Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-01333/USCOURTS-casd-3_12-cv-01333-7/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, 

v. 

STATE NATIONAL INSURANCE 

COMPANY, INC. and ROES 1 through 

25, inclusive, 

Defendants. 

Case No. 12cv1333 BTM(MDD) 

ORDER SUSTAINING IN PART AND 

OVERRULING IN PART 

OBJECTIONS AND REVERSING IN 

PART ORDER ON REMAND 

Defendant State National Insurance Company, Inc. ("State National") and 

Third Party Arnold & Arnold, Inc. ("A&A") (collectively "Objectors") have filed 

objections [Doc. 1321 to the Order on Remand re: Plaintiffs Motion to Compel 

("Order on Remand") [Doc. 125]. For the reasons set forth herein, the Court 

SUSTAINS IN PART and OVERRULES IN PART the objections and 

REVERSES IN PART the Order on Remand. 

I. BACKGROUND 

On March 21, 2014, the Court remanded a discovery order with 

instructions to make findings as to the applicability of the attorney-client 

privilege to various documents sought by Plaintiff. [Doc. 79.1 On July 21,2014, 

1 12-cv-1333 BTM-MDD 

Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 1 of 8
1 the Magistrate Judge issued the Order on Remand. Although the Magistrate 

2 Judge identified a number of documents that are privileged, he found that the 

3 privilege does not extend to any of the other disputed documents. [Doc. 125.] 

4 The Magistrate Judge found that documents shared with A&A are not 

5 confidential because disclosure was not reasonably necessary to further 

6 Defendant's interests in the litigation. 

7 Objectors filed timely objections to the Order on Remand. [Doc. 132.] 

8 The Court held a hearing on those objections on September 3, 2014. 

9 Defendant thereafter supplemented the record as to certain documents 

10 disclosed to or held by A&A. [Doc. 166.] At the September 3 hearing, the Court 

11 made tentative rulings. The Court has reconsidered all the arguments and 

12 issues this Order, which supercedes any tentative rulings made orally on 

13 September 3, 2014. 

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15 II. STANDARD OF REVIEW 

16 When considering objections to a magistrate judge's non-dispositive 

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

18 set aside any part of the order "that is clearly erroneous or is contrary to law." 

19 The "contrary to law" standard applies to a magistrate judge's purely legal 

20 determinations. Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 

21 2d 980, 983 (S.D. Cal. 1999). The "clearly erroneous" standard applies to 

22 factual determinations and discretionary decisions. kL. See also Concrete Pipe 

23 & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 623 (1993) (the 

24 review is "significantly deferential, requiring 'a definite and firm conviction that 

25 a mistake has been committed. "'). The question of whether an attorney-client 

26 relationship existed between two persons at a particular time is a question of 

27 fact. See Larsen v. Coldwell Banker Real Estate Corp., No. 10-0401,2012 WL 

28 359466, *5 (CD. Cal. Feb. 2, 2012). 

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Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 2 of 8
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III. DISCUSSION 

3 A. Failure to Apply the Dominant Purpose Test 

4 Objectors object that the Magistrate Judge failed to apply the dominant 

5 purpose test, but instead conducted an in camera review of individual 

6 documents exchanged between State National Insurance Company ("SNIC") 

7 and Gordon & Rees to determine if they "clearly contain attorney-client 

8 information." 

9 Technically, Objectors are correct. The proper procedure would have 

10 been to first determine the dominant purpose of the relationship between 

11 SNIC/Optimum and Gordon & Rees. Costco v. Superior Court, 47 Ca/'4th 725, 

12 740 (2009). If it was determined that the communications in question were 

13 made during the course of an attorney-client relationship, the communications 

14 would be privileged. J..Q,. 

15 Upon review of the evidence in the record, the Court finds that the 

16 dominant purpose of the relationship between SNIC/Optimum and Gordon & 

17 Rees was legal in nature. Optimum, the claims agent for SNIC, retained 

18 Gordon & Rees to provide coverage advice and general legal advice regarding 

19 Plaintiff's claims. (Didier Dec/. [Doc. 1 04-1] ~8.) Both Optimum and SNIC were 

20 clients of Gordon & Rees. (J..Q,.) The Court finds it significant that Optimum 

21 retained Gordon & Rees shortly after being contacted by Annette Clark, 

22 counsel for Plaintiff, regarding the claims. (J..Q,.) As explained by Ms. Didier, 

23 former president of Optimum, it was out of the norm for the insured to have 

24 retained an attorney so early in the claims process: "[W]e wanted guidance 

25 because that was a very unusual step on the part of the insured. So we felt it 

26 would be reasonable to have someone that would be speaking the same 

27 language as his attorney to ensure that things ran smoothly and were handled 

28 properly." (Didier Dep. [Doc. 104-5]204:3-9.) 

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Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 3 of 8
1 Accordingly, communications between SNIC and/or Optimum and Gordon 

2 & Rees are privileged. However, upon review of the limited number of 

3 documents that are still in dispute, there are very few communications that are 

4 solely between SNIC and/or Optimum and Gordon & Rees. The bulk of the 

5 communications were also shared with A&A, implicating the issue of waiver. 

6 Therefore, the Court proceeds to an analysis of whether the privilege was 

7 waived as to documents shared with A&A. 

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9 B. Disclosures to Arnold & Arnold 

10 Objectors object to the Magistrate Judge's ruling that documents shared 

11 with A&A are not confidential because disclosure to A&A was not "reasonably 

12 necessary" to further Defendant's interests in the litigation. 

13 Upon further consideration of the matter, the Court finds that in addition 

14 to gathering information and carrying out an investigation to assist in the 

15 adjustment of the claims, A&A was in fact acting as an agent for Optimum for 

16 purposes of communicating with Plaintiff and conveying SNIC's coverage 

17 position. Duties assigned to A&A included surveying the vessels, 

18 communicating with Plaintiff and his attorney, interviewing Plaintiff, and 

19 preparing correspondence setting out SNIC's coverage position. (Didier Decl. 

20 [Doc. 104-1],-r 6, Hillger Decl. [Doc. 104-2],-r 3.) Although Optimum made the 

21 decision whether to accept or deny coverage for the claims, A&A was tasked 

22 with the responsibility of drafting correspondence to Plaintiff regarding SNIC's 

23 coverage position. (Dider Decl. ,-r 7; Hillger Decl. ,-r 3.) 

24 Under Cal. Evid. Code § 952, "confidential communication between client 

25 and lawyer" is defined as: 

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rl]nformation transmitted between a client and his or her lawy.er in 

Uie course ofthat 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 

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Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 4 of 8
1 accomp'lishment of the p'urpose for which the lawyer is consulted, and includes a legal opinion formed and the advice given by the 

2 lawyer in the course ofthat relationship. 

3 (Emphasis added.) 

4 Here, considering A&A's duties, it was reasonably necessary for A&A to 

5 be privy to communications between Optimum and Gordon & Rees regarding 

6 coverage, investigation, claims handling, and communication with the insured. 

7 Section 73 of the Restatement Third of Law Governing Lawyers provides that 

8 when a client is a corporation or other artificial entity, "the attorney-client 

9 privilege extends to a communication that: (1) otherwise qualifies as privileged 

10 under §§ 68-72; (2) is between an agent of the organization and a privileged 

11 person as defined in § 70; (3) concerns a legal matter of interest to the 

12 organization; and (4) is disclosed only to: (a) privileged persons as defined in 

13 § 70; and (b) other agents of the organization who reasonably need to know of 

14 the communications in order to act for the organization. (Emphasis added.) 

15 Comment g to § 73 explains: 

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The need-to-know limitation of Subsection (4 )(b) permits disclosing privileged communications to other agents ofthe organization who 

reasonably need to know of the privileged communrcation in order 

to act for the organization in the malter. Those agents include 

persons who are resp'onsible 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 by1he lawyer. Access of such persons to privileged communications is not limited 

to direct exchange with the lawyer. 

21 (Emphasis added.) See also Zurich American Ins. Co. v. Superior Court, 155 

22 Cal. App. 4th 1485, 1499-1500 (2007) (citing to Comment g to section 73). 

23 Even though A&A's contract stated that A&A was "not an employee or 

24 agent" of Optimum, in practice, A&A was acting for Optimum in investigating 

25 the claim, communicating with the insured, and conveying SNIC's coverage 

26 decision. Accordingly, A&A reasonably needed to be a party to privileged 

27 communications regarding legal advice or guidance regarding coverage and 

28 claims handling. See Residential Constructors, LLC v. Ace Property and Cas. 

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Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 5 of 8
1 Ins. Co., 2006 WL 3149362, at *14-15 (D. Nev. Nov. 1,2006) (holding that 

2 independent adjustor handling the investigation of a claim for the insurer was 

3 the functional equivalent of a claims employee of the insurer and that 

4 confidential communications between defendant's coverage counsel and 

5 defendant's independent adjustor for purposes of providing legal advice or to 

6 obtain information in order to render legal advice to the defendant, were 

7 privileged); see also Markwest Hydrocarbon, Inc. v. Liberty Mut. Ins. Co., 2007 

8 U.S. Dist. Lexis 27243, *11-13 (D. Colo. Apr. 12, 2007) (rejecting plaintiffs' 

9 argument that disclosure of a communication to defendants' outside claims 

10 adjuster necessarily amounted to a waiver of the attorney-client privilege ). 

11 The Court has reviewed in camera the remaining documents in dispute 1 

12 and finds that most of the documents that were shared with A&A are privileged 

13 because they relate to the duties A&A was hired to perform on behalf of 

14 Optimum, and the communications were necessary for A&A to follow legal 

15 advice orfor Gordon & Rees to render the advice. The Court has determined, 

16 however, that certain documents fall outside the privilege because they relate 

17 only to claims adjustment, reveal no SUbstance of the privileged 

18 communication, do not relate to the purpose of Gordon & Rees's retention, 

19 and/or other reasons. These documents are listed in Exhibit A to this Order. 

20 Objectors shall turn over these documents to Plaintiff within 3 days of the entry 

21 of this Order. 

22 The following documents are illegible: ARNL 1114, ARNL 1433, ARNL 

23 1465, ARNL 1127, ARNL 1129, ARNL 1216-1217. If Objectors wish to 

24 continue to assert privilege as to these documents, Objectors shall produce 

25 legible copies to the Court for in camera review within 3 days of the entry of this 

26 Order. 

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28 1 These documents have been lodged and will be held by the Court for any 

subsequent review. 

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1 IV. CONCLUSION 

2 For the reasons discussed above, Objectors' objections are sustained in 

3 part and overruled in part, and the Magistrate Judge's Order on Remand is 

4 reversed in part and affirmed in part as detailed above_ The documents listed 

5 in Exhibit A of this Order are not privileged and shall be produced to Plaintiff 

6 within 3 days of this order. If Objectors continue to assert the privilege as to 

7 illegible documents ARNL 1114, ARNL 1433, ARNL 1465, ARNL 1127, ARNL 

8 1129, andARNL 1216-1217,Objectors shall produce legible copiestotheCourt 

9 for in camera review within 3 days of the entry of this Order. 

10 IT IS SO ORDERED. 

11 Dated: Ar~?.S;~O\,,\ ~rctA~_ 

12 BARRY TED MOSKOWITZ, Chief Judge United States District Judge 

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Case 3:12-cv-01333-BTM-MDD Document 212 Filed 11/25/14 Page 7 of 8
1 EXHIBIT A 

2 ARNL 957 

ARNL 1033 

3 ARNL 1126 

ARNL 1171 

4 ARNL 1184 (redact the first sentence of the third paragraph) 

ARNL 1205-1206 

5 ARNL 1210 

ARNL 1229 

6 ARNL 1232 (redact first email (from Soares), first sentence of fourth email, and second 

7 ARNL 1234 

sentence of the last email) 

(redact first email (from Soares), first sentence of fourth email, and second 

sentence of the last email) 

8 ARNL 1235 (redact March 12 email from George Soares (second from bottom» 

ARNL 1236 

9 ARNL 1238 (redact first sentence in the full email from Didier and the second sentence of 

email from Bill Arnold) 

(redact first sentence in email from Didier and the second sentence of email 

from Bill Arnold) 

10 ARNL 1240 

11 ARNL 1241 

ARNL 1242 

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(redact first email (from Soares), first sentence of fourth email, and second 

sentence of the last email) 

ARNL 1243 

13 ARNL 1246 (redact first email (from Soares), first sentence of fourth email, and second 

sentence of the last email) 

14 ARNL 1247 

ARNL 1257 

15 ARNL 1271 (redact second sentence of the last email) 

ARNL 1273-74 

16 ARNL 1300 

ARNL 1316 

17 ARNL 1327-1329 

ARNL 1333 

18 ARNL 1349 (redact bottom email) 

19 SNIC 968 (redact first paragraph of email from Hillger) 

SNIC 1500 

20 SNIC 1812-1824 (redact references to communication with Soares or coverage counsel) 

SNIC 2001-2014 

21 SNIC 2016-2019 

SNIC 2034 

22 SNIC 2055-2056 

SNIC 2100 

23 SNIC 2148 (redact second email) 

SNIC 2367 

24 

ARNL 1265-1266 

25 ARNL 1286-1287 

ARNL 1324 

26 ARNL 1326 

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