November 2012 Vol. 9, No. 3


Attorney-Client Privilege


Stephan v. Unum Life Ins. Co. of America (9th Cir. 2012) __ F.3d __, 2012 WL 3983767


In an ERISA action asserting that disability plan administrator-insurer abused its discretion in excluding beneficiary’s bonus to calculate his predisability earnings, were internal memoranda between administrator’s, an insurer, claims analyst and its in-house counsel about how the policy should be interpreted discoverable under the fiduciary exception to the attorney-client privilege where the communications did not address any liability the administrator might face and the communications did not indicate they were prepared with such liability in mind, but where they were created after beneficiary’s counsel had contacted the plan administrator about benefits but before the administrator has made a final decision on whether to grant or deny benefits? 


Yes.  An insurer that serves as a plan administrator has a structural conflict of interest in processing claims since it decides who gets benefits and also pays for those benefits, giving it a financial incentive to deny claims.  (2012 WL 3983767 at *9.)  In a question of first impression in the Ninth Circuit Court of Appeals, the Court recognized that the fiduciary exception to the attorney-client privilege, which bars an administrator from asserting the privilege over communications with counsel on administrative matters such as whether to grant or deny benefits, applies to insurers acting as plan administrators.  The Court of Appeals agreed with the analysis in Klein v. Northwestern Mutual Life Ins. Co. (S.D. Cal. 2011) 806 F.Supp.2d 1120 (EQ 8.3.7) and the majority of other courts to address the issue.  Courts that have recognized the fiduciary exception to the attorney-client privilege have done so on one of two bases.  Some courts have recognized the exception based on the ERISA trustee’s duty to disclose to beneficiaries all information about plan administration.  (2012 WL 3983767 at *11.)  Other courts have reasoned that the beneficiaries, not the ERISA fiduciary who acts as the representative of the beneficiaries of the plan, are the real “clients.”  (Ibid.)  Under either theory, the Ninth Circuit concluded that the duty to disclose all information regarding plan administration applies equally to insurance companies and trustees alike.  (Ibid.)

The Court of Appeals reversed the trial court order denying discovery of the disputed documents on the ground, even assuming that the fiduciary exception applied to insurers, the documents had been created after contact from the beneficiary’s counsel and therefore after an adversarial relationship had begun.  Having reviewed the disputed documents in camera, the Court of Appeals found that they related solely to how the policy should be interpreted and whether beneficiary’s bonus should be included in the calculation of his pre-disability monthly earnings as opposed to bearing any indication that they were created in contemplation of any criminal or civil liability the plan administrator may face.  (Id. at *12.)  There was no binding precedent in the Ninth Circuit on when the interests of the plan fiduciary and the beneficiary become so adverse that the fiduciary exception does not apply.  (Id. at *13.)  The Court of Appeals sided with Klein and other courts that have held that “it is not until after the final determination – that is, after the final administrative appeal – that the interests of the Plan fiduciary and the beneficiary diverge for purposes of application of the fiduciary exception.”  (Ibid.)

“In sum, advice on the amount of benefits [beneficiary] was owed under the Plan, given before [plan administrator] had made any final determination on his claim, constitutes advice on plan administration.  Such advice was given before the interests of [beneficiary] and [fiduciary] became adverse.  The fiduciary exception to the attorney-client privilege therefore applies to the documents at issue here. “  (Ibid.)


The district court was directed on remand to allow discovery of the documents “[a]bsent some other basis for withholding them.”   (Ibid.)

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