SNR Denton on Cedell v. Farmers Insurance Co.: Washington Limits Attorney-Client Privilege in First-Party Bad Faith Cases

SNR Denton on Cedell v. Farmers Insurance Co.: Washington Limits Attorney-Client Privilege in First-Party Bad Faith Cases

   By William T. Barker & Ronald D. Kent, Partners, SNR Denton

In Cedell v. Farmers Insurance Co., the Washington Supreme Court held that, in a first-party bad faith claim (other than regarding a uninsured or underinsured motorist claim), the insurer's quasi-fiduciary duty of good faith and fair dealing limits its ability to invoke the attorney-client privilege.  It also held that bad faith could be regarded as form of civil fraud for purposes of the crime-fraud exception to the privilege.  This commentary compares those rules to the law elsewhere and evaluates the respective rules.

Bruce Cedell's home was destroyed by fire, and he was insured by Farmers.  Cedell was not at home at the time, but his girlfriend, Ackley, said the fire was started by a candle.  The fire department concluded that the fire was "likely" accidental.  According to the court:

Farmers' fire investigator found "no physical evidence supporting an incendiary origin" and agreed with the fire department that a candle was "a possible, or even probable, source of ignition ... consistent with the remaining physical evidence." He stated that Ackley's "admission that she lit a 'flower candle' on the headboard" was "consistent with the acute burn patterns seen to the headboard and mattress," explaining that "[c]andles with foreign objects imbedded are frequent causes of accidental fires when the objects, such as dried flowers, substantially alter the candle's burning characteristics." Farmers, nevertheless, delayed its coverage determination, noting that Ackley (who was not an insured) had given inconsistent statements [apparently concerning possible methamphetamine consumption on the premises].  Cedell alleges that Farmers ignored repeated phone calls and that he was forced to file a claim with the office of the insurance commissioner and ultimately, eight months after the fire, hire an attorney to elicit action from his insurer.

In January 2007, a Farmers adjuster estimated that Farmers' exposure would be about $ 70,000 for the house and $ 35,000 for its contents. A few months later, a Farmer's estimator, Joe Mendoza, concluded that the fire-related damage to the residence alone was about $ 56,498. Farmers hired an attorney, Ryan Hall, to assist in making a coverage determination. Hall examined Cedell and Ackley under oath. In July 2007, Hall sent Cedell a letter stating that the origin of the fire was unknown and that Farmers might deny coverage based on a delay in reporting and Ackley's and Cedell's inconsistent statements about the fire. The letter extended to Cedell a one-time offer of $ 30,000, good for 10 days. Cedell tried unsuccessfully to contact Farmers about the offer during the 10 days, but no one from Farmers returned his call.

The trial court ordered production of privileged materials in the claim file pursuant to the crime-fraud exception.  The supreme court enunciated new rules and remanded for their application to this case.  It recognized that, in UM/UIM claims, the insurer stands in the shoes of the tortfeasor and is entitled to similar privilege and work product protection.  On other types of first-party claims:

[w]e start from the presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant. However, the insurer may overcome the presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.

If privilege is found to exist, it may be pierced under the crime-fraud exception, with bad faith being regarded as a type of civil fraud:

"First, the court determines whether there is a factual showing adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to evoke the fraud exception has occurred. Second, if so, the court subjects the documents to an in camera inspection to determine whether there is a foundation in fact for the charge of civil fraud. The in camera inspection is a matter of trial court discretion."

This commentary (1) reviews the basics of the attorney-client privilege and the work product protection (2) distinguishes some areas in which there is significant litigation but which present fewer problems: ordinary or fact work product generated in adjusting a claim and attorneys used as claim adjusters, (3) addresses the main subject: the availability and extent of attorney-client privilege protection, and (4) considers the rules applicable to opinion work product.  Each section examines the extent to which Washington's new rules accord with or differ from the law elsewhere.

The commentary concludes that "[w]hile seemingly far reaching, the Washington court's presumption against the privilege for material in the claim file is closer to the rule elsewhere than it would appear.  The extension of the crime-fraud exception is probably more significant."

Most jurisdictions address access to privileged and work-product materials through analysis of when the insurer is deemed to have waived the protection by placing them :at issue."  The commentary examines the division of authority on the standard applicable to that question, and examines the extent to which otherwise protected materials are made accessible by each rule.  It also reviews the standards generally applied with respect to the crime-fraud exception and the division of authority on whether bad faith should be deemed a form of fraud for purposes of that exception.  Finally, it reviews the standards applicable to discovery of opinion work product.

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and the New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.

Ronald D. Kent heads the Litigation Department in SNR Denton LLP's Los Angeles office. He is also Co-Chair of the Firm's National Insurance Litigation and Coverage Practice and is a member of the firm-wide Policy & Planning (Management) Committee. Since 2005, he has been named each year as a leading trial lawyer nationally and in California, based on peer and client evaluations, by Chambers USA: America's Leading Lawyers, the highly respected independent attorney rating organization. Mr. Kent has extensive experience representing major insurance companies on a wide variety of matters, including fraud and bad faith actions, class action and multiple plaintiff litigation, defense of toxic tort and other environmental claims, insurance coverage actions and general business disputes. Mr. Kent has tried matters in state and federal courts throughout California, and in other states, and has successfully handled in excess of 70 arbitrations to final resolution. In addition, he has briefed and argued numerous appellate matters in the California Supreme Court, nearly all California district courts of appeal and the Ninth Circuit Court of Appeals. Mr. Kent is the co-author of the second edition of New Appleman Insurance Bad Faith Litigation.

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