The Applied Underwriters’ Legal Saga…

Court Rejects CIC’s Demand To Compel

The San Mateo Superior Court overseeing the conservation and rehabilitation of California Insurance Company is ordering the California Department of Insurance to provide more information about why it is claiming some documents are privileged and not subject to discovery. But the court largely rejected CIC’s requests to compel disclosure of additional records. It also tossed the Applied Underwriters affiliate’s request for sanctions against the Department.

The discovery dispute stems from the Department’s responses to an April 22nd Request for Production of Documents (RFP). The request focused on CDI’s internal communications regarding the decision to seek conservation of CIC and the basis for the proposed rehabilitation plan that is teed up for court review early next year.

The Department produced over 1,000 records but said nearly 900 others were protected based on various privileges, including attorney-client, work product, and deliberative process. CIC’s motion to compel focused on 285 documents containing communications with CDI’s in-house attorney and another 125 that CDI says are protected by “official information privilege” or “deliberative process privilege.”

Arguments Fall Flat

CIC put forth several arguments as to why the Department had waived privilege, but the court found that none of the arguments held water.

“Waiver of the privileges occur when a holder, without coercion, discloses a significant part of the confidential communication, or consents to another’s disclosure of it,” the court noted. “CIC has not shown that the verification of the Conservation Application, or the filing of the declarations disclosed any confidential communications. Merely attesting to facts is not tantamount to disclosing a communication.”

The court also rejected CIC’s argument that the Department’s actions resulted in an “implied waiver” of privileges. The court notes that CIC’s position would have far-reaching consequences for any internal governmental communications in enforcement actions. “[T]he implications of CIC’s position is even more far-reaching. If a governmental agency waives all privileges whenever it institutes an action that requires internal communications and deliberations, then virtually any action by a government agency would result in the waiver of its privileges. This is not the law,” the court held. The court pointed out the Department is not relying on the challenged documents to meet its burden in the conservation.

Similarly, CIC’s “fundamental fairness” argument also flopped. The court noted that it ultimately must determine if CDI’s action in the conservation proceeding is irrational, contrary to statute, a breach of fiduciary duty, or discriminatory. “Those determinations do not depend on the internal process used by CDI to decide upon its actions,” the court held. “The CDI’s Rehabilitation Plan Application and its supporting declarations identify the factual and legal grounds for the Plan, which CIC can fairly challenge without violating the CDI’s asserted evidentiary privileges.”

Privilege Log

The court did order CDI to file an updated privilege log with additional information within 21 days. The log is used by the court to determine if documents are being properly withheld.

In one case, the court notes that the log lacks enough information to determine if the attorney-client privilege applies to a communication involving Deputy Commissioner Bryant Henley. The court says it cannot tell from the information provided if Henley acted as Deputy Commissioner or as a special counsel for the issue. The former is not protected, but the latter would be, the court says.

“The deficiencies in CDI’s privilege log do not, however, result in the waiver of any privileges,” the court held in ordering the Department to update the log for the 285 documents involving communications with in-house attorneys and the 125 other contested documents. As to the sanctions issue, the court says it finds “a good faith basis for CDI’s assertion of the privileges and or opposing the motion.

Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.