Every state has a statutory minimum insurance-coverage requirement for tort liability involving the use of motor vehicles. Yet, research shows that nearly 13% of the nation’s drivers are uninsured. At least 20 states require insurers to offer uninsured (UM) or underinsured motorist (UIM) coverage to their residents. Consequently, those who have been injured in auto accidents by drivers with insufficient or no insurance—who are lucky enough to have purchased UM or UIM coverage where it is offered—must turn to their own insurers for compensation.
When UM and UIM lawsuits are filed, the plaintiff-insureds frequently add extra-contractual (EC) claims. Needless to say, the addition of the EC theory complicates things. A significant and obvious concern for defense counsel and the EC claims professional is whether, and to what extent, the attorney-client privilege protects claim file materials created during the investigation, evaluation, and resolution of the underlying claim—particularly when that file contains communications from the underlying defense counsel. Answering this question will inform how defense counsel and the EC claim professional will approach expensive and time-consuming discovery and motion practice on the EC claim.
A general framework for determining whether, and to what extent, the attorney-client privilege protects the underlying claim file involves several issues. First, which law governs the privilege question? Second, does that law extend the attorney-client privilege to any materials in the underlying claim file and, if so, to what extent? Third, if the privilege does apply, are there circumstances triggering a waiver? This article briefly addresses the second and third questions. It provides an overview of three general approaches to the attorney-client privilege when an underlying UM/UIM claim file is requested in discovery.
Attorney-Client Privilege Principles
The attorney-client privilege is a bedrock principle of American jurisprudence, and its basic elements are straightforward. As the Northern District of Texas observed in Jolivet v. Compass Group USA, Inc., “For a communication to be protected as privileged, the proponent must prove: (1) that he made a confidential communication; (2) to a lawyer or her subordinate; (3) for the primary purpose of securing either a legal opinion or legal services, or assistance in some legal proceeding.”
The U.S. Supreme Court explains in Upjohn Co. v. U.S. that the purpose of the privilege “is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”
When the principles underlying the privilege are thwarted, however, the repercussions can be profound. As the Kentucky Court of Appeals has commented, the absence of the attorney-client privilege for insurers in this context may “impede the free flow of information and honest evaluation of claims” (see Guaranty Nat. Ins. Co. v. George).
Yet, in first-party bad faith actions arising from UM and UIM claims, the attorney-client privilege does not always apply to communications between the insurer and underlying defense counsel. This means that even though the communications between the insurer and defense counsel on the UM/UIM claim will be protected by the privilege while the UM/UIM claim is pending, the same communications may ultimately lose their privileged status once that claim has been resolved and the EC claim has reached the discovery phase.
Most jurisdictions offering UM and UIM coverage recognize the attorney-client privilege in bad faith actions because UM and UIM claims are inherently adversarial from the outset of litigation. These jurisdictions include Montana (see Palmer v. Farmers Ins. Exchange), West Virginia (see State ex rel. Brison v. Kaufman), Washington (see Barry v. USAA), California (see Aetna Cas. & Surety Co. v. Superior Court), and Florida (see Genovese v. Provident Life and Accident Ins. Co.). Nevertheless, waiver becomes an important concern when the insurer defends the EC claim by either implicitly or explicitly placing underlying defense counsel’s opinions at issue.
Three Broad Approaches
Because of the delicate interplay between privilege and waiver, courts have developed three general approaches to the attorney-client privilege in this context. Under the first approach, a litigant may be considered to have waived the privilege upon the assertion of a claim, counterclaim, or affirmative defense to which privileged material is relevant. The Ohio Supreme Court implicitly followed this approach in Boone v. Vanliner Ins. Co., in which an insured alleged a bad faith denial of UIM coverage. The court held that an “insurer’s lack of good faith in denying coverage are unworthy of protection.” It then held that the insured is entitled to discover claim file materials containing attorney-client communications related to the issue of coverage that were created prior to the coverage denial.
The second approach provides that a litigant waives the attorney-client privilege only when the insurer directly puts its attorney’s advice at issue in the case. Under this approach, the reliance must be distinct and unequivocal. For example, the Supreme Court of Montana held in Palmer by Diacon v. Farmers Ins. Exchange that waiver was not unequivocal when the UIM adjuster testified he had merely reviewed defense counsel’s recommendation to deny coverage while making his own decision on the issue.
Tucked between these two perspectives is a “middle ground” approach that balances the need for discovery with the importance of maintaining the privilege. As the Arizona Supreme Court explains in State Farm v. Lee, waiver will not be found solely because the insured has filed a bad faith action, the insurer denies the allegations of bad faith in its answer, or the insurer asserts an affirmative defense of good faith in its pleadings. Instead, if the insurer relies on a defense that it subjectively and reasonably evaluated the law—but the evaluation necessarily incorporated what the insurer learned from its lawyer—the communication is likely to be found discoverable.
When confronted with EC claims arising from the handling of UM and UIM claims, defense counsel and the EC claims professional must determine whether, and to what extent, the attorney-client privilege protects the underlying claim file. If that file enjoys at least some protection under the privilege, the next concern is whether defending the bad faith claim may trigger an express or implied waiver. Whether a waiver is possible will depend on the unique facts of the case but will most likely be found when communications with counsel are used to defend the bad faith allegations. Consequently, defense counsel and the EC claims professional should anticipate aggressive discovery and motion practice from the plaintiff-insured when attorney-client communications in the underlying claim file are used to rebut allegations of bad faith.