On September 12, 2012, the Ninth Circuit became the first circuit court to consider the Third Circuit’s holding in Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007), that the ERISA “fiduciary exception” to the attorney-client privilege did not apply to an insurer making claims decisions in a fiduciary capacity. In a brief discussion within an opinion addressing a number of other issues as well, the Ninth Circuit declined to follow Wachtel. Stephan v. Unum Life Insurance Co. of America, No. 10-16840, 3:08-cv-01935-MHP (9th Cir. Sept. 12, 2012).

Since the 1980s, a number of courts, including the Ninth Circuit, have recognized a “fiduciary exception” to the attorney-client privilege in the context of ERISA. In litigation initiated by plan beneficiaries (or sometimes by the government), courts have required production of legal advice given to plan fiduciaries in the context of plan administration, on the theories that the fiduciaries are acting for the benefit of the beneficiaries and/or that disclosure obligations of ERISA fiduciaries extend to legal advice they have received. This “fiduciary exception” has been subject to a number of limitations and exceptions.

One such limitation was found by the Third Circuit in Wachtel v. Health Net, Inc. which rejected the application of the fiduciary exception to an insurer making claims decisions in a fiduciary capacity. The Third Circuit based its conclusion that the plan participants were not the true beneficiaries of the legal advice in question on four factors. First, unlike the traditional situation in which the fiduciary exception had been applied where the fiduciary was managing assets over which it lacked ownership rights, the insurer was making decisions with respect to claims paid from its own assets. Second, the court reasoned that there was a structural conflict of interest when an insurer was making eligibility decisions regarding benefits paid from its own funds and that this structural conflict undermined the argument that the insurer’s counsel was providing advice for the benefit of the plan beneficiaries. Third, the court reasoned that there was an additional structural conflict where an insurer was responsible for making decisions for multiple benefit plans at once. Fourth, the court also noted that the insurer paid for the legal advice with its own assets, not the assets of the plan or its beneficiaries. Under these facts, the court concluded that the insurer was the real client of counsel and that the fiduciary exception therefore should not apply.