Can U.S. commercial policyholders tell their insurers their deepest secrets?

Can a risk manager in the United States tell an insurer his or her company’s secrets?

Only if insurance companies are willing to sign binding legal agreements that confirm they will not turn around and use those secrets against their insureds later down the road, says Pennsylvania lawyer Peter D. Laun, partner at Jones Day. Otherwise, he advises risk managers, don’t give your insurer privileged documents if the insurance company has already denied part of your claim.

Laun fielded questions from an audience of risk managers at the 2012 Risk and Insurance Management Society (RIMS) Annual Conference & Exhibition in Philadelphia on Apr. 17. He was speaking specifically about a Catch-22 situation commonly facing risk managers when insurers deny one aspect of a claim, but “reserve rights” on whether or not another portion of the claim is covered until litigation on the issue is underway.

Often when insurers “reserve rights,” they ask risk managers for more information to decide whether or not there is coverage. This changes how privilege is handled during the litigation, Laun says.

Privilege refers to documents that are protected from disclosure in court. Privilege is waived if insurers and policyholders do not share a common interest. An example would be a situation in which the policyholder discloses privileged documents to an insurer that has already denied all or part of the policyholder’s claim.

Waiving privilege means the insurance company could disclose the documents in court as the basis for denying the claim on which it had reserved rights.

Risk managers acting for insureds thus face a dilemma. If they do not produce the requested documents to the insurer, their claim could be denied (since they are not co-operating with the insurer). But if they do provide the privileged documents, and those documents contain sensitive information that prejudice the insured’s case, the insurer might use them in court to justify denying the claim.

Laun said his way of handling this dilemma on behalf of risk managers is to draw up a common interest agreement with the insurer. The document acknowledges that the insured and the insurer have a common interest, meaning the document passing hands to the insurer remains privileged and cannot later be used against the insured.

“You can imagine how well this goes over with carriers,” says Laun. “But my philosophy is, if you want to look into my sock drawer, you can’t use it against me. If you want me to give my innermost secrets to you about what’s happening in litigation, then you can’t use it against me.

“The reason why I think a court will often enforce that is because if in fact [insurers are] trying to use [that information] against you, they’re not aligned with you. It undermines the whole concept behind a common interest privilege.”