Is a carrier’s claim file covered by attorney-client privilege?
When an insurer denied liability for a bad faith lawsuit, the plaintiff argued that the denial waived the attorney-client privilege over the claim files.
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When an insurer is sued for bad faith and answers the complaint by denying liability, does it waive the attorney-client privilege and can it be required to produce its claim file? If the South Carolina Supreme Court agrees to answer this question, it will affect insurance bad faith cases in that state, and perhaps elsewhere across the country.
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The case
Mount Hawley Insurance Company provided ContraVest Construction Company with excess commercial liability insurance from July 21, 2003, to July 21, 2007. During that period, Contravest constructed the Plantation Point development in Beaufort County, S.C.
In 2011 the Plantation Point Horizontal Property Regime Owners Association sued Contravest for alleged defective construction of Plantation Point. Mount Hawley refused Contravest’s demands to defend or indemnify Contravest in the suit, as Contravest contended was required by its insurance policies, and Contravest ultimately settled the case.
Contravest and the owners association subsequently sued Mount Hawley, alleging bad faith failure to defend or indemnify, breach of contract, and unjust enrichment.
During discovery, the plaintiffs sought production of Mount Hawley’s file on Contravest’s claim for excess coverage relating to the Plantation Point suit and Mount Hawley’s files relating to all of Contravest’s claims under its excess liability policies.
Mount Hawley contended that these files contained material protected by the attorney-client privilege, and it produced the files in redacted form with accompanying privilege logs.
The plaintiffs filed multiple motions to compel, arguing that Mount Hawley had waived the attorney-client privilege as to these files.
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The district court’s decision
The U.S. District Court for the District of South Carolina granted the motions to compel and ordered Mount Hawley to produce the files for inspection in the judge’s chambers.
In finding that Mount Hawley’s files were not protected by South Carolina’s attorney-client privilege, the district court relied on City of Myrtle Beach v. United Nat. Ins. Co. [No. 4:08-1183-TLW-SVH (D.S.C. Aug. 27, 2010)]. That case also involved a bad faith insurance suit under South Carolina law in which the insured sought to compel the insurer to produce the claims file, and the insurer argued that the file contained material protected by the attorney-client privilege.
The district court in City of Myrtle Beach adopted the approach articulated in Hearn v. Rhay [68 F.R.D. 574 (E.D. Wash. 1975)], as “consistent with established South Carolina law.” Applying Hearn, the district court in City of Myrtle Beach found that there was no per se waiver of the attorney client privilege simply by a plaintiff making allegations of bad faith. However, if a defendant voluntarily injected an issue in the case, whether legal or factual, the insurer voluntarily waived, explicitly or impliedly, the attorney-client privilege. Thus “voluntarily injecting” the issue was not limited to asserting the advice of counsel as an affirmative defense. A party’s assertion of a new position of law or fact could be the basis of waiver.
Applying this definition of waiver, the court in City of Myrtle Beach found that “[f]or the purposes of the motion to compel, … the [insured] has presented a prima facie case of bad faith,” and the insurer failed to meet its burden of establishing the absence of waiver of the attorney-client privilege on account of the defenses asserted in its answer, including that the insurer had acted reasonably and in good faith. The court in City of Myrtle Beach noted that “[w]hile this ruling amounts to a virtual per se waiver of the privilege in this case, this result is based on the facts and issues presented by [the insurer] in its Answer and its failure to meet its burden as to the applicability of the privilege with this in mind.”
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It’s about ‘balance’
In Mount Hawley’s case, the district court rejected Mount Hawley’s argument that City of Myrtle Beach was inconsistent with South Carolina law in light of the fact that one member of the Supreme Court of South Carolina had criticized the Hearn decision in a separate opinion concurring in part and dissenting in part. [Davis v. Parkview Apartments, 762 S.E.2d 535, 549-51 (S.C. 2014)] The district court found “that the numerous decisions that have applied City of Myrtle Beach in this district provide stronger evidence [than the separate opinion in Davis] that the Supreme Court of South Carolina would adopt such an approach.” The district court also concluded that this approach struck the best balance between the “important policy goals of the attorney-client privilege … against the substantive interests underlying an insured bad faith claim.”
Following the approach articulated in City of Myrtle Beach, the district court concluded that because the plaintiffs had established a prima facie case of bad faith failure to insure, and Mount Hawley in its answer had denied bad faith liability, Mount Hawley had waived the attorney-client privilege with respect to the attorney-client communications in the claim files, to the extent such communications were relevant under federal procedural rules.
The district court thus ordered Mount Hawley to produce the files for its review.
After the district court denied Mount Hawley’s motion for reconsideration, the insurer appealed to the U.S. Court of Appeals for the Fourth Circuit for a ruling to vacate the district court’s order granting the motions to compel.
In its appeal, Mount Hawley challenged the district court’s holding that the files were not protected by the attorney-client privilege because Mount Hawley had put them “at issue” in the case by denying liability for bad faith failure to defend or indemnify.
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The Fourth Circuit’s decision
The Fourth Circuit didn’t directly address the question of attorney-client privilege in this case; it punted. In its opinion, the Fourth Circuit explained that if South Carolina law did not support the “at issue” exception applied in City of Myrtle Beach, the district court’s order granting the motions to compel was erroneous.
The circuit court said that it found no South Carolina authority that appeared to definitely answer this question, and it certified the following question of law to the Supreme Court of South Carolina: Does South Carolina law support application of the “at issue” exception to the attorney-client privilege such that a party may waive the privilege by denying liability in its answer?
The case is In re Mt. Hawley Ins. Co., No. 18-1401 (4th Cir. June 28, 2018).
Editor’s note: The final answer will depend on whether the Supreme Court of South Carolina accepts the certified question and, if it does, on what it decides. No matter what the court says, however, the underlying bad faith lawsuit remains to be resolved.
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Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is director of FC&S Legal, editor-in-chief of Insurance Coverage Law Report, and founder and president of Meyerowitz Communications Inc.