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What You Say Could Be "At Issue" - Waiver of the Attorney-Client Privilege in Bad Faith Cases

December 04, 2017 BY Sarah Dumbacher

Not every communication that falls within the scope of the attorney-client privilege is entitled to protection. Under certain circumstances, the privilege may be considered implicitly waived when justice so requires. This is because the public policy of protecting confidential attorney-client communications must be balanced against the equally strong public interest in the proper administration of justice. State v. Doster, 276 S.C. 647, 284 S.E.2d 218 (1981). Courts have found this especially true in bad faith insurance cases which by their nature “turn heavily on what an insurer knew at the time a coverage decision was made.” ContraVest Inc. v. Mt. Hawley Insurance Company, 2017 WL 1190880 (D.S.C. March 31, 2017). Accordingly, such concerns have led to varying restrictions on the availability of the privilege in bad faith cases and claims professionals should be mindful of the restrictions imposed in their respective jurisdictions.

Some courts have held that the attorney-client privilege is simply inapplicable in bad faith cases, in essence finding a per se waiver of the privilege. E.g. Boone v. Vanliner Ins. Co., 91 Ohio St.3d 209, 744 N.E.2d 154, 158 (2001). Specifically, the Ohio Supreme Court has held that “in an action alleging bad faith denial of insurance coverage, the insured is entitled to discover claims file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of coverage.” Id.; see also In re Bergeson, 112 F.R.D. 692 (D.Mont. 1986).

Other jurisdictions have held that the attorney-client privilege is waived when an insurer asserts its good faith in the handling of a claim or specifically raises advice of counsel as a defense. E.g. Jones v. Nationwide Ins. Co., 2000 WL 1231402 (M.D. Pa. 2000); see also Allstate Ins. Co. v. Clancey, 936 N.E.2d 2010).  Such decisions are based on the theory that advice of counsel is “intrinsically woven” into such claims or using a low “relevance” standard.

In the middle of the divergent caselaw on attorney-client privilege are courts that require an affirmative act by the insurer that places the advice of counsel “at issue” in order for waiver of the privilege to apply. The leading opinion in this group of cases is Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash 1975). In Hearn, the District Court for the Eastern District of Washington set forth three criteria material to the determination of whether an insurer has implicitly waived the attorney-client privilege: “(1) assertion of the privilege was the result of some affirmative act, such as filing suit or raising an affirmative defense, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” However, these criteria were to only be used after a “substantial showing of merit [of the] plaintiff’s case.” 

While Hearn involved an inmate’s civil rights action against prison officials under 42 U.S.C. § 1983, the criteria set forth in that decision have been widely applied to bad faith insurance cases. See City of Myrtle Beach v. United Nat. Ins. Co., 2010 WL 3420044 (D.S.C. 2010); Lorenz v. Valley Forge Ins. Co., 815 F.2d 1095 (7th Cir. 1987). In City of Myrtle Beach, the District Court for the District of South Carolina opined in relation to a first-party property bad faith case that there was “no per se waiver of the attorney-client privilege simply by a plaintiff making allegations of bad faith.” After finding that the insured had made a prima facie showing of bad faith, the Court turned to the insurer’s defenses and allegations to determine whether there had been any waiver of the attorney-client privilege. The Court explained that if a defendant insurer “voluntary injects an issue in the case, whether legal or factual, the insurer voluntarily waives, explicitly or impliedly, the attorney-client privilege.” More specifically, the Court found that the insurer’s affirmative defenses asserted in the Complaint, including that the insurer had acted reasonably and in good faith, along with its denials of factual allegations made by Plaintiff,  “injected into [the] case… issues of law and fact contained in the documents for which [the insurer] seeks attorney client protection.” Accordingly, the insurer was said to have waived its attorney-client privilege with respect to those documents and was ultimately compelled to produce them.

Explained another way, attorney-client communications are put in issue when a “client asserts a claim or defense, and attempts to prove that claim or defense by disclosing or describing an attorney-client communication.” See Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851 (3rd Cir. 1994). If the party by some specific act or assertion puts the content of counsel’s advice behind its claim of good faith, the advice becomes a factual basis of a defense and will thus no longer be protected by the attorney-client privilege. See First South Bank v. Fifth Third Bank, 2013 WL 1840089 (D.S.C. May 1, 2013).

In sum, the attorney-client privilege is not to be used by insurers as both a sword and a shield.  Courts are increasingly allowing insureds access to privileged communications in bad faith actions, when such information would ultimately be used to prove an insurer’s good faith defense. Claims professionals and attorneys alike must be mindful of this trend throughout the claim process. Efforts that can be made to curb the impact of these recent court decisions include seeking advice of counsel only when necessary and limiting individuals involved in a conference call or roundtable to only those individuals that are needed for particular items being discussed. Such efforts will help limit unnecessary attorney-client communication that would otherwise be protected by the anticipation of litigation privilege had the attorney not been present. 

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)