A significant minority of states permit plaintiffs who win judgments against insured defendants to assert claims directly against the defendants’ insurers—including claims for extracontractual liability, based on alleged bad faith failure to settle the underlying case.  Plaintiffs suing under these direct action statutes are often described as “standing in the shoes” of the insured tortfeasor.  Before the plaintiff slipped on that footwear, however, the insured conducted privileged communications with her attorney, some of which also involved her insurer.  Last month, in Boozer v. Stalley, No. 5D13-4365 (Fla. Ct. App. Sept. 5, 2014), a Florida appellate court rejected a plaintiff’s attempt to discover those communications; but the issue is still a long way from being resolved.

The Tripartite Relationship

When a liability insurer hires an attorney to defend a policyholder, it creates a “tripartite relationship” among insurer, insured and insured’s counsel.  The nature of that relationship—like that of all human interactions—is complex and mysterious, inspiring prose that ranges from the abstruse to the rhapsodic.  One classic formulation calls the tripartite relationship

[a]n entity [that] may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large.

Bank of America, N.A. v. Superior Court of Orange County, 212 Cal.App.4th 1076 (Cal. App. 2013), quoting American Mut. Liab. Ins. Co. v. Superior Court, 38 Cal.App.3d 579 (Cal. 1974).

Maybe so.  But in Big Sky Country, they say that an insurer, an insured and a lawyer make a “privileged community or magic circle,” In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806 (Mont. 2000), and that’s pretty special.

One important aspect of the tripartite relationship is that it doesn’t crumble in hard times.  When the members of the magic circle aren’t getting along—when the insurer denies coverage, or when the insured sues for bad faith—the rules that founded the relationship still apply.  Among other things, members generally can still assert the attorney-client privilege against outsiders, e.g., Fidelity Nat’l Financial, Inc. v. Nat’l Union Fire Ins. Co., 2014 WL 1393743 (S.D. Cal. 2014), but they may not do so against one another.  E.g., CAMICO Mut. Ins. Co. v. Heffler, Radetich & Saitta, 2013 WL 315716 (E.D. Pa. 2013); MapleWood Partners v. Indian Harbor Ins. Co., 295 F.R.D. 550 (S.D. Fla. 2013).

Mr. Stalley Steps In

The Boozer case arose out of an automobile accident in which Benjamin Hintz was injured by Emily Lynn Boozer.  Douglas Stalley, as guardian for Mr. Hintz, sued Ms. Boozer for negligence.  Ms. Boozer was insured under two policies issued by Allstate, which hired counsel to defend the suit.  After settlement discussions failed, Stalley obtained a judgment in excess of the policy limits.  Allstate paid the limits, and Stalley brought a new claim against Allstate for bad faith, seeking the balance of the underlying judgment.  Although Ms. Boozer did not appeal the judgment, the attorneys hired by Allstate continued to represent her in post-judgment proceedings.

In the course of the bad faith suit, Stalley sought to depose the attorney who defended Ms. Boozer against the negligence claim.  After the trial court denied the attorney’s motion for a protective order, the attorney refused to answer certain questions at the deposition, and both the attorney and Ms. Boozer petitioned for certiorari review, by the Fifth District Court of Appeal, to quash the order that allowed the deposition.  (Full disclosure:  attorneys from Carlton Fields Jorden Burt represent one of the parties to the action that did not participate in the appeal.)

In opposing that appeal, Mr. Stalley argued

that in the context of third-party bad faith litigation, he stands in the shoes of Boozer and may obtain discovery of any materials that would be available to her, including those that would otherwise be protected by the attorney-client privilege.

These Shoes Are Made for Standing

Stalley’s position has substantial support in Florida law.  In Baxley v. Geico General Ins. Co., 2010 WL 1780796 (N.D. Fla. May 4, 2010), a third-party bad faith suit that similarly arose out of an automobile accident and an excess judgment, a federal court applying Florida law gave the plaintiff access to the files of the attorneys who represented the insured defendant in the underlying suit.  And in Dunn, Continental Cas. Co. v. Aqua Jet Filter Systems, Inc., 620 So.2d 1141 (Fla. Ct. App. 1993), the same court that heard Boozer had rejected a claim of privilege and granted a third-party plaintiff access to an insurer’s claim and litigation file, “because the injured third party ‘stands in the shoes’ of the insured party … and the insurer owed a fiduciary duty to its insured.”

The Court of Appeal noted, however, that a series of recent decisions, culminating in Genovese v. Provident Life & Accident Ins. Co., 74 So.3d 1064 (Fla. 2011), had clearly upheld the right of a liability insurer to assert the privilege over its own communications with counsel in the context of a claim for bad faith.  Discerning a trend from these cases, the court adopted the reasoning of another case, Progressive Express Ins. Co. v. Scoma, 975 So.2d 461 (Fla. Ct. App. 2007), which the court in Baxley had rejected as “an aberration.”  In Scoma, a different Florida Court of Appeal had found:

[A]lthough [the personal representative of the decedent in the underlying case] may ‘stand in the shoes’ of [the insured] for the purposes of standing to bring a bad faith action, that position does not permit her access to otherwise privileged communications between [the insured] and his counsel in the [underlying] wrongful death action, at least in the absence of a waiver of the privilege by [the insured] or his written assignment of the bad faith claim.  A person does not waive or otherwise lose an attorney-client privilege merely because a third party is authorized to file a lawsuit against the person’s insurance company.

See also Maharaj v. GEICO Casualty Co., 289 F.R.D. 666 (S.D. Fla. 2013).  By adopting this reasoning, the court in Boozer expressly “recede[d] from Dunn to the extent it allows the unqualified discovery of attorney-client protected material.”

The Kicker

As the quoted language from Scoma and Boozer reminds us, the more typical plaintiff in a third-party bad faith suit has received an assignment of the insured’s claim, which entails a waiver of the insured’s right to assert the attorney-client privilege.  That waiver also vitiates the insurer’s right to assert the privilege over attorney-client communications that have been shared with the insured.  Furthermore, an insurer that provides a defense subject to a reservation of rights may be unable to use the privilege to protect its own communications with insured’s counsel.  E.g.,  Enns Pontiac, Buick & GMC Inc. v. Flores, 2011 WL 6181924 (E.D. Cal. 2011).

There are, in short, a number of ways by which plaintiffs against insureds can penetrate the magic circle of the tripartite relationship.  As Boozer demonstrates, though, merely alleging bad faith will not always suffice.