Privileges and The Proper Timing of Bad Faith Claims
Missouri appellate courts have been relatively quiet this summer in weighing in on cases involving bad faith and coverage litigation. To fill this void, the decisions of Washington and West Virginia courts addressing the ripening of bad faith claims and the application of the attorney-client privilege in bad faith litigation will be discussed below.
RIPENING OF A BAD FAITH CLAIM
State ex rel. Universal Underwriters Co. v. Wilson
2017 WL 2415343 (W.Va. June 1, 2017)
The Wilson litigation stems from a motor cycle accident in which David Allen was struck and killed by an SUV driven by Salvatore Cava. At the time of the accident, Cava was insured by Zurich under a garage policy and was allegedly insured by an umbrella policy which Zurich denied applied to the accident. The family of Allen filed suit against Cava, and eventually his father, and added a claim for declaratory judgment as to the amount of coverage available under the Zurich Policies. Zurich retained counsel to defend Cavas.
After some time, the Cavas filed cross-claims against Zurich under West Virginia’s Unfair Trade Practices Act and for bad faith. These claims primarily focused on and complained about the defense strategy employed by counsel retained by Zurich and Zurich’s refusal to offer more than the limits of the garage policy to settle the claims made by the plaintiffs. Because of these actions, the Cavas’ claimed the continuing litigation caused emotional distress.
Zurich moved to dismiss the Cavas’ cross-claims, alleging among other things that such claims were premature. The trial court denied Zurich’s request and Zurich sought a writ of prohibition to prevent the trial court from enforcing its order denying the claims.
On appeal, the Court agreed that the claims were premature and reversed the trial court’s order. The Court determined that whether the Cavas would sustain any compensable damages was contingent on future events. Namely whether the Cavas would face an excess judgment and how the amount of coverage available under the policies issued by Zurich was resolved.
DETERMINING PRIVILEGE IN BAD FAITH LITIGATION
Hawthorne v. Mid-Continent Cas. Co.
2017 WL 2363740 (D. Wa. May 31, 2017)
Hawthorne centered on a discovery dispute turning on the application of the attorney-client and work product privilege. Predictably, the carrier withheld certain emails on the grounds that the emails were protected by the attorney-client and work product privileges. The plaintiff sought production of and moved to compel the discovery of these materials.
The Court recognized that Washington, in bad faith cases, recognizes a presumption that no attorney-client privilege is applicable between an insured and its insurer in the claims adjustment process. This includes communications between attorneys and the carrier when those attorneys are involved in the quasi-fiduciary tasks of investigating, evaluation, negotiating, or processing a claim. However, this presumption can be rebutted by the carrier showing that certain communications or documents had nothing to do with the above quasi-fiduciary tasks. In addition, a privilege can be waived by showing a foundation in fact for the allegations of bad faith.
The district court then went on to note the process for the Court to undertake in determining whether any privilege would apply. Initially the Court determines whether the plaintiff has made a colorable showing that the carrier acted in bad faith. If this showing is made, the court holds an in camera review to determine if the attorney was acting in the normal claims adjustment process and, if not, whether a foundation exists to permit a claim for bad faith. If the answer to either question is in the affirmative, the attorney-client privilege is not applicable to prevent disclosure.
Proving bad faith is often difficult as the documents and information needed to do so is generally in the possession and control of the carrier. Absent waiver, these may be out of the claimant’s reach. Certain safeguards, such as those in place in Washington, are needed to ensure fair discovery and that bad faith practices can’t be concealed by the carrier by simply hiring an attorney to perform the carrier’s obligations.