In Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686 (2013), the Washington Supreme Court significantly restricted an insurer’s ability to assert the attorney-client privilege over communications with counsel by ruling that there is a presumption of no attorney-client privilege in first-party bad faith claims handling lawsuits.  The insurer may, however, overcome the presumption by showing that its attorney was “not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”

As one Washington federal district court noted, while it is difficult to assess when a particular communication involves an attorney performing quasi-fiduciary duties, “as a general matter, there will likely be no privilege for a lawyer investigating facts to reach a coverage decision, but there likely will be a privilege for a lawyer giving an insurer strictly legal advice about potential liability that could result from a coverage decision or some other course of action.”  Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014).  However, the attorney-client privilege can still be overcome if the insured asserts that the insurer engaged “in an act of bad faith tantamount to civil fraud” and makes a showing that “a reasonable person would have a reasonable belief that an act of bad faith has occurred” or that an insurer engaged in a “bad faith attempt to defeat a meritorious claim.”  Such analysis would, however, require something more than an honest disagreement between the insured and the insurer about coverage under the policy. For a prior G&R Insurance Bulletin on Cedellclick here.

Unfortunately, the Cedell Court caused some confusion regarding the process through which an insurer can overcome the presumption.  In short, it is unclear if there is a two-step process which requires the insurer to show that its attorney was not performing quasi-fiduciary (investigating and evaluating or processing the claim), followed by an in camera review of the allegedly privileged documents, or if the in camera review is part of the initial showing.  As one federal district court noted, “the opinion creates rather than alleviates confusion about what must be produced, and under what circumstances.”  Phil. Indem. Ins. Co. v. Olympia Early Learning Center, 2013 U.S. Dist. LEXIS 93067, at *3 (W.D. Wash. July 2, 2013).  There has been no Washington state court decision that explains the process identified in Cedell, but recent Washington federal district court decisions applying Cedell may shed some light on this confusion, at least in federal court practice. MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 78883 (W.D. Wash. May 27, 2014)

In MKB Constructors, Judge James L. Robart held that because state substantive law applies to the attorney-client privilege, an insurer must demonstrate that the attorney was not engaged in the “quasi-fiduciary tasks of investigating and evaluating or processing” a claim under Cedell.  However, federal law applies to the manner in which the court determines the existence of the privilege because the process through which an insurer can overcome the presumption is procedural in nature.  As a result, the court may use its discretion and utilize mechanisms other than an in camera review, i.e. privilege log, affidavit, declaration, to determine the applicability of Cedell in the specific context of the case.  Even so, most of the federal court decisions since MKB Constructorsutilized in camera review to assess whether the insurer’s counsel engaged in quasi-fiduciary tasks.  See MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 102759 (W.D. Wash. July 28, 2014); Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014); Johnson v. Allstate Prop. & Cas. Ins. Co., 2014 U.S. Dist. LEXIS 121342 (W.D. Wash. August 29, 2014); Collazo v. Balboa Ins. Co., 2014 U.S. Dist. LEXIS 109336 (W.D. Wash. August 7, 2014); Palmer v. Sentinel Ins. Co., 2013 U.S. Dist. LEXIS 103079 (W.D. Wash. July 23, 2013).

Another important aspect of the MKB Constructors decision is the holding by Judge Robart that Cedell is inapplicable in federal court when the work-product doctrine is invoked.  The work product doctrine is governed by Federal Rules of Civil Procedure Rule 26(b)(3); thus, Cedell is inapplicable when an insurer withholds documents under the work product doctrine in federal court.  It is important to keep in mind, however, that in the Ninth Circuit, a document is eligible for work product protection only if the document was prepared or obtained because of the prospect of litigation.  In re Grand Jury Subpoena (Mark Torf), 357 F.3d 900, 907 (9th Cir. 2004).  If a document would have been created in substantially similar form in the normal course of business, however, the fact that litigation is afoot will not protect it from discovery.  Id. at 908.  Under this analysis, Washington federal courts have held that draft denial letters prepared by the insurer’s coverage counsel are discoverable.  See Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 118400 (W.D. Wash. August 25, 2014); Tilden-Coil Constructors, Inc. v. Landmark Am. Ins. Co., 2010 U.S. Dist. LEXIS 106369 (W.D. Wash. September 23, 2010).

Finally, as predicted, the federal district court in Carolina Cas. Ins. Co. v. Omeros Corp., 2013 U.S. Dist. LEXIS 53225 (W.D. Wash. April 12, 2013), rejected the insurer’s argument that Cedell only applies to first-party claims, not to third-party liability claims.  The federal district court reasoned that the Cedell court based its ruling on the quasi-fiduciary duty of an insurer to its insured, which exists in both first-party and third-party claims.  Id. at *6-7.

Cedell is still very much alive and well in Washington and insurers should continue to pay close attention to how it impacts reliance on the attorney-client privilege in discovery in both first and third-party bad faith litigation.