The Washington Supreme Court Holds That in First-Party Bad Faith Litigation There Is a Presumption of No Attorney-Client Privilege

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When an insured sues an insurer for bad faith, how much of the claims file maintained by the insurer is discoverable? In a 5-4 decision, the Washington Supreme Court recently weakened insurers’ ability to protect confidential communications with their attorneys in first-party claims where the insured has alleged bad faith. Cedell v. Farmers Insurance Company of Washington, No. 85366-5 (February 22, 2013). The court held that, in the context of a first-party claim for bad faith claim handling and processing, courts must apply a presumption that there is no applicable attorney-client privilege. The court further held that an insurer would be entitled to overcome the presumption by showing that its counsel was providing legal advice as to the insurer’s potential liability and was not acting in the insurer’s “quasifiduciary” function. Upon this showing, the insurer is entitled to an in camera review where the trial court will determine if the privilege applies, subject to the insured’s assertions that the privilege does not apply due to an exception, including the civil fraud exception.

In Cedell, Farmers issued a homeowners policy to Bruce Cedell for his home, which was destroyed by a fire in November 2006 when he was not present. The fire department concluded it was “likely” accidental. Farmers’ own investigator found no evidence of an incendiary origin and agreed with the fire department that a candle was a probable source of ignition. The insured’s girlfriend was at the home when the fire started. Farmers’ investigator found her statements consistent with the evidence found during the investigation, although she admitted that she and others “might have consumed” methamphetamine that day. The Washington Supreme Court noted that, in spite of this evidence, Farmers delayed its coverage determination on the basis that she gave inconsistent statements. In January 2007, an adjuster estimated Farmers’ liability to be approximately $70,000 for the house and $35,000 for personal property. Another estimator found the damage to the home was approximately $56,498. The home was later valued at more than $115,000.

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