Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-01333/USCOURTS-casd-3_12-cv-01333-4/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ROBERT McADAM,

Plaintiff,

CASE NO. 12cv1333-BTM (MDD)

ORDER ON REMAND RE:

PLAINTIFF’S MOTION TO

COMPEL

v.

STATE NATIONAL

INSURANCE COMPANY, INC.

and ROES 1 through 25,

inclusive, 

Defendants.

This matter comes to the Court on remand from the District Court’s

March 21, 2014, Order. (ECF No. 79.) The District Court remanded with

instructions that this Court “make particularized, written findings of fact

and conclusions of law as to the application of the attorney-client

privilege” and to make “where appropriate, determinations of whether

any of the communications made during a period when an attorney-client

relationship did not predominate are nonetheless privileged.” (Id. at 16.) 

I. Procedural History 

A. Plaintiff’s Motion to Compel

On September 3, 2013, Plaintiff filed a Motion to Compel Better

Discovery Responses from Defendants. (ECF No. 32.) A hearing was

held on Plaintiff’s Motion on September 27, 2013. (ECF No. 49.) After

- 1 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 1 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

some initial discussions between the parties, a dispute remained

regarding over 650 pages of documents. Those documents were

submitted to the Court for in camera review. The parties filed

supplemental briefs regarding these documents on October 28, 2013. 

(ECF Nos. 42, 43.) On November 1, 2013, this Court issued an Order

holding that Defendants, who had failed to provide the Court with any

declarations supporting their position that the documents were

privileged, had failed to establish a prima facie case of privilege as to

documents created before the start of the instant lawsuit. (ECF No. 44.) 

Defendants State National and Arnold and Arnold (“A&A”) timely filed

objections to the Court’s Order with the District Court on November 15,

2013. (ECF No. 50.) 

B. The District Court’s Order re: Defendants’ Objections

The District Court issued its Order re: Defendants’ Objections on

March 21, 2014. (ECF No. 79.) In the Order, the District Court made

several findings. First, the District Court examined Defendants’

contention that the documents at issue were privileged based on an

attorney-client relationship between State National, A&A, Optimum

Claims Services (“Optimum”), and Gordon & Rees LLP (“G&R”). The

District Court noted that Defendants had failed to provide declarations

regarding the nature of scope of that relationship, and that therefore this

Court could have found that no privilege existed without conducting an

in camera review. (Id. at 8.) The District Court further noted, however,

that because this Court did in fact conduct such a review, it was required

to perform a thorough review supported with detailed factual findings. 

(Id.) The District Court remanded for that purpose. 

The District Court also examined Defendants’ contention that

documents shared with A&A should be considered confidential

- 2 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 2 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

communications. (Id. at 13.) The District Court suggested that, separate

from other privilege concerns, Defendants had failed to establish that it

was reasonably necessary to share documents with A&A in order to

further State National and Optimum’s interests in litigation, and

therefore those documents may have lost their confidential nature. (Id.) 

The District Court also remanded for this Court to determine if

documents shared with A&A should be considered confidential. (Id.) 

II. Analysis

A. Documents Shared with A&A Are Not Confidential

Because Disclosure to A&A Was Not “Reasonably

Necessary” to Further Defendants’ Interests in

Litigation.

The majority of documents at issue are documents that were shared

with A&A. There is an outstanding question as to whether documents

shared with A&A retain their confidential nature. (Id.) If these

documents are not confidential, then regardless of other privilege issues,

they are not protected under the attorney-client privilege and are subject

to disclosure. Cal. Evid. Code § 952; U.S. v. Richey, 632 F.3d 559, 566

(9th Cir. 2011). Thus, the confidentiality of documents shared with A&A

is a threshold issue that the Court addresses first. The Court will then

address the remaining documents. 

In their original briefing, Defendants asserted that documents

shared with A&A were confidential and protected pursuant to Cal. Evid.

Code § 952, even though there was no direct attorney-client relationship

between A&A and G&R, because sharing those documents was

reasonably necessary to further the litigation interests of Optimum and

State National. (ECF No. 35.) 

The District Court addressed the issue in its March 21, 2014,

- 3 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 3 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Order. (ECF No. 79.) First, the District Court noted that the documents

were not protected based on a relationship between A&A and State

National. (Id. at 14.) Defendants cited Insurance Co. of North America v.

Superior Court (“INA”), 108 Cal. App. 3d 758, 767 (1980) and Zurich Am.

Ins. v. Superior Court, 155 Cal. App. 4th 1485, 1504 (2007) for the

proposition that disclosure of otherwise confidential information to a

reasonably necessary party to further the purpose of the attorney’s legal

consultation does not destroy confidentiality. The District Court found

the comparison inapt, noting, “To the extent the objectors ask the Court

to find that communications with A&A are privileged based on the

relationship between A&A and State National, they misread INA.” (ECF

No. 79 at 14.) The District Court noted that in INA, the entity that

confidential information was shared with had a unity of interest and

identity with the client entity, whereas here, A&A explicitly held itself

out as an “independent” adjuster assigned to investigate the Plaintiff’s

claim. (Id. at 14-15.) 

Second, the District Court suggested that A&A would not fall under

the exception articulated in Gen-Probe, Inc. v. Becton, Dickinson and Co.,

2012 U.S. Dist. LEXIS 49028, *10 (S.D. Cal. April 6, 2012). In GenProbe, the court recognized that sharing documents with an “independent

contractor” may not destroy the confidential nature of those documents if

the contractor is “the functional equivalent of a[n] employee [of the

client], working in tandem with [the client’s employees].” Id. at 11. In

Gen-Probe, the client proved that the contractor at issue was the

equivalent of an employee through declarations and exhibits showing

that the contractor worked with employees on the project at issue, the

nature of the contractor’s work was identical to the type of work

performed by actual employees, and the contractor was vested with

- 4 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 4 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

similar levels of direction and supervision as actual employees. Id. at 10-

11. The District Court found that Defendants had failed to show that

A&A fell under this narrow exception, stating “State National

established only that A&A adjusted claims and corresponded with G&R. 

State National even emphasized that it does not do claims adjustment. 

(Objs. 7.) Hence, A&A’s work was not functionally equivalent to State

National’s.” (ECF No. 79 at 15.) Based on these findings, the District

Court remanded with instruction for this Court to decide whether any of

A&A’s documents could still be considered “confidential communications

necessary to facilitate or effectuate legal counsel (as opposed to claims

adjustment)[.]” (Id. at 15-16.) 

In their supplemental briefing, Defendants contend that A&A

should be considered equivalent to an employee of Optimum, rather than

an employee of State National. Defendants note that A&A “was retained

by Optimum to survey the Vessels, assist in the adjustment, and draft

correspondence to the insured.” (ECF No. 104 at 12.) Defendants cite

two out-of-district cases, Royal Bahamian Association, Inc. v. QBE

Insurance Corp., 2010 U.S. Dist. LEXIS 101275 (S.D. Fla. 2010) and

Markwest Hydrocarbon, Inc. v. Liberty Mutual Ins. Co., 2007 U.S. Dist.

LEXIS 27243 (D. Col. 2007), for the proposition that documents shared

with an independent adjustor remain privileged. (Id.) 

Defendants also provide additional information on A&A’s job

duties. Defendants state, “Duties assigned to Arnold during the

pendency of the claim included surveying the Vessels, communicating

with Plaintiff and his attorney, interviewing Plaintiff, and preparing

correspondence to send to Plaintiff regarding SNIC’s coverage position. 

[Didier Dec., ¶ 6; Hillger Dec., ¶ 3; Elstein Decl., ¶ 2, Exhibit A, pp.

227:18-25].” (ECF No. 104 at 5-6.) Defendants also assert that A&A was

- 5 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 5 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the “authorized representative” of Optimum and State National, and “in

that capacity also consulted G&R as counsel for Optimum and SNIC to

provide it with legal advice. [Didier Dec., ¶ 10; Hillger Dec. ¶ 4][.]” (ECF

No. 104 at 6.) Defendants contend that these job duties necessitated

sharing information with A&A. (Id.) These contentions are supported by

the declarations of Wanda Didier, Gene Hillger, and Matthew C. Elstein. 

(ECF No. 104.) 

In his supplemental briefing, Plaintiff reiterates the District

Court’s analysis of INA, Zurich, and Gen-Probe, emphasizing that GenProbe’s functional equivalence exception only applies when the agent also

meets the “need-to-know” standard for confidential disclosure. (ECF No.

113 at 15-16.) Plaintiff also points to evidence that contradicts the

statements in the declarations submitted by Defendants. Plaintiff notes,

“As A&A and Optimum representatives testified, A&A was

fundamentally not involved in making decisions on coverage– that was

exclusively the job of Optimum. (Hillger Depo., 124:1-15; Didier Decl., ¶

7.)” (ECF No. 113 at 16.) Plaintiff also points to Mr. Arnold’s testimony

at his deposition that “[A&A] had no authority to do anything” (Arnold

Depo., 54:12-17) and that “we were never involved in this actually doing

adjusting.” (Arnold Depo., 59:6-7.) Plaintiff also contends that “A&A

was not an agent of Optimum, and needed Optimum’s approval to

perform any of its services. (ECF No. 113, Clark Decl., Exh. 3 ¶¶ 1-2.)” 

Plaintiff also challenges Defendants’ assertion that A&A should be

considered an authorized representative of Optimum. Plaintiff notes

that the contract between A&A and Optimum explicitly disclaims any

such relationship where is states, “It is mutually understood that you are

an independent contractor, and not an employee or agent of Optimum

Claims Services, Inc.” (Clark Decl., Exh. 3 ¶¶ 1-2.) 

- 6 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 6 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

At the June 20, 2014, hearing on this matter, Defendants countered

that the fact that A&A did not do adjusting does not mean they were not

serving as the equivalent of an Optimum employee. Defendants’ counsel

compared A&A to an Optimum employee, “just an employee with limited

authority.” (June 20, 2014 Hearing Transcript, 12:17-18.) Defendants

stated that what A&A did in this case is “identical to what a lower level

adjuster does at an insurance company.” (Id. at 18:12-13.) Thus,

Defendants contend it was irrelevant that A&A had no authority to make

coverage determinations, because that failing does not take A&A out of

the Gen-Probe requirement that the independent contractor be vested

with similar levels of discretion and supervision as employees of the

client. Defendants also stressed A&A’s involvement in communicating

with the insured, contending it was “absolutely necessary for them to

know - - A&A to know G&R’s legal advice and being able to put together

the denial letter or the partial acceptance letters in the insured. Because

how else would they know what the position of the company was without

[communicating].” (June 20, 2014 Hearing Transcript at 21:1-5.) 

Plaintiff’s counsel contended that Defendants’ embrace of A&A’s

actions was post hoc, now that such an embrace wold be advantageous,

and that the deposition testimony of Mr. Arnold and Mr. Hillger

establish that A&A was not treated as an employee of Optimum and did

not need to know any legal advice provided by G&R. Plaintiff also

challenged the importance of A&A’s communication with Plaintiff,

asserting that “there’s absolutely no reason for [A&A] to know what the

coverage strategies are, what’s going on between Gorgon & Rees and

Optimum in order for them to be able to conduct their fact investigation.” 

(June 20, 2014 Hearing Transcript, 24:24-25:1.) Plaintiff suggested that

A&A could have simply been given the final coverage determination by

- 7 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 7 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Optimum and relayed that information to Plaintiff, thus there was no

need for A&A to be involved in the actual discussion of coverage. “[T]he

information that they truly needed to know. It’s very finite. It’s the

provisions of the policy that apply related to wear and tear that entitled

them to denial of the Jessica and the portions of the policy that entitled

them to be able to cut off certain portions of the claim for the Shirley. 

They didn’t need to know anything more.” (June 20 2014 Hearing

Transcript, 26:5-9.) 

The burden of establishing that documents shared with A&A are

confidential is on Defendants. U.S. v. Richey, 632 F.3d 559, 566 (9th Cir.

2011). The District Court noted that Defendants had failed to carry this

burden with respect to documents shared with A&A. Nothing provided

by the Defendants in their supplemental briefing or at the June 20, 2014,

hearing changes this analysis. Contrary to Defendants’ arguments at the

hearing, it is not enough for Defendants to show that A&A was the

functional equivalent of an Optimum employee. To the extent that GenProbe created an exception for independent contractors communicating

with corporate counsel, and to the extent that exception applies in this

context, Defendants are required to show both that A&A was the

functional equivalent of an employee, and that such an employee would

need to know of legal advice in order to further the attorney-client

relationship.

As explained in Zurich, “The need-to-know limitation . . . permits

disclosing privileged communications to other agents of the organization

who reasonably need to know of the privileged communication in order

to act for the organization in the matter. Those agents include persons

who are responsible for accepting or rejecting a lawyer’s advice on behalf

of the organization or for acting on legal assistance, such as general legal

- 8 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 8 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

advice, provided by the lawyer.” 155 Cal. App. 4th at 1500. Nothing in

Gen-Probe or in United States v. Graf, 610 F.3d 1148, 1159 (9th Cir.

2010), the case relied on by Gen-Probe, supports eliminating the “need to

know” requirement, which would fundamentally alter privilege law going

forward. Taking Defendants’ approach to its logical conclusion, and

eliminating the need to know requirement, would give independent

contractors even greater privilege protection than a client’s regular

employees, and would extend the privilege even to unrelated parties with

no part in the litigation. Such a holding is untenable, and to the extent

that Gen-Probe extends the privilege to independent contractors, it can

only do so when those contractors “are responsible for accepting or

rejecting a lawyer’s advice on behalf of the organization or for acting on

legal assistance, such as general legal advice, provided by the lawyer.” 

Zurich, 155 Cal. App. 4th at 1500. 

Here, while Defendants may contend that information is typically

shared between counsel and an employee with the duties attributed to

A&A, they have presented no evidence supporting those contentions. 

Rather, they have presented conclusory statements in their declarations

and at the June 20, 2014, hearing. As described above, those statements

are rebutted by the sworn deposition testimony of Mr. Arnold and Mr.

Hillger regarding the extent of A&A’s duties. (Hillger Depo., 124:1-15;

Didier Decl., ¶ 7; Arnold Depo., 54:12-17, 59:6-7; Clark Decl., Exh. 3 ¶¶ 1-

2.) That evidence establishes that A&A was principally concerned with

fact gathering. The transmission of those facts is not protected by any

privilege. Defendants’ primary remaining argument for applying the

privilege is that A&A was responsible for communicating with Plaintiff

regarding Optimum’s coverage position, but as Defendants note, this

does not necessarily mean that A&A needed to know confidential

- 9 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 9 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

information. By its very nature, Optimum’s coverage position as stated

in letters to Plaintiff is not confidential. The evidence shows that A&A

had no role in crafting that position and had no authority to alter that

position before presenting it to Plaintiff. Thus, Defendants have failed to

establish that A&A’s duties required the transmission of confidential

information in order to further the attorney-client relationship between

G&R and Optimum or State National. Documents shared with A&A are

therefore not confidential, and not protected by the attorney client

privilege. Zurich, 155 Cal. App. 4th at 1500. 

Neither of the out-of-district cases cited by Defendants, which are

not binding on this Court, alter this analysis. Defendants assert that

“independent adjusters are agents of the insurer and their

communications are protected by the attorney-client privilege.” (ECF No.

104 at 12:22-12:23.) Defendants cite Royal Bahamian Association, Inc. v.

QBE Insurance Corp., 2010 U.S. Dist. LEXIS 101275, (S.D. Fla. 2010), in

support. In Royal Bohemian, the court found that sharing documents

with an independent claims adjuster did not destroy the privilege

because the insurer “would be handicapped in its ability to evaluate the

claim if its field adjuster could not communicate with [the insurer’s]

outside counsel without waiving the attorney-client privilege.” Id. at *8-

11. Defendants also point to Markwest Hydrocarbon, Inc. v. Liberty

Mutual Ins. Co., 2007 U.S. Dist. LEXIS 27243 (D. Col. 2007), where the

court again rejected the idea that communication to an independent

adjuster destroyed privilege between the insurer and outside counsel on

the grounds that the independent adjuster is an agent of the insurer. Id.

at 10-13. 

As an initial matter, neither case was decided under California’s

privilege law, and therefore their probative value is questionable. 

- 10 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 10 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Further, Markwest is inapplicable. Markwest relied on the fact that the

adjuster was an agent of the insurer. Here, the agreement between A&A

and Optimum clearly states, “It is mutually understood that you are an

independent contractor, and not an employee or agent of Optimum

Claims Services, Inc.” (February 29, 2012 Optimum Claims Services

letter (Clark Decl., ¶ 6, Ex. 3).) Mr. Arnold also stated at his deposition,

“we had no authority to do anything.” (Arnold Depo., 54:12-17 (Clark

Decl., ¶ 5, Ex. 2).) Similarly, Royal Bahamian likewise involved an

examination of “agents and subordinates working under the direct

supervision and control of the attorney[.]” 2010 U.S. Dist. LEXIS 101275

at *3. In both cases, the court found an agency relationship based on the

fact that the adjustor was performing the exact same role as an in-house

adjustor. Those facts are not present here and the parties have

disclaimed an agency relationship. Accordingly, Defendants have failed

to establish that documents shared with A&A were necessary to advance

the attorney-client relationship. Those documents are not confidential

and must be disclosed. 

B. In Camera Review of the Remaining Documents

In addition to documents shared with A&A, which are not

privileged, there are also roughly 150 other pages of documents at issue. 

While the parties debate the nature of the relationship between

Optimum and State National, because this Court has already conducted

an in camera review, and because the parties have introduced enough

evidence on both sides to warrant an in-depth review, the Court has no

alternative but to perform a detailed review to determine which

documents contain privileged legal advice, and which documents contain

unprivileged claims adjusting information. In accordance with the

District Court’s directions, the Court conducted an in camera review of

- 11 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 11 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

these remaining documents and finds that the following documents

contain privilege attorney-client communications:

! SNIC 2005-2014 is a post litigation claims report containing

legal opinions from G&R. 

! SNIC 2016-2019 are emails regarding other insured that are

irrelevant and contain confidential legal advice. 

! SNIC 2092-2093 are emails between Optimum employees

discussing confidential legal advice.

! SNIC 2094-2098 are emails and attachments between

Optimum and Wind River Reinsurance discussing confidential

legal advice.

! SNIC 2146-2147 are communications between G&R and

Optimum containing confidential legal advice. 

! SNIC 2158-2167 is a letter from G&R to Optimum containing

confidential legal advice. 

! SNIC 2168-2177 is a letter from G&R to Optimum containing

confidential legal advice. 

! SNIC 2192-2193 is an email from Wind River to Optimum

containing confidential information regarding the ongoing

litigation. 

! SNIC 2217-2218 is an email from G&R to Optimum

containing confidential legal advice. 

The remainder of the documents contain unprivileged claimsadjustment information. As the District Court noted, many documents

such as State National’s claims log (SNIC 1812-1820), a March 13, 2012,

note from Ms. Didier (SNIC 1821-24), and email exchanges between Mr.

Soares and Ms. Didier discussing claims adjustment (SNIC 2224-26), do

not clearly contain attorney-client information, and this Court can find

- 12 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 12 of 13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

no basis for privilege even in light of the additional evidence supplied by

Defendants.1

 Only the documents designated above contain privileged

information. The remainder must be disclosed. 

IT IS SO ORDERED.

DATED: July 21, 2014

 

 Hon. Mitchell D. Dembin

 U.S. Magistrate Judge

1

The District Court also expressed skepticism whether SNIC 2217- 2218 clearly contained privileged information. This Court finds, however, that based on further review and in light of the additional information provided by the parties, SNIC 2217-2218 does contain privileged

information. 

- 13 - 12cv1333-BTM (MDD)

Case 3:12-cv-01333-BTM-MDD Document 125 Filed 07/21/14 Page 13 of 13