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(Article from Insurance Law Alert, July/August 2018)

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The Fourth Circuit has asked the South Carolina Supreme Court to address whether an insurance company waives attorney-client privilege by challenging allegations of bad faith failure to defend or indemnify.  In re Mt. Hawley Ins. Co., 2018 WL 3203033 (4th Cir. June 28, 2018).

In a construction defect coverage dispute, the policyholder sought production of its insurer’s claim files.  The insurer argued that the files contained information protected by attorney-client privilege and produced the files in redacted form.  The policyholder moved to compel, arguing that the insurer waived privilege.  A South Carolina district court granted the motion to compel and ordered the insurer to produce the files for in camera inspection.  The insurer sought a writ of mandamus from the Fourth Circuit to vacate the district court’s order.  The insurer argued that the district court erred in holding that the files were not protected by privilege because the insurer put them “at issue” by denying it had acted in bad faith and by asserting that it acted reasonably.

Emphasizing the lack of controlling South Carolina law as to the scope of the “at issue” exception to attorney-client privilege in the context of insurer bad faith claims, the Fourth Circuit certified the following question to the South Carolina Supreme Court:  “Does South Carolina law support application of the ‘at issue’ exception to the attorney-client privilege such that a party may waive the privilege by denying liability in its answer?”  We will keep you posted of any developments in this matter.