Bad faith complaints present unique challenges for insurers (and their lawyers) with respect to the attorney-client privilege: if the insurer’s state of mind is in question, the legal advice on which the insurer relies is also in question, renouncing the privilege? And if so, under what circumstances? The following addresses this issue in the context of a common practice for insurance lawyers – authoring letters of denial – and two recent participations that should serve as warnings in this practice.
I. Waiver of the Lawyer-Client Privilege: Legal Advice vs. Insurer’s Coverage Decision
In cases involving bad faith claims, the courts are relatively clear that an insurer waives its attorney-client privilege when it expressly invokes the defense of “attorney’s counsel”, which generally states that “when an insurer’s shares are in In accordance with the counsel given to her by the lawyer, the insurer’s actions are taken in good faith and, therefore, the essential element that an injured insured must demonstrate when establishing the insurer’s bad faith is nullified. ” However, courts are less united on whether a waiver occurs when the insurer receives advice from its attorney when making its coverage decision, but does not expressly state the “defense counsel”.
Most courts dismiss waiver claims under these circumstances, recognizing the difference between (a) the lawyer’s advice on the law and (b) the insurer’s final decision to provide coverage or not. The latter is relevant to a claim of bad faith, but the former is not. On the other hand, some courts have held that, under certain circumstances, the insurer waives its attorney-client privilege by relying on legal advice – even without actually invoking the defense of “attorney’s advice”. The Arizona Supreme Court summarized the underlying reasoning as follows:
When a litigant seeks to establish his mental state by claiming that he acted after investigating the law and arriving at a well-founded belief that the law allowed the action he took, then the extent of his investigation and the basis for his subjective assessment are questioned. Thus, the advice received from the lawyer as part of his investigation and assessment is not only relevant, but in an issue like this, inextricably intertwined with the court’s truth-seeking functions.
II. Letters of denial authored by insurance attorney
This issue of attorney-client privilege has recently spread to a new battleground, which is a common practice for insurance lawyers: writing letters of denial. In order to deal with the resignation under these circumstances, some courts continued the majority’s reasoning, reinforcing the distinction between the legal opinion of the lawyer and the insurer’s final decision on granting coverage. However, two recent decisions are expected to serve as a warning to insurers and their lawyers in the future.
The first is Canyon Estates Condo. Ass’n v. Atain Specialty Ins. Co., in which the Western District of Washington considered that the insurer’s outside attorney did not perform “a privileged task” when he wrote and sent letters of denial directly to the insured. The court explained that Washington law imposes the presumption that “there is no relevant attorney-client privilege between the insured and the insurer in the claims adjustment process”, which the insurer can overcome “by showing that his attorney was not involved in the quasi-fiduciary process tasks of investigating and evaluating or processing the claim, but instead provide the insurer with advice on its own potential liability ”, such as“ whether or not there is coverage under the law ”.
In concluding that the insurer had not overcome this presumption in relation to the letters of denial, the court explained that the lawyer “clearly – and arguably, knowingly – was involved in at least some quasi-fiduciary activities, including the drafting of letters of letters signed by [the insurer] and sent to [the insured] related to coverage and claims processing. “ Although the writing of the denial letter certainly involved legal issues in relation to coverage, the court argued that “when the insurer’s attorney is involved in quasi-fiduciary and hedging or liability capabilities”, a waiver of privilege is likely to occur because “the analysis legal counsel and recommendations to the insurer regarding liability in general or coverage in particular will most likely imply the work performed and the information obtained in your quasi-fiduciary capacity. ” Important, though Canyon Estates involve claims in bad faith, the court’s reasoning offers no indication that the presence of such claims was essential to its decision. In fact, the district court did not mention “bad faith” at all, which suggests that insurers and their lawyers may face challenges of privilege, even when the insured does not make allegations of bad faith.
The second warning is Travelers Prop. Cas. Co. of Am. V. 100 Renaissance, LLC, in which the Mississippi Supreme Court found that an insurer waived its attorney-client privilege when its internal attorney wrote letters of denial, which were then sent from the expert to the insured. Initially, the insurer denied the insured’s claim because it did not involve an “automobile” covered by the policy. The insured’s attorney then sent a lengthy legal review to the insurer’s appraiser, arguing that a specific Mississippi statute required coverage. The expert was not a lawyer and therefore sought the advice of the insurer’s internal lawyer, who then wrote a letter (on behalf of the expert) that reaffirmed why – under Mississippi policy and statutes – coverage was not needed. Ultimately, the insured made claims against the insurer in bad faith and sought a deposition from the insurer’s internal attorney, along with emails between the attorney and the expert.
The Mississippi Supreme Court concluded that the insurer waived the attorney-client privilege, explaining that “if the claims handler trusted substantially, if not fully, on the internal board to prepare your letter of denial, the internal board’s reasoning must be discovered. “ The court argued that, although the insurer sent the letter “in an effort to explain its arguable and legitimate basis for denying the claim”, the expert’s testimony made it clear that she did not really understand the legal basis for the denial and therefore the letter only represented the attorney reasons to deny the complaint – no of the insurer. According to the court, this meant that the lawyer did more than just “act as a lawyer and advise [the adjuster] to include in the denial letter. “ Approvely citing the Arizona Supreme Court ruling on Lee, the court explained:
[A] litigant cannot wield the sword with one hand – stating as a defense that, as required by law, he made a reasonable investigation of the state of the law and in good faith drew conclusions from that investigation – and with the other hand raised the shield – using the privilege to prevent the jury from discovering what its employees really did, learned and gained from the investigation.
As in Lee, the heart of this decision is the rejection of any distinction between (a) the lawyer’s advice on the law and (b) the insurer’s final decision to provide coverage or not. However, whether the insurer can articulate that advice, as well as its attorney should be irrelevant as to whether the coverage decision itself had a solid legal basis – an issue where disagreement 100 Renaissance underlined. Without this distinction, privilege would appear to be at risk in all cases involving claims of bad faith (and perhaps even those without such claims) where legal analysis is at least a partial basis for denial. And given the wide range of legal, common and interpretive issues that inform each decision, this will be a frequent occurrence.
This leaves an insurer (and the appraiser in particular) with two options: (a) trying to interpret the law itself without the help of a lawyer, or (b) asking the insurer’s lawyer for legal advice, in which case your communications will be subject to discovery. , unless the insurer can sufficiently re-articulate the legal analysis. Therefore, in both cases, the insurer must be able to explain frequently complex legal issues. Dissent in 100 Renaissance exactly described this dilemma: “Most therefore seem to impose the requirement that, to preserve privilege, a claims manager must be able to explain the legal arguments in her testimony – the same legal issues for which she sought advice in first place. “ In addition, they are also the same legal issues that the insured should have your lawyer explain, with which the insurer’s board then disagreed. As a result, not only should the insurer be able to articulate legal analyzes, but also for issues where legal professionals differ. In fact, both the majority and the dissent in 100 Renaissance they really seem to recognize this, but come to totally different conclusions.