Unum Must Disclose Attorney Memo in Disability Case

The attorney-client privilege provides confidentiality for all communications between attorneys and clients pertaining to legal advice. However, the courts have carved out an exception for fiduciaries–including insurance claims administrators–under principles of trust law, which requires the furnishing of information to trust beneficiaries in order to protect their rights, and which holds that a trust attorney’s real clients are the beneficiaries rather than the trustees.

Thus far, the Third Circuit has declined to extend the fiduciary exception to communications between an insurance company and its in-house attorneys where the insurance company funds the disability plan and pays benefits out of its own assets. In Wachtel v. Health Net, Inc., the Court reasoned that the exception did not apply in the case of a fully-insured health plan. It rationalized that in such a case, the insurance company–not the beneficiaries–is the attorney’s real client, as the insurance company maintains ownership over the plan funds, pays its attorneys from its own assets, and owes fiduciary duties to multiple classes of customers rather than the beneficiaries of any one plan. Further, the Court concluded that while ERISA expanded certain trustee obligations to insurance companies, Congress did not intend to apply the entire scope of trust law obligations to ERISA fiduciaries.

In contrast, the Ninth Circuit in Stephan v. Unum Life Ins. Co. of Am. held that memoranda between Unum’s claims department and its in-house counsel regarding interpretation of the plaintiff’s disability insurance contract could be subject to disclosure. Mark Stephan filed for disability benefits after becoming a quadriplegic in a bicycling accident. Stephan disputed Unum’s calculation of his pre-disability earnings, as Unum interpreted the contract to exclude the plaintiff’s annual bonus from the earnings. Since the disability policy provided a monthly benefit of 60% of a claimant’s earnings, the exclusion of the bonus left the plaintiff with a considerably lower benefit figure.

Stephan sought discovery of memoranda regarding “how the insurance policy under which Stephan was covered ought to be interpreted and whether Stephan’s bonus ought to be considered monthly earnings within the meaning of the Plan.” The Court held that the information was discoverable, as the communications were sent during the appeal process, when Unum was merely seeking advice on how to handle Stephan’s claim. As the parties were not in litigation, Unum lacked a sufficient adversarial relationship with Stephan by which to claim the privilege.

We applaud the Ninth Circuit’s decision as a vindication of ERISA claimants’ rights to fairness and transparency, and hope that ultimately the Third Circuit will similarly apply the fiduciary exception to the attorney-client privilege to bring more claimants under its protection. Wachtel stated that it was influenced by the fact that “fiduciary obligations of insurers who contract with ERISA plans are not well-settled at law,” and the Court could come to embrace a broader application of the fiduciary obligation once the breadth of an ERISA insurer’s fiduciary obligations becomes better settled under the law. We at Bonny G. Rafel regularly fight for transparency and accountability, which is an essential component of ERISA’s guarantee of a “full and fair” review.

–By Sara E. Kaplan, Esq.

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