In Cedell v. Farmers Ins. Co. of Washington, No. 85366-5 (Wash. February 21, 2013), a 5-4 majority of the Washington Supreme Court established a new framework for evaluating attorney-client privilege and work-product issues in bad-faith lawsuits against first-party insurers. The framework does not apply to bad-faith lawsuits involving underinsured motorist (“UIM”) coverage.
First, the Court declared that it will presume that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad faith lawsuit.
Second, the Court held that an insurer may seek to rebut that presumption by demonstrating that the insurer’s attorney “was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.” If the insurer can satisfy that burden, it should be entitled to an in camera review of the disputed information and the redaction of privileged and protected information.
Third, the Court held that, even if the insurer successfully rebuts the presumption, the insured may seek to pierce the attorney-client privilege by demonstrating that “a reasonable person would have a reasonable belief that an act of bad faith has occurred.” In that event, the trial court would conduct an in camera review of the privileged materials, and if the trial court determines that “there is a foundation to permit a claim of bad faith to proceed,” it will declare that the insurer has waived its attorney-client privilege.
Following the Court’s ruling, in future bad-faith lawsuits relating to first-party insurance claims one can reasonably anticipate some confusion and disagreement about whether the insurer’s attorney’s conduct constituted “counsel as to [the first-party insurer’s] liability” which would be subject to the attorney-client privilege, or a “quasi-fiduciary task” that would not be subject to the privilege. Moreover, a first-party insurer should be keenly aware that if its attorney undertakes tasks that could be construed to be quasi-fiduciary tasks such as investigating, evaluating, or processing the first-party claim,  the insurer’s communications with its attorney relating to those tasks might not be privileged and  the attorney’s work product relating to those tasks might not be protected. Because of that, if a first-party insurer’s attorney undertakes such quasi-fiduciary tasks, it might behoove the insurer and its attorney to establish separate files that relate to those tasks.