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by Meredith C. Schilling

A recent case out of Colorado highlights the continued attack on the attorney-client privilege during the claim adjustment process. In In re: Hill Hotel Owner, LLC v. Hanover Insurance Company, 557 P.3d 798 (Colo. Oct. 29, 2024), the District Court issued an order requiring the insurer defendant to turn over all communications between two structural engineers and outside counsel. Ultimately, the Colorado Supreme Court returned the case to the District Court to reconsider its order after the District Court acknowledged an error in its analysis. While the case has been remanded, it still raises significant concerns about how courts view communications with outside counsel during the claim adjustment process. 

Background of Underlying Case

In the underlying case, Hill Hotel Owner, LLC constructed a hotel in Boulder, Colorado, including a basement parking garage with a thick concrete slab floor. See Original Proceeding (District Court, Denver County, Case No. 23CV31492). In 2022, damage to the concrete slab floor was discovered. Hill Hotel claimed rain caused the damage and filed a claim with Hanover Insurance Company under its Builder’s Risk Policy seeking to recover remediation costs. 

During the adjustment, Hanover retained a structural engineer who concluded that the cause of the loss was due to faulty workmanship not covered by the Builder’s Risk Policy. Hanover hired a second structural engineer to review the findings and provide additional insight. Hanover’s outside counsel consulted with the structural engineers for guidance on the technical matters related to the construction. These communications became the focal point of a privilege dispute after Hanover denied coverage and Hill Hotel sued for breach of contract and bad faith.   

Hanover claimed that the communications were protected by the attorney-client privilege because its outside counsel was providing legal advice, but Hill Hotel disagreed, arguing the attorneys were involved in an ordinary factual investigation with third-party engineers. The District Court agreed with Hill Hotel and granted its motion to compel, finding that the communications were not protected by either work-product or attorney-client privilege because they were not prepared in anticipation of litigation. See April 12, 2024 Order re: March 21, 2024 Discovery Dispute (Dorancy, J.).  

Appeal to Colorado Supreme Court

Hanover filed a Petition for Rule to Show Cause to the Colorado Supreme Court. Having made no finding that the privilege had been waived or that any other recognized exception to the privilege applied, Hanover argued that the District Court ignored longstanding case law and made a critical legal error by imposing an anticipation-of-litigation element on Colorado’s attorney-client privilege. “The District Court’s rule conditioning the attorney-client privilege on anticipation of litigation imperils virtually all of Hanover’s pre-litigation privileged communication with outside counsel and threatens to make counsel for both sides witnesses.” See April 22, 2024 Petition for Rule to Show Cause under C.A.R. 21 (Supreme Court Case No. 2024SA113). Relying on Alliance Construction Solutions v. Department of Corrections, 54 P.3d 861 (Colo. 2002), Hanover also argued that the District Court failed to address the context and purpose of the communications in question, which were created for the purpose of Hanover obtaining legal assistance. Id. at 869-87 (providing the elements of the attorney-client privilege and citing the Restatement (Third) of the Law Governing Lawyers § 68). Hanover requested an order vacating the District Court’s ruling and remanding the case with instructions to apply the “legal assistance” test for privilege. See Petition. 

On appeal to the Supreme Court, the parties, and several other entities filing amicus briefs, argued the issue of whether claims adjustment communications with an insurer’s experts and outside counsel are privileged. Their approach to the issue was unequivocal: either it’s always privileged or it’s always discoverable. The policyholder side argued that courts consistently “confer great weight upon the purported objectivity of experts retained during a claim investigation.” See In Re Hotel Owner, LLC v. Hanover Ins. Co., 2024 WL 4678370, at *9 (Corrected Brief of Amicus Curiae the Colorado Trial Lawyers Association). Extending the attorney-client and work product privileges to outside counsel conducting routine claims investigations lets insurers abuse the privileges to hide bad faith claims handling activities by “shopping” for attorneys and hiring multiple investigators to develop “alternative reports and theories” that support a bad faith position, all of which will be hidden from policyholders. See e.g. In Re Hotel Owner, LLC v. Hanover Ins. Co., 2024 WL 4678369, at *16 (Brief of Amicus Curiae United Policyholders in Support of Respondent).

The District Court then unexpectedly admitted that the rationale used in ordering disclosure of the communications was wrong. See In Re Hotel Owner, LLC v. Hanover Ins. Co., 2024 WL 4678373, at *8 (Denver County District Court’s Response to the Petition to Show Cause) (“The District Court agrees that the test for attorney-client privilege does not hinge on whether litigation was anticipated and that its April 12 Order was incorrect in ruling otherwise.”). Notwithstanding the District Court’s admission, Hanover asked the Supreme Court to issue a decision on appeal to clarify questions about the correct standard. The Supreme Court declined to revisit existing precedent and instead issued an order directing the District Court to reevaluate the privileged nature of the communications. See In Re Hotel Owner, LLC v. Hanover Ins. Co., 557 P.3d 798 (Colo. Oct. 29, 2024).  

Comment

While the ultimate outcome in this case is unknown, it highlights the ongoing attack on the traditional protections provided by the attorney-client privilege when those communications occur as part of a claim adjustment. Policyholders and their advocates have been increasingly seeking to discover communications between insurers and their attorneys made during claim investigations, like the policyholder did in Hill.  It can no longer be presumed that by simply hiring outside counsel during the claim adjustment, communications with counsel will be protected. Courts are increasingly finding that if those communications are part of the adjustment process, as opposed to seeking legal advice, they are not protected. When hiring outside counsel and involving an expert, it is important to understand that not all communications will be protected by the attorney-client privilege. Delineating that the communications are intended to be part of the legal advice counsel was hired to provide supports the argument that they should be protected.