Attorney Client Privilege Not Automatically Waived by Contesting Bad Faith Claim

The South Carolina Supreme Court, on certification from the Fourth Circuit, held that denying liability and/or asserting good faith in an answer does not, standing alone, waive attorney-client privilege.   The South Carolina Supreme Court adopted the middle ground, which involves a fact intensive approach to determining whether attorney-client privilege is waived in bad faith insurance coverage actions. 

The question at issue before the South Carolina Supreme Court arose from a bad faith action against Mount Hawley Insurance Company (“Mount Hawley”) for its failure to defend its insured, ContraVest Construction Company (“ContraVest”), in a construction defect action.  Mount Hawley provided ContraVest with excess commercial liability insurance during the time period ContraVest constructed a development in South Carolina.  ContraVest was sued for alleged defective construction of the development.  Mount Hawley refused to defend or indemnify ContraVest in the suit, and ContraVest ultimately settled the case.

ContraVest then sued Mount Hawley alleging bad faith failure to defend or indemnify, breach of contract, and unjust enrichment.  Mount Hawley answered stating it acted in good faith in denying coverage.  The insured sought discovery to uncover the reasons why the insurer denied coverage, i.e., seeking Mount Hawleys’s files relating to all of ContraVest’s claims under the excess policies.  Mount Hawley objected to the discovery stating the requests included communications protected by the attorney-client privilege.  ContraVest filed multiple motions to compel, arguing Mount Hawley waived the attorney-client privilege as to those files by placing the otherwise privileged communications “at issue.”

The district court determined ContraVest had established a prima facie case of bad faith and ordered the documents in question to be submitted to the court for an in-camera inspection. Mount Hawley sought a writ of mandamus from the Fourth Circuit to vacate the district court’s order.  In turn, the Fourth Circuit certified the following question: “Does South Carolina law support application of the ‘at issue’ exception to attorney-client privilege such that a party may waive the privilege by denying liability in its answer?”

The South Carolina Supreme Court analyzed the issue narrowly in the limited context of a bad faith action against an insurer and answered as follows: “No, denying liability and/or asserting good faith in the answer does not, standing alone, place the privileged communications ‘at issue’ in the case.”

The issue of reconciling attorney-client privilege and insurance bad faith law was one of first impression for the South Carolina Supreme Court.  Under South Carolina law, a client, the sole owner of the attorney-client privilege, can waive the privilege, and such waiver must be “distinct and unequivocal.” As a result, when a party asserts an implied waiver of privilege, “caution must be exercised, for waiver will not be implied from doubtful acts.” 

The South Carolina Supreme Court held that a party asserting privilege has the initial burden to make a prima facie showing that the communications in question are privileged.  If the initial burden is met, the party challenging the privilege must establish the communications are otherwise discoverable under an exception or waiver.

There are three approaches jurisdictions use to determine the presence or absence of a waiver of the attorney-client privilege:  (1) a substantial minority of jurisdictions have broadened the crime-fraud exception to the attorney-client privilege and found the privilege does not extend to any communications in furtherance of any crime or tort, including bad faith insurance claims; (2) other jurisdictions have upheld the attorney-client privilege absent direct, express reliance on a privileged communication by a client in making out his claim or defense, thus rejecting implied waiver; and (3) some jurisdictions take a middle-ground approach and find the answer depends on a case-by-case analysis of the facts.  The South Carolina Supreme Court adopted the middle-ground approach.  In making its ruling, it relied heavily on the Arizona Supreme Court case of State Farm Mutual Automobile Insurance Co. v. Lee.   In Lee, the Arizona Supreme Court held “[t]he party that would assert the privilege has not waived unless it has asserted some claim or defense, such as the reasonableness of its evaluation of the law, which necessarily included the information received from counsel.”

“[W]e find the Lee framework is the most consistent with South Carolina’s policy of strictly construing the attorney-client privilege and requiring waiver to be ‘distinct and unequivocal.’  This case-by-case approach accounts for and fairly distributes the risks and benefits of the various competing public policies.” In Re Mt. Hawley Ins. Co., Appellate Case No. 2018-001170 (S.C. June 12, 2019).