Insurance Co. of North America v. Superior Court

Opinion

Insurance Company of North America (INA), a casualty insurer, seeks a writ of prohibition against the superi- or court to preserve the confidentiality of its attorney-client communications against discovery by GAP Corporation (GAP). INA is a defendant in a superior court action brought by GAP against INA, INA Corporation, INA Financial Corporation, and others, seeking declaratory and other relief with respect to liability insurance coverage for asbestos-related claims.

In the INA group of affiliated companies, INA Corporation is the parent holding company, and INA Financial Corporation, Life Insurance Company of North America, and INA, are, directly or indirectly, wholly owned subsidiaries. The issue of attorney-client privilege arose under the following circumstances: Some 3,000 actions, 800 of them in Los Angeles County alone, are and have been pending against GAF and other manufacturers and commercial users of asbestos for damages for personal injuries assertedly the result of exposure of workers over substantial periods of time to asbestos fibers. From 1950 to 1975 INA was GAF’s products liability insurer, and as a consequence of this and similar coverage for others INA found itself facing substantial liability for asbestos-related claims, whose potential amount, it is suggested, could reach $20 billion. As a consequence of this exposure INA employed the firm of Michael Gallagher in Cleveland, Ohio, as outside counsel to advise it on asbestos-related matters, and it solicited Gallagher’s opinion on the extent of coverage of INA’s products liability insurance policies with respect to asbestos-related claims against its insureds. On March 11, 1977, Gallagher undertook to report to his client on this and related legal matters at a meeting at INA’s home office in Philadelphia, Pennsylvania, attended by eight full-time officers and employees of INA, five outside counsel, and two other persons. At this meeting Gallagher briefed senior management of INA on the nature and dimension of the asbestos litigation, the extent of INA coverage under its policies, its potential liability for asbestos-related claims, and possible initiation of an

GAF, while recognizing that communications between attorney and client are ordinarily privileged (Evid. Code, § 954), asserts the privilege does not apply here, because two outsiders were present at the meeting and attorney-client communications in the presence of third persons are not privileged. (Marshall v. Marshall (1956) 140 Cal.App.2d 475 , 480 [ 295 P.2d 131 ].) Two issues are presented. The narrow issue is whether the two persons present at the meeting were in truth and in fact outsiders to INA. The broad issue is whether, even if the two were legally unrelated to INA, disclosure to them furthered the interest of the client or was reasonably necessary to accomplish the purpose for which counsel had been consulted.

The two persons present at the conference were Earl McHugh, vice president-law of INA Corporation, attending in his capacity as a legal officer of the parent company; and Donald Heth, president of Life Insurance Company of North America, a wholly owned subsidiary of INA Corporation, attending in his capacity as a member of the reserve committee created by INA Corporation to supervise the reserve policies of its operating subsidiaries. The trial court rejected INA’s claim that McHugh and Heth were present at the briefing to further the interest of the client INA in the consultation, and it concluded that their attendance destroyed confidentiality of communication between attorney and client and made Gallagher’s legal opinions and advice discoverable. The court took the view that because Gallagher was retained only by INA and not by INA Corporation and Life Insurance Company of North America the presence at the conference with INA’s consent of officers of the latter two companies resulted in a waiver by INA of its attorney-client privilege.

For reasons set out below we disagree with the trial court’s conclusions, both on the narrow issue and on the broad issue, and we order a writ of prohibition to issue.

The Evidence Code (Stats. 1965, ch. 299, § 2) sets out a statutory privilege for attorney-client communication (§ 954) and declares all such communication presumptively confidential (§ 917). A confidential communication is defined in section 952: “As used in this article, ‘confi

A corporate client, like other artificial entities, can only receive communications from its attorney by means of human agency—officers, agents, and employees of the corporation selected by the corporation’s directors and officers to act on its behalf. A corporation, like a natural person, is entitled to the full benefit of the attorney-client privilege (D. I. Chadbourne, Inc. v. Superior Court (1964) 60 Cal.2d 723 , 736 [ 36 Cal.Rptr. 468 , 388 P.2d 700 ]). And a corporation, again like a natural person, is not limited to employment of full-time officers, agents, and employees, but it may avail itself of the services of part-time employees, ad hoc consultants, temporary advisers, and other servants it selects for specific purposes. (Corp. Code, § 207; Lab. Code, §§ 3351, 3357.)

With these general principles in mind we consider the relationship of McHugh and Heth to INA.

McHugh, according to papers submitted in support of the petition, was vice president-law of INA Corporation, the parent holding company of which INA was a wholly owned operating subsidiary. His duties included general supervision of legal affairs for INA Corporation’s entire group operation, and general supervision of all major litigation involving INA Corporation and its subsidiaries. His responsibilities covered rendition of legal advice and assistance to the management, executives, and legal departments of various subsidiaries; selection of outside counsel in some cases; assistance and guidance to outside counsel during the course of major litigation; and advice to

We turn to Heth, the other person at the conference, identified as president of Life Insurance Company of North America, another wholly owned subsidiary of INA Corporation, and as a member of the reserve committee created by INA Corporation to advise, coordinate, and review reserve policies for its principal operating subsidiaries. Review of reserve policies by the reserve committee served the dual purpose of insuring the financial health of the entire INA group and assuring the officers of the parent holding company that its operating subsidiaries were following sound actuarial practices. But like McHugh, because of the separate corporate existence of INA, neither the reserve committee nor Heth could directly order INA to adopt a particular reserve policy. Technically, all they could do is give advice, and although in overwhelming probability their advice, unless criminal or fraudulent, would be followed, it would remain no more than advice. Hence, the formal status of Heth in relation to INA was that of a part-time expert

It is apparent the authors of section 952 intended a comprehensive construction of the attorney-client privilege when they specified that neither (1) disclosures to third persons present to further the interest of the client, nor (2) disclosures to third persons which are reasonably necessary to transmit information or accomplish the purpose for which the attorney has been consulted, destroys confidentiality of communication. Such a comprehensive construction was forthcoming in Cooke v. Superior Court (1978) 83 Cal.App.3d 582 [ 147 Cal.Rptr. 915 ], a proceeding in which a husband sought to retrieve attorney-client communications that had been surreptitiously removed by a household servant and delivered to his wife’s attorneys. Counsel for the wife contended the purloined documents were not privileged, because they had been circulated to persons other than the husband and his counsel in the divorce action, including business associates and attorneys for the husband in other matters. The court held such disclosures did not defeat the privilege. “[A]ll of the alleged recipients were either attorneys who represented Mr. Cooke in some capacity, or were members of his family or

Other persuasive authority supports the conclusion that no waiver of the attorney-client privilege occurs by reason of disclosure of confidential communications to business associates to whom disclosure is reasonably necessary. In Duplan Corporation v. Deering Milliken, Inc. (D.S.C. 1975) 397 F.Supp. 1146 , patent licensees challenged the claim of attorney-client privilege by the corporate patent owner in respect to legal communications disclosed to the patent owner’s corporate subsidiaries. The court found that disclosure to representatives of related or affiliated corporations of communications between a corporate client and its counsel did not waive the attorney-client privilege. “Although an interest of a third party corporation from a commercial standpoint would not establish a sufficient community of interest, the fact that the communications are among formally different corporate entities which are under common ownership or control leads this court to treat such inter-related-corporate communications in the same manner as intracorporate communications. In the leading case of United States v. United Shoe Machinery Corp., supra, 89 F.Supp. at 359, the court stated, ‘For present purposes the client is United Shoe Machinery Corporation and all its subsidiaries and affiliates considered collectively.’ Thus, if a corporation with a legal interest in an attorney-client communication relays it to another related corporation, the attorney-client privilege is not thereby waived.” (Pp. 1184-85; italics added.)

Analogies may be found in other spheres of the law, for example, the operation of government bureaus and departments. We do not believe the confidentiality of a legal briefing given to the Social Security Administration would be disturbed by the presence at the briefing of a representative of the Department of Health and Human Resources or that the confidentiality of a communication by counsel to the Department of the Army would be breached by the presence at the conference of a representative of the Department of Defense. Even though these government organizations are separate legal entities, a community of interest exists among them sufficient to justify common briefings with

We can develop in concrete form some of the ramifications of disclosure of attorney-client communications to business associates by assuming that at bench, because of the importance of the legal questions to be discussed at the briefing of March 11, 1977, the president of INA Corporation decided to attend the meeting himself to receive the benefit of Gallagher’s briefing. We will further assume that the president had no direct duties in either counseling the legal departments of operating subsidiaries or recommending sound actuarial practices to their accountants, that he merely wished to acquaint himself as a matter of corporate group policy with a legal problem of great importance to the parent company and the entire INA group. Would his presence at the conference destroy the confidentiality of Gallagher’s communication? We think not. In our view the president’s attendance at the briefing would fall squarely within the terms of section 952, which preserves the confidentiality of an attorney-client communication when a third person is present to further the interest of the client in the consultation. At bench, the purpose of the consultation was to obtain legal advice about INA’s liabilities for asbestos claims under its outstanding insurance contracts. In all probability such legal advice would shape and guide the action to be taken by INA to meet the hazards of the asbestos problem. But INA was not a solitary island in a remote ocean but a member of a large archipelago of wholly owned subsidiaries located in INA Corporation’s inland sea. Basic policy and direction on critical problems would ultimately be determined by the parent company. As the court observed in Duplan Corporation v. Deering Milliken (D.S.C. 1975) 397 F.Supp. 1146 , 1164: “The chain of command in military, business, government, and private societies is an accepted pattern of modern civilization.” Such being the case, simultaneous delivery of legal advice to a subsidiary client and a controlling parent company, a delivery which facilitates speedy and accurate determination of business policy by the parent, furthers the interest of the client in the consultation. Because in a pragmatic sense the parent company can be viewed as Gallagher’s ultimate client, the purpose of the consultation

We note that the Law Revision Commission comment to section 952 specifically declares that a legal communication is confidential even though made in the presence of a parent or a business associate. (West’s Cal. Evid. Code (1968) p. 200.) At bench INA Corporation is both parent and business associate of its operating subsidiary, INA.

What we have said in the hypothetical instance of a subsidiary’s attorney-client consultation attended by the president of the holding company applies equally to other representatives of the holding company and its affiliates who are present for good business reasons to further the interest of the client (Cf. Harper & Row Publishers, Inc. v. Decker (7th Cir. 1970) 423 F.2d 487 , 491 [ 9 A.L.R.Fed. 674 ], affd. (1971) 400 U.S. 348 [ 22 L.Ed.2d 478 , 89 S.Ct. 1273 ]). Absent some conflict of interest or some evidence of antagonism among entities, disclosure of counsel’s legal opinion to holding company and affiliated company officers and employees who need to know this information in order to properly perform their duties is a disclosure which is reasonably necessary to accomplish the purpose for which counsel have been consulted. Hence it is privileged. We conclude, at least in the instance of wholly owned subsidiaries and affiliates, that the presence of a representative of a parent or affiliated company at a legal briefing of a

What we have said so far assumes the physical presence of the holding company president or his business associates at the attorney-client conference in which legal advice was given. But the specific language of Evidence Code, section 952 protects confidentiality of attorney-client communication, even when the communication is transmitted through intermediaries. Personal attendance at the legal briefing may not be necessary to preserve confidentiality of communication. The president could stay in his office, commission a deputy to report back to him on the legal advice given at the conference, and obtain the benefit of Gallagher’s confidential advice and opinions through written communications or through the oral report of his deputy. Such relayed communications are likewise protected by section 952, which preserves the confidentiality of disclosures which are reasonably necessary to transmit the information. The same is true of dissemination of legal advice and opinion to those persons to whom such information is reasonably necessary to accomplish the purpose of the legal consultation. Disclosures to such persons remain confidential, even though the recipients have not been briefed by counsel in person. In our view such persons would include all officers and employees of the INA group for whom knowledge of the legal advice sought and given was reasonably necessary for the proper performance of their duties. Consequently, all written or oral communications of legal opinions and advice given to such persons as a consequence of legal consultation of counsel remain confidential.

By way of warning, however, we point out that when the privilege is extended to cover orally relayed attorney-client communications, as section 952 indicates it is proper to do (Cf. Duplan Corporation v. Milliken (D.S.C. 1975) 397 F.Supp. 1146 ), it is probable that nice factual questions will arise involving differentiation between legal advice (which is confidential) and discussion of corporate policy (which is not). For example, if an officer of INA reported to an officer of INA Corporation on the legal advice given by Gallagher with respect to asbestos coverage, under section 952 that report would be confidential. But if, after delivery of the report, the two officers undertook to discuss what business policies the corporations should pursue in the light of Gallagher’s legal advice, the latter discussion would not be confidential under the attorney-client privilege and would be discoverable. It is apparent that as we move from the legal conference itself and written

To sum up, we construe section 952 to mean that attorney-client communications in the presence of, or disclosed to, clerks, secretaries, interpreters, physicians, spouses, parents, business associates, or joint clients, when made to further the interest of the client or when reasonably necessary for transmission or accomplishment of the purpose of the consultation, remain privileged. (San Francisco v. Superior Court (1951) 37 Cal.2d 227 , 234-237 [ 231 P.2d 26 , 25 A.L.R.2d 1418 ]; Cooke v. Superior Court (1978) 83 Cal.App.3d 582 [ 147 Cal.Rptr. 915 ]; De Los Santos v. Superior Court (1980) 27 Cal.3d 677 [ 166 Cal.Rptr. 172 , 613 P.2d 233 ].) As part of this general rule, we conclude that an officer or employee of a holding or affiliated company can receive legal advice from counsel employed by a wholly owned subsidiary or affiliate without destroying the confidentiality of the communication and, as applied to this cause, that the transmission of legal opinions and advice given by counsel for INA to representatives of IN A Corporation and its affiliates was a disclosure reasonably necessary to accomplish the corporate client’s purpose in consulting counsel and was protected from discovery by the attorney-client privilege.

I

t appears the trial court inadvertently required production of memorandums and notes of a paralegal in Gallagher’s law firm present at the briefing of March 11, 1977. Such materials, the work product of Gallagher’s law firm, are not discoverable. (Code Civ. Proc. § 2016, subds. (b) and (g).)

Let a writ of prohibition issue prohibiting the superior court from enforcing its order of April 28, 1980, and directing that court to vacate and set aside its order requiring discovery of documents and testimony relating to the proceedings of March 11, 1977. Costs to petitioner.

Compton, J., and Beach, J., concurred.

A petition for a rehearing was denied August 25, 1980, and the petition of real party in interest for a hearing by the Supreme Court was denied September 24, 1980.