South Carolina Supreme Court Rules on Attorney Client Privilege Treatment in Bad Faith Law

The SC Supreme Court recently addressed a novel issue of how attorney-client privilege is treated  with regard to insurance bad faith law.  The issue arose out of a construction defect lawsuit when the Insurer failed to defend its Insured, a contractor.  After settling out of the case personally, the Insured sued the Insurer for bad faith refusal to defend.  In discovery, the Insured sought the Insurer’s claim file including correspondence between the Insurer and its attorneys.  The Insurer claimed privilege over those communications, but the Insured argued that the Insurer’s denial of liability for bad faith and its affirmative defense of “good faith” resulted in waiver of the attorney-client privilege.  The discovery dispute ultimately found its way to the SC Supreme Court.

The Court held that a denial of bad faith and/or the assertion of good faith by an insurer does not, standing alone, place a privileged communication “at issue” such that the attorney-client privilege is automatically waived.  Instead, the Court adopted a middle-ground, case-by-case approach akin to Arizona law.  Per the Court’s holding, a client does not waive the attorney-client privilege simply by bringing or defending a lawsuit; rather, waiver requires the additional interjection of the issue of advice of counsel (either expressly or implicitly) by the client.  In other words, whether or not “advice of counsel” is raised as an affirmative defense, if the client defends based on the affirmative theory that the client’s mental state at the time at issue (such as when the Insurer denied the Insured’s claim) was based on an evaluation of the law and the facts then existing, such would equate to putting the legal evaluation “at issue” and thus result in a waiver of the privilege.

In re: Mt. Hawley Ins. Co., Op. No. 27892 (S.C. Sup. Ct., June 12, 2019)