A bad faith claim by an insured against his insurer for the way in which the insurer handled a claim presents a scenario in which there is tension between two basic legal principles: the insured’s need to discover all relevant facts and the insurer’s need to communicate with its attorney without fear of consequence or disclosure. Certainly, the insured needs access to the claims file in order to discover facts to support a bad faith claim. It is also clear that the insurance company, in handling claims and preparing for litigation, will seek advice of counsel. Thus, a bad faith case requires that the insured’s need to access information be balanced against the insurer’s need for the protection of the attorney-client privilege. In Cedell v. Farmers Ins. Co. of Washington, 295 P.3d 239 (Wash. 2013), the Supreme Court of Washington tackled this issue head-on and, in an en banc opinion, established a test for determining whether the attorney-client privilege applies in a first party insurance bad faith claim.
Bruce Cedell’s home had been insured with Farmers Insurance Company of Washington for over 20 years when it was destroyed by a fire. After conducting an investigation, the fire department concluded that the fire that left Cedell homeless was “likely” accidental. Despite this finding, Farmers delayed its coverage determination and generally ignored communications from Cedell for months. Eight months after the fire, Cedell hired an attorney in an attempt to get Farmers to act upon his claim.
Farmers eventually hired an attorney, Ryan Hall, to assist in making a coverage determination. Hall’s activities included examining Cedell and his girlfriend under oath, sending a letter to Cedell regarding coverage, and extending to Cedell a one-time offer of $30,000.00, good for ten days. Cedell’s calls to Farmers regarding the offer went unanswered.
Approximately one year after the fire, Cedell sued Farmers alleging, among other things, that it acted in bad faith in handling his claim. In response to Cedell’s discovery requests, Farmers produced a heavily redacted claims file, asserting that the redacted information was privileged. Farmers also declined to answer some of Cedell’s interrogatories, again asserting the attorney-client privilege.
Cedell then filed a motion to compel, arguing that the claim of privilege could not be used to benefit the insurer in a bad faith action by a first party insured. Cedell moved for disclosure of the files or, in the alternative, a private review by the judge to make the determination. Farmers argued in opposition that Cedell had to make an initial showing of civil fraud in order to obtain the full claims file. The trial judge disagreed, concluding that the facts were “adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to invoke the fraud exception . . . to the attorney-client privilege had occurred.” The trial judge then conducted a private review, after which he ordered Farmers to provide Cedell with all of the documents that it had previously withheld or redacted. On appeal, the Court of Appeals reversed. Subsequently, the Supreme Court of Washington granted review.
The Washington Supreme Court recognized the tension between the right to broad discovery and the attorney-client privilege, but also highlighted the unique considerations of a first party insurance bad faith claim. Specifically, the Court explained that in bad faith claims (except for insured motorist claims), the insured is entitled to access to the claims file. Importantly, the Court noted the “’well-established principle in bad faith actions . . . that communications between the insurer and the attorney are not privileged with respect to the insured.” (quoting Barry v. USAA, 989 P.2d 1172 (Wash. 1999)). The Court then used this presumption of discoverability as the foundation for formulating its test.
The Court explained that the insurer can overcome the presumption of discoverability by showing that its attorney provided it with legal counsel rather than simply engaging in quasi-fiduciary tasks such as investigating, evaluating, and processing the claim. According to Cedell, upon such a showing, the insurance company is entitled to an in camera (private review) inspection of the claims file by the trial judge. If the judge finds that the attorney-client privilege applies, the next step is to address any claims the insured may have to pierce the attorney-client privilege. In a case where civil fraud is asserted, the court must engage in the following 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.
Applying the test to the facts of Cedell’s case, the Court stated that Farmers could only overcome the presumption favoring disclosure by showing that Hall was simply offering legal opinions rather than acting in a quasi-fiduciary way. Because Hall had assisted in the investigation, aided in adjusting the claim, negotiated with Cedell, and performed other quasi-fiduciary duties that Farmers was obligated to provide to its insured, the Court found that Farmers could not even clear the first hurdle. Moreover, because it was unclear whether the trial court had followed the correct test, the Court remanded the case for further proceedings.
The Cedell opinion sets forth a step-by-step test for determining the applicability and scope of the attorney-client privilege in first party insurance bad faith claims. Whether or not the presumption of discoverability can be overcome hinges upon the actions of the insurer’s attorney. Even if it can be established by in camera review that the claims file is privileged, an insured may get a second bite at the apple—that privilege can be pierced with a showing of bad faith and confirmation from the court, again after in camera review, that the claim should be allowed to proceed. Bad faith claims can be difficult to prove and prevail on in certain jurisdictions more than others. This opinion provides an strong precedent on how courts around the country should engage in the necessary analysis to allow policyholders to obtain needed information to support a claim of bad faith.
Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or email@example.com.
Kristen M. Chatterton