IL Sup.Ct. / Waste Mgt Doctrine

Attorney-Client Privilege Common Interest Exception Not Applied in Broker Dispute 

The Illinois Supreme Court, in an opinion written by Justice Thomas with Justices Kilbride, Garman, Karmeier, Theis, and Neville concurring, reversed the Appellate Court and held that under Illinois law the “common-interest” exception to the attorney-client privilege does not apply in circumstances where there is no insured-insurer relationship between parties and the party claiming the privilege is bringing suit based on the defendant’s negligence in failing to procure appropriate insurance as a broker.  Imperative to the court’s decision was that it found no commonality of interest. A previous Bytes on the overturned appellate decision can be found here

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.  On interlocutory appeal, the Appellate Court found Waste Management controlling as to allowing discovery of the documents and therefore affirmed the circuit court’s discovery order in all material respects.  It also affirmed the denial of a stay but remanded with directions for the circuit court to proceed with discovery while monitoring the necessity for a stay in the future.  

The Illinois Supreme Court agreed with the Foundations that the lower courts erred in applying Waste Management to the facts of the case at hand to negate attorney-client privilege.  According to the Foundations, Waste Management did not apply because there was no “special relationship” that existed between Gallagher and the Foundations.  The agreement of the parties only required Gallagher to indemnify the Foundation for Gallagher’s own negligence, and thus, not a situation like in Waste Management where the parties had an obligation by contract and by public policy to act in good faith toward each other and to share in communication.  The Illinois Supreme Court found the key circumstances in Waste Management, that the parties had a special relationship and were in privity of contract, were absent from the present case.  “To apply the doctrine here would be at odds with the purpose of the attorney-client privilege to promote full and frank consultation between a client and legal advisor without fear of compelled disclosure.  It seems to us that Gallagher’s and the Foundations’ interests were always adverse, and there was not a commonality of interest in the same way that is the case when an insurer has a duty to indemnify and defend from the beginning.”  Therefore, the Illinois Supreme Court reversed the portion of the Appellate Court’s judgment that affirmed the circuit court’s order to compel discovery, but affirmed the portions of the Appellate Court’s judgment that affirmed as modified the denial of the stay and vacated the circuit court’s contempt ruling.  Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Services, Inc., 2019 IL 123936 (Nov. 21, 2019).