Yes, Virginia, There is an “Insurance Compliance Self-Evaluative Privilege”

In 1897, 8-year-old Virginia O’Hanlon sent a letter to the editor of the New York Sun newspaper asking if Santa Claus existed.  The paper’s editor, Francis Pharcellus Church, responded in an Virginniaeditorial declaring “Yes, Virginia, there is a Santa Claus.”  You may read about this story on the Newseum’s website, accessible here.

While no one has asked a newspaper (or me) whether there is an Insurance Compliance Self-Evaluative Privilege, I am certain the legal public has this question on its collective mind.  So, I will end everyone’s anxiety by stating, yes, Virginia, there is an Insurance Compliance Self-Evaluative Privilege, but only in certain states.

Model Act

In 1988, the National Conference of Insurance Legislators (NCOIL) adopted a model act titled Insurance Compliance Self-Evaluative Privilege Model Act, which you can access here. The purpose of this act is to encourage insurance companies conducting activities regulated by a state insurance agency to conduct voluntary internal audits of their compliance with state and federal regulations.

The Privilege

To further this purpose, the act creates an evidentiary privilege that protects from discovery an “insurance compliance self-evaluative audit document,” which the act broadly defines as documents prepared as a result of or in connection with an insurance compliance audit.  The privilege specifically covers an audit report prepared by an auditor, memoranda analyzing all or portions of the insurance-compliance audit, discussions of implementation issues, and implementation plans that address correcting past non-compliance or preventing future non-compliance.

The privilege also precludes the examination in any civil, criminal, or administrative proceeding an insurance company’s employee or consultant hired for the purpose of conducting an insurance-compliance audit.

Exceptions

The privilege does not protect documents, communications, data, reports, and other information that an insurance agency expressly requires the insurance company to collect, develop, or maintain. There are two exceptions to the privilege: when asserted for a fraudulent purpose or the self-audit contains evidence relevant to the commission of a criminal offense.

Selective Waiver

The model act includes a selective-waiver provision that permits the insurance company to voluntarily disclose self-audits without fear that the disclosure will constitute privilege waiver in subsequent state litigation.   And to the extent that a state insurance agency has authority to compel a self-audit, this disclosure likewise does not operate as a privilege waiver in subsequent litigation.

An unanswered yet significant issue, however, is whether federal courts would adhere to the state-law selective waiver provision or rule that disclosure to a state insurance agency amounts to privilege waiver.  Fed. R. Evid. 502(a) is of no help because it applies only to disclosures to federal agencies.

Where Does the Privilege Apply?

Several legislatures have adopted, in some form, the Insurance Compliance Self-Evaluative Privilege, including Arizona, District of Columbia, GeorgiaHawaii, Illinois, Kansas, Michigan, New Jersey, North Dakota, Oklahoma, and Oregon.  The Washington Legal Foundation issued an advocacy piece, which you may access here, that outlines benefits of the privilege in today’s regulatory environment.

Is this privilege on your state legislature’s radar?