(Article from Insurance Law Alert, January 2015)
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In two recent decisions, the Arizona Court of Appeals and the Tenth Circuit reached different conclusions as to whether an insurer waived attorney-client privilege by putting the advice of counsel at issue.
In Everest Indem. Ins. Co. v. Rea, 2015 WL 195450 (Ariz. Ct. App. Jan. 15, 2015), the Arizona Court of Appeals accepted "special action jurisdiction" to address whether an insurance company impliedly waived attorney-client privilege by asserting subjective good faith as a defense in a bad faith action. The court held that it did not.
A policyholder alleged that Everest settled an underlying suit in bad faith. Everest countered that the decision to settle was made in good faith "based on its subjective beliefs concerning the relative merits of the various courses of action." Although Everest acknowledged that it communicated with counsel in making that decision, it did not specifically assert that it relied on the advice of its attorneys in opting to settle. The court held that such conduct was insufficient to establish "at issue" waiver of privilege.
Under Arizona law, in order to waive privilege by putting the advice of counsel at issue, "a party must do more than simply confer with counsel and take action incorporating counsel’s advice." Rather, waiver may be implied only "when, after receiving advice from an attorney, a party makes an affirmative assertion that it was acting in good faith because it relied on counsel’s advice to inform its own evaluation and interpretation of the law." In other words, implicit waiver requires the assertion of a claim or defense that is "dependent on" the advice of counsel; the mere fact of consultation with counsel (or, as was the case here, participation of counsel in settlement negotiations) is not enough. Applying this standard, the court concluded that Everest did not impliedly waive privilege by putting the advice of counsel at issue. In so ruling, the court noted that Everest had not expressly cited the advice of counsel in support of its subjective good faith.
In contrast, the Tenth Circuit ruled that an insurer waived attorney-client and work-product privilege by putting the advice of its counsel at issue in litigation with a broker. Seneca Ins. Co. v. Western Claims, Inc., 2014 WL 724071 (10th Cir. Dec. 22, 2014).
A property owner sought coverage for hail damage from Seneca Insurance. Seneca hired Western Claims to investigate the claim, who estimated the claim value at approximately $1,000. Seneca paid that amount and closed its file. Several months later, the property owner sought to reopen the file based on a roofing estimate of approximately $750,000. When Seneca refused to pay, the owner brought suit alleging breach of contract and bad faith. During litigation, Seneca sought advice from two attorneys. Based on the legal advice received, Seneca settled with the property owner for $1 million. Seneca then sued Western Claims alleging negligence and seeking to recover the settlement payment. During discovery, Seneca disclosed a claim note that stated that Seneca had settled with the property owner "on advice of Counsel." Western Claims then sought to compel Seneca to produce documents relied upon by Seneca in settling the hail damage claim. Seneca refused, claiming attorney-client privilege and work-product protection. The district court granted Western Claims’ motion to compel and the Tenth Circuit affirmed.
The Tenth Circuit concluded that Seneca had waived privilege by putting the advice of counsel "at issue" in the litigation against Western Claims. Although the Oklahoma Supreme Court has not endorsed a specific test for determining "at issue" waiver, the Tenth Circuit held that such waiver requires that the party asserting privilege took "some affirmative act" that put the protected information at issue "by making it relevant to the case." The Tenth Circuit further held that at issue waiver requires a showing that enforcing privilege would deny the opposing party access to information "vital to [its] defense." The court found that these elements were established here because Seneca took the affirmative act of filing suit against Western Claims and then relied on the advice of counsel to justify the reasonableness of the settlement. The court also deemed the material "vital" to Western Claims because the advice of counsel was the only basis asserted for justification of the settlement. Seneca Insurance serves as an important reminder that "attorney-client communications cannot be used both as a sword and a shield."
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