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Page 410 DEFENSE COUNSEL JOURNAL–October 2012insured are a sturdy barrier against thesort of information leakage that filesplittingis intended to prevent.Although there is no duty to split afile, there are valid reasons for an insurerto split a file anyway. First, anyadministrative costs or inconvenience thatmay accompany the decision to split a filemust be weighed against the possibility ofrelated allegations of bad faith or estoppelif the file is not split. An insurer mighttherefore conclude that splitting a file is areasonable precaution even in a case inwhich the perceived need to do so isdoubtful. Any administrative costsaccompany splitting a file are certain tobe lower than the cost of litigating theissue somewhere down the line. Second,splitting a file avoids the allegedappearance of impropriety. Granted, anappearance of impropriety is too thin areed on which to base allegations of badfaith or other misconduct against aninsurer, but appearances may nonethelessmatter to an insurer for a variety ofreasons. Third, an insurer may wish tosplit a file to give the insured extraassurance of fair treatment, or to increasethe defense lawyer’s willingness to shareinformation with the adjuster handling theliability aspect of the matter and, in doingso, enhance the insurer’s ability tosuccessfully defend the case. Finally, ifan insurer anticipates litigation with itsinsured, splitting the file may in somejurisdictions enhance the insurer’s abilityto assert the attorney-client privilege orwork product immunity with respect tocoverage-related communications withthe insurer’s in-house lawyers or outsidecoverage counsel. 6565 Savrin and Kandel, supra note 57, at 54-55.If an insurer opts to split a file, itmust consider at least two logisticalissues. First, who should be screened inthe process? Clearly, the adjustersresponsible for coverage and liabilitymust be screened from one another, buthow high must the screen go? Should itextend to the adjusters’ immediatesuperiors or higher? The safe answer isthat the screen should extend up to theperson ultimately responsible for decidinghow the claim should be resolved,whether by way of settlement, trial,declaratory judgment action, or denial.How the screen should be implementedwill depend on the insurer’s informationtechnology capabilities and itsinformation and records managementsystems. Second, under whatcircumstances, if any, should the screenbe treated as permeable? In other words,it is ever appropriate for the coverage andliability adjusters to communicate aboutthe matter with one another? If so, forwhat purpose? As a practical matter, thecoverage and liability adjusters may needto communicate about matters that willbenefit the insured or which at least willnot affect the insured’s defense.Enforcing an absolute ban oncommunications in such situations wouldseem to make little sense.An insurer that opts to split a filemust also consider at least two broaderpractical issues. First, and perhaps mostfundamentally, an insurer that opts to splita file must be prepared to demonstratewhy it employed the screening proceduresit did and further that those procedureswere effective. Insurers that split filesshould therefore think carefully abouthow they document and enforce theirscreening procedures or protocols.
Splitting the File in Liability Insurance Page 411Second, an insurer that establishes aprotocol for splitting files or which hasregular procedures for doing so must beprepared to follow them uniformly out ofthe reasonable concern that the failure tofollow them in any particular case maybecome evidence of allegedly improperconduct. 66III. ConclusionDefenses under reservation of rightsoccasionally raise concerns aboutconflicts of interest between the insurerand insured, including whether (1)whether the insurer may defend the casein such a way as to defeat coverage; (2)whether the insurer may mount less than afull defense if it believes it will be able tolater deny coverage or that any ultimateloss will not be covered; or (3) whetherthe insurer will gain access to theinsured’s confidential or privilegedinformation which it can then use to itsadvantage in coverage litigation. Toguard against these possibilities and todispel later allegations of bad faith orother claims of misconduct, liabilityinsurers sometimes “split the file” in acase defended under reservation of rights.Although insurers may choose to splitfiles for several legitimate businessreasons, they have no duty to do so. Aninsurer’s failure to split a file should notsupport bad faith or estoppel allegations,nor should it give rise to any other claimsof misconduct by the insurer.66 Id. at 55 (citing Aetna Cas. & Sur. Co. v.Mitchell Bros., Inc., 814 So. 2d 191, 199 (Ala.2001) (Lyons, J., concurring in part anddissenting in part)).
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