Advice of Counsel as a Defense to the Tort of Bad Faith

A Video About the Waiver of the PrivilegeShow more

INTENTIONAL WAIVER

Insurers frequently turn to outside counsel, or internal claims adjusters who are licensed lawyers, for legal advice regarding their coverage determinations on claims. In later litigation over denials of coverage or a carrier’s claims-handling conduct, a question that frequently arises is whether the advice provided by such counsel is protected from disclosure to insureds. Insurers may be obligated to disclose otherwise-privileged communications if the insurer relies on “advice of counsel” as a defense to the claim for breach of contract or bad faith.

It is not unusual for insurers to assert as a defense to charges of bad-faith by claiming that their conduct was reasonable because they relied on the advice of counsel. When an insurer asserts the defense, it puts the substance of the advice it obtained at issue. By so doing most courts conclude the insurer waived the attorney-client privilege.[Chicago Title Insurance Co. v. Superior Court, 174 Cal. App.3d 1142 (1985).]

UNINTENTIONAL WAIVER

In Sony Computer Entertainment America, Inc. v. Great American Ins. Co., et al., 229 F.R.D. 632 (N.D.Cal. 2005) Sony Computer Entertainment Company, Inc. sued American Home Assurance Co. and other insurance companies for wrongful denial of insurance coverage in connection with two consumer lawsuits against Sony. The suits arose from claims of property damage, false advertising, and other injuries in connection with Sony’s PlayStation and PlayStation 2 products. American Home filed motions to compel responses to discovery contesting that Sony’s assertion of the attorney-client privilege at the depositions of Jennifer Liu, an attorney and Sony’s director of legal and business affairs.

Sony’s Ms. Liu was designated by Sony as its person most knowledgeable for deposition under F.R.C.P. Rule 30(b)(6) regarding one of the consumer lawsuits. At the depositions, Sony’s counsel asserted the attorney-client privilege and the attorney-work product doctrine and instructed Ms. Liu not to answer questions.

CRIME FRAUD EXCEPTION

A waiver of the privilege also may result when the carrier is sued for bad faith and/or fraud. For example, California Evidence Code Section 956 provides: “there is no privilege under this article if the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit a crime or a fraud.” Even without a statute, the license to practice law, is not a license to commit a crime.

One federal court ruled that a bad faith claim not involving fraud is insufficient to trigger the exception. In Freedom Trust v. Chubb Group of Insurance Cos., 38 F.Supp.2d 1170 (C.D. Cal. 1999) the insured argued that the privilege had been waived because the insurer denied coverage in bad faith. The court recognized that the attorney “does not have to be aware of the fraud for the crime-fraud exception to apply” and that the fraud exception includes civil fraud. The court noted a split in authority nationally as to whether a bad faith claim triggers the crime-fraud exception.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4