SPECIAL ADVERTISING SECTION
not, by itself, indicate a determination to litigate.
Therefore, insurance companies cannot claim that inves-
tigative documents are privileged because they were
prepared in anticipation of litigation before a coverage
denial, because claims investigations often continue after
outside counsel is hired.
The Advice of Counsel as Shield
An insurance company in bad faith litigation can also
waive the attorney-client privilege when it asserts its
good faith due to its reliance on its counsel’s advice.
Insurance companies commonly defend bad faith or
malicious claim handling allegations giving rise to punitive
damages by providing evidence that the insurance company relied on the advice of competent counsel. This is
an implied waiver, whereby the insurance company voluntarily puts its state of mind and attorney advice at
issue. In such circumstances, the policyholder is entitled
to discover communications between the lawyer and
insurance company, which relate to the advice on denial
of coverage.
When an insurance company makes factual assertions in defense of a claim, which incorporate the advice
and judgment of counsel, it cannot deny a policyholder
the opportunity to uncover the foundation for those
assertions in order to contradict them. The policyholder
should be entitled to test the reasonableness of the
attorney’s opinion and the insurance company’s reliance
on the opinion.
INSURANCE
The Insurance Industry Recognizes Waiver in
Investigatory Circumstances
Even the insurance industry affirms this challenge
to the privilege that is traditionally raised by policyholders. Recently, AIU, an insurance company similarly
situated to a policyholder in coverage litigation, sued
its reinsurer, TIG, alleging that TIG had breached the
reinsurance contracts at issue by failing to indemnify
AIU for its share of settlement payments in an underlying matter. In an attempt to compel production of
TIG’s claims files and challenge TIG’s assertion of the
attorney-client and work-product privileges, AIU
argued (in the same manner that a policyholder would
argue in bad faith litigation against an insurance company) that TIG’s counsel was acting as a claims investigator, and not as a lawyer.
Ultimately, on a motion to reconsider, AIU court
found that certain documents were, in fact, privileged,
but it was only after a detailed and fact intensive inquiry
into the nature of the claimed privileges and documents
at issue. Nonetheless, this case is noteworthy because it
highlights the insurance industry’s recognition of this
challenge to the privilege.
What to Do
Do not be fooled by the involvement of the insurance company’s lawyer in handling, or litigating a claim.
As a policyholder, you are entitled to discovery to prove
your bad faith claim. If an attorney was involved in the
insurance company’s investigation of the claim, push for
the information and shift the burden to the insurance
company to tell you why the information is privileged.
Uncovering Bad Faith
To prove bad faith, a policyholder must show how
the insurance company processed the claim, how the
claim was considered, and why the insurance company
took the action that it did. Once it has made this factual
inquiry, the policyholder must also show the absence of
a reasonable basis for denying benefits of the policy and
the insurance company’s knowledge or reckless disregard, or the lack of a reasonable basis for denying the
claim. An insurance company’s intentional denial, failure
to process, or failure to pay a claim without a reasonable basis can give rise to a bad faith lawsuit. Therefore,
some courts find that an insured’s claim of bad faith may
also be the basis for disclosure of privileged insurance
company communications, in what is referred to as the
bad faith exception.
Caroline R. Hurtado is a shareholder in the Ventura,
California office of Anderson Kill. Ms. Hurtado has exten-
sive experience in policy enforcement, errors and omissions
and business litigation. Ms. Hurtado's background and
experience in handling complex business transactions
ensures maximum benefits for clients. Ms. Hurtado can be
reached at 805-288-1300 or churtado@andersonkill.com
