Various courts have addressed the extent to which an insured's allegation of bad faith eviscerates an insurer's right to invoke the attorney-client privilege. While insureds argue that an allegation of bad faith is sufficient to waive the privilege, insurers argue that an insurer's right to invoke the privilege should be revocable only under the same crime/fraud exception applicable to non-insureds.
The latest court to address the issue in the first party context is the Washington Court of Appeals. In Cedell v. Farmers Ins. Co. of Washington, Case No. 38921-5-II. (Wash. App. Div. 2 Aug. 3, 2010), the court held bad faith allegations alone, even if supported by some evidence, do not eviscerate an insurer's right to attorney-client privilege. Rather, the insured must establish fraud.
In Cedell, the insured filed a bad faith action against his insurer after the insurer had not settled his claim stemming from an accidental fire at his home over a year after the incident. During the course of discovery, the insured sent interrogatories and requested documents, including the case file on the insured's claim. The insurer produced heavily redacted documents, withheld documents and refused to respond to interrogatories on the basis of attorney-client privilege and work product protection.
After finding that the facts of the case were adequate to support a good faith belief the insurer engaged in wrongful conduct, the trial court conducted an in-camera review of the redacted documents. The court ordered the insurer to produce the insured's entire claim file including all attorney-client privileged and work product documents.
On appeal, the court rejected the insured's argument that insurers have no attorney-client privilege rights in a first-party bad faith claim simply because information about the insurer's handling of the claim is central to the bad faith allegations.See also W. Va. ex rel. Allstate Ins. Co. v. Madden, 601 S.E.2d 25, 34 (W. Va. 2004) (holding filing a first-party bad faith claim action alone does not automatically waive the insurer's attorney-client privilege); cf. Dion v. Nationwide Mut. Ins. Co., 185 F.R.D. 288, 294-95 (D. Mont. 1998) (finding that first-party bad faith allegations do not automatically waive insurer's attorney-client privilege). Instead, the Washington Court of Appeals held that insurers do not lose attorney-client privilege protection unless an otherwise recognized exception, such as fraud, applies.
Importantly, the Cedell court distinguished between a prima facie showing of fraud versus a showing of bad faith. Although the trial court had found sufficient facts to support a finding of bad faith, it had not made sufficient findings to support fraud. Accordingly, without a factual basis for finding fraud, the Court of Appeals held that the trial court abused its discretion by ordering an in-camera review of the evidence and ordering disclosure and production of the privileged information.
Other courts have been less protective of the privilege. See, e.g., Hutchinson v. Farm Family Cas. Ins. Co., 867 A.2d 1, 6-7 (Conn. 2005) (holding a number of courts have concluded that the civil fraud exception should be extended to claims of bad faith against insurers); see also Allstate Indem. Co. v. Ruiz, 899 So.2d 1121, 1131 (Fla. 2005) (an insurance agent's generally protected work product was subject to discovery in a bad faith action); Adega v. State Farm Fire & Cas. Ins. Co., Case No. 07-20796-CIV (S.D. Fla. 2008 Apr. 9, 2008) (applying Ruiz decision to attorney-client privilege).
The Cedell court has it right. An insurer should be able to adjust a first-party claim with the same protections as when any other business determines its contractual rights and obligations.
While eviscerating the privilege may assist the insureds in pending cases, the long-term effect could be anti-consumer. If the insurer's analyses and considerations are subject to discovery, insurers will not receive the candid views that otherwise might support settlement.
Lew Hassett is Co-Chairman of the firm's Insurance and Reinsurance Practice. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Mr. Hassett received his bachelor's degree from the University of Miami and his law degree from the University of Virginia.
Cindy Chang is an Associate in the firm's Insurance and Reinsurance Practice. Her practice includes an array of insurance and reinsurance dispute, regulatory and corporate matters. Ms. Chang received her bachelor's degree from Washington University and her law degree from Washington University School of Law.
