Washington Presumes Insurers have no Attorney-Client Privilege in Bad-Faith Litigation

by A. Janay Ferguson

In first-party bad-faith lawsuits against insurers, there is a presumption that the attorney-client privilege does not apply to the insurer’s attorneys, the Washington Supreme Court has held.  In Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), the Court determined that insurers must show “that [an] attorney was providing counsel to the insurer” and not engaged in the quasi-fiduciary function of claims-handling before the attorney-client privilege will attach.

In Cedell, the second story of the insured plaintiff’s house was destroyed by fire while he was away from home.  The estimated value of the damage was about $70,000 for the house and $35,000 for its contents.

The insured’s girlfriend was present at the house and stated she believed the fire had been started by a candle.  Also, the girlfriend, who was not an insured, admitted that she and others at the house might have used methamphetamine on the day of the fire.  The insured, Cedell, denied using methamphetamine and any knowledge that his girlfriend had done so that day.  The fire department concluded that the fire was “likely” accidental based on the girlfriend’s report concerning the candle.

The insurer retained an attorney to assist it with making a coverage determination.  The insurer’s attorney examined Cedell and his girlfriend under oath.  In July 2007, the attorney sent Cedell a letter stating that the origin of the fire was unknown and that the insurer might deny coverage based on a delay in reporting and the girlfriend and Cedell’s inconsistent statements about the fire.  The letter extended to Cedell a one-time offer of $30,000,  good for 10 days.  Cedell tried unsuccessfully to contact the insurer about the offer during the 10 days, but no one returned his call.

A year later, when the claim had still not been paid, Cedell sued the insurer and demanded production of the underwriting claim file.  The insurer produced a heavily redacted file, asserting that the redacted information was not relevant or was privileged.  The insurer also declined to answer interrogatories based on the ground of attorney-client privilege, including Cedell’s question regarding why it had given him “10 days to either accept or reject the [$30,000] offer.”

The trial court found adequate non-privileged evidence to support a good faith belief that the insurer had acted in bad faith, which was sufficient to invoke the fraud exception to the privilege.  It then ordered an in-camera review, and concluded that, on a bad faith claim, the insured is entitled to discover the entire claim file, including privileged and work product material.  The Court of Appeals granted discretionary review, and later reversed.

The Supreme Court’s analysis of the attorney-client privilege began from the conclusion that the insured needs access to the insurer’s file to discover facts supporting a claim of bad faith and permitting insurers to assert a blanket privilege would unreasonably obstruct discovery.  The Court recognized an exception for UIM claims because in that context, insurers are entitled to counsel’s advice in strategizing the same defenses that the tortfeasor could have asserted.

Acknowledging the privilege would still apply when an insurer’s attorneys were providing advice regarding the insurer’s potential liability, the Cedell Court held that in first party insurance claims by insureds claiming bad faith in the handling and processing of claims, other than UIM claims, there is a presumption of no attorney-client privilege.  The insurer may assert an attorney-client privilege by showing in camera that the attorney was providing counsel to the insurer.  Upon such a showing, the insured may still be entitled to pierce the attorney-client privilege by asserting the civil-fraud exception.

Once the civil-fraud exception is asserted, the superior court must engage in a two-step process.  First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials.  Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived.

Under the facts of Cedell’s case, the Supreme Court concluded the attorney did not share a privilege with the insurer because he assisted in the investigation of Cedell’s claim by taking sworn statements and corresponding with Cedell.  The Court found the attorney negotiated with the insured on the insurer’s behalf by sending the offer letter.  Accordingly, the burden was on the insurer to show the attorney’s communications were privileged and not discoverable under the civil-fraud exception.

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