Monday, February 25, 2013

Washington Supreme Court erodes insurer’s right to attorney-client privilege when insurer is sued for bad faith handling of a first-party claim

In another controversial 5-4 decision, the Washington Supreme Court on 2/21/13 substantially eroded the attorney-client privilege for first party insurers being sued for bad faith claims handling. See Cedell v. Farmers Ins. Co. of Wash., Wash. Supreme Court No. 85366-5 (en banc, Feb. 21, 2013). First, the court held that in cases in which an insured is claiming bad faith in the handling and processing of first-party claims, other than UIM claims, there is a presumption of no attorney-client privilege. Second, the court held that when an insured is suing an insurer for bad-faith handling of a first-party claim, the “civil fraud” exception to attorney-client privilege does not require the insured to show actual fraud. Rather, if after in camera review of the claimed privileged materials the court finds “there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived.” The Supreme Court added that an insured’s ability to pierce an insurer’s attorney-client privilege through the assertion of civil fraud in this manner applies to bad faith cases arising from UIM as well as all other first-party claims.

The Cedell case involved a first-party claim on a homeowner’s policy for a house fire, and an allegation that the insurer had violated its duty of good faith claims handling of the fire-loss claim. The insurer retained coverage counsel during the claims process, and that attorney examined witnesses under oath, directly interacted with the insured during the claims process, issued a coverage position letter on behalf of the insurer and made a time-limited settlement offer to the insured. Although Washington courts have long held that normal claims handling functions cannot be shielded with attorney-client privilege by retaining an attorney to perform them, the Cedell court went much further today in creating a “presumption” of no attorney-client privilege whenever an insurer is sued for bad faith handling of a first-party claim (the court excepted UIM claims from this newly created presumption). The insurer may overcome the presumption upon a showing in camera that the attorney was providing legal counsel to the insurer (e.g., a coverage opinion) and was not engaged in the insurer’s quasi-fiduciary functions, such as investigating and evaluating the claim.

The second holding of the Cedell opinion is a more significant departure from prior law and seriously erodes the first-party insurer’s right to protect confidential communications with its counsel. The attorney-client privilege historically has not protected communications in which an attorney and client are actively discussing how to commit fraud—this is known as the “civil fraud exception” to attorney-client privilege. But for first-party insurers (including UIM insurers), the Washington Supreme Court now says fraud need not be established to pierce the insurer’s attorney-client privilege. If the civil fraud exception to attorney-client privilege is asserted, the court must engage in a newly created 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 insurer’s attorney-client privilege “shall be deemed to be waived.” In sum, the Washington Supreme Court has turned the “civil fraud exception” to attorney-client privilege into a “bad faith” exception for first-party insurers.

Soha & Lang attorneys are available to assist insurer clients in understanding and addressing the impact of this decision both during the claims handling process and after an allegation of bad faith claims handling has been made.


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  2. Every type of insurance policy is different, and each is subject to its own set of laws and procedures.

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