Monday, January 21, 2013

Work Comp and Independent Counsel

I think one of the more interesting aspects of workers' compensation litigation is the relationship of the parties, and in particular the relationship of the defense parties: employer, carrier/administrator and the attorney.

Most employers believe that when the insurance company hires a lawyer to defend a claim that the lawyer either has some duty towards the employer's interests, or that the lawyer should be communicating with the employer.

Back when I was practicing work comp defense it was quite routine for the defense lawyer to communicate directly with the employer because it simply was more efficient. Many times correspondence would be copied to the employer at the request of the employer and/or carrier/administrator. 

Conference calls and meetings were conducted with both parties present wherein all information on a claim, and strategy, would be discussed.

Often I would participate in routine claim file reviews along with representatives from both carrier and employer. Documentation would be shared, communications were freely discoursed.

There wasn't much consideration given to whether or not attorney-client privilege would be compromised. It was thought that everyone was on the same team, even though it was clear from disclosures and other communications that the lawyer hired by the carrier was the lawyer for the carrier.

This assumption was, and is, erroneous.

As reported this morning in WorkCompCentral news, a pair of state supreme court cases from Montana and Texas are making a distinction between counsel for the carrier, the administrator, and the employer.

Texas Supreme Court's decision last June in In Re XL Specialty Insurance Co. and Montana's Supreme Court March decision in America Zurich Insurance Co. v. Montana 13th Judicial District Court et al hold that the attorney-client privilege does not extend to communications between a carrier's counsel and a third-party claims adjuster or a claimant's employer.

The Texas Supreme Court cited the fact that the carrier and employer were not joint clients of the same defense attorney, nor that the employer was joined to the workers' compensation dispute as a party that shares a joint defense with the carrier, as a failure in the attorney-client privilege between XL Specialty Insurance Co. and the employer, Cintas Corp., rejecting XL's argument that the communications between its attorney and Cintas regarding a claim by Cintas employee Jerome Wagner were protected by privilege.

Since disclosure of privileged materials to a party outside of the attorney-client relationship waives the privilege, and Cintas was outside the relationship between XL and its attorney, the court said the communications between the attorney and Cintas were subject to discovery by Wagner in his claim against XL for the alleged bad-faith handling of his claim.

In the Montana case, Phillip Peters filed a claim against the Roscoe Steel & Culvert Co.

Roscoe's insurance carrier, Zurich, accepted liability. Zurich then contracted with Employee Benefit Management Solutions (EBMS), a third-party adjuster, to manage the claim.

When Peters and Zurich could not agree on the level of his impairment, Zurich consulted an attorney who prepared an evaluation of Peters' claim. The attorney sent a copy of this report to EBMS, and the Montana Supreme Court said this action waived the privilege that would have otherwise attached. In light of this, the court said, when Peters later sued Zurich for mishandling his claim, he was entitled to obtain the evaluation during discovery.

The essence of these rulings is that the courts find that each party has their independent legal interests, and each party thus waives any attorney-client privileges if a party permits counsel to communicate with another party directly without first establishing an attorney-client relationship.

While legal pundits and those who argue that the courts perpetuate the lawyering of America (after all, judges and justices are themselves lawyers), these holdings make sense.

If one of the parties engaged in conduct that was either illegal, unethical or in some other way against the interest of one of the other parties without the knowledge of that other party, sharing counsel communications without having that protective relationship means the innocent party also shares putative knowledge of the untoward acts or omissions.

There is no independent layer of protection. And if the communications reflect action that is either illegal, unethical or worse having a single lawyer could present a conflict of interests, particularly if an action may result in some damage to one of the defendant parties.

Texas observers told WorkCompCentral that the Supreme Court's opinion suggests that if the employer and the carrier both retained the same counsel then the privilege should extend to both parties, but I have reservations about this tactic. Carrier interests and employer interests are not necessarily aligned in workers' compensation cases.

The carrier's interest generally is to close the claim as quickly as possible to free up reserve money. Usually that's the employer's goal too, but sometimes we have seen the employer pursue protracting the litigation for one reason or another - perhaps in retaliation, perhaps because there is a disbelief in the claim, perhaps just because there is a misunderstanding.

A simple example - in California there is an anti-discrimination statue generally referred to as Labor Code 132a. This section prohibits an employer from discriminating against an employee (not necessarily an injured worker) who either alleges, reports or witnesses an industrial injury. The statute has been interpreted broadly to include all sorts of employer actions against employees.

California workers' compensation policies state that a defense MAY be provided in 132a allegations, but that there is no coverage for any damages or indemnity that may be awarded on such a claim - this is because 132a claims are regarded as intentional acts and public policy prohibits insuring against deliberate misdeeds.

In such situations, while the employer may be relieved that there is counsel on the claim, the better practice is for the employer to retain independent counsel to represent its interests, and to keep communications that may be privileged separate and apart of the communications that concern the case in chief - better to not poison the well with information that could be damaging in the wrong hands.

While employer and carrier should be aligned in an ultimate disposition of a claim, those interest cease at the policy declarations page. These cases illustrate that carriers, administrators, and employers will at times have opposing interests.

1 comment:

  1. One of these shortsighted moves is an event organizer’s decision to declare certain (or all) employees are independent contractors and thus exempt from the employer’s workers' compensation requirements. They have discovered that by hiring "independent contractors" rather than "employees", they can save on workers' compensation insurance as well as state and federal taxes.
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