In Strawn v. Morris, Polich & Purdy (No. A150562, filed 1/4/19), a California appeals court held that policyholders could state a claim for invasion of privacy against an insurer’s coverage counsel and law firm, where the counsel had disseminated inadvertently produced tax returns to forensic accountants while evaluating coverage.

In Strawn, a couple’s home was destroyed by fire and the husband was prosecuted for arson, but the criminal case was dropped. Notwithstanding, their insurance claim was denied on the ground that the husband intentionally set the fire and fraudulently concealed his actions. In addition to the insurance company, the insureds also named the carrier’s coverage counsel and his firm in the ensuing bad faith lawsuit, alleging causes of action for elder financial abuse and invasion of privacy.

Although the trial court sustained the attorneys’ demurrer without leave to amend, the appeals court reversed as to the invasion of privacy claim. The attorney had been tasked with the coverage investigation, and had demanded production of financial records from the couple. Although they had objected to producing tax returns, the couple’s accountants inadvertently included the tax returns, which counsel then provided to a forensic accounting firm for analysis. The couple alleged that this constituted a publication of private information.

The Strawn court first held that the litigation privilege of Civil Code section 47(b) would not apply. The court agreed with the attorneys that the “publication” to the forensic accountants constituted a “communicative act.” However, the court said that prelitigation communications are only protected when litigation is imminent. The transmittal of the tax returns was a full year before the lawsuit, and the court said that it was by no means certain that the couple would ever sue, so the litigation privilege did not attach.

The Strawn court then found the invasion of privacy claim viable. The court noted that tax returns are clearly protected as private, but relevance can overcome the privilege and Insurance Code section 2071 establishes relevance in an insurance claim, because the statute requires the insurer to advise their insureds that tax returns may be “necessary to process or determine” claims but “maintains the insured’s taxpayer privilege against disclosure, in essence permitting the taxpayer to determine whether to disclose the returns despite potential consequences in terms of the processing of the claim.”

The Strawn court said that whether relevance overcame the privilege was a fact question that could not be decided on demurrer:

“[W]hether the public policy of preventing insurance fraud outweighs the confidentiality of tax returns would depend, in part, on the extent to which the financial information appellants did disclose was sufficient to allow State Farm to determine appellants’ financial condition, and the extent to which the returns revealed confidential information not relevant to State Farm’s investigation (e.g., medical deductions). Similarly, the seriousness of the privacy invasion worked by disclosure of the tax returns would depend on what information was contained in the returns that was not also contained in the voluntarily disclosed financial documents from which the tax returns were prepared. In short, the seriousness of the alleged invasion of privacy presented a question of fact that could not be resolved on demurrer.”

The Strawn court also saw a fact question as to whether the insureds had waived the privilege by virtue of having pursued an insurance claim. Citing Wilson v. Superior Court (1976) 63 Cal.App.3d 825 and Fremont Indemnity Co. v. Superior Court (1982) 137 Cal.App.3d 554, the Strawn court said that “Whether that reasoning applies in the present circumstances would depend, again, on what information was revealed in the tax returns beyond that contained in the material appellants agreed to disclose.”

While finding that the insurer’s counsel could be liable for invasion of privacy, the Strawn court rejected the elder abuse claim. The court said that the Elder Abuse Act (Welf. & Inst. Code, § 15610), is more in the nature of a heightened remedy for other wrongs, and was therefore an extension of the underlying bad faith claim. Consequently, it was subject to the rule that only the contracting insurer can be liable for breach of contract or bad faith: “An insurer’s bad faith denial of a claim can support a cause of action for financial elder abuse. [] But to say that an attorney who assists the insurer in investigating the claim, acting solely as representative of the insurer, can be liable for financial elder abuse would impose liability where [Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566.] held there could be none.”