If the issues in a declaratory relief action over insurance coverage overlap the issues in the underlying litigation against the insured, the insurer cannot, over the insured’s objection, use the declaratory relief action as a forum to litigate factual issues affecting the insured’s liability in the underlying action. The insurer cannot use the discovery process in the declaratory relief action to investigate or develop facts that are logically related to issues affecting the insured’s liability in the underlying action. The court in the declaratory relief action must stay any discovery aimed at facts relating to such issues. A confidentiality order in the declaratory relief action is no substitute for the required stay because (a) if the insurers use the discovered information in the declaratory relief action, the insured could be collaterally estopped in the underlying action, and (b) if the information is obtained in the declaratory relief action, the insured bears the expense of producing it, whereas if it’s produced in the underlying action the defending insurers bear the expense. However, the insured must produce a privilege log of any documents it withheld from prior productions in the declaratory relief action—though not a privilege log of its future privileged communications about the underlying action.
California Court of Appeal (Menetrez, J., sitting by assignment); August 23, 2017; 2017 WL 3614305