United States: Does The Fiduciary Exception Apply To Legal Advice Received By Insurers During The Claims Process

Seyfarth Synopsis: Adding to the body of conflicting authority on the scope of the attorney-client privilege in ERISA lawsuits, a district court has found that the fiduciary exception to attorney-client privilege applies to an insurance company that acts as a claim administrator, thus requiring disclosure of  communications between the insurer and its lawyers regarding a claim for benefits during the claims process.

When an insurance company asks its attorneys for advice regarding decisions on benefits claims and appeals, it may be doing so without the protection of attorney-client privilege, according to a recent decision from the Southern District of New York. In McFarlane v. First UNUM Life Insurance Company, the court granted Plaintiff's motion to compel production of  documents determined by the court to be within the fiduciary exception to the attorney-client privilege. No. 16-cv-07806, 2017 WL 480500 (S.D.N.Y. Feb. 6, 2017). In doing so, the court rejected the argument that the fiduciary exception to attorney-client privilege—which makes a fiduciary's communications with counsel discoverable in certain situations— does not apply to insurers acting as benefit claims administrators.

Plaintiff sought benefits under an LTD plan offered by her employer. Authority to make decisions on benefit claims and appeals had been delegated to Defendant, the insurer who issued the policy. After benefits were terminated, Plaintiff filed suit and sought production of the administrative record. Along with its production, Defendant produced a privilege log containing three entries related to communications between the Lead Appeals Specialist and Defendant's in-house attorneys. Those three entries were the subject of Plaintiff's motion.

Defendant argued these documents were privileged based on the rationale of Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). In Wachtel, the Third Circuit found the fiduciary exception did not apply to insurers. It reasoned, that in contrast to an internal claims-administrator, when an insurer acts as the claim administrator the legal advice it seeks during the claim process is paid for by the insurer, not by the beneficiary or benefit plan. As such, the insurer—as opposed to a traditional administrator—owns the funds that will ultimately be paid out and has an interest in the management of those assets.

Rejecting the Third Circuit reasoning, the court found that the dispositive factor under Second Circuit law is the purpose of the communication in question. Thus, if the purpose of the communication concerns the exercise of fiduciary functions, the requirement that the fiduciary act in the beneficiary's best interests makes the beneficiary the "true client" of the advice. This is a "fact-specific inquiry" and requires the court to examine both the content and context of the communication.

The court's rejection of Wachtel highlights the fact that courts differ in their application of the fiduciary exception. It also, however, demonstrates that fiduciaries need to be aware of the risk that a court may find their communications with counsel discoverable should a dispute arise regarding an administrator's decision during the administrative review process.

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