Insurer’s Defense In Bad Faith Claim Puts Otherwise Protected Communications “At Issue”

A South Carolina federal district court, applying South Carolina law, ruled that an insurer affirmatively waived both the attorney-client and work product protections from disclosure because it raised a defense that its denial of coverage was reasonable.

East Bridge Lofts Property Owners Association, Inc. (“East Bridge”) sued Creekstone SC I, LLC (“Creekstone”). Creekstone tendered the claim to Crum & Forster Specialty Insurance Company (“Crum & Forster”) in October 2012. Crum & Forster denied the claim on April 10, 2014. Other than attending one mediation conference, where Creekstone alleges Crum & Forster “failed to make a meaningful offer,” Crum & Forster did not participate in the underlying suit. East Bridge ultimately won a $55 million jury verdict against Creekstone in the underlying action.

East Bridge and Creekstone (collectively “Plaintiffs”) brought a claim for bad faith against Crum & Forster (“Defendant”). In its affirmative defenses to the complaint, Defendant argued that it had a reasonable basis to deny coverage in the underlying action. During discovery, Plaintiffs issued a subpoena to Defendant’s coverage counsel seeking his file pertaining to the underlying action. Defendant filed a motion to quash.

Although it recognized “conflicting policy concerns,” the court rejected Defendant’s assertions that the contents of the file were protected by the attorney-client privilege and/or the work product doctrine. The court found that when Defendant asserted that it acted reasonably and in good faith, Defendant waived the attorney-client privilege by putting “at issue the evidence it had before it at the time it denied the claim, including communications with counsel relevant to its state of mind.” The court also found that the work product doctrine did not apply because there was no other means for Plaintiffs to discover the relevant facts of Defendant’s thoughts and knowledge prior to the denial of the claim.

The court additionally denied Defendant’s motion to quash discovery of non-privileged documents in the coverage counsel’s file. The court reasoned that Plaintiffs had shown the information was relevant and Defendant had failed to establish that producing the documents would create an undue burden or expense. East Bridge Lofts Prop. Owners Ass’n, Inc. v. Crum & Forster Specialty Ins. Co., No. 2:14-cv-2567-RMG (D.S.C. June 3, 2015).

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