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(Article from Insurance Law Alert, May 2015)

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The South Dakota Supreme Court ruled that an insurer did not impliedly waive attorney-client privilege in a bad faith action and that the district court erred when it ordered the insurer to produce claim files without conducting an in camera review. Andrews v. Ridco, Inc., 2015 WL 1955644 (S.D. Apr. 29, 2015).

An injured employee sued his employer and its workers’ compensation insurer alleging bad faith. The employee sought discovery of his claim file and approximately 250 other claim files that were allegedly part of a deceptive claims handling program. The insurer objected on the basis of attorney-client privilege. After a limited in camera review of the employee’s claim file, the trial court concluded that the insurer had impliedly relied on the advice of counsel in defending against the bad faith claim and had therefore waived attorney-client privilege as to all claim files. The South Dakota Supreme Court disagreed.

The South Dakota Supreme Court ruled that the insurer did not expressly or implicitly rely on the advice of counsel as a defense. As the court noted, implicit waiver requires an affirmative act that places the privileged material at issue in the litigation, which was not established here. In so ruling, the court rejected the employee’s assertion that the insurer injected advice of counsel into the litigation by embedding attorney-client communications into the claim file notes and then redacting those communications. The court explained: "[a]t this point in the litigation, Twin City has merely alleged that it did not act in bad faith… . Twin City has not placed at issue its subjective good-faith reliance on the advice of counsel such as would invoke an implied waiver of the … claim file notes." Finally, the court ruled that the trial court committed reversible error by failing to inspect the claim files in camera before making a determination as to implied waiver. Although the court declined to create an across-the-board procedural requirement for in camera review, it held that "the present facts establish that Twin City satisfied its burden of triggering the circuit court’s obligation to conduct an in camera review of the disputed documents."

Whether claim file notes are privileged is commonly disputed in coverage litigation. Decisions in this context are highly fact-specific and dependent upon applicable jurisdictional law. In another recent decision addressing this issue, a New York appellate court granted a policyholder’s motion to compel the production of claim file notes. Lalka v. ACA Ins. Co., 2015 WL 2146923 (N.Y. App. Div. 4th Dep’t May 8, 2015). There, the court held that claim file reports relating to the payment or rejection of claims were not privileged, even if prepared by attorneys. The court reasoned that claim payment decisions are "part of the regular business of an insurance company" and therefore not privileged, "even when those reports are ‘mixed/multi-purpose’ reports, motivated in part by the potential for litigation with the insured."