The United States District Court has confirmed in a recent decision that in most circumstances, the attorney-client privilege will be waived in bad faith litigation in South Carolina. In Contravest, Inc. v. Mt. Hawley Ins. Co., the district court was asked to determine whether the insurance company in a bad faith action had waived the attorney-client privilege relative to certain documents and materials sought in discovery. The district court found that it did waive the privilege.
Briefly, the plaintiff Contravest was sued in a construction defects action by a homeowners’ association, and tendered the defense to defendant Mt. Hawley. After Mt. Hawley refused to defend or indemnify, Contravest settled with the homeowners’ association, and assigned Contravest’s bad faith claims to the homeowners’ association. Contravest and the homeowners’ association then sued Mt. Hawley, asserting bad faith, breach of contract, and unjust enrichment. Mt. Hawley removed the action to the district court. In response to certain discovery requests, Mt. Hawley objected and served a privilege log describing as privileged various communications between Mt. Hawley and its lawyers. The plaintiffs moved to compel production of those communications.
The magistrate judge assigned to the case filed a report recommending the communications be produced, stating Mt. Hawley had waived the attorney-client privilege. In reviewing the recommendation of the magistrate judge, the district court began its analysis with a review of the history of waiver of the attorney-client privilege in South Carolina. The court noted the elements of the attorney-client privilege and then the elements of a bad faith action. While recognizing that other states have held the privilege inapplicable in bad faith cases, the court “determined that South Carolina favors a different approach.” Citing an unpublished South Carolina district court decision, the court found South Carolina requires “the proponent of the privilege establish the absence of waiver.” Though not adopted by the South Carolina Supreme Court, the district cited a Washington district court case, Hearn v. Rhay, for the proposition that “if a defendant voluntarily injects an issue in the case, whether legal or factual, the insurer voluntarily waives, explicitly or impliedly, the attorney-client privilege.” In short, whenever a plaintiff alleges bad faith in a complaint, and the insurance company answers the complaint, the issue of whether the attorney-client privilege is waived arises.
The Contravest court recognized this approach is nearly a “per-se” waiver of the privilege in every bad faith action. To “constrain” such a result, the court noted that the plaintiff must make a “substantial showing of merit [of bad faith] before the court should” find waiver of the privilege.
The court then discussed Justice Pleicones’ concurrence in Davis v. Parkview Apartments, which argued the waiver must be “unequivocal” and implied waiver cautiously invoked. In rejecting the concurrence as an indication of how the high court would rule, the Contravest court cited four (4) district court decisions, two decided before the Parkview concurrence and two after, as “stronger evidence that the Supreme Court of South Carolina” would adopt an approach of implied waiver constrained by a prima facie showing of bad faith.
Turning to the issue of the prima facie showing, the court acknowledged that analysis of this element should at least focus on the “bad faith element of the claim.” This means the court must resolve whether the plaintiff’s claims were covered under the policy. However, the district court did not address Mt. Hawley’s argument regarding the bad faith element because the insurance company did not raise it before the magistrate judge. Additionally, the court focused on the insured’s prima facie evidence, finding that the insured had presented enough evidence to create at least an inference of bad faith.
In summary, after considering the history of implied waiver, public policy concerns, the evidence presented, and the failure of the insurer to raise a critical issue to the magistrate judge, the district court ruled Mt. Hawley had waived the attorney-client privilege with respect to “relevant” attorney-client communications contained in the claim file.
With this decision, the South Carolina district courts are signaling that claims of privilege, in legitimate bad faith actions, are dead. Left unaddressed in the district court’s opinion is what an insurance company can do to avoid implied waiver and still effectively defend a bad faith action. Without further direction, insurance companies face the unenviable choice of either putting their communications at risk of discovery, or avoiding those communications altogether.