(Article from Insurance Law Alert, June 2019)
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The South Carolina Supreme Court ruled that an insurer does not automatically waive attorney-client privilege when it denies coverage and asserts good faith in the context of a bad faith claim; rather, privilege is waived only when the insurer’s defense necessarily relies on information received from counsel. In re: Mt. Hawley Ins. Co., 2019 WL 2441119 (S.C. June 12, 2019).
The discovery dispute arose out of an insured’s bad faith claim against its insurer. When the insurer asserted that it had acted in good faith in denying coverage, the insured sought to discover the basis for the coverage denial. The insurer refused to produce certain documents on the basis of attorney-client privilege. A South Carolina district court ordered the documents to be submitted for an in camera inspection. The insurer sought a writ of mandamus from the Fourth Circuit to vacate the district court order. As reported in our July/August 2018 Alert, 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 attorney-client privilege such that a party may waive the privilege by denying liability in its answer?”
The South Carolina Supreme Court answered the question in the negative, stating “we find little authority for the untenable proposition that the mere denial of liability in a pleading constitutes a waiver of the attorney-client privilege.” Addressing the specific issue of whether asserting good faith in response to a bad faith claim operates as a waiver to privilege by placing privileged communications “at issue,” the court endorsed a fact-specific “middle-ground” approach. The court adopted the analysis set forth in State Farm Mutual Automobile Insurance Co. v. Lee, 13 P.3d 1169 (Ariz. 2000). There, the court held that privilege is waived when an insurer asserts good faith based on its “subjective understanding of the law as informed by counsel—rather than defending exclusively on an objective reading of the disputed policy exclusions.” (Emphasis in original).
The court acknowledged that insurers will likely confer with counsel in virtually all bad faith cases, and that “most if not all actions taken will be based on counsel’s advice.” The court cautioned: “This does not waive privilege.” Rather, waiver occurs when an insurer “claims its actions were the result of its reasonable and good-faith belief that its conduct was permitted by law and its subjective belief based on . . . information and advice received from . . . lawyers.” The court imposed an additional requirement that the party seeking waiver of attorney-client privilege make a prima facie showing of bad faith.