The Privilege is in the Policy: Tripartite Attorney-Client Relationship Arises Where Insurer Retains Counsel Pursuant to Policy Terms—to Prosecute or Defend

In Bank of America v. Superior Court, ___Cal.Rptr.3d ___, 2013 WL 151153 (Cal. Ct. App. Jan. 15, 2013) the California Court of Appeal for the Fourth Appellate District held that a tripartite attorney-client relationship arises, accompanied by the associated attorney-client privilege and work product protections, when an insurance carrier hires a law firm to prosecute an action on behalf of its insured pursuant to the policy terms.

Bank of America, N.A. (B of A) was the insured under a lender’s title policy issued by Fidelity National Title Insurance Company (Fidelity) to insure a deed of trust on certain real property.  Pacific City Bank (PCB) had recorded a deed of trust on the same property and, after recording a notice of default, noticed a trustee sale.  B of A tendered the claim to Fidelity, which hired counsel to institute an action on behalf of B of A to protect its interests.

In the litigation initiated by B of A, PCB served subpoenas seeking communications between B of A’s counsel and Fidelity.  B of A moved to quash the subpoenas on the grounds that they sought documents that were protected by the attorney-client privilege and constituted attorney work product.  The trial court held that, because the law firm was retained to prosecute, rather than defend, the underlying action, Fidelity did not have a “favored position” or “sacred role” in the litigation and thus there was no attorney-client relationship between Fidelity and counsel representing B of A.

The Court of Appeal reversed, holding that the trial court erred as a matter of law in making an artificial distinction based on whether the retention of counsel by the carrier was for the purpose of defending or prosecuting an action.  Rather, the court focused on whether the retention was within the scope of Fidelity’s contractual duties to B of A.  In the context of title insurance, a title insurer owes “kindred duties” to defend and initiate lawsuits to protect the integrity of the insured’s title. For this reason, the court found that there were no distinguishing factors between the prosecution and defense of an action, and it rejected the argument that a tripartite relationship is created only when counsel is retained by the carrier to defend its policyholder.  Accordingly, the court held  that a tripartite relationship was created between B of A, Fidelity, and retained counsel when Fidelity retained counsel to prosecute litigation on behalf of B of A pursuant to the terms of the insurance contract.  The court also found that the tripartite relationship existed regardless of whether there was a formal retainer agreement between the carrier and the law firm.  Further, the tripartite relationship existed even though the carrier retained counsel under a reservation of rights, because the reservation of rights did not trigger the insured’s right to independent counsel. Finally, the court rejected arguments that Fidelity or B of A had waived their rights to assert the attorney-client privilege or attorney work product doctrine.

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