IL App., Atty/Client Privilege

Common Interest Doctrine Applicable as Exception to Attorney-Client Privilege in Case Between Insured and its Broker.

On interlocutory appeal, the Illinois Appellate Court for the Second District, applying Illinois law, held that the “common-interest” doctrine applies as an exception to the attorney-client privilege when an insured sued its insurance broker for malpractice based on the denial of a claim.  Thus, the appellate court compelled the production of documents that would have been privileged but for the commonality of interests between the parties.

The Robert R.  McCormick Foundation and the Cantigny Foundation (the “Foundations”) sued their former insurance broker, Arthur J. Gallagher Risk Management Services, Inc. (“Gallagher”).  The Foundations were the second largest shareholder group in the Tribune Company (“Tribune”).  The Foundations sold their preferred stock for $2 billion during a leveraged buyout (“LBO”) of the company in 2007.  Less than one year after the transaction, Tribune filed for bankruptcy protection.  After the LBO, the Foundations hired Gallagher to procure for them directors’ and officers’ (“D&O”) liability insurance.  Gallagher obtained $25M in D&O coverage through a policy with Chubb Insurance (“Chubb”).   A year later, the Foundations cancelled their Chubb policy and purchased what Gallagher allegedly advised the Foundations was the same coverage at a reduced premium from Chartis Insurance (“Chartis”).

After Tribune exited bankruptcy, aggrieved shareholders filed many federal suits across the country against more than 5000 defendants and the suits were eventually consolidated in the Southern District of New York.  The Foundations were named in three of the suits that generally allege that the Foundations orchestrated the LBO through actual and constructive fraud.  The suits seek to unwind the LBO and to claw back creditors’ funds.  Chartis denied coverage for the LBO litigation under a policy exclusion for claims “in any way relating to any purchase or sale of securities.”  The Foundations asserted that the Chubb policy would have provided coverage, so they sued Gallagher for breach of contract and professional negligence resulting in the loss of coverage.  During discovery in the case, Gallagher subpoenaed the Foundations and their legal counsel for: “1. Any reports or opinion letters prepared for *** the Foundations *** relating to the Tribune Co. or the LBO. 2. Any and all communications related to the Foundations’ Director[s]’ and Officers[’] insurance policy or coverage. 3. Any and all communications with the Foundation related to the Tribune Bankruptcy. 4. Any and all communications with the Foundations related to the LBO Litigation.”  The Foundations refused to produce the documents citing attorney-client privilege and moved to quash the subpoenas or stay the case until the completion of the LBO litigation.  Gallagher in turn sought an order to compel production.  According to the trial court, “by suing Gallagher the Foundations had aligned Gallagher’s interest with their own in the underlying litigation—that is, that Gallagher ‘may bear the ultimate burden of payment of the underlying claims and defense costs.’” Thus, the trial court found that under Waste Management, Inc. v. International Surplus Lines Ins. Co., 144 Ill. 2d 178, 190 (1991), the Foundations must produce the requested materials.  The trial court also denied the Foundations’ request for a stay.

The appellate court found that the second exception to the attorney-client privilege promulgated in Waste Management, the common-interest doctrine, applied to the case at hand.  The exception depends not on the nature of the parties but on the “commonality of interests” between them, or who might be “ultimately liable for payment if the plaintiffs in the underlying action received either a favorable verdict or settlement.”  The Foundations argued that the Waste Management common-interest doctrine should not apply to a broker malpractice lawsuit.  The appellate court disagreed stating that “Illinois courts have recognized that, although the dispute in Waste Management arose from an insured-insurer relationship, ‘parties do not have to match the classic profile of an insurer and insured for the concepts in Waste Management, Inc. to apply.’”

The Foundations argued that they did not have a mutual interest with Gallagher in the LBO litigation.  However, the appellate court found that Gallagher stood in the insurer’s shoes for purpose of the malpractice action because the Foundations sued Gallagher for the alleged loss of coverage.  Accordingly, the appellate court held that “because Gallagher might be ‘ultimately liable’ in the LBO litigation … we find that a commonality of interests exists between the Foundations and Gallagher.”  The appellate court ruled the common-interest exception applied only to those matters on which the parties might share liability, such as the LBO litigation, and not those matters on which the parties are opposed, such as coverage.  Therefore, the appellate court vacated the portion of the trial court’s order which compelled the Foundations to produce documents on the issue of coverage.  The appellate court also affirmed the trial court’s order denying a stay, but did so without prejudice, pending discovery, dispositive motions, and the status of the LBO litigation.  The Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Services, Inc., No. 13-L-481 (Ill. App. Ct. July 20, 2018).