South Carolina Supreme Court recently held that insurance companies facing bad-faith actions do not automatically waive attorney-client privilege for documents sought in such suits by denying liability. In re Mt. Hawley Ins. Co., 2019 S.C. LEXIS 53 (S.C. Jun. 12, 2019).
After an insurer denied coverage for a construction defect suit, the insured brought a bad-faith tort action against the insurer. During discovery, the insured sought documents addressing why the insurer denied coverage, but the insurer argued that some of the information requested was protected by the attorney-client privilege. The court ultimately ordered that the documents in question be submitted to the court for an in camera inspection. The insurer sought a writ of mandamus from the U.S. Fourth Circuit Court of Appeals to vacate the district court’s order, leading the Fourth Circuit to certify the following question to the South Carolina Supreme Court: “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 of its insurer?”
Noting that it was considering the question in the narrow context of a bad-faith action against an insured, the South Carolina Supreme Court answered that denying liability and/or asserting good faith in an answer does not, standing alone, place privileged communications at issue. The South Carolina court adopted an approach enunciated in an Arizona case, which took a middle-ground approach in determining whether an insurer waives attorney-client privilege in a bad-faith action. The South Carolina Supreme Court held that a client does not waive the privilege simply by defending a lawsuit, and thus in a tort action against an insurer for bad-faith refusal to provide coverage the party seeking waiver of the attorney-client privilege must make a prima facie showing of bad faith.