When Are Internal Insurer Memos Discoverable?

The recent 9th Circuit case Stephan v. Unum Life Insurance provides new guidance on when an insurance company’s internal documents may be discoverable.

Mark Stephan, a resident of California, suffered a bicycle accident that injured his spinal cord, rendering him quadriplegic. He filed for total disability benefits under his employer-sponsored Unum disability insurance policy, which was part of a plan governed by ERISA.

Mr. Stephan’s policy required Unum to pay him a benefit equal to a percentage of his pre-disability earnings. When Unum calculated how much Mr. Stephan was earning, it included his monthly salary, but not his annual bonus. This allowed Unum to calculate a much lower earnings rate—and thus a much lower amount that Unum had to pay in disability benefits.

Mr. Stephan sued Unum, seeking to overturn its benefit determination. After the trial court found in Unum’s favor, Mr. Stephan appealed, and the 9th Circuit Court of Appeals examined his case.

One of the main issues in Mr. Stephan’s case was whether Unum had to turn over a series of internal memoranda to Mr. Stephan in discovery. These memoranda were created by Unum’s in-house attorneys regarding Mr. Stephan’s claim, so Unum argued that they were protected from disclosure by the attorney-client privilege.  Mr. Stephan sought to use them to demonstrate that Unum had a conflict of interest, since it was responsible for both analyzing and potentially paying his claim.

The Court of Appeals held that Unum should have been required to disclose the memoranda.  The Court explained that there is an exception to the attorney-client privilege for situations like these, called the “fiduciary exception.” Generally speaking, a “fiduciary” is someone with an obligation to act in the interest of another. For example, when an employer sets up a benefit plan for its employees, that employer has an obligation to operate the plan for the employees’ best interests. That employer is considered a fiduciary with respect to the benefit plan.

The fiduciary exception traditionally means that an employer acting in the capacity of a fiduciary can’t assert the attorney-client privilege against claimants on matters of claim administration. The Court held that this exception can apply not just to employers, but to insurance companies as well, if the insurance company is taking on the fiduciary role. In this case, the Court found that the exception did apply, so Unum should have turned over the memoranda:

[A]dvice on the amount of benefits Stephan was owed under the Plan, given before Unum had made any final determination on his claim, constitutes advice on plan administration. Such advice was given before the interests of Stephan and Unum became adverse. The fiduciary exception to the attorney-client privilege therefore applies to the documents at issue here.