawsuit are “kindred duties” addressing “the same fundamental concern.” Thus, the court saw the fact that the litigation involved an affirmative claim as an artificial distinction.

The appeals court also rejected the business lender’s argument that the reservation of rights had created a conflict that was inconsistent with a claim of joint privilege. For one thing, the court pointed out that the right to invoke any conflict as a disqualifying event belonged to BOA. The court said that the business lender, as BOA’s adversary, could not assert BOA’s right to Cumis counsel in order to create a waiver of the attorney-client privilege or to the attorney’s work product as to communications between attorney and the insurer.

This decision may also assist professionals — particularly in-house law firm general counsel — in protecting from disclosure their pre-litigation communications with errors and omissions insurers and their coverage and/or monitoring counsel. Such communications, which often occur after notice of circumstances that might potentially give rise to a claim has been given to the insurer and while the underlying litigation is still pending, have often been the subject of heated discovery disputes in subsequent malpractice litigation. Although this case likely will not preclude such disputes outright, it offers further support for protecting communications between insured professionals and their insurer’s counsel.

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