Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-01333/USCOURTS-casd-3_12-cv-01333-2/pdf.json

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

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ROBERT McADAM,

Plaintiff,

Case No. 12-cv-1333 BTM-MDD

ORDER RE: OBJECTIONS TO

THE ORDER COMPELLING

BETTER DISCOVERY

RESPONSES

v.

STATE NATIONAL INSURANCE

COMPANY, INC. and ROES 1

through 25, inclusive,

Defendants.

Defendant State National Insurance Company, Inc. (“State National”)

and Arnold & Arnold, Inc. (collectively, “the objectors”) have filed objections

(Doc. 50) to the November 1, 2013 Order Compelling Better Discovery

Responses in this case. For the reasons set forth herein, the Court

VACATES the Order (Doc. 44) and the matter is REMANDED for further

proceedings consistent with this Order.

I. BACKGROUND

This case arises from a “Hull and Machinery/Protection and Indemnity”

Policy (“Policy”) issued by State National to Plaintiff Robert McAdam for the

term May 5, 2011 to May 5, 2012. State National is a “program”

underwriting firm that does not do claims adjustment itself. Plaintiff owns the

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vessels Jessica M and Shirley B, both of which were insured under the

Policy at all relevant times. On February 24, 2012, Shirley B’s rudder

snapped off while the vessel was fishing near New Zealand. Jessica M

sailed some 70 miles to help and towed Shirley B to port in Tauranga, New

Zealand. State National directed the Shirley B to a repair yard in

Whangarei, New Zealand. Both ships underwent repairs in New Zealand.

Plaintiff sought reimbursement for repairs under the Policy. State National

retained Optimum Claims Services, Inc. (“Optimum”) for claims adjustment

purposes. The claim concerning the Jessica M was denied in May 2012. 

On June 4, 2012, Plaintiff filed this lawsuit, asserting the following

causes of action: (1) breach of insurance contract; (2) breach of the implied

covenant of good faith and fair dealing; (3) injunctive relief and restitution

pursuant to Cal. Bus. & Prof. Code §§ 17200, et seq.; and (4) declaratory

relief. The Court dismissed the third cause of action. (Doc. 9.) Discovery

proceeded thereafter under the charge of Magistrate Judge Dembin. 

A hearing on Plaintiff’s Motion to Compel (Doc. 32) was held on

September 27, 2013. At that hearing, State National’s counsel requested an

in camera review. Hr’g Tr. 13:3-11 (Doc. 49). Judge Dembin ordered the

parties to meet and confer regarding remaining discovery disputes, and to

file a joint brief concerning any materials that remain in dispute on October

14, 2013. (Doc. 39.) On October 2, 2013, the objectors produced over 560

pages of documents previously withheld, along with an amended privilege

log. These documents included, inter alia, State National’s reinsurance

contract with Wind River Reinsurance Co. and Optimum’s claim handling

guidelines. (Doc. 43.) State National redacted, as irrelevant and

“proprietary,” information concerning loss reserves, and asserted the

attorney-client privilege as to communications (a) between State National

and Gordon & Rees, LLP (“G&R”), and (b) G&R and independent adjuster

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and marine surveyor Arnold & Arnold (“A&A”). Over 650 pages remained in

dispute. State National thereafter submitted the disputed documents for

review in camera, and the parties filed supplemental briefs on October 28

(Docs. 42, 43). On November 1, 2013, Judge Dembin ruled (1) that

Defendant had failed to establish a prima facie case of privilege as to

documents that predate the lawsuit, and (2) the loss reserve information is

discoverable because it is potentially relevant to the subjective intent

component of Plaintiff’s “bad faith” claim. (Doc. 44.) 

State National and A&A filed a timely objection to Magistrate Judge

Dembin’s November 1, 2013 Order (Doc. 44). The objectors here challenge 

the findings that: (1) the dominant purpose of the engagement between

G&R and State National was claims adjustment (Order 7:15-17); (2)

Optimum is not covered by the attorney-client privilege (Order 8:2-4), and (3)

A&A is not covered by the attorney-client privilege (Order 6:16-19). The

objectors thus challenge the requirement that they produce all documents

withheld on the basis of the attorney-client privilege that were created prior

to June 4, 2012. They likewise challenge the Order to the extent it requires

turning over allegedly privileged documents held by A&A or Optimum. There

is no objection to the order to produce documents concerning reserves. 

II. STANDARD OF REVIEW

When considering objections to a magistrate judge’s non-dispositive

discovery order under Fed. R. Civ. P. 72(a), the district judge must modify or

set aside any part of the order “that is clearly erroneous or is contrary to

law.” The “contrary to law” standard applies to a magistrate judge’s purely

legal determinations. Computer Economics, Inc. v. Gartner Group, Inc., 50

F. Supp. 2d 980, 983 (S.D. Cal. 1999). The “clearly erroneous” standard

applies to factual determinations and discretionary decisions. Id. See also

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Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602,

623 (1993) (the review is “significantly deferential, requiring ‘a definite and

firm conviction that a mistake has been committed.’”). The question of

whether an attorney-client relationship existed between two persons at a

particular time is a question of fact. See Larsen v. Coldwell Banker Real

Estate Corp., No. 10-0401, 2012 WL 359466, *5 (C.D. Cal. Feb. 2, 2012).1

III. DISCUSSION

A. The Attorney-Client Privilege in California

1. Generally

State law governs attorney-client privilege claims in federal district

courts sitting in diversity. Fed. R. Evid. 501. In California, clients enjoy a

privilege “to refuse to disclose, and to prevent another from disclosing, a

confidential communication between client and lawyer.” Cal. Evid. Code 

§ 954. Such communications include legal opinions formed and the advice

given in the course of that relationship. Id. § 952; Calvert v. State Bar, 54

Cal. 3d 765, 779 (1991). The party claiming the attorney-client privilege has

the burden of establishing the preliminary facts necessary to support its

exercise, i.e., a communication made in the course of an attorney-client

relationship. Costco Wholesale Corp. v. Superior Court, 47 Cal. 4th 725,

733 (2009) (“Costco”); United States v. Martin, 278 F.3d 988, 999-1000 (9th

Cir. 2002) (the first part of establishing the privilege is demonstrating that

As a preliminary matter, the Court disregards declarations that were not 1

before the magistrate judge (Docs. 50-6, 50-7, 50-8). An objection filed

pursuant to 28 U.S.C. § 636(b)(1)(A) or Rule 72(a) may not be wielded as a

shoehorn to add material to the record. United States v. Howell, 231 F.3d 615

(9th Cir. 2000) ("[I]t would be fundamentally unfair to permit a litigant to set its

case in motion before the magistrate, wait to see which way the wind was

blowing, and—having received an unfavorable recommendation—shift gears

before the district judge." (citation omitted)). See generally Williams v. McNeil,

557 F.3d 1287 (11th Cir. 2009); SEC v. Pattison, 2011 U.S. Dist. LEXIS 22398

(N.D. Cal. Feb. 22, 2011); Paramount Pictures Corp. v. Replay TV, No. 01-cv9358, 2002 WL 32151632, *1 (C.D. Cal. May 30, 2012) (objecting parties may

not present affidavits containing evidence not presented to magistrate judge). 

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legal advice was sought); In re Spalding Sports Worldwide, Inc., 203 F.3d

800, 805 (Fed. Cir. 2000) ("the central inquiry is whether the communication

is one that was made by a client to an attorney for the purpose of obtaining

legal advice or services."). Once a prima facie claim of privilege is

established, the communication is presumed to have been made in

confidence and the opposing party has the burden to establish the

communication was not confidential or that the privilege does not apply for

other reasons. Id. The privilege “only protects disclosure of

communications between the attorney and the client; it does not protect

disclosure of underlying facts which may be referenced within a qualifying

communication.” State Farm Fire & Casualty Co. v. Superior Court, 54 Cal.

App. 4th 625, 639 (1997). Furthermore, “documents prepared independently

by a party, including witness statements, do not become privileged

communications or work product merely because they are turned over to

counsel.” Wellpoint Health Networks, Inc. v. Superior Court, 59 Cal. App.

4th 110, 119 (1997).

2. The Dominant Purpose Test

Sometimes it is difficult to determine whether the attorney-client

privilege attaches to a communication, particularly if there was ostensibly

more than one purpose for the correspondence. If it served a dual purpose,

one for transmittal to an attorney in the course of professional employment

and one not related to that purpose, the question is which purpose

predominates. Costco, 47 Cal. 4th at 739-40; 2,022 Ranch LLC v. Superior

Court, 113 Cal. App. 4th 1377, 1398 (2003) (“communications reflecting the

requesting of, or rendering of, legal advice are protected by the attorneyclient privilege” but those reflecting “factual claims investigation” or

“adjustment” records or reports are subject to discovery regardless of

whether conducted by an attorney). As Judge Dembin noted, in the

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insurance and warranty context, “this doctrine has developed [such that the]

privilege and work product are very narrowly construed. . . .” Hr’g Tr. 15:21-

16:1 (Sept. 27, 2013) (Doc. 49). 

In determining whether a communication is privileged, the Court looks

to the dominant purpose of the attorney’s work. “Thus, the attorney-client

privilege does not apply where the attorney was merely acting as a

negotiator for the client, merely gave business advice, or was merely acting

as a trustee for the client.” Clark v. Superior Court, 196 Cal. App. 4th 37, 37

(2011). It follows that, when an insurer hires an attorney both to provide a

legal opinion and to serve as a claims adjuster, “the court must make a

determination of which purpose was primary.” Ivy Hotel, San Diego LLC v.

Houston Casualty Co., No. 10-cv-2183, 2011 U.S. Dist. LEXIS 119746, *11

(S.D. Cal. 2011) (Skomal, M.J.) (quoting Umpqua Bank v. First American

Title Ins. Co., 2011 U.S. Dist. LEXIS 34088, *7 n.1, 2011 WL 997212, *3

(E.D. Cal 2011). The objectors argue that the predominant purpose test

must be applied on a document-by-document basis. (Reply 2 n.3.) The

Court disagrees. “[I]t is not the dominant purpose of a particular

communication that dictates whether the attorney-client privilege is

applicable; rather the issue is what was the dominant purpose of the

relationship.” Cason v. Federated Life Ins. Co., No. 10-cv-0792, 2011 WL

1807427, *2 (N.D. Cal. Oct. 17, 2011) (applying Costco). See also Clark v.

Superior Ct., 196 Cal. App. 4th 37, 51 (2011) (“the focus of the inquiry is the

dominant purpose of the relationship between the parties to the

communication.”); Umpqua Bank, 2011 U.S. Dist. LEXIS 34088 at *7 n.1

(“the court in Costco specifically stated that the initial question should be

about the dominant purpose of the relationship.”). If the dominant purpose

of the relationship was attorney-client at the time of the communications,

they are privileged. If not, they are generally discoverable, though the

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producing party may request an in camera inspection of a particular

communication to support a claim that it should be protected nonetheless.

See Aetna Casualty & Surety Co. v. Superior Court, 153 Cal. App. 3d 467,

476 (1984). As the Court in Costco put it:

The proper procedure would have been for the trial court first to

determine the dominant purpose of the relationship between the

insurance company and its in-house attorneys, i.e., was it one of

attorney-client or one of claims adjuster-insurance corporation . . . .

The corporation, having the burden of establishing . . . that the

communications were made during the course of an attorney-client

relationship, was free to request an in camera review of the

communications to aid the trial court in making that determination,

but the trial court could not order disclosure of the information over

the corporation's objection. If the trial court determined the

communications were made during the course of an attorney-client

relationship, the communications, including any reports of factual

material, would be privileged, even though the factual material

might be discoverable by some other means. If the trial court

instead concluded that the dominant purpose of the relationship

was not that of attorney and client, the communications would not

be subject to the attorney-client privilege and therefore would be

generally discoverable. However, even then, the corporation would

be entitled to request an in camera review of a particular

communication to support a claim that it should be protected

despite the general absence of an attorney-client relationship.

Costco, 47 Cal. 4th at 739-40 (citations omitted). 

3. State National’s Failure to Provide Declarations

At the September 27 hearing, defense counsel stated “I’ve made an

offer of proof to the Court and I intend to back that up with appropriate

declarations regarding the relationship.” Hr’g Tr. 28:7-9 (Sept. 27, 2013).

This promise was reiterated weeks later in the parties’ joint brief. (Joint Br.

Oct. 14, 2013) (Doc. 40 at 4 n.4) (stating that, on October 15, 2013, State

National “will file with the Court declarations of George Soares, Wanda

Didier, and Bill Arnold establishing the facts of the attorney-client relationship

between Gordon & Rees LLP, Optimum Claims Services, State National,

and A&A.”). Indeed, declarations as to the existence, nature, and scope of

an attorney-client relationship may provide sufficient evidence of the

relationship even in the absence of, e.g., a written retainer agreement. See

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Missigman v. USI Northeast, Inc. 131 F. Supp. 2d 495, 513 (S.D.N.Y. 2001).

Yet no such declarations were filed; nor did State National request more time

to file them. Instead, counsel submitted over six hundred pages of 2

documents in camera (Docs. 40-1, 40-2) unaccompanied by a declaration

even though the Court was under no obligation to conduct an in camera

review in the absence of declarations. See generally Cal. Evid. Code §

915(a) (prohibiting in camera review with respect to, inter alia, the attorneyclient privilege, except where specifically requested by the party purportedly

holding and asserting the privilege); In re Oracle Corp. Secs. Litig., 627 F.3d

376, 385 (9th Cir. 2010) ("It behooves litigants . . . to resist the temptation to

treat judges as if they were pigs sniffing for truffles."). 

 The absence of declarations distinguishes this case from those cited

by the objectors. In Umpqua Bank and Ivy Hotel, the insurer hired an 3

attorney to provide a coverage opinion and that attorney became a primary

State National’s counsel allegedly believed, based on an October 16, 2

2013 telephone conference, that he had additional time to provide declarations. 

(Decl. of Matthew Elstein ¶21.) That is questionable since the parties had until

October 28, 2013 to file supplemental briefs (Doc. 41), and State National filed

a brief on October 28 but did not mention the declaration deadline therein. But

the record is murky and the contention is plausible, so the Court, though wary

of granting an unwarranted mulligan, credits Mr. Elstein’s statement. 

The objectors misquote Umpqua Bank for the proposition that “[t]here 3

has not been a single case that has ever allowed an insured to obtain legal

advice provided by an attorney to its insurer client because the ‘dominant

purpose’ of the retention was claims adjustment. The mere fact that legal

advice was provided establishes that the ‘dominant purpose’ was legal.” (Objs.

11:19-23.) These sentences appear nowhere in Umpqua Bank, and they are

wrong. See Syncora Guarantee. Inc. v. EMC Mortg. Corp., No. 13-mc-80037,

2013 WL 2552360, *3 (N.D. Cal. June 10, 2013); Fisher v. Kohl’s Dept. Stores,

Inc., No. 11-cv-3396, 2012 WL 2377200, *5 (E.D. Cal. 2012) (holding that the

defendant “failed to make a sufficient showing that the dominant purpose of

incident reports was transmission to an attorney for purposes of seeking legal

advice” where the record lacked “a clear indication that they were in the first

instance directed to an attorney for legal advice.”). 

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point of contact regarding the claim. In Ivy Hotel, the purpose of the 4

relationship was evidenced by a declaration of the insurer’s senior claims

attorney and representations of the attorney who served as a claims

adjuster. 2011 U.S. Dist. LEXIS 119746 at *14. Similarly, in Umpqua Bank,

the court relied, in part, on representations at a hearing made by the

insurer’s in-house claims attorney who retained outside counsel. 2011 U.S.

Dist. LEXIS 34088 at *10. See also Kandel v. Brother Int’l Corp., 683 F.

Supp. 2d 1076, 1082 (C.D. Cal. 2009) (preliminary facts supporting claim of

privilege established by declarations). The objectors point to no case finding

the predominant purpose of a relationship involving claim adjustment to be

attorney-client absent any testimonial evidence. Thus, the Court could have

refused to conduct an in camera review absent the promised declarations.

Yet if a judge elects to undertake an in camera review, even if it is “out of an

abundance of caution,” the disposition should reflect explanatory findings

and conclusions demonstrating why the documents are or are not covered

by the privilege. See Su Hwa She v. Holder, 629 F.3d 958, 963-64 (9th Cir.

2010); United States v. Cal. Mobile Home Park Mgmt. Co., 107 F.3d 1374,

1382 (9th Cir. 1997). For this reason, the Court continues its analysis herein.

C. In Camera Review

As mentioned supra, Judge Dembin did not have to, but did, conduct

an in camera examination of the disputed documents. (Order 6.) The 

Court has also reviewed the documents. As discussed in the following

subsections, many pages highlighted by the objectors do not evidence an

attorney-client relationship. For instance, a March 13-14, 2012 email chain

indicates that G&R was serving as a general point of contact for claims

adjustment purposes. (SNIC2216.) But others do convey legal advice. 

State National did not distinguish or otherwise refer to these authorities 4

before Judge Dembin. Compare Def.’s Objs. (Doc. 50-1) and Reply (Doc. 53)

with Def.’s Opp’n to Pl.’s Mot. to Compel (Doc. 37). 

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That is important here because certain documents may be privileged even if

created or communicated when an attorney-client relationship did not

predominate. Costco, 47 Cal. 4th at 740.

1. Gordon & Rees LLP

State National argues that Judge Dembin erred in concluding that the

dominant purpose of the engagement between G&R and State National was

claims adjustment up until the filing of this lawsuit on June 4, 2012 (Order 7).

As evidence of a pre-litigation attorney-client relationship with George

Soares of G&R, the objectors point to, e.g., State National’s claims log

(SNIC1812-1820) and a March 13, 2012 reference to “GS-cover counsel” in

Optimum Claims Adjuster Wanda Didier’s notes (SNIC1821-24).

Additionally, the terms “coverage” and “coverage counsel” are scribbled on

printouts of a March 9-13, 2012 email exchange between Mr. Soares and

Ms. Didier discussing the claim adjustment. (SNIC2217, SNIC2224-26.) 

These documents say little or nothing about the existence or scope of an

attorney-client relationship, and they are insufficient to establish an attorneyclient relationship prior to the inception of litigation. See GE Capital Corp. v.

DirectTV, Inc., 1998 U.S. Dist. LEXIS 18940, *7 (D. Conn. 1998) (“If the

document was prepared for purposes of simultaneous review by legal and

non-legal personnel, it cannot be said that the primary purpose of the

document is to secure legal advice. Therefore, one of the critical elements

of the attorney-client privilege is absent at the outset.”). Cf. Garcia v. City of

El Centro, 214 F.R.D. 587 (S.D. Cal. 2003) (the mere fact that a plaintiff filed

a claim does not bring subsequent insurance investigations within the ambit

of the work product doctrine). 

However, the documents also include an April 25, 2012 letter from

G&R to Ms. Didier providing an “evaluation of coverage” that ostensibly

contains a legal analysis of the State National insurance policy covering the

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Shirley B. (SNIC2158-SNIC2167.) That letter, though addressed to

Optimum, opines as to the extent to which State National is legally bound to

cover damage claimed. Although the insurer bears the burden of proof, this

letter appears to be an attorney-client communication, as it was ostensibly

written in response to a request for legal advice. In this respect, this dispute

is similar to the one faced in Aetna Casualty & Surety Co., where it was

undisputed that “Aetna retained [counsel] to investigate [a] claim and make a

coverage determination under the policy.” 153 Cal. App. 3d 467, 476 (Cal.

App. 1st Dist. 1984). The Court explained:

This is a classic example of a client seeking legal advice from an

attorney. The attorney was given a legal document (the insurance

policy) and was asked to interpret the policy and to investigate 

the events that resulted in damage to determine whether Aetna

was legally bound to provide coverage for such damage.

Id. The April 25 letter is not mentioned in the Order compelling discovery

and it may well fall within the attorney-client privilege. Whether the objection

may be sustained as to advice contained in the letter turns on whether

Optimum was acting as State National’s agent with respect to it.

5

The magistrate judge concluded that not one of the documents dated

prior to the filing of this suit (June 4, 2012) is privileged. But this broad

conclusion may very well be in error. The problem for this Court is that the

record is unclear and the magistrate judge made only a summary conclusion

on his reading of hundreds of pages of documents. The best course of

action is to have a full hearing as to the applicability of the privilege and

decide the matter on very specific findings of fact and conclusions of law. 

This matter is remanded for that purpose. 

Costco exhorts this result due to the decision to review documents in

5

camera and the Order’s flat summary of that review as to State National. The

situation in Costco was otherwise distinct because (a) there was no dispute that

Costco engaged its attorneys to provide legal advice, and (b) the trial court did

not find that the relationship’s dominant purpose was anything other than legal

advice. Costco, 47 Cal. App. 4th. 725, 733, 735-36 (2009).

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2. Optimum Claims Service, Inc.

Judge Dembin found that “[t]here is no evidence that Optimum, as a

claims administrator, is covered by any attorney-client relationship between

Gordon & Rees and Defendant State National.” (Order 8.) This may be so,

but as discussed in the preceding section, it is unclear from the record.

Weighing against this finding are the April 25, 2012 opinion letter addressed

to Wanda Didier of Optimum, and State National’s indication that it

communicated with G&R through Optimum (Objs. 10). 

California Evidence Code § 952 states, in extenso:

As used in this article, "confidential communication between client

and lawyer" means information transmitted between a client and his

or her lawyer in the course of that relationship and in confidence by

a means which, so far as the client is aware, discloses the

information to no third persons other than those who are present to

further the interest of the client in the consultation or those to whom

disclosure is reasonably necessary for the transmission of the

information or the accomplishment of the purpose for which the

lawyer is consulted, and includes a legal opinion formed and the

advice given by the lawyer in the course of that relationship.

Thus, the question is whether communications with Optimum were

confidential disclosures “reasonably necessary for the transmission of the

information or the accomplishment of the purpose for which the lawyer is

consulted.” Cal. Evid. Code § 952. As discussed supra, the Court finds that

the record is inadequate for proper review because the facts of the

relationships between and among G&R, State National, and Optimum were

not sufficiently established or otherwise revealed by the analysis and

discussion of in camera documents. If, on remand, Judge Dembin finds that

there was a primarily attorney-client relationship between G&R and State

National prior to June 2012, then he must also consider whether the

relationship between State National and Optimum was such that attorney

communications with Optimum fell within the ambit of § 952. Except to the

extent they fell within § 952, communications to or through Optimum are not

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privileged, as the communication itself would be a third-party disclosure.6

3. Arnold & Arnold

The objectors argue that documents withheld by A&A were confidential

communications within the scope of § 952, because they were “reasonably

necessary to further the interest of the litigant.” Insur. Co. of North America

v. Superior Court, 108 Cal. App. 3d 758, 767 (1980) (“INA”). They also claim

that A&A was an “authorized representative” of Optimum for purposes of

Cal. Evidence Code § 951, an argument not raised before the magistrate

judge. Judge Dembin found nothing in the record “suggesting that

communications with Arnold & Arnold are protected by virtue of the attorneyclient relationship between Gordon & Rees and State National.” (Order 6.) 

The Order, having found no attorney-client relationship between State

National and G&R, did not expressly reach the question of whether

communications with A&A could have fallen under the derivative protections

of §§ 951 or 952. To the extent A&A holds an otherwise privileged

document, the relationship between State National and A&A is potentially

important, as transmittal to a third party outside of §§ 951 or 952 generally

destroys confidentiality. Grosslight v. Superior Court, 72 Cal. App.3d 502,

506 (1977) (“the attorney-client privilege does not protect information coming

from a third party who is not a client unless the person is acting as the

client’s agent”). See also United States v. Gann, 732 F.2d 714, 723 (9th Cir.

1984) (communications made to attorney overheard by police while they

were searching the defendant’s home were not privileged because he knew

or should have known that third parties were present). As mentioned with

respect to Optimum, supra, confidentiality is not destroyed to the extent the

This question might be avoided with respect to the April 25 letter, as 6

Plaintiff’s counsel indicated that coverage opinions are outside the scope the

discovery requests. (Hr’g Tr. 21:12-14.)

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communication was necessary to further the legal consultation. See Zurich

Am. Ins. v. Superior Court (“Zurich”), 155 Cal. App. 4th 1485, 1504 (2007)

(remanding for determination of whether disclosure fell within scope of

§ 952); INA, 108 Cal. App. 3d at 765 (“The key concept here is need to

know. While involvement of an unnecessary third person destroys

confidentiality, involvement of third persons to whom disclosure is

reasonably necessary to further the purpose of the legal consultation

preserves confidentiality of communication.”). 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 advice, provided by the lawyer.

155 Cal. App. 4th 1485, 1500. 

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. In INA, there was

no question that attorney-client communications were at issue. The

issue was whether the presence of third party business associates

(from the parent company and a sister company) destroyed the

confidentiality of the communication. Common ownership and control

allowed the Court to find that “in a pragmatic sense, the parent

company can be viewed as [the] ultimate client . . . .” INA, 108 Cal.

App. 3d at 768-69 (“The key consideration is that the nature of the

interest be identical, not similar, and be legal, not solely commercial . .

. .” (citation omitted)). Here, A&A was hired as a claims adjuster, and it

apparently acted at the direction of Optimum. (See ARNL1383.) The

objectors have demonstrated no unity of interest or identity among

these entities. To the contrary, A&A held itself out as an “independent”

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adjuster assigned to investigate the claim. See generally Roush v.

Seagate Technology, LLC, 150 Cal. App. 4th 210, 225 (2007) (absent

an obvious reason or adequate explanation as to why communication

to percipient witness was necessary to further litigation interest, the

disclosure operates as a waiver of privilege). 

Finally, State National cites Gen-Probe Inc. v. Becton, Dickinson

and Co., 2012 U.S. Dist. LEXIS 49028, *10 (S.D.Cal. April 6, 2012) for

the proposition that the communications are privileged because A&A

was an independent contractor retained to perform the entity’s

functions. (Objs. 13.) In Gen-Probe, the court found that the privilege

attached to an independent contractor who “was a functional

equivalent of a[n] employee, working in tandem with RELA employees

on Project Ginny.” Id. at 11. This equivalency was evidenced by

declarations and exhibits showing, inter alia, that he regularly worked

with employees on the project at issue, the nature of his work was

identical to the type of work performed by actual employees, and he

was subject to similar levels of direction and supervision. Id. at *10-11. 

Here, 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. Moreover, no agency or

attorney-client relationship between G&R and A&A has been

demonstrated. See United States v. Gurtner, 474 F.2d 297, 299 (9th

Cir. 1973) (communications with an accountant at counsel’s

suggestion were not privileged because the accountant was not shown

to be acting as a consultant for the attorney); Holmgren v. State Farm

Mutual Auto. Ins. Co., 976 F.2d 573, 576-78 (9th Cir. 1992) (applying

similar analysis to work product in bad faith insurance case). Thus,

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only confidential communications necessary to facilitate or effectuate

legal counsel (as opposed to claims adjustment), may be privileged.

On remand, Judge Dembin will decide whether any of A&A’s

documents fit that bill.

IV. CONCLUSION 

For the reasons stated, the Magistrate Judge’s November 1,

2013 Order (Doc. 44) is hereby VACATED. It is accordingly

ORDERED that all matters pertaining to the document production

are REMANDED to Magistrate Judge Dembin for analysis consistent

with this Order. Judge Dembin shall schedule another hearing, apply

the predominant purpose test, and make particularized, written findings

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

privilege to each of the documents to which the defendants continue to

object. This shall include, where appropriate, determinations of

whether any of the communications made during a period when an

attorney-client relationship did not predominate are nonetheless

privileged. 

IT IS FURTHER ORDERED that the parties may file, at a date

set by Judge Dembin prior to the hearing, evidence concerning the

nature of the relationships between and among Gordon & Rees LLP,

Optimum Claims Services, Inc., State National Insurance Co., and

Arnold & Arnold, Inc. Plaintiff has leave to depose any person offering

testimony as to the existence of an attorney-client relationship. 

IT IS SO ORDERED.

DATED: March 21, 2014 __________________________

BARRY TED MOSKOWITZ

Chief Judge

United States District Court

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