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)

First Lattes, Then Legal Precedent: Waiver Of Attorney-Client Privilege In Bad Faith Cases

What happens in Washington may not stay in Washington.  Earlier this year, the Washington Supreme Court addressed the scope of the attorney-client privilege and work product for an insurer defending against a bad faith claim brought by its insured. See Cedell v. Farmers Ins. Co. of Washington, 176 Wash. 2d 686, 295 P.3d 239 (2013).  In that case, the insured filed suit against his homeowners insurer for bad faith when it refused to pay his fire loss claim for a year after the loss. The insurer retained coverage counsel to assist in its evaluation of the claim. During discovery, the insurer produced a heavily redacted copy of its claim file, including a privilege log that cited the attorney-client privilege and work product as bases for more than 200 redactions and withholdings. The insured filed a motion to compel, claiming that the attorney-client and work product privileges did not apply in bad faith litigation. The insurer moved for a protective order.

The trial court conducted an in cameralock and chainreview of the redacted documents and decided that the attorney-client privilege would never apply because “[i]n the context of a claim arising from a residential fire, the insurer owes the insured a heightened duty—a fiduciary duty, which by its nature is not, and should not be adversarial.” The trial court also found that the insured was entitled to the insurer’s work product and awarded sanctions and attorney’s fees against the insurer.

On appeal, the Washington Supreme Court held that when an insured brings a first-party bad faith claim against its insurer, attorney-client privilege and work product protection are presumptively not relevant to claims adjustment communications.  The court in Cedell outlined a process by which the insurer may overcome this presumption: