Zurich American Ins. Co. v. Superior Court, No. B194793.

• Court: California Court of Appeals
• Writing for the Court: Epstein
• Citation: 155 Cal.App.4th 1485,66 Cal.Rptr.3d 833
• Parties: ZURICH AMERICAN INSURANCE CO., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Watts Industries, Inc., Real Party in Interest.
• Docket Number: No. B194793.
• Decision Date: 11 October 2007

66 Cal.Rptr.3d 833 155 Cal.App.4th 1485 ZURICH AMERICAN INSURANCE CO., Petitioner,
v.
The SUPERIOR COURT of Los Angeles County, Respondent; Watts Industries, Inc., Real Party in Interest. No. B194793. Court of Appeal, Second District, Division 4. October 11, 2007.

[66 Cal.Rptr.3d 834]

Selman Breitman, Neil H. Selman, Sheryl W. Leichenger, Kathleen Caswell Vance, and Rachel E. Hobbs, Los Angeles, for Petitioner.

No appearance for Respondent.

Rochefort, Rubalcava & MacCuish, David S. MacCuish and Richard C. Giller, Los Angeles, for Real Party in Interest.

[66 Cal.Rptr.3d 835]

EPSTEIN, P.J.

Zurich American Insurance Company (Zurich) contends the trial court and the discovery referee whose reports it adopted used the wrong standard in overruling its claim of attorney-client privilege in this discovery dispute with Watts Industries, Inc. (Watts). We agree that the challenged orders employed an overly restrictive definition of the attorney-client privilege, and grant relief on that basis. We decline to consider the privacy argument raised by Zurich for the first time in this court.

FACTUAL AND PROCEDURAL SUMMARY

Watts admitted many of the allegations of Zurich's petition for mandate. We take much of our factual and procedural summary from those uncontested facts.

The parties have been embroiled in litigation for the last nine years over the underlying actions, State of California ex rel. Nora Armenta v. James Jones Company and Los Angeles Department of Water and Power et al. ex rel. Nora Armenta v. James Jones Company et al. (collectively, the Armenta litigation). The instant action, Watts Industries, Inc. v. Zurich American Insurance Company (Super.Ct.L.A.County, 2004, No. BC245144) was brought by Watts. It pleads various causes of action arising out of Zurich's allegedly bad faith breach of its duty to defend and to provide coverage for Watts in the Armenta litigation. Zurich then filed a declaratory relief action against Watts and others seeking a determination of its rights and duties under the policies. Zurich American Insurance Company v. Watts Industries, Inc. et al. (Super.Ct.L.A.County, 2006, No. BC326747).) This action was consolidated with the Watts bad faith action. Meanwhile, Zurich instituted arbitration over separate deductible agreements in Illinois.

During discovery in the instant action, Watts requested production of various Zurich documents, including documents from its claims file. Zurich objected, invoking the attorney-client privilege and the attorney work product doctrine. Through a meet and confer process, the parties narrowed their dispute from over 2,000 documents to about 850. Watts moved to compel production, claiming that the documents sought were not protected by the attorney-client privilege or the work product doctrine. Zurich opposed the motion, arguing that some documents were protected and objecting to discovery of documents involving other insureds.

The trial court granted the motion to compel in part, ordering Zurich to produce for in camera inspection documents withheld on the grounds of the attorney-client privilege, the work product doctrine, or the Civil Code section 47 litigation privilege. A further meet and confer effort reduced the number of contested documents to 500. Of these, 230 contained reserve or reinsurance documents, as well as documents Zurich contended were protected by the attorney-client privilege and work product doctrine. It is these 230 documents which were addressed in the trial court orders that are the subject of this writ petition.¹

The discovery dispute was referred to Honorable Lester E. Olson (Ret.) for in camera inspection of the documents. It was agreed that the referee would first review some 76 documents identified by Zurich as claim file documents. After a tentative ruling and telephonic hearing, the referee issued a report and recommendations

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for a court order. The trial court adopted the referee's report and issued the proposed order. We therefore examine the findings of the report in detail.

In paragraph 6 of the report, the referee rejected the broad privilege claimed by Zurich for all internal documents concerning reserves and reinsurance matters. These were described as the "disallowed documents." The referee concluded that "[e]xcept for the items in the claim file that contain actual copies of letters or email communications from outside counsel, or documents that have been created by counsel, or received by counsel, or that contain direct communications from counsel, as indicated in the comment section of the attached listing of documents, the documents are not protected by the attorney-client privilege nor the work product privilege."

The referee recognized that many of the disputed documents "indicate internal litigation plans and strategy with respect to the cases in dispute," but "the attorney-client privilege is limited to communications by counsel to a client, and by a client to counsel. The fact that many of the disputed items contain discussion of legal matters, strategy, and status of the bad faith litigation cannot be used to cloak them with either the attorney-client privilege or the work product privilege for that reason alone."

The referee viewed the Supreme Court's decision in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309 (White), to be controlling and supportive of his conclusion that the "disallowed" documents are not privileged. The referee also concluded that Zurich's litigation privilege claim is not recognized in California law. Instead, the only litigation privilege recognized in California is Civil Code section 47 (hereafter section 47), and the disputed documents examined do not fall within the scope of that protection. The referee found that only the attorney-client privilege and work product doctrine apply.

The referee relied on Insurance Co. of North America v. Superior Court (1980) 108 Cal.App.3d 758, 166 Cal.Rptr. 880 (INA) and 2,022 Ranch v. Superior Court (2003) 113 Cal.App.4th 1377, 7 Cal.Rptr.3d 197 (2,022 Ranch) for his conclusion that documents concerning loss reserves and reinsurance were discoverable.

The trial court adopted the referee's recommendation that Zurich be directed to produce the "disallowed" documents and incorporated the referee's work sheet in its order. Documents marked "sustain" were held not subject to production.

Following this order, the referee issued a second report covering the balance of the reserve and reinsurance documents. He applied the same test for attorney-client privilege that he used in the first report, ruling that only documents "that contain actual copies of letters or e-mail communications from outside counsel, or documents that have been created by counsel, or have been received by counsel, or that contain direct communications from counsel" are protected by the attorney-client privilege. Thus, the privilege applied only to "communications by counsel to a client, and by a client to counsel." As in the first report, the referee concluded that "[t]he fact that many of the disputed items contain discussion of legal matters, strategy, and status of the bad faith litigation cannot be used to cloak them with either the attorney-client privilege or the work product privilege for that reason alone." The referee also repeated his view that White, supra, 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309, INA supra, 108 Cal.App.3d 758, 166 Cal.Rptr. 880, and 2,022 Ranch, supra, 113 Cal.App.4th 1377, 7 Cal.Rptr.3d 197, supported

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his conclusion that some documents were not privileged.

The parties stipulated that Zurich's further production of documents be stayed pending resolution of this petition, and asked the court to adopt the referee's second report and deem it a final order for purposes of writ review. The trial court issued the requested order.

Zurich then sought a writ of mandate or prohibition from this court, asking that we compel the trial court to vacate its orders compelling production and to enter a new order denying discovery of what Zurich regarded as attorney-client privileged documents and documents revealing confidential litigation and or settlement strategies, including documents containing reserve and reinsurance information. We also were asked to direct the trial court to examine the remaining 270 disputed documents in conformance with the principles we articulate concerning the attorney-client privilege or right to privacy.

After preliminary opposition and additional briefing, we issued an order to show cause why a peremptory writ of mandate should not issue directing the trial court to vacate its orders and enter a new order determining that the following material is protected from discovery: (1) portions of written internal communications between employees of Zurich that reveal Zurich's evaluation of, or its litigation or settlement strategies concerning, the Watts bad faith action which "transmit or discuss underlying legal advice received by [Zurich] for the purpose of defending against or settling the action;" (2) portions of written communications from Zurich to its reinsurer on the Watts liability policy "that reveal [Zurich's] evaluation of, or its litigation or settlement strategies concerning, the action and that also transmit or discuss underlying legal advice received by [Zurich] for the purpose of defending against or settling the action;" and (3) portions of Zurich's internal "loss reserve" documents that reveal Zurich's "evaluation of, or its litigation or settlement strategies concerning the Watts action and that also quote, summarize or discuss underlying legal advice received by [Zurich] for the purpose of defending against or settling the action." We informed the parties that we were "particularly interested in whether, and to what extent, the attorney-client privilege applies to such information."

DISCUSSION I

Extraordinary...