In Everest Indem. Ins. Co. v. Rea, the Arizona Court of Appeals recently held that an insurer’s admission that it consulted with counsel in making decisions on an insurance claim does not waive the attorney-client privilege unless the insurer claims that it “was acting in good faith because it relied on counsel’s advice to inform its own evaluation and interpretation of the law.”  ___P.3d ___, 2015 WL 195450 (Ariz. App. January 15, 2015) (emphasis in original). 

In Everest, the insurer communicated with its attorneys in making decisions about the underlying insurance claim.  Id. at *3.  The plaintiffs argued that the insurer waived the attorney-client privilege for those communications by “defending against their bad faith claim on the basis of subjective good faith.”  Id. at *1.   The trial court agreed and ordered the insurer to produce the privileged communications with its counsel.  Id.   The Court of Appeals accepted special action jurisdiction and reversed the trial court’s order, holding that the insurer had not waived the attorney-client privilege. Id.

In reaching its decision, the Court of Appeals clarified the Arizona Supreme Court’s decision in State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 56-58 (2000), which held that an insurer waived the attorney-client privilege by asserting that its investigation and evaluation of the law were in good faith.  The Everest court held that, under Lee, “to waive the attorney-client privilege, a party must make an affirmative claim that its conduct was based on its understanding of the advice of counsel – it is not sufficient that the party consult with counsel and receive advice.”  Everest, 2015 WL 195450 at *2.  In Everest, although the insurer had consulted with counsel about its decisions on the underlying claim, there was nothing to suggest that the insurer’s “subjective belief in the legality of its actions necessarily included or depended on the advice it received from counsel.”  Id. at *3.    The Court distinguished Mendoza v. McDonald’s Corp., 222 Ariz. 139 (App. 2009) on the grounds that, in that case “[t]he employer expressly admitted that it had relied substantially on the advice … of counsel in reaching its decisions.”  Everest, 2015 WL 195450 at *3.

The Arizona Court of Appeals’ decision in Everest is important because it rejects what had become a common plaintiffs’ argument in Arizona bad faith cases: that by defending a bad faith claim through an assertion of its subjective good faith, an insurer automatically waives the attorney-client privilege for communications with counsel during the underlying claim.  Everest confirms that insurers may defend themselves on subjective reasonableness grounds following consultation with counsel without the risk of waiving the attorney-client privilege.