How to Avoid Creating Discoverable Communications Between Employers and Workers’ Compensation Carriers
While working on the assembly line at ABC Manufacturing, Linda the line worker claims that she strained her back while pulling a product off the line. In accordance with ABC’s workers’ compensation insurance policy, Linda’s manager immediately reports the claim to ABC’s carrier. After reviewing the facts, Carrie, the carrier’s claims adjuster, denies Linda’s claim. Linda appeals the decision to the Division of Workers’ Compensation and obtains a Benefit Review Conference. Because ABC’s policy provides for a large self-insured retention, the employer asks for regular reports on Linda’s claim from Carrie. At the Benefit Review Conference, the Division of Workers’ Compensation determines that Linda did sustain a compensable injury and is entitled to benefits under the policy.
Linda, who believes that her claim was mishandled from the start, files a bad faith action against Carrie and the carrier, and asks for copies of the letters, reports and other communications between Carrie and ABC while her claim is pending. Suddenly concerned that the candid reports she sent ABC might be disclosed to Linda, Carrie immediately contacts the carrier’s trusted lawyer, Larry, who tells Carrie not to worry. Larry tells Carrie that her letters, reports and other communications are covered by the attorney-client privilege. Larry assures Carrie that no Texas court would ever require disclosure of those communications to Linda.
However, Larry the lawyer is wrong.
Several months ago, the Supreme Court of Texas addressed the issue of whether communications between an insured employer and counsel retained by a workers’ compensation carrier are privileged. In the case of In re XL Specialty Insurance Company and Cambridge Integrated Services Group, Inc., 373 S.W.3d 46 (Tex. 2012), the court considered a scenario similar to the one presented above in which an injured employee sought discovery of communications between the carrier and his employer. While recognizing that the attorney-client privilege is “the oldest of the privileges” under common law, the Court also weighed the potential suppression of relevant evidence under a strict rule of confidentiality. The Court also analyzed several recognized components of the attorney-client privilege in Texas, including the joint client doctrine as well as the joint defense and common interest doctrines.
In the XL Specialty case, the carrier argued that one provision of Texas Rule of Evidence 503, which has been described as the “joint client” or “joint defense” provision, protects communications between the carrier and the insured employer while claims are being administered. The Court noted that the joint client doctrine only applies when an attorney represents two or more clients on the same matter, and the joint defense privilege applies only where information is shared between separately represented parties in the same matter. Since an employer would not be a proper party in a bad faith lawsuit brought in Texas against a workers’ compensation carrier, the court did not believe that the “same matter” requirement was met. Perhaps more importantly, the Court pointed out that in Texas, unlike most other states, communications made under the joint defense doctrine are only privileged in pending actions. In other words, no commonality of interest exists absent actual litigation, and communications outside of actual litigation are not privileged.
Ultimately, the Court determined that the carrier did not meet the burden of establishing that the communications between its adjuster and the insured employer met any of the privilege provisions contained within Rule 503. Because workers’ compensation claims in Texas are brought against the carrier and the carrier is responsible for paying benefits, the carrier—not the employer—is the actual client and party to the pending action. Therefore, any communications between the carrier and the insured employer are discoverable. The court further recognized that in spite of interests in common during the administrative claim, communications between the carrier and insured employer during the administrative action are simply not privileged.
Obviously, the decision of the Supreme Court of Texas in the XL Specialty case should raise concerns for insured employers, carriers handling workers’ compensation claims, and their attorneys. In order to avoid the potential pitfalls associated with communications between carriers and insured employers in a workers’ compensation setting, we recommend undertaking the following steps to protect such communications from discovery:
Counsel representing carriers should avoid copying insured employers on any correspondence or other communications to the adjuster or carrier. Because those communications can later be discovered in Texas, what would otherwise be privileged information can later be used against either the carrier or the insured employer in subsequent litigation.
While insured employers often have a significant interest in the disposition of claims, access of the employer to the carrier’s claim information must be limited. Insured employers should keep this in mind when requesting reports and other documents from the carrier. Additionally, for insured employers who require reporting, carriers should draft separate reports with updates including only non-privileged information. Insured employers, carriers, and their respective counsel should keep in mind that an insured employer who attempts to become too involved in the direction or participation in the handling of a claim can subject both the insured employer and the carrier to additional litigation.
Carriers should incorporate internal controls to ensure that confidential and privileged information is not inadvertently disclosed to insured employers or other third parties. Carriers should consider maintaining a separate repository or file of confidential correspondence, notes, documents or other communications within each claim file. Carriers may also wish to incorporate additional safeguards such as additional steps, passwords, or supervisor requirements for accessing privileged information to prevent mistaken disclosure.
Adjusters should not include any confidential or privileged information, or even summaries thereof, in logbook or notebook entries. These entries, since they are often discoverable, should only include factual, non-privileged information about the claim. Entries should be limited to non-privileged information such as current claim status, publicly disclosed positions of the parties, and information produced in non-privileged communications.
In the XL Specialty case, the Supreme Court of Texas noted the special factors and issues arise in handling and defending workers’ compensation claims. Unlike other areas of insurance law, claims in the context of workers’ compensation are brought against the carrier, as opposed to the insured employer, and the carrier is directly responsible for paying benefits. Fortunately, Texas employers have been afforded an option of avoiding this problem, and others, by choosing to become “nonsubscribers” to the workers’ compensation system.
In Texas, providing workers’ compensation coverage is optional for employers. Although an employer may choose to “go bare” and simply not implement an alternative to participating in the workers’ compensation system, this course of action is not recommended. By developing and administrating their own employee injury benefit plans, these nonsubscribers have found this alternative to be a more cost-effective approach to handling employee on-the-job injury claims. Additionally, because litigation in nonsubscriber cases directly involves the employer, the potential waiver issues addressed in the XL Specialty case simply do not arise.
Some of the following are benefits available to employers who choose to become nonsubscribers in Texas:
Significant cost reductions through management of claims by the employer;
Increased benefits to employees at a lower cost to the employer;
Better control of fraudulent claims through increased employer involvement; and
Increased control over medical treatment received by injured employees.
Although the advantages to nonsubscribers are substantial, there are some drawbacks. These disadvantages include the following:
Fewer administrative remedies can increase the risk of litigation from injured employees;
Forfeiture of defenses in litigation, including proportionate responsibility; and
Responsibility of the employer to arrange for management of its employee benefit plan.
In considering whether to become a nonsubscriber in Texas, employers should consider both the benefits of opting out of the workers’ compensation system as well as the ramifications of doing so, especially from a litigation perspective. Although defending a non-subscriber case can present additional challenges, working with attorneys well-versed in nonsubscriber law to develop a comprehensive defense strategy can substantially reduce the impact of those challenges while allowing the employer to reap the benefits of being a nonsubscriber.
This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their situation in connection with topics discussed.
Copyright © 2013 Kane Russell Coleman & Logan PC. All rights reserved. Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.