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The Second Appellate District of California granted the writ petition filed by Zurich American Insurance Co. ("Zurich"), finding that the trial court and the discovery referee whose reports it adopted used an overly restrictive definition of attorney-client privilege in overruling Zurich's corporate privilege claims in its discovery dispute with Watts Industries, Inc. ("Watts"). The appellate court held that a corporation's attorney-client privilege extended to confidential communications between corporate agents regarding legal advice and strategy, including those in which the corporation's attorneys are not directly involved or which do not include excerpts of direct communications from the attorneys.
In this discovery dispute, Zurich objected to production of various documents from its claims files and reserve or reinsurance documents, invoking the attorney-client privilege and the work product doctrine. The trial court adopted the discovery referee's reports rejecting the privileges claimed by Zurich for all internal documents concerning reserves and reinsurance matters. The referee also concluded that "[e]xcept for items in the claim file that contain actual copies of letters or e-mail communications from outside counsel, or documents that have been created by counsel, or received by counsel, or that contain direct communications from counsel, . . . the documents are not protected by the attorney-client privilege or the work product privilege. The referee recognized that many of the disputed documents "indicate internal litigation plans and strategy with respect to the cases in dispute," but "the attorney-client privilege is limited to communications by counsel to a client and by a client to counsel. The fact that many of the disputed items contain discussion of legal matters, strategy, and status of the bad faith litigation cannot be used to cloak them with either the attorney-client privilege or the work product privilege for that reason alone."
The parties stipulated that Zurich's further production be stayed pending resolution of the writ concerning the discovery orders, which were treated as final for purposes of the writ review. After preliminary briefing, the Court of Appeals issued an order to show cause why a writ of mandate should not be issued directing the trial court to vacate its orders and enter a new order determining that the following materials are protected from discovery by the attorney-client privilege: (1) portions of internal communications between Zurich employees revealing Zurich's evaluation of (or its litigation or settlement strategies concerning) the underlying action and which discuss legal advice received by Zurich for purposes of defending against or settling the action; (2) such communications between Zurich and its reinsurer; and (3) such internal loss reserve documents.
After further briefing, the Appellate Court, following principles governing corporate attorney-client privilege in California and federal caselaw, directed the trial court on remand to apply specific guidelines to its privilege determinations. "The first relevant inquiry is whether the document contains a discussion of legal advice or strategy of counsel for Zurich," noting that Cal. Evid. Code ยง 952 provides that a confidential communication "includes a legal opinion formed and the advice given by the lawyer in the course of that relationship."
Thereafter, "[i]f it is determined that the document reflects legal advice or opinions and is thus privileged, the court must determine whether Zurich waived the privilege by distributing the advice within the corporation." Section 952 extends the privilege to confidential communications shared with "those who are present to further the interests of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purposes for which the lawyer is consulted . . . ." The disputed documents must be reviewed to determine whether the Zurich employees to whom legal advice was relayed come within this broad definition.
The Appellate Court's ruling relied heavily upon Insurance Co. of North America v. Superior Court (1980) 108 Cal. App. 3d 758 ("INA"), where the court reasoned: "The key concept here is need to know. While involvement of an unnecessary third person in attorney-client communications destroys confidentiality, involvement of third persons to whom disclosure is reasonably necessary to further the purpose of the legal consultation preserves confidentiality of communication." Id. at 765. "[D]isclosure may be made to persons not present at the attorney-client consultation, i.e., the third persons need not necessarily participate in the legal consultation." Id. at 766.
The Appellate Court directed the trial court to determine whether the Zurich employees with whom the legal advice was shared come within these principles. "If so, the document is privileged if there is a showing that it was to be treated as confidential. If not the document is subject to discovery."
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.
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