Article: June 2015: Insurance Litigation Update

New York’s First Judicial Department Splits from Other Courts and Applies Common Interest Privilege to Communications Not in Anticipation of Litigation. Last December, the Appellate Division of the Supreme Court of New York, First Judicial Department issued a decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 124 A.D. 3d 129 (2014), which could have important implications for protecting communications among insurers that are part of a joint defense group. The First Department held that reasonably anticipating litigation is not required to take advantage of the common interest privilege. Id. at 131-32. Although the case was decided within the context of a merger agreement between two companies, the rationale of the decision would allow communications between insurance defense groups to stay protected even when some or all of the insurers in the group are not anticipating litigation.

In Ambac Assurance, Ambac, a financial guaranty insurer, brought suit against Countrywide Home Loans and certain of its affiliates (collectively “Countrywide”), as well as Bank of America Corp. (“Bank of America”), in connection with Ambac’s insurance for certain residential mortgage-backed securitizations offered by Countrywide prior to Countrywide’s merger with Bank of America. Id. at 131. Specifically, Ambac alleged that one of the companies, Countrywide, fraudulently induced it to insure payments on mortgage-backed securities, and that Bank of America was liable as Countrywide’s successor-in-interest. Id. With regard to its successor liability claims, Ambac sought disclosure of documents related to communications between Bank of America, Countrywide and their counsel for the period of time between the entry and close of the merger between the two companies. Id. at 131-32. Bank of America argued that the common interest doctrine applied protecting the documents from disclosure. Id. At 132.

The Supreme Court of New York upheld a determination by a Special Referee that the documents at issue were not automatically protected by the Attorney Client privilege. Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 980 N.Y.S.2d 274 (Sup. Ct. 2013). The Supreme Court held that New York law requires parties communicating with each other to reasonably anticipate litigation in order to take advantage of the common interest doctrine. Id.

On appeal, the First Department reversed the Supreme Court and held that parties did not need to reasonably anticipate litigation in order to claim protection of communications under the common interest doctrine. Ambac Assurance, 124 A.D. 3d at 137. The court reasoned that “imposing a litigation requirement in this scenario discourages parties with a shared legal interest, such as the signed merger agreement here, from seeking and sharing that advice, and would inevitably result in the onset of regulatory or private litigation because of the parties’ lack of sound guidance from counsel.” Id.

Delaware and some federal courts have similarly held that anticipation of litigation is not necessary to establish a common interest. Id. at 131. It is unclear, however, whether New York will join this line of cases because the state’s appellate courts are now split on the issue. As recently as last year, the Second Department Appellate Division of New York had held that reasonable anticipation of litigation is required under the common interest doctrine. Hyatt v. State Franchise Tax Bd., 105 A.D.3d 186, 206 (2013).

If New York does follow the federal and Delaware rules by adopting Ambac Assurance, the rule could have important implications in the insurance industry. It has been common practice for insurance companies to create joint defense groups across an insurance tower even when only one company is involved in litigation. Any communications between insurance companies and counsel in such defense groups would be protected from disclosure under the rule articulated in Ambac Assurance. Under the former rule, insurance companies would risk the disclosure of any communications when such defense groups were formed.