TEXAS SUPREME COURT HOLDS ATTORNEY-CLIENT PRIVILEGE DOES NOT APPLY TO COMMUNICATIONS BETWEEN INSURER’S LAWYER AND EMPLOYER IN COMP BAD FAITH CASE

July 20, 2012

In a recently issued-opinion, the Texas Supreme Court held that the attorney-client privilege did not apply in a bad faith action brought by an injured employee against a workers’ compensation insurer to communications between the insurer’s lawyer and the employer during the underlying administrative proceedings. In re XL Specialty Ins. Co., --- S.W.3d ---, 2012 WL 2476851, No. 10–0960 (Tex. June 29, 2012).

In considering the “allied litigant privilege” applicable in multi-party litigation, the Court determined that Texas Rule of Evidence 503(b)(1)(C) applies to joint defense situations in Texas where multiple defendants, represented by separate counsel, work together in a common defense, and that the protection afforded under the Rule only protects communications be made in the context of a pending action.

In response to the insurer’s argument that the communications at issue were protected by the insurer- insured relationship, the Court stated that it did not recognize a general insurer-insured privilege but agreed that in certain circumstances, communications between an insurer and its insured may be shielded from discovery by the attorney—client privilege.  In this case, the communications at issue were made between the insured’s lawyer and a third party who was not represented by insurer’s lawyer (or any other lawyer) and was not a party to the litigation or any other related pending action.  Therefore, the Court held that the insurer failed to show that the communications were within the parameters of Rule 503 and were thus not protected from discovery under the allied litigant doctrine or any other part of Rule 503.

Chief Justice Wallace B. Jefferson delivered the opinion of the Court, in which Justices Nathan Hecht, Dale  Wainwright,  David  Medina,  Paul  W.  Green,  Phil  Johnson,  Justice  Eva  Guzman,  and  Debra Lehrmann joined.  Justice Don R. Willett issued a dissenting opinion in which he took issue with the fact that the question answered by the majority, albeit weighty, arose possibly from a claim that no longer exists.