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Nossaman LLP


When Does an Insurance Co. Waive Atty-Client Privilege?


If an insurance company alleges it lawfully denied a claim, is that an implied waiver of the attorney-client privilege as to its consultation with coverage counsel?

When a policyholder sues an insurer for bad faith, for failing to defend or cover an allegedly insured claim, insurers usually assert the defense that they acted in good faith and lawfully. Witness the insurance industry's efforts to stretch the "genuine dispute" defense beyond reasonable limits. Where the insurer receives pushback to use adjuster-language, from the insured's counsel, most all adjusters consult their coverage counsel to bolster their confidence in the denial. Once the lawsuit for coverage/bad faith arrives, most insurers will not assert "advice of counsel" as a defense because they know that doing so waives any privilege and puts the insurers' coverage counsel's advice directly at issue, thus making it fully discoverable. But is that reasonable?

Most likely it is a fiction to assert the adjuster did not consider the coverage counsel advice he or she sought and paid for. How can an adjuster simply treat the coverage counsel's advice as though it did not exist? Either the adjuster adopted the views of the coverage counsel — where the views supported denial — or rejected the advice — where the views questioned denial.

In either case, that information is highly relevant to the issue of the insurer's good faith and fair dealing. It seems to us that the mere fact that the adjuster sought and obtained coverage counsel advice before issuing a denial (or before rejecting reconsideration of a denial) should make that advice discoverable. Perhaps if the insurer defends a bad faith lawsuit by asserting the insurer acted in good faith and lawfully, that defense alone should be an implied waiver of the attorney client privilege.

We read a case recently affirming an implied waiver where the party explicitly did not assert "advice of counsel" as a defense, only that the defendant "had a good faith belief that its conduct was lawful." The trial court found that in doing so it "injects the issue of its knowledge of the law into the case and thereby waives the attorney-client privilege." (See Barker v. Columbus Regional Healthcare System Inc., relying on Cox v. Adm'r U.S. Steel & Carnegie.) 

Barker involved claims that the defendants violated various statutes, the Anti-Kickback Statute, Stark Law and False Claims Act. Did this decision take the Cox opinion out of context and misapply it? The Cox opinion is worth a review — the case involved union members suing a defendant company and others over a change in the pension fund policy allegedly in a manner that included engaging in Racketeer Influenced and Corrupt Organizations Act violations and violations of provisions of the Labor Management Relations Act during the labor negotiations. The lawsuit was brought after two of the union negotiators were convicted of a crime. The defendants asserted they acted lawfully as a defense.
The discussion of the attorney-client waiver issue in Cox was detailed and comprehensive at pages 1417-1420:

 [The] Eighth Circuit observed that "courts have found waiver by implication" in three sets of circumstances: "[(1)] when a client testifies concerning portions of the attorney-client communication, [(2)] when a client places the attorney-client relationship directly at issue, and [(3)] when a client asserts reliance on an attorney's advice as an element of a claim or defense.

As a district court in our circuit has observed:

[A]ll of these established exceptions to the rules of privilege have a common denominator; in each instance, the party asserting the privilege placed information protected by it in issue through some affirmative act for his own benefit, and to allow the privilege to protect against disclosure of such information would have been manifestly unfair to the opposing party." (See Pitney-Bowes Inc. v. Mestre, quoting Hearn v. Rhay.)

As we discussed in the previous section, the attorney-client privilege "was intended as a shield, not a sword.' " (See GAB Business Services Inc. v. Syndicate, quoting Pitney-Bowes Inc. v. Mestre.) USX waives the privilege if it injects into the case an issue that in fairness requires an examination of otherwise protected communications. In Conkling v. Turner, the plaintiff claimed that the RICO statute of limitations period was tolled because he did not know that a statement made by the defendants was false until told by his attorney 18 years after the fact. The Fifth Circuit held that by doing so, he waived the privilege as to communications from his attorney about the statement — "the attorney-client privilege is waived when a litigant "places information protected by it in issue through some affirmative act for his own benefit, and to allow the privilege to protect against disclosure of such information would be manifestly unfair to the opposing party.' " (See Hearn v. Rhay, alteration in original.)

See also Lorenz v. Valley Forge Ins. Co., 815 F.2d 1095, 1098 (7th Cir.1987) ("To waive the attorney-client privilege … a defendant must do more than merely deny a plaintiff's allegations. The holder must inject a new factual or legal issue into the case."); Sedco Int'l S.A. v. Cory, 683 F.2d 1201, 1206 (8th Cir.) ("By asserting fraud, [the defendant] … waived his right to assert the privilege to prevent disclosure of communications which might have proven he did not rely on [the plaintiffs'] statements."), cert. denied, 459 U.S. 1017, 103 S. Ct. 379, 74 L. Ed. 2d 512 (1982). The defendant need not raise an affirmative defense to inject a new issue into the case, although it frequently occurs that way. Cf. Lorenz, 815 F.2d at 1098 (stating that new issues are "most often" injected "through the use of an affirmative defense").

United States v. Bilzerian, although a criminal case, is instructive. Prior to his trial for securities fraud, Bilzerian announced his intention to testify that he believed in good faith that certain disclosures he made to the U.S. Securities and Exchange Commission were legal. The district court ruled that if he were to do so, he would waive the attorney-client privilege with respect to those communications with his counsel regarding the legality of his actions. Bilzerian therefore declined to assert his good faith belief. He was convicted, and he challenged the conviction, arguing that the district court had prevented him from denying criminal intent — an essential element of the crime with which he was charged. The Second Circuit rejected his argument, reasoning that:

Bilzeria's testimony that he thought his actions were legal would have put his knowledge of the law and the basis for his understanding of what the law required in issue. His conversations with counsel regarding the legality of his schemes would have been directly relevant in determining the extent of his knowledge and, as a result, his intent.

The court held that Bilzerian had not been deprived of the right to deny criminal intent; he "was free to deny criminal intent … without asserting good faith."

Similarly, in the present case, USX could have denied criminal intent without affirmatively asserting it believed that its change in pension fund policy was legal. Having gone beyond mere denial, affirmatively to assert good faith, USX injected the issue of its knowledge of the law into the case and thereby waived the attorney-client privilege.

The district court ordered the disclosure of those attorney-client communications bearing on USX's knowledge of the law relating to its leave of absence policy, from the date Rich and Phillips first proposed the payments to May 22, 1988 (the date the company ceased making direct payments to the Fairfield Six). USX argues that because the company admits it was not certain of the plan's legality after the Third Circuit's 1986 decision in Trailways Lines Inc. v. Trailways Inc., the waiver should only apply to communications made before that date. We cannot say, however, that the district court abused its discretion in determining that the communications USX had with its attorneys, after Trailways and prior to its decision to cease making direct payments, might bear on what USX knew about the legality of the plan, and when USX knew it. Accordingly, the order of the district court is affirmed."

California law seems more restrictive on this issue in the context of insurance litigation where, the custom and practice is that an insurer must affirmatively assert an advice of counsel defense before the plaintiff policyholder may obtain the insurer's communications with its coverage counsel. But why should there be any difference from the context of this and other cases where the issues are complex and the business arrangements of a dubious nature?

What if the insurer in the bad faith case simply affirmatively alleges, as a defense, it acted in good faith and legally? Is that an implied waiver allowing discovery as to the basis for such a defense? A policyholder's counsel might consider sending discovery requests inquiring whether the insurer-defendant claims to have acted legally at all relevant times. We suspect the insurer-defendant is likely to respond in the affirmative — if it does so, will it have waived the privilege?

It is an intriguing argument but one that should be cautiously considered, because it is the exception which could swallow the privilege. Indeed, it is difficult to imagine a defense where the claim is violation of law, state or federal statute, which would not include the good faith belief that the defendant did not violate the law. So far this Eleventh Circuit trial court decision seems to stand alone in extending the holding of the Cox opinion, but the implied waiver concept works best where the defendants made decisions or undertook actions which are the subject of complex laws or regulations. Correctly applying contractual interpretation in compliance with the admittedly complex insurance statutory and common law is not a simple matter.

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