Claims of bad faith present unique challenges for insurers (and their counsel) with respect to attorney-client privilege: if the insurer\u2019s state of mind is at issue, is the legal advice on which the insurer relied also at issue, thereby waiving the privilege? And if so, under what circumstances? The following addresses this issue in the context of a common practice for insurance counsel\u2014authoring denial letters\u2014and two recent holdings that should serve as warnings in this practice.<\/p>\n\n\n\n
I. Waiving Attorney-Client Privilege: Legal Advice vs. Insurer\u2019s Coverage Decision<\/strong><\/p>\n\n\n\n In cases involving claims of bad faith, courts are relatively clear that an insurer waives its attorney-client privilege when it expressly invokes the \u201cadvice of counsel\u201d defense, which generally provides that \u201cwhen an insurer\u2019s actions are in conformity with advice given to it by counsel, the insurer\u2019s actions are taken in good faith, and thus the essential element that an aggrieved insured must demonstrate in establishing insurer bad faith is nullified.\u201d[1]<\/a> 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 assert the \u201cadvice of counsel\u201d defense.<\/p>\n\n\n\n Most courts reject claims of waiver under these circumstances, recognizing the difference between (a) the attorney\u2019s advice on the law and (b) the insurer\u2019s ultimate decision to provide coverage or not. The latter is relevant to a claim of bad faith, but the former is not.[2]<\/a> By contrast, some courts have held that under certain circumstances, the insurer waives its attorney-client privilege by relying on legal advice\u2014even without actually invoking the \u201cadvice of counsel\u201d defense. The Supreme Court of Arizona summarized the underlying rationale as follows: <\/p>\n\n\n\n When a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question. Thus, the advice received from counsel as part of its investigation and evaluation is not only relevant but, on an issue such as this, inextricably intertwined with the court\u2019s truth-seeking functions.[3]<\/a><\/p>\n\n\n\n II. Insurance Counsel Authoring Denial Letters<\/strong><\/p>\n\n\n\n This attorney-client privilege issue has recently spread to a new battleground, and one which is common practice for insurance counsel: authoring denial letters. To address waiver under these circumstances, some courts have continued the majority rationale by reinforcing the distinction between the attorney\u2019s legal advice and the insurer\u2019s ultimate decision whether to grant coverage.[4]<\/a> However, two recent decisions should serve as warnings to insurers and their attorneys moving forward.<\/p>\n\n\n\n The first is Canyon Estates Condo. Ass\u2019n v. Atain Specialty Ins. Co<\/em>., in which the Western District of Washington held that the insurer\u2019s outside counsel did not perform \u201ca privileged task\u201d when it authored and sent denial letters directly to the insured.[5]<\/a> The court explained that Washington law enforces a presumption that \u201cthere is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process,\u201d which the insurer may overcome \u201cby showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability,\u201d such as \u201cwhether or not coverage exists under the law.\u201d[6]<\/a><\/p>\n\n\n\n Concluding that the insurer had not overcome this presumption with respect to the denial letters, the court explained that the attorney \u201cclearly\u2014and arguably, knowingly\u2014engaged in at least some quasi-fiduciary activities, including the authoring of draft letters signed by [the insurer] and sent to [the insured] related to coverage and claims processing.\u201d[7]<\/a> Although drafting the denial letter surely involved legal questions regarding coverage, the court reasoned that \u201cwhere the insurer\u2019s attorney is involved in both quasi-fiduciary and coverage or liability capacities,\u201d waiving privilege is likely to occur because \u201ccounsel\u2019s legal analysis and recommendations to the insurer regarding liability generally or coverage in particular will very likely implicate the work performed and information obtained in his or her quasi-fiduciary capacity.\u201d[8]<\/a> Importantly, although Canyon Estates<\/em> did involve claims of bad faith, the court\u2019s reasoning offers no indication that the presence of such claims was essential to its decision. Indeed, the district court did not mention \u201cbad faith\u201d at all, which suggests that insurers and their attorneys could face privilege challenges even when the insured does not assert claims of bad faith. <\/p>\n\n\n\n The second warning is Travelers Prop. Cas. Co. of Am. v. 100 Renaissance, LLC<\/em>, in which the Supreme Court of Mississippi held that an insurer waived its attorney-client privilege when its in-house counsel ghostwrote denial letters, which were then sent from the adjuster to the insured.[9]<\/a> Initially, the insurer had denied the insured\u2019s claim because it did not involve a covered \u201cauto\u201d under the policy.[10]<\/a> The insured\u2019s attorney then sent a lengthy legal analysis to the insurer\u2019s adjuster, arguing that a particular Mississippi statute mandated coverage.[11]<\/a> The adjuster was not an attorney, and therefore sought advice from the insurer\u2019s in-house counsel, who then penned a letter (in the adjuster\u2019s name) that reaffirmed why\u2014under the policy and Mississippi statutes\u2014coverage was not required.[12]<\/a> Ultimately, the insured asserted claims against the insurer for bad faith, and sought a deposition of the insurer\u2019s in-house counsel, along with emails between counsel and the adjuster.[13]<\/a><\/p>\n\n\n\n The Supreme Court of Mississippi concluded that the insurer waived its attorney-client privilege, explaining that \u201cif the claims handler relied substantially, if not wholly<\/em>, on in-house counsel to prepare her denial letter, the reasoning of in-house counsel should be discoverable.\u201d[14]<\/a> The court reasoned that although the insurer sent the letter \u201cin an effort to explain its arguable and legitimate basis to deny the claim,\u201d the adjuster\u2019s testimony made clear that she did not actually understand the legal basis for the denial, and therefore the letter merely represented the attorney\u2019s<\/em> reasons for denying the claim\u2014not the insurer\u2019s<\/em>.[15]<\/a> According to the court, this meant that the attorney did more than just \u201cact as legal counsel and give advice to [the adjuster] to include in the denial letter.\u201d[16]<\/a> Citing with approval the Supreme Court of Arizona\u2019s decision in Lee<\/em>, the court explained: <\/p>\n\n\n\n [A] litigant cannot with one hand wield the sword\u2014asserting as a defense that, as the law requires, it made a reasonable investigation into the state of the law and in good faith drew conclusions from that investigation\u2014and with the other hand raise the shield\u2014using the privilege to keep the jury from finding out what its employees actually did, learned in, and gained from that investigation.[17]<\/a><\/p>\n\n\n\n Like in Lee<\/em>, the heart of this decision is the rejection of any distinction between (a) the attorney\u2019s advice on the law and (b) the insurer\u2019s ultimate decision to provide coverage or not. Yet, whether the insurer can articulate that advice as well as its attorney should be immaterial to whether the coverage decision itself had sound legal basis\u2014an issue which the dissent in 100 Renaissance<\/em> underscored.[18]<\/a> Without this distinction, privilege would seemingly be at risk in every case involving claims of bad faith (and perhaps even those without such claims) where legal analysis is at least a partial basis for the denial. And given the vast array of statutory, common law, and interpretive issues that inform each decision, this will be a frequent occurrence.<\/p>\n\n\n\n This leaves an insurer (and the adjuster in particular) with two choices: (a) try to interpret the law itself without help from legal counsel, or (b) ask the insurer\u2019s attorney for legal advice, in which case their communications will be subject to discovery unless the insurer can sufficiently re-articulate the legal analysis. Thus, in either case, the insurer must be able to explain often-complex legal issues. The dissent in 100 Renaissance<\/em> described this exact dilemma: \u201cThe majority thus appears to impose a requirement that in order to preserve the privilege, a claims handler must be able to explain legal arguments at her deposition\u2014the same legal issues for which she sought advice in the first place.\u201d[19]<\/a> Not only that, these are also the same legal issues that the insured had to have its attorney<\/em> explain, with which the insurer\u2019s counsel then disagreed. As a result, not only must the insurer be able to articulate legal analyses, it must do so for issues on which legal professionals diverge. Indeed, both the majority and dissent in 100 Renaissance<\/em> actually appear to acknowledge this, yet arrive at starkly different conclusions.[20]<\/a><\/p>\n\n\n\n [1]<\/a> James M. Fischer, Should Advice of Counsel Constitute a Defense for Insurer Bad Faith<\/em>, 72 Tex. L. Rev. 1447, 1461\u201362 (1994).<\/p>\n\n\n\n [2]<\/a> See<\/em> Aetna Casualty & Sur. Co. v. Superior Court<\/em>, 153 Cal. App. 3d 467, 475 (Cal. Ct. App. 1984) (insurer did not waive privilege because it did not invoke \u201cadvice of counsel\u201d defense, but instead \u201cclaim[ed] it acted as it did not because it was advised to do so, but because the advice was, in its view, correct; and it is prepared to defend itself on the basis of that asserted correctness rather than the mere fact of the advice. Such a defense does not waive the attorney-client privilege\u201d); Botkin v. Donegal Mut. Ins. Co<\/em>., 2011 U.S. Dist. LEXIS 63871, *19 (W.D. Va. 2011) (\u201cThere would be little point in retaining coverage counsel to issue an opinion if a party did not intend to rely on it. Likewise, if reliance always gave rise to waiver in this circumstance, no one would seek coverage counsel\u2019s advice.\u201d); Palmer by Diacon v. Farmers Ins. Exch<\/em>., 261 Mont. 91, 110 (Mont. 1993) (\u201cThe attorney-client privilege applies unless the insurer directly relies on advice of counsel as a defense to the bad faith charge<\/em>.\u201d) (emphasis in original) (citations omitted).<\/p>\n\n\n\n [3]<\/a> State Farm Mut. Auto. Ins. Co. v. Lee<\/em>, 199 Ariz. 52, 60 (Ariz. 2000); see<\/em> Tackett v. State Farm Fire & Casualty Ins. Co<\/em>., 653 A.2d 254, 260 (Del. 1995) (when \u201can insurer makes factual representations which implicitly rely upon legal advice as justification for non-payment of claims, the insurer cannot shield itself from disclosure of the complete advice of counsel relevant to the handling of the claim\u201d); but see<\/em> Bertelsen v. Allstate Ins. Co<\/em>., 796 N.W.2d 685, 703 (S.D. 2011) (finding that the Supreme Court of Arizona\u2019s decision in Lee<\/em> went \u201ctoo far.\u201d).<\/p>\n\n\n\n [4]<\/a> See<\/em> Liberty Corp. Capital Ltd. v. Palmetto Bluff Shooting Club, LLC<\/em>, 2020 U.S. Dist. LEXIS 220654, *11 (D. S.C. 2020) (drafting denial letter does not waive privilege because \u201c[b]ased on counsel\u2019s advice, the client will always have subjective evaluations of its claims and defenses,\u201d and therefore \u201cinsurer must take one step further and assert that its denial of the claim is objectively reasonable because it relied on the advice of counsel\u201d) (citations omitted); Barnard Pipeline, Inc. v. Travelers Prop. Cas. Co. of Am<\/em>., 2014 U.S. Dist. LEXIS 53778, *9 (D. Mont. 2014) (insurer\u2019s attorney drafted denial letter, but \u201cinsurer has not asserted the defense of advice of counsel, and therefore has not waived the attorney-client privilege, simply because the insurer\u2019s representative admits in response to a question on cross-examination that he\/she listened to advice of counsel in deciding to deny an insured\u2019s claim.\u201d).<\/p>\n\n\n\n [5]<\/a> 2020 U.S. Dist. LEXIS 10915, *4 (W.D. Wash. 2020).<\/p>\n\n\n\n [6]<\/a> Id<\/em>. at *2\u20133 (citations omitted).<\/p>\n\n\n\n [7]<\/a> Id<\/em>. at *4.<\/p>\n\n\n\n [8]<\/a> Id<\/em>. at *3\u20134 (citations omitted).<\/p>\n\n\n\n [9]<\/a> 2020 Miss. LEXIS 409, *16\u201317 (Miss. 2020).<\/p>\n\n\n\n [10]<\/a> Id<\/em>. at *2.<\/p>\n\n\n\n [11]<\/a> Id<\/em>.<\/p>\n\n\n\n [12]<\/a> Id<\/em>. at *4\u20135.<\/p>\n\n\n\n [13]<\/a> Id<\/em>. at *13\u201314.<\/p>\n\n\n\n [14]<\/a> Id<\/em>. at *22 (emphasis in original).<\/p>\n\n\n\n [15]<\/a> See id<\/em>. at *12 (\u201cI don\u2019t know. I\u2019m not an attorney. I don\u2019t know anything about statutes. That\u2019s what we have General Counsel for. I deal with policy language, what\u2019s in the policy.\u201d).<\/p>\n\n\n\n [16]<\/a> Id<\/em>. at *18.<\/p>\n\n\n\n [17]<\/a> Id<\/em>. at *21.<\/p>\n\n\n\n [18]<\/a> Id<\/em>. at *27 (regardless of whether it can articulate legal analysis, \u201cTravelers has already given its reasons for denying the claim. And the relevant question is whether Travelers had an \u2018arguable or legitimate basis for denying the claim.\u2019\u201d) (citations omitted).<\/p>\n\n\n\n
\n\n\n\n