D&O Insurance: The Cooperation Clause and Privileged Communications


Most corporate risk managers are familiar with the sometimes symbiotic and sometimes adversarial relationship that can exist between directors and officers of the companies for whom they work and the insurance companies that insure them. The duality of this relationship is perhaps most evident after a lawsuit has been filed against the company and its directors and officers.

In those instances, the policyholder and the carrier should be aligned at least to the extent that they strive to work together to resolve the litigation as quickly and inexpensively as possible. They are also aligned in maintaining the confidentiality of their communications and not sharing that information with legal opponents in an ongoing case.

Yet, in the D&O insurance setting, a majority of jurisdictions refuse to extend either the attorney/client privilege (or the attorney/work product doctrine) to communications between counsel retained by policyholders and an insurer. This is true even in situations where the parties have executed a joint defense agreement. Additionally, at least one court has ruled that such communications are not protected against disclosure to litigant opponents in an ongoing case.

The Defense and Cooperation Clauses

D&O policies generally do not include a “duty to defend” component. Instead, the policyholder selects defense counsel, fronts the defense costs, and controls the underlying litigation, all of which is tempered by (among other things) the cooperation clause of the policy. Insurers invoke the cooperation clause to seek information concerning the factual and legal bases of the claims being asserted.

Because sharing information with a D&O carrier may be critical to assist in the evaluation of liability risks, the cooperation clause had been described as a material provision of the policy and a condition precedent for the insured’s rights under the policy. A breach of the cooperation clause that causes actual and substantial prejudice to the carrier may operate to relieve the insurer of liability under the policy. Thus, the risks associated with the failure of a policyholder to cooperate could be catastrophic.

Take, for example, the case of Imperial Corporation of America (ICA), whose shareholders filed lawsuits against the company and its directors and officers. CNA, a Chicago-based property/casualty insurer, issued a D&O policy covering ICA and its directors and officers. The director defendants selected and paid counsel. Litigation included a document depository to allow counsel access to documents and the defendants executed two “joint defense agreements,” which enabled them to share information and to bar disclosure of confidential communications, work product and strategy.

The defense counsel authored two letters to CNA analyzing the allegations of the underlying litigation and including the counsel’s “candid analysis of the risk of exposure presented by the underlying action.” During a deposition, the defense counsel discovered that these letters had been inadvertently included in the document depository and the directors sought to protect the contents of the letters.

Relying heavily on the fact that CNA did not have a duty to defend and played no role in the selection of counsel and the carrier was represented by separate counsel, the court concluded that the letters were not protected from disclosure by the attorney/client privilege. The court also found that the defendants had waived any “work-product protection” afforded the letters. The court noted that, with respect to the first letter (written before CNA was a party to joint defense agreement), counsel should have been aware that a future coverage was a “very real possibility” because the carrier had not committed to indemnify its insured, thus pitting the insured against the insurer.

With respect to the second letter, after the carrier signed the agreement, the court concluded that the letter failed to satisfy the requirements of a joint defense doctrine. Instead, the court concluded that the letter constituted a “normal business communication between an insured and an insurer, with the insured having the contractual obligation to keep the insurer informed about the insured’s insurance claim with the insurer.” The court refused to apply the joint defense doctrine to the second letter.

Suggested Strategies

It is in the best interests of both policyholders and their D&O carriers to avoid having joint communications ending up in the hands of a litigant opponent in an ongoing case. To avoid this, the following strategies are offered to help maintain the confidentiality of those communications.

1. Joint Defense Agreements
In situations where the policyholder has selected counsel and the insurer is represented by separate counsel, the parties should execute a joint defense agreement covering their communications. The joint defense agreement should expressly acknowledge that the carrier and the policyholder are aligned in their desire to work together to evaluate and assess the risks of the underlying litigation in order to efficiently resolve that litigation.

2. Confidentiality Agreements
The parties should execute a confidentiality agreement acknowledging that, in order to satisfy the requirements of the cooperation clause under the policy, the policyholder must share confidential information with the carrier and the parties agree to maintain the confidentiality of that information.

3. Procedures to Maintain the Privilege
Policyholders and carriers should implement procedures to maintain the privileged nature of their communications including marking all written communications as “privileged and confidential,” limiting the dissemination of those communications to people directly involved with the litigation or claim, and instructing recipients not to share them with inessential third parties.

4. Avoid Written Communications
Policyholders and insurers should avoid communicating privileged information in writing as much as possible but, instead, provide oral reports and updates. To the extent that written communications are necessary, the policyholder should avoid including any information in writing that it would not want discovered by third parties and coverage issues should never be addressed in the same communication as liability issues.

The majority of jurisdictions have concluded that neither the attorney/client privilege nor the attorney/work product doctrine automatically shield from production communications between counsel for policyholders and a D&O insurer. Practitioners should remain vigilant in balancing the obligation to share information with the carrier, with the risk that such communications might be discovered in the underlying litigation, possibly by litigant opponents.


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