Does the Attorney-Client Privilege Still Exist in Bad Faith Litigation?

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January 08, 2014

The attorney-client privilege is one of the oldest privileges recognized in the American legal system. It has the important purpose of encouraging full and truthful communications between attorney and client. Recently, however, plaintiffs in insurance bad faith cases have asserted that the attorney-client privilege does not always protect communications from disclosure when the plaintiff is seeking information concerning an insurance carrier’s handling of a claim. While there is no bad faith exception to attorney-client privilege, an insurer should be aware that when it relies on advice of counsel as a defense to bad faith or when its attorney has acted as a claims adjuster with a law degree during investigation of the claim, a court may order that communications between attorney and client be produced.

Basics of the Attorney-Client Privilege
Under Pennsylvania’s privilege statute, codified at 42 Pa.  C.S.A. § 5928, a communication is protected by the attorney-client privilege if it meets several prerequisites. The person who asserts entitlement to the privilege must be (or must seek to be) a client of the attorney. The person to whom the communication was made must be a lawyer (or a lawyer’s subordinate) acting in that capacity in connection with the communication. The communication must relate to a fact about which the attorney was informed by the client for the purpose of securing primarily either an opinion of law or legal services, and not for the purpose of committing a crime or a tort. The communication must be solely between the client (or clients) and the attorney, as the presence of nonparties invalidates the privilege. Lastly, the privilege must be affirmatively claimed (and not waived) by the client. The burden of proving that the attorney-client privilege applies to a communication rests with the party asserting the privilege. Courts take a dim view of those who assert a blanket protection when responding to discovery requests. Instead, a party seeking to assert the privilege should make a clear showing that it applies to each communication for which protection is sought. Often, this is done by creating a privilege log. In fact, a privilege log listing all privileged documents is required in federal courts. The privilege log may include the name of the author of the privileged communication, all recipients of the communication, the date of the communication, and a brief description of the substance of the communication (without actually revealing any privileged information). If a privilege log is sufficiently detailed, it may provide enough information for a court to rule on a claim of protection without an in camera review of the purportedly privileged documents themselves. The privilege log should be adequate to permit the court to determine whether all elements of the privilege are present in each document.

Attorney-Client Privilege In Bad Faith Litigation
There is no hard and fast bad faith exception to the attorney-client privilege in Pennsylvania. There are, however, arguments which plaintiffs have made in order to obtain communications between an attorney and client while avoiding the protections of the attorney-client privilege.

Some courts have held that if an insurer defends itself against a bad faith claim by asserting that it relied on the advice of counsel, the insurer then waives the attorney-client privilege and invites discovery of all communications from its attorneys. If a client injects a lawyer’s assistance into a dispute, or if an insurer places an attorney-client communication at issue in a dispute involving the client as a party, then the attorney-client privilege will most likely be deemed by the court to have been waived.

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The extent to which an insurer must raise advice of counsel as a defense before a court will find that it waived the attorney client privilege was recently tested in Oak Lane Printing and Letter Service v. Atlantic Mutual Insurance Company, 2007 U.S.  Dist. LEXIS 42923 (E.D. Pa., June 13, 2007). There, the plaintiff sued insurance companies who had issued policies covering property damage to a damaged printing press, but who had refused to pay the entire cost to replace the press. Among other claims, the plaintiff alleged the insurers had acted in bad faith. The insurers answered the complaint by stating that their claims handling was “in good faith and compliance with the law.”

During discovery, the plaintiff sought all communications between an insurer and its counsel. The insurers provided a privilege log which identified the attorney-client privilege as a basis for withholding certain documents. The plaintiff moved to compel the documents, arguing that the insurers had waived the attorney-client privilege because the answers had asserted that their claims handling was “in good faith and compliance with the law.”

The court rejected the argument that an insurer somehow waived the attorney-client privilege by asserting that it had acted in good faith. The court wrote that in a bad faith case, the attorney-client privilege is not waived merely “because the advice of counsel is relevant to the defense,” either. The court found that an attorney’s advice does not become at issue so as to become discoverable merely because the advice is relevant, or even where the advice might affect the client’s state of mind. Instead, “[a]dvice of counsel is at issue only where a party attempts to prove its defense by disclosing attorney-client communications.” Thus, attorney-client communications should not become discoverable unless the insurer specifically pleads the advice of counsel defense. The court concluded that the insurers did not affirmatively raise advice of counsel as a defense, and thus they did not waive the attorney-client privilege. One key to retaining the attorney-client privilege is that the attorney must be acting as an attorney, rather than as an adjuster or investigator. Insurers face problematic opinions in which courts order that communications between an attorney and his or her insurer client must be produced because the attorney was not acting in his or her capacity as a lawyer. To prevent such an invasion, insurers must build an effective case for preserving the attorney-client privilege.

For example, in Pengate Handling Systems v. Westchester Surplus Lines, 2007 U.S. Dist. LEXIS 13303 (M.D. Pa. February 27, 2007), the court held that the question of whether precomplaint claims communications are privileged turns on whether the insurer’s attorney was acting in a legal capacity. The Pengate plaintiff submitted a claim to the defendant-insurer under a professional liability policy. The insurer denied the claim, and the plaintiff later requested reconsideration of the coverage denial.
The insurer hired an attorney-consultant to evaluate a claim related estimate provided by the plaintiff, and hired an attorney from a different law firm to act as coverage counsel.  Following the reconsideration process and subsequent denial, the plaintiff initiated suit and served discovery on the insurer. The insurer responded to the plaintiff’s requests with answers, objections and a privilege log. The plaintiff moved to compel certain documents which were listed on the privilege log, including documents pertaining to the services of the consultant attorney and the coverage counsel.

The court noted that attorney-client privilege extends “only to discussions where the individual is acting as an advisor, i.e., presenting opinions and setting forth defense tactics as to the procedures to be utilized for an effective defense.” The privilege does not extend “to a discussion of the facts, no matter how extensive or involved the discussion may become.” With that, the court concluded that the coverage counsel had really acted as claims investigators or adjusters prior to February 7, 2005. The court thus ordered the insurer to produce all communications with coverage counsel prior to and until February 7, 2005.

The insurer moved for reconsideration of the order. Hastily composing a declaration (similar to an affidavit) by the outside attorney in which he asserted he and his firm were retained to provide legal advice, the insurer convinced the court to make an incamera inspection of the purportedly privileged documents. Upon that review, the court relaxed its prior order and afforded protection under the attorney-client privilege for specific documents.

Oak Lane, Pengate, and cases like them reflect continuing attempts to erode the contours of the attorney-client privilege in bad faith litigation. Pengate suggests insurers should properly build a timely case for preservation of the privilege. The problem with Pengate and similar decisions is that it is often difficult to determine exactly when an attorney is acting in a lawyerly capacity versus when he or she is merely discussing facts. Experienced bad faith counsel can help insurers navigate these rocky shoals with sound legal advice so that privileged communications are not lost through inappropriate pleading of the advice of counsel defense or by the insurer’s use of counsel.

Platte Moring is Managing Partner of our Allentown office and focuses his practice on commercial, insurance, and bad faith litigation. He can be contacted at 610-782-4948 or [email protected].

Dan Twilla concentrates his practice on commercial and insurance litigation matters, as well as estate planning, real estate, and municipal law. He can be contacted at 610-782-4955 or
[email protected].

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