NO. 91-523 IN THE SUPREME COURT OF THE STATE OF MONTANA 1993

DAVID ALARIC PALJ4ER, a Protected Person, by Martha Rose Diacon,his Conservator, -.

. Plaintiff and

-vFARMERS INSURANCE EXCHANGE, Defendant 

### and

APPEAL FROM: 

### District Court 

### of the Eighth Judicial District, 

### In and for the County of Cascade, TheHonorableThomas

### M. McKittrick,Judgepresiding.

COUNSEL OF RECORD: For Appellant: William Conklin 6r L.D. Mybo (argued)

## ,Conklin,Nybo & Leveque, Great Falls,Montana 

### For Respondent: 

### Dennis 

### Patrick Conner (argued), 

### Great Falls, Montana; and 

### John C. Risjord (argued)

## , Risjord & James, Overland Park,Kansas For Amicus: Randy J, Cox, Boone, Karlberg & Haddon, Missoula, Montana: 

### Dana L. Christensen, 

### Murphy, Robinson, Heckathorn & Phillips,Kalispell,Montana;anRobert F. James (argued),James, Gray & McCafferty, Great Falls,Montana

Submitted: December 10, 1992
Filed: Decided: October 18, 1993Justice R. C. McDonough delivered the Opinion of the Court, 

### This is an appeal from an orderbased on 

### a jury verdict and a judgment of $750,000 in compensatory damages and $750,000 in punitive damages against Farmers Insurance Exchange (Farmers) for breach of the covenant of good faith and fairdealing (bad 

### faith). We reverse and remand for a 

### new trial. 

### his action arose in conjunction with a claim by Palmer, the insured, against Farmers, the insurer, for uninsured motorist benefits. Palmer's claim ensued after a no-vehicle-contact motorcycle accident on June 10, 1984. Farmers requested that the court bifurcate the uninsured motorist claim from the bad faith claimand staydiscoveryproceedings concerningbad faithuntil the 

### uninsuredmotorist claimwasresolved. The court granted Farmers' request on August 21, 1986. The uninsured motorist claim proceeded to trial in March of 1987. The jury found 

### an uninsured motorist liable for Palmer s injuries. We affirmed theverdict and judgment on appeal. Palmer by Diacon v. Farmers Ins. Exch. (1988), 233 Mont. 515, 761 P.2d 401. The bad faith action was revived in the fall of 1988 and the

case 

### went to trial on March 4, 1991. After the 

### jury verdict, the trial judgeapprovedthepunitive damage award and entered judgment against Farmers. Farmers filed a motion for either a judgment notwithstanding the verdict or a 

### new trial. Themotion was deemed denied. 

### This appeal followed. The pertinent issues on 

### appeal are: 21. Whether the District Court erred by denying Farmers' motion for directedverdict. 2. Whether the District Court erred in admitting evidence from the underlying trial. 3. Whether Farmers is entitled to a new trial because the District Court ordered Farmers to produce, and later allowed intoevidence, correspondence betweenFarmersand its attorneys who defended the underlying uninsured motorist lawsuit. A. Whether the attorney-client privilege applies to first-party bad faith cases in which the insurer's attorney did not represent the interests of the insured in the underlying case. B. Whether Farmers' claim file contained material subject to attorney-clientprivilege. C. Whether Farmers voluntarily waived its attorneyclient privilege. D. Whether evidence of privileged communications is admissible against the holder of the privilege after the court erroneously compelled its discovery. E. Whether the admission of privileged materials into evidenceprevented Farmers fromhaving a fairtrial,thus entitling it to a new trial. 4. Whether the District Court erred in ordering the production of work-product materials and then allowing the materials into evidence. A. WhethertheDistrict Court erred in ordering Farmers toproduce thework-product materials in itsclaim files. B. Whether theDistrictCourt erred indeterminingthat one of Farmersr former defense attorneys waived the protection of the work-product doctrine by making testimonial use of certain work-product materials. 5. Whether theDistrict Court erredby admitting evidence of the litigation tactics of Farmers' attorneys and of Farmers' decision to appeal. 

### A. Whether evidence of an insurer's post-filing conduct, such as litigation strategy and tactics in defending the underlying suit, is admissible in a bad faith action based on the insurer's decision to deny coverage.B. Whether an insurer's decision to appeal the verdict in the underlying case is admissible as evidence in a subsequent bad faith action. From the inception of the proceedings, Palmer has maintained that an unidentified tractor and semitrailer (the truck) crossed the centerlineand ran hismotorcycle off the road. Farmersdenied the uninsured motorist claim in February of 1986, after a witness told a Farmersvclaimsadjuster that the truckwas in its own lane. A few days later Palmer filed suit against Farmers for denying the claim and for bad faith. Pursuant to a motion to compel, the court ordered production of Farmers' entire claim file during discovery on the bad faith claim. The court also ruled that Farmers was not required to produce materials dated after October, 26, 1988, the date Palmer notified Farmers that he intended to proceed with the bad faith claim. However, the materials dated prior to October 26, 1988 included confidential reports sent to Farmers by the attorneyswho represented it in the uninsured motorist case. On February 21, 1989, Farmers produced its claim file under court order. At that point, nothing had transpired in the bad faith action, except Palmer's motion to compel and a letter from Farmers' attorney Bill Gregoire to Palmer's attorney. The letter stated that Farmers would have to obtain new counsel for the bad faith trial because Farmers would likely call him and Farmers' other attorneys,Marvin Smith and James Walsh, aswitnesses in the bad faith trial.

### Equipped with attorney Gregoire's confidential reports to Farmers, Palmer deposed several of Farmers' employees who had worked on the uninsured motorist case. Among the persons that Palmer questioned using the privileged materials was Bud Rausch, Farmersfbranch claims supervisor. Neither Rausch nor any of the other deponentshadbeen designatedasexpert witnesses at thetime of their depositions. At a deposition on September 13, 

### 1989, Palmer's attorney cross-examined Rausch extensively on five of the letters Farmers received from its attorney Gregoire and on events which transpired duringpreparation for trial and during trial. Palmermade similar

use of Gregoire's letters to Farmers when he deposed a Farmers' claims representative on February 16, 

### 1990, and Farmers' investigator on February 19, 1990. Farmers identified its prospective expert witnesses on July 18, 1990, in an answer to an interrogatory. Farmers identified Frank Weedman and Bud Rausch as potential expert witnesses. In addition, Farmers identified attorneys Smith, Walsh, an,3Gregoire

as potential witnesses in the bad faith trial. The answer also stated: "If called as witnesses, those individuals will not be examined regarding their confidentialprivileged communicationsto the defendant regarding that underlying suit or the instant bad faith action." Farmers hired Weedman as an expert witness regarding reasonable insurance industry practice on March 8, 1990, a year after Farmers produced its claim file for Palmer. Farm'erssent acopy of the same claim file to Weedman for his review. Shortly thereafter, Farmers filed a motion for return of privileged communications. Nine months later, one week before trial, the District Court ruled on the motion for return of privileged communications. The court ruled that neither the attorney-client privilege nor the work-product doctrine apply in first-party bad faith actions, and therefore,Palmerwas entitled to Farmers1entire claim file. The court then ruled that Farmers had waived the privilege because the experts it intended to call at trial based their opinions on a review of the entire claimfile, including attorney correspondence. At trial, most of Palmer's case-in-chief involved evidence concerning the underlying trial and Farmers1post-filing conduct. The evidence included the strategy and litigation tactics of Farmers1attorneys who defended the underlying case and testimony from the underlying trial. In questioningBud Rausch, the first witness at trial, Palmer introduced into evidenceand readnine of the reports consisting of confidential communications between Farmers and its former attorneys. After the reports had been disclosed to the jury, Farmers called its former attorneys as witnesses to explain their actions in defending the underlyinguninsured motorist case. Near the end of the trial, Farmers offered the complete claim file into evidence to rebut Palmer's use of selected portions of the privileged materials.Farmers made a motion for a directed verdict at the end of Palmer's case-in-chief. The court denied the motion. Farmers renewed the motion at the close of all of the evidence with a stipulation from Palmer that the earlier motion and argumentswere deemed repeated. The court accepted the form of the motion and again denied it. This opinion will refer to additional facts where they are pertinent to the discussion. Our review of the District Court's conclusions of law is plenary;we determine whether the court's conclusions are correct. We review discretionary acts of the District Court to determine whether the court abused its discretion. Steer Inc. v. Dept. of Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

Did the District Court err by denying Farmers' motion for a directed verdict? 

### his is a borderline issue, considering the closeness of the questions of fact in the underlying case. See Palmer bv Diacon, 761 P.2d at 404. But, given the standard for granting a directed verdict, we conclude that the District Court did not commit reversible errorby denying Farmers1motion foradirected verdict. This case arose before the legislature enacted 9 33-18-242, MCA, which appears to have codified our common law standard of liability for bad faith in denying insurance coverage. Under Montana common law, an insurer cannot be held liable for bad faith in denying a claim if the insurer had a reasonable basis for contesting the claim or the amount of the claim. Tynesv. Bankers 7Life Co. (1986), 224 Mont. 350, 364, 730 P.2d 1115, 1124. As we have stated, "[i]t is generallyheld that an insurer is entitled to challenge a claim on the basis of debatable law or facts and will not be liable for bad faith or punitive damages for denying coverage if its position is not wholly unreasonable." Safeco Ins. Co. v. Ellinghouse (1986), 223 Mont. 239, 248, 725 P.2d 217, 223;

see also St. Paul Fire & Marine Ins. Co. v. Cumiskey (1983), 204 Mont. 350, 665 P.2d 223: 5 33-18-242(5), MCA. Farmers cited Cumiskev to support its position that the court should have granted its motion for a directed verdict. In Cumiskev, an insurer filed a declaratory judgment action, asking the court to interpret the policy and determine the relationships of theparties and their legal rights. The insured counterclaimed, alleging that the insurer acted in bad faith by bringing the declaratory judgment action insteadofpayingtheclaim. Cumiskev, 665 P.2d at 226-27. The trial court granted a directed verdict in favor of the insurer. We upheld the court because in a proper case, an insurer may filea declaratory judgment actionto obtain adeterminationof the validity, continuance or coverage of the insurancepolicy, the extent of liability, or the insurer's duty under the policy. Cumiskev, 665 P.2d at 227. We held that filing a declaratory judgment action under appropriate circumstances does not necessarily constitute bad faith. See Cumiskey, 665 P.2d at 227. In this case, Farmers contested liability, contending that Palmer's accident was not caused by another motorist, andtherefore, Palmer's uninsured motorist policy did not cover the accident. Cumiskev does not require the court to grant a directed verdict under the facts of this case. Farmers also contends that the District Court should have granted its motion for a directed verdict because Farmers had a reasonable basis to deny coverage. To support its contention, Farmers argues that statements taken fromwitnesses before Farmers denied the claim gave it a reasonable basis fordenying the claim. WitnessAtchison told a claims investigator that, contraryto Palmer's assertion,a truckdidnot runPalmer's motorcycle off the road. In a later deposition, Atchison adhered to his story, stating that from the time he first saw the truck until the motorcycle went off the road, the truck never left its own lane. In all of his statements, Atchison never deviated from his testimony that the truckwas in its own lane and did not run Palmer off the road. In addition, Farmers obtained statements from some dirt bikers. They reported seeing a motorcycle speeding down the highway at full throttle about one-half mile from the accident

scene. Itmatched thedescription of Palmer's motorcycle. Shortly thereafter,they came across Palmer's motorcycle along with Palmer and his passenger in the ditch. According to the dirt bikers, no other speeding motorcycles went past thembefore they cameupon the accident. Farmers argues that the statements of Atchison and the dirt bikers gave it 

### a reasonablebasis fordenying the claimas amatterof law. Under the law, if Farmers had a reasonable basis upon which to deny the claim, it cannot be found to have acted in bad faith. Tvnes, 730 P.2d at 1124. Because Palmer's uninsured motoristpolicywould not covertheaccidentunless another vehicle

ran Palmer off the road, thewitnesses' statements appear at first glance to provide a reasonable basis for denying the claim. Palmer, however,countersthat itwas unreasonable for Farmers to rely onAtchison's statements becauseAtchisonwas anunreliable witness. Palmer points out thatAtchison kept changing details of his story, suchas the exact speed of themotorcycle before it left the road and whether he saw the motorcycle as it left the road or merely a cloud of dust. Palmer argues that itwas unreasonable for Farmers to deny coverage based on Atchison's information because Atchison changeddetailsofhis story. The credibility ofAtchison is, therefore, a question of fact in this case. Palmer supplied another witness who was riding a motorcycle similar to Palmer's. The witness testified that he and his wife were speeding on the same road at about the time of the accident. Palmer argues that thisgivesanotherreasonable explanationof the speeding motorcycle seenby the dirt bikers. However, there isno evidence that Farmers knew of this witness' statement when it denied the claim. In a jury trial, a judgemay direct a verdict in favor of the party entitled thereto when the case presents only questions of law. Section 25-7-302,MCA. When a defendantmoves fora directed

### verdict, the court views only the evidence presented by the 

### plaintiff and views it in the light most favorable to 

### the plaintiff. Cremer

### v. CremerRodeo Land & 

### Livestock Co. (3979),181 

### Mont. 87, 91, 592 P.2d 485, 488. A 

### courtmay not withdraw a case from the jury, unless the conclusion requested by the defendant must follow from the evidence as a

### matter of law and the 

### plaintiff cannot recover under any view that could reasonably be drawn from the evidence. Cremer, 592 

### P.2d at 488. The test 

### for determining whether the evidence is legally 

### sufficientto withdraw a case 

### from 

### the jury is whether reasonable people coulddraw different conclusions 

### fromtheevidence. If 

### only

one canclusion is 

### reasonably proper, a directed verdict is 

### appropriate. Cremer, 592 

### P.2d at 488. 

### Here, the court evidently concluded 

### that more 

### than one conclusion 

### was reasonably proper based on 

### the evidence. Consequently, it denied Farmersfmotion for directed verdict. In reviewing the courtf s denial of Farmersf motions, we apply the common-law standard forholding an insurer liable forbad faith in denying a claim. Under that standard, 

### an insurer cannot be 

### held liable if the insurer had a reasonable basis for contesting the claim. Tvnes, 730 P.2d 

### at 1124. In 

### this case, there 

### is conflicting evidence concerning the 

### credibility of thewitnesses. It is 

### for the jury todetermine 

### the probative value of the evidence and draw inferences from the 

### evidence,and then determine whether Farmers had a

### reasonablebasis fordenying the claim.We hold 

### that Cumiskev does not require the District Court to grant a directed verdict for Farmers. We further hold that the courtdidnot commitreversible error

### by concluding that reasonable people could draw different conclusions about whether Farmers' had

a reasonable basis for contestingPalmer's claim. Accordingly, the court did not err in denying Farmers' motion for a directed verdict.

Did the District Court err in admitting evidence from the underlying trial and other irrelevant evidence? Because

### we are reversing on other grounds and remanding for a

new trial, we will 

### not rule 

### on the particulars relative to this issue. However, some comment is necessary because the District Court admitted into evidence a large quantity of material relating to the underlying uninsured motorist trial. Relevant evidence is flevidence having any tendencytomake the existence of any fact that is of consequence 

### to the determination of the action more probable or less probable than it would be without the evidence." Rule 401,M.R.Evid. Trial judgeshave the discretion to determine the relevancy and admissibility of evidence, Dahlin v. Holmquist (1988), 235 Mont. 17, 20, 766 P.2d 239, 241. However, the admission of irrelevant evidence is an abuse of discretion and warrants a new trial 

### if it affects the substantial rights of 

### a party. Dahlin, 766 P.2d at 241. Material from the underlying trial tending to show what Fanners knew or should have known at the time 

### it made the decision to deny the claim is relevant. In addition, material tending to 12showwhether or not such knowledge supports a reasonable basis for denying the claim is relevant. See Rule 401,M.R.Evid. However, evidence from the underlying trial that is not related to Farmersf basis for denying the claim is not relevant. The essential issue in this case is whether Farmers had a reasonablebasis for denying the claim. Any evidence that does not relate to facts of consequence to this issue is not relevant. 111. Did the District Court erroneously order Farmers to produce, and later allow into evidence, correspondencebetween Farmers and its attorneys who defended the underlying uninsured motorist lawsuit, thus entitling Farmers to a new trial? Ina request forproduction of documentson February 26, 1986, PalmerrequestedFarmers' "entire file on the accident described in the Complaint filed herein, including but not limited to any and all documents relating to plaintiff's claim for uninsured motorist benefits." Palmer also requested from Farmers, "[a] ny and all correspondence between you, your agents and attorneys and plaintiff,plaintiff's agentsandattorneys,concerningplaintiff's claim for uninsured motorist benefits." Sometime later, Palmermoved to compel discovery of Farmers' claim files developed in investigatingand defending the uninsured motorist suit. Farmers produced everything in its files, except for correspondencebetween Farmers and its attorneys and materials dated after October 8, 1985,the date Palmer's attorney threatened to sue for bad faith if Farmers did not pay Palmer's claim. Farmers objected to producing exhibits consisting of confidential attorney-client communications on the grounds that 13they wereprotectedby attorney-clientprivilege. Farmersobjected to producing other exhibits on the grounds that they were immune from discovery under the work-product: rule. The court ordered Farmers to produce the attorney-client communications. In 

### an order dated February 16, 1989, the court ruled that "defendant's assertion of the attorney-client privilege with respect to those claim file documents which constitute communications between it and its counsel is overcome by plaintiff's need 

### forsuchmaterials 

### inpreparation of itsbad faith

case against defendant.'l On February 21, 1989, pursuant to court order, Farmers produced 

### all claim file materials dated before October 26, 1988. Among the materials were several letters from Farmersf defense attorney Gregoire, including eight letters marked "confidential reports." Over continuing objections by Farmers, the District Court allowed into evidence these letters and other correspondence between Farmers and its attorneys who defended the underlying uninsured motorist case. Farmers 

### argues that 

### it did not have 

### a fair trial because the District Court admitted this; privileged material into evidence. 

### Farmerspoints out 

### that thebad faith trial shouldhave centered 

### on whether the infomation it had when it denied Palmer's claim constituted a reasonable basis for contesting the claim. Farmers contends thatby admittingprivileged materials, the court allowed Palmer to focus much of the bad faith case 

### on the litigation tacticsdefense counselused inpreparing for theunderlying trial,in conducting the trial itself, and in recommending and pursuing the subsequent appeal. Therefore, Farmers argues, it is entitled to a new trial. We agree. The fundamental purpose of the attorney-client privilege is to enable the attorney to provide the best possible legal advice and encourage clients to act within the law. The privilege furthers this purpose by freeing clients from the consequences or the apprehension of disclosing confidential information, thus encouraging them to be open and forthright with their attorneys. State ex rel. United States Fidelity and Guaranty Co. 

### v. Second Judicial Dist. Ct. (1989), 240 Mont. 5, 10, 783 P.2d 911, 914

(USF&G)

## , (citingUpjohn Co. v. United States (l98l), 449 U.S. 383,

Another importantpolicy behind the attorney-client privilege is to foster the attorney-client relationship by ensuring that attorneys are free to give accurate and candid advice without fear that the advicewill laterbe used against the client. We approve of the Missouri Supreme Court's recognition of this policy, articulated as follows: As long as our societyrecognizes that advice as to matters relating to the law should be given by persons trained in the law--that is, by lawyers--anything that materially interferes with that relationship must be restricted or eliminated, and anything that fosters the success of that relationship must be retained and strengthened. The relationship and the continued existence of the giving of legal advice by persons accurately and effectively trained in the law is of greater societal value, it is submitted, than the admissibility of a piece of evidence in a particular lawsuit. Contrary to the implied assertions of the evidence authorities, the heavens will not fall if all relevant and competent evidence cannot be admitted.State ex rel. Great Am. Ins. Co. v. Smith (Mo. l978), 574 S.W.2d 379, 383 (quotingSedler & Simeone, Comment, Privileqes in the Law of Evidence: TheRealities ofAttornev-ClientConfidences,24Ohio St.L.J. 1, 3 (1963)). With these policies inmind, we will apply the statutes and rules to the particular contentions of the parties.

A. Does the attorney-client privilege apply to first-party bad faithcases in which the insurer's attorneydid not: represent the insured's interests in the underlying case? Palmer contends that all correspondence between Farmers and its former attorneys is discoverable because the attorney-client privilege does not apply in first-party bad faith actions such as this one. We previously held that the attorney-client privilege applies in the context of third-party bad faith actions, but we have not determined whether the privilege applies in first-party bad faith litigation. USF&G, 783 P.2d at 916. For definitional purposes, a third-partybad faith action is one in which the plaintiff is a third-party claimant rather than the insured. In a first-party bad faith action the plaintiff is the insured. There are different types of first-party bad faith actions. Palmer argues that this Court has made a distinction between third-party and first-party bad faith actions. Palmer argues, based on federal district court cases, that the attorney-client privilege does not apply in first-party bad faith cases. See Bergeson v. National Surety Corp. (D.Mont. 1986), 112 F.R.D. 692: Bakerv. CNA Ins. Co. (D.Mont. 1988), 123 F.R.D. 322. We disagree.

16One type of first-party bad faith action involves dual representation by the attorney. Judge William Jameson first expressed the concept of dual representationas follows: "Underan insurance contract, however, the insurer initially employs the attorney to represent the interests of 

### both the insured and the insurer.I1 Jessenv. O'Daniel (D.Mont. 1962), 210 F.Supp 317, 331- 32; see also Ellinuhouse, 725 P.2d at 226;USF&G, 783 at 913-14. First-party bad faith cases involving dual representation often arise after a third-party claimant obtains a judgment in

excess of policy limits and the insured later sues the insurance company for failure to settle within policy limits. In these cases, courts have held that the insured is entitled to the entire claim fileprepared fortheunderlying lawsuit,because the insurer created the fileprimarily on behalf of the insured. E.g., Baker, 123 F.R.D. at 326. The rationale courts use to abrogate the attorney-client privilege in such cases is that one joint client

(the insurer) cannot assert the privilege against another joint client (the insured). See, e.g. Baker, 123 F.R.D. at 325-26; see also 22 A.L.R.2d 659 5 3; 4 A.L.R.4th 765 (annotations concerning applicability of attorney-client privilege in dual representation cases). Thepresent case is adistinct type of first-partyaction. In this type of action, the claimant and the insurer are in adverse positions from the outset of the underlying case. Farmers stepped into the shoes of the unidentified third party motorist when it denied Palmer coverage under his uninsured motorist policy. Theattorneys who represented Farmers in the uninsured motorist case have not represented Palmer, therefore the dual representation reasoning does not apply in this case. The nature of the relationship, not the nature of thecauseof action,controls whether communicationsbetween attorneyand client

can be discovered. USF&G, 783 P.2d at 915. Tbe attorney-client privilege protects communications in first-party bad faith cases when the insurer's attorneydid not represent the interests of the insured in the underlying case. That is tbe nature of the relationshiphere;therefore, theattorney-client privilegeapplies in this case.

B. Did Farmers1file containmaterial subjectto attorney-client privilege? The subject matter and author of each exhibit is critical in determining whether the attorney-client privilege prevents its discovery. Absent a voluntary waiver or an exception, the privilege applies to all communications from the client to the attorney and to all advice given to the client by the attorney in the course of the professional relationship. Kuiper v. Dist. Ct. of the Eighth Judicial Dist. (1981), 193 Mont. 452, 461, 632 P.2d 694, 699; see also 6 26-1-803,MCA. The portion 

### of Farmers1 file produced under court order contained "confidentialreportstt concerning thepending litigation from Farmers' attorney Gregoire to Farmers. The reports constituted advice from Gregoire to Farmers on many matters relating to Palmer's claim. In the reports, Gregoire evaluatedwitnesses, evaluated the trial, advised Farmers concerning his investigation and trial preparation, advised Farmers on his opinions of defense and trial strategy, advised Farmers on the prospect for a successful defense, and advised Farmers on posttrial negotiations and on grounds for appeal. The reports clearly contain advice given to Farmers by its attorney inthe courseof the attorney's professional relationship. The attorney-client privilege protects Farmers from disclosing those reports and any other correspondence sent in the course of the professional relationship with its attorneys. See Kui~er, 632 P.2d at 699. Theprivilege of non-disclosure isnot lost merely because the communications contain relevantnonlegal considerations. UnionOil Co. of Calif. 

### v. Dist. Ct. (1972), 160 Mont. 229, 236, 503 P.2d 1008, 1012. Theprotection appliesunless the communications fall within some exception to the privilege or Farmers voluntarily waived the privilege. C. Did Farmers voluntarily waive its attorney-client privilege? Palmer contends that Farmers waived its attorney-client privilege before the court ordered production of the privileged correspondence. According to Palmer,Farmers waived the privilege when Farmers' attorney Gregoire sent a letter dated November 15, 1988, to Palmer's attorney, stating that Farmers would have to obtainnew counsel for the bad faith trial because he and Farmers' other attorneys, Smith and Walsh, might be called as witnesses in the trial. Palmer argues that after Gregoire sent the letter,Palmer was entitled to discover the bases of the testimony and 

### opinions those attorneys would present to the juryThis argument has no merit for two reasons. First, the attorney-client privilege belongs to the client and an attorney cannot waive it without consent of the client. See 5 26-1-803, MCA; Rule 503, M.R.Evid. Second, Farmers did not list the attorneys as witnesses until July 18, 1990, over a year after the court ordered Farmers to produce the privileged materials. Even then, Farmers stated that the attorneys would testify to factual matters, but would not testify regarding confidential privileged information. Palmer further contends 

### that Farmers voluntarily waived its attorney-client privilege several times after Farmersproduced the privileged material under court order. Notably,all of the alleged waivers occurred after the court compelleddiscovery and Palmerhad made extensive use of the privileged materials in preparing his

case. Palmer's arguments are inconsequential because Farmers did not voluntarily release the attorney communications--the court ordered 

### it to do so. We will, however, address each of Palmerrs arguments in turn. Palmer asserts that Farmers did 

### not object to 

### his crossexamination regardingthe contents of theprivilegedcorrespondence at thedeposition of Bud Rausch,Farmers' branch claims supervisor. Insoarguing,Palmer overlookedthe following continuing objection made by Farmersr attorney at the beginning of the 

### deposition. *'[I]n order to preserve our objections, Iwish to state a general and continuing objection 

### to any and 

### allreferencetoandquestioning regardingdocuments frornthe claim files of Farmers InsuranceExchange,pertaining to Mr. Palmer's claims in their several, various versions, which documents

### we produced over objection 

### and pursuant to the court's order compelling production, dated February 16, 1989. Defendant's objections are that such documents are immune 

### from discovery under the workproduct protectionaffordedbyRule 26(b)3of theMontana Rules of Civil Procedure. And also,because agreatmany of such documents constitute communications between defendant and 

### its attornevs and are ~rivileaed under the attornev-client privileqe, I: have 

### a second obiection.

(Emphasisadded.) Farmers thus preserved its objection to Palmerrs use of the privileged materials, and nothing in Rausch's deposition acted as

a waiver 

### of Farmers' attorney-client privilege. Palmer next contends that Farmers waived its attorney-client privilege by relying 

### on advice of counsel in its decision to deny Palmer'sclaim. However,mere reliance on an attorney's advice is not the crucial factor. The attorney-client privilege applies lgunless the insurer directly relies on advice of counsel as a defense to the bad faith charse." (Emphasis added.) SpectraPhysicsv. Superior Court (Cal.App. 1988), 244 Cal.Rptr. 258, 261;

see also ~ransamerica ~itle Ins. Co. v. Superior Court (Gal-App.

Upon cross-examination in his deposition and at trial, Bud Rausch stated that advice of counsel influenced Farmersfdecision to deny Palmer's claim. Although Farmers listenedtothe advice of counsel in deciding to deny Palmer's uninsured motorist claim, Farmers did not directly rely on advice of counsel as a defense to Palmerrsbad faith claim. Therefore, Palmer's contention thatFarmers waived its privilege by relying on advice of counsel is lacking inmejrit. See Svectra-Phvsics, 244 Gal-Rptr. at 261. Palmer next contends that Farmers did not object at trial to the admission of privileged communications. On the contrary, during ahearing on themorning of trial, Farmers made a continuing objection to use of the privileged materials as evidence. The court granted the request for a continuing objection so that at trial Farmers1 attorney would not have to get up and object continually,whenever privileged material was discussed or offered into evidence. Thereafter, Farmers was not required to state specific attc~rney-client privilege objections to each exhibit. Palmer next contends that at trial Farmers made an "unequivocal and thorough waiver of purported attorney-client privilege.I' During arguments over the relevance of some communicatiors between Farmers and its attorneys, the discussion focused onwhich communications Palmerwanted to examine. Farmers counsel stated, "It's already been waived. It's already been produced." Taken in context, this statement is not a waiver, rather it is a comment that there were no attorney-client communications left that had not been produced under court order. Palmer next contends that Farmers made multiple waivers by naming attorneys as witnesses, by furnishing their communications to experts who then testified with regard to them, by permitting their insured to testify to communications without objection, and by calling their attorneys to the witness stand to testify to the subjectsof theprivileged information. Under the circumstancesofthis case, these actions do not constitute a waiver of the attorney-client privilege. One thing is clear. At the time the District Court abrogated Farmers' attorney-client privilege and ordered production of Farmers' claim file and all confidential attorney-client communications between ~armersand its attorneys Smith, Walsh, Clarke, and Gregoire, Farmers had done nothing that could be interpreted as avoluntary relinquishment of its right to claimthe privilege. As a general rule, "[a] person upon whom these rules confer a privilege against disclosure waives the privilege if the person 

# .

. 

# . voluntarily discloses or consents to disclosure of any significant part of the privileged matter." Rule 503, M.R.Evid. Mere reference to privileged reports is not enough to waive the attorney-client privilege. To have waived the privilege by disclosing privileged communications, Farmers would have had to voluntarilydivulgethe specific confidentialmaterial contained in the reports. See Union Oil Co. of Calif., 503 P.2d at 1012-13. Once the court erroneously abrogated Farmers' attorney-client privilege by compelling discovery of the confidential reports, it

was too late for avoluntary waiver to occur and Farmers' claim of privilege was not defeated. See Rule 504, M.R.Evid. Farmers, therefore,did not voluntarily waive the attorney-clientprivilege applicableto the communications betweenFarmersand its attorneys. D. Is evidence of privileged communications admissible against the holder of theprivilege if the court erroneously compelled its discovery?TheDistrictCourt inthis case compelled discovery of all the materials dated after October 26, 1988, in the claim file, including materials subject to attorney-client privilege. In so ruling,the court foundthat Palmerdemonstrateda substantialneed for the materials and would incur undue hardship in obtaining the substantial equivalent of those privileged materials. The District Court seems to have confused the attorney-client privilege with thework-product doctrine. A showing of need cannot defeat the attorney-clientprivilege, whereas a showing of needmay overcome the immunity from discovery given to an attorney's work product. USF&G, 783 P.2d at 915. As discussed above, the purpose of the attorney-client privilege is to fostertheattorney-client relationshipby enabling attorneys to provide the best advicepossible to their clients and encourage the clients to act within the law. The privilege furthersthispurpose by encouragingclientsto give information to their attorneys without fear that it will later be used against them.Theprivilege also furthersthispurposeby allowing attorneys to give candid advice to clientswithout fear that later it can be used against the client. Our statute reflects this policy by includingas privileged communicationsanyadvice fromtheattorney to the client given within the professional relationship. See 5 26-1-803,MCA. TheMontana Rules of Evidence promote the policies underlying the attorney-client privilege by providing that "[a] claim ofprivilege is not defeated by a disclosure which was compelled erroneously 

# . . . 

# . '1 Rule 504, M.R.Evid. This rule provides a remedy for the holder of a privilege when a court erroneously compelsdiscovery of privileged material. "The remedy provided is that the privilege may be subsequently claimed and the disclosed subjectmatter made inadmissible. Rule 504,M.R.Evid.

## ,Commission Comments. Rule 504 was intended for this situation, inwhich theholder of a privilege was compelled to disclose privileged matters pursuantto court order. Rule 504,M.R.Evid., Commission Comments. Evidence of the privileged communications between Fanners and its attorneys was not admissible against Farmers merely because the court erroneously compelled its discovery.

E. Did the admission of privileged materials into evidence prevent Farmers fromhaving a fairtrial, thus entitling it to a new trial? The District Court misconstrued the law when it ordered Farmers toproduce privileged material and admitted theprivileged material into evidence. An example of the prejudicial effect of the disclosure of the correspondence between Farmers and their attorneys, was the attorneysv analysis and recommendations to Farmers relative to theunderlying case being dangerous to Farmers and the need for the retention of an accident reconstruction expert. The alleged failure to timely retain such an expert contrarytothe recommendationof their attorneyswas a substantial element in Palmer's proof of Farmerstbad faith in investigating and settling Palmer's claim. Palmer claimed the retention of suchan expert and his opinionwould have refuted any statements relied

on by Fanners that Palmer was speeding. The attorneys' analysis and recommendations and Farmers' reaction to them was brought out thoroughly in the direct examination by Palmer's attorney of Farmers' branch claim supervisor as an adverse witness. Such correspondence was also noted extensively in Palmer's attorneys' final argument as evidence of bad faith and failure to timely and properly investigate the claim. This error also helped Palmer to focus his case on the trial preparation strategy and litigation tactics of Farmers' attorneys, rather than on whether Farmers had

a reasonable basis for denying liability. In issue V below, we further discuss how evidence of Farmers' litigation tactics and strategy prejudiced Farmers. The admission of privileged correspondence into evidence materially affected Farmers1 substantial rights and prevented Farmers from having a fair trial. See § 25-11-102(1), MCA. Therefore, we vacate the District Court's order and judgment and remand for a new trial inwhich Farmers can reassert its attorneyclient privilege. See Rule 504,M.R.Evid., Commission Comments. IV. Did the District Court err in ordering the production of workproduct materials and then allowing thematerials into evidence? On February 16, 1989,the District Court orderedproductionof all Farmers1claim filematerials dated after October 26, 1988,the date of a letter from Palmer's attorney to Farmers' attorney expressing that Palmer would proceed with the bad faith action. During the secondweek of trial, the court ordered Farmers1 former 26defense counsel to produce the 

### firm's witness files to Palmer's counsel. Farmers contends that the ~istrictCourt erred in ordering production of thesematerials on the grounds that some of the materials were immune from discovery under the work-product doctrine. We agree. We are remanding because of errors involving the issue of attorney-client privilege, but we are also remandingbased on this issue because the admission of certain work-product materials affected Farmers' substantial rights and prevented 

### it from having

a fair trial. See § 25-11-102 (1)

## ,MCA.

A. Did the District Court 

### err by ordering Farmers to produce the work-product materials in its claim file? Inresponse to Palmer's motion to compel discovery of Farmers' claim file,Farmers objected toproducinganymaterials dated after October 8, 1985. 

### On that date, Palmer's attorney threatened to sue for bad faith if Farmers denied Palmer's claim. Farmers argues that, after that date,the unprivileged materials in the filewere prepared in anticipation of litigation, thus were subject to the work-product doctrine. The work-product doctrine protects materials prepared in anticipation of litigation, even though litigation is 

### not in progress. Rule 26(b) (3), M.R.Civ.p. Normally, claim files are commenced in anticipation of litigation and an investigation must be geared toward the eventuality of litigation. For that reason,

we have held that work-product protection applies from the time 

### a claim file is opened. Kui~er, 632 P.2d at 701.

### In 

### a bad faith case,however, the investigation is not geared toward ultimate bad faith litigation from the time the insurer opens a claim file. At that time, the insurer would have no reason to expectbad faith litigationand investigationsarenotmade with the expectation of such litigation. In the present case, Farmers does not seek the protection of the work-product doctrine formaterials prepared between the time it opened the claim file and October 8, 1985. Therefore, we need not 

### rule 

### onwhether the doctrine applies tomaterials dated during that time period. Materials prepared after Palmer's attorney threatened to sue 

### for bad faith if Farmers denied Palmer's claim, however, were prepared with 

### an eye toward eventual bad faith litigation. Therefore, any materials dated after October 8, 1985, are subject to the work-product doctrine. Materials in the files dated after that date, therefore, are discoverable only upon the required showing discussed below. In the February 16, 1989 order, the court found: I1[a]fter considering the arguments 

### of counsel and the court deeming itself fully advised, the court finds that plaintiff had made a satisfactory showing that he has substantial need of defendant's claim file materials for the preparation of plaintiff's bad faith case against defendant and that plaintiff 

### is unable without undue hardship to obtain the substantial equivalent of those materials, 

### thus overcoming defendant's work-product obje~tion.~~As discussed above, if materials in the files are privileged because they are confidential attorney-client communications,they are immune from discovery. However,materials consisting of work product prepared in anticipation of litigation or in another related case have a qualified immunity from discovery under the work-productdoctrine. See Rule 26(b)(3), M.R.Civ.l?. The immunity offered by the doctrine is only a qualified immunity because work product is discoverable in certain circumstances. The immunity offered by the work-product doctrine depends on the type of work product being sought. There are two basic types of work product. First, there is ordinary work product, which relates to factual matters. Next, there is opinion work product, which relates to mental impressions, opinions, conclusions, or legal theories. See Rule 26(b)(3), M.R.Civ.P. Ordinaryworkproduct isdiscoverable to the extent that it is not privileged and is 'relevant to the subject matter involved in the pending action." Rule 26(b)(l),M.R.Civ.P. However, a party

can discover ordinary work product "prepared in anticipation of litigation or for trial or for another party or by or for that otherparty's representative (includingtheotherparty's attorney, consultant, surety, indemnitor, insurer, or, agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. Rule 26(b)(3)

## , M.R.Civ.P.

### "At its core, the work-product doctrine shelters the mental processes of the attorney,providing aprivileged area within which he can analyze and prepare his client's case." United States v. Nobles (1975),422U.S. 

### 225, 238, 45L.Ed. 141, 154, 95S.Ct. 2160, 2170. Because of thispurpose, opinion work product is subject to additional protection by the court. The Montana Rules of Civil Procedure provide this protection by stating that in ordering discovery of work product upon the required showing, "the court shall protect against disclosure of themental impressions, conclusions, opinions, or legaltheoriesof

an attorney or other representative of a party concerning the litigation." Rule 26(b) (3), M.R.Civ.P. This Rule does not absolutely preclude discovery of opinion work product, rather it mandates that the courtprovide greater protection for opinionwork product than for ordinary work product. See Nobles, 422 US. 

### at

ThisCourthas endorsedthe followingrationale concerningthe greater protection granted to opinion work product: It is clear thatopinionworkproduct isentitled to substantially greater protection than ordinary work product. Therefore, unlike ordinary work product, opinion work product cannotbe discoveredupon a showing of substantial need and an inability to secure the substantial equivalent of the materials by alternate means without undue hardship. [See Rule 26(b) (3), M.R.Civ.P.1 In our view, opinion work product enjoys a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances. See Hickman v. Tavlor, supra. Our unwillingness to recognize an absolute immunity for opinionwork product stems fromthe concern that there may be rare situations, yet unencounteredby this court, whereweightyconsiderations of public policy and a proper administration of justice would militate against the nondiscovery of an attorney'smental impression. [Actually, the special protection Rule 26(b) (3)gives to opinion work product is broader and protects the mental impressions of an attorney or other representative 

### of a party concerning the litigation.] Absent such compelling showing, the 

# . . . opinion work product shouldremain immune fromdiscovery. Kui~er, 632 P.2d at 701-02 (citationomitted). Several courts, including the Ninth Circuit Court ofAppeals, have designated a rare and extraordinary circumstance when opinion work product is discoverable. We agreewith the reasoning of those courts which have held that opinion work product is discoverable when themental impression isdirectlv at issue in the case and the need for thematerial is compelling. See,e.g., Holmgrenv. State Farm Mut. Auto. Ins. Co. (9th Cir. 1992), 976 F.2d 573, 577: Handgards, Inc. v. Johnson & Johnson (N.D.Ca1. 1976), 413 F.Supp. 926, 932-33. To clarify the terms we use in this test, by 8*directly at issue in the case"wemean that themental impressions actually are the issue in the case. To meet the "compellingneeds1 requirement, the party seeking discovery must demonstrate that weighty considerations of public policy and the administration of justice outweighthe need toprotect themental impressionsof the opposing party's attorneys or its representatives. See Kui~er, 632 P.2d at 701-02. Inabad faith case, suchas thepresent case,where the issue is whether the insurer had a reasonable basis for denying the claim, the mental impressions and opinions of the insurer are directlyat issue. The basis for denying such a claim lies only in themental impressions of those representatives of the insurer who 31decided to deny the claim. Consequently, a party may discover the opinion work product of the representatives whose mental impressions are directly at issue, but only upon a showing of compelling need bevond the substantial need/undue hardship test required by Rule 26(b)(3), M.R.Civ.P., for ordinary work product. See Holmqren, 976 F.2d at 577. Here, theDistrictCourt orderedproduction of Farmers' entire claim file. Farmers' claims agents and a branch claims supervisor made thedecision todeny coverage,so theirmental impressions and opinions are directly at issue in this case; therefore,materials containing the insurer's mental impressions are discoverable on a showing of compelling need. It is difficult to envision a circumstance in which the compelling need requirement would not be met when the mental impressionsof a ~artv are directly at issue in the case. However, because of thepossibility of a rareand extraordinary circumstance in which the mental impressions should not be discovered, we decline to rule that the compelling need requirement is automaticallymet in such cases. The work-product doctrine, however, protects materials containingthemental impressionsof Farmers' attorneys. Thecourt ruled that when attorney Walsh took the stand, Farmers placed advice of counsel squarelyat issue in theproceedings. Farmers, however,did not rely on advice of counsel as a defense to the bad faith charge. The insurer, not the attorneys,made the ultimate decision todeny coverage in this case. Therefore,attorneymental

### impressions and opinions are not directly at issue, so the threshold requirement of the test for discoverability of opinion work product is not met. As a result,materials that contain the mental impressions and opinions of Farmers1 former attorneys are immune from discovery under the work-product doctrine, unless a waiver occurred. The District Court erred by ordering Farmers to produce all claim file materials dated after October 26, 1988,

### on a showing of substantialneed andunduehardship. On remand, it is incumbenton Farmers to show which materials included in the District Court's order contain opinion work product. The court thenmust apply the law to each exhibit to determine whether it is discoverable. If part of an exhibit is discoverable, the court must redact the undiscoverable portions of thematerials. See Kui~er, 632 P.2d at

B. 

### Did the District Court err in determining that one of Farmers' former defense attorneys waived the protection of the workproduct doctrine by making testimonial use of certain workproduct materials? In addition to ordering production of Farmers1 claim files, the District Court, during the course of the trial, ordered Farmers1 former attorneys from the law firm of Smith, Walsh, Clarke, and Gregoire (the Smith firm) to produce several of the firm's witness files. The court specified certain files on named witnesses and any files that had anything to do with speed. Palmer argues that attorney Walsh waived the work-product immunityby making testimonial use of the materials at trial. On the other hand, Farmers argues that, except for his testimony 33regarding expert witness Dr. Shapley, Walsh only generally mentioned four otherwitnesses. Therefore, Farmers argues,Walsh did not waive the protection of the work-product doctrine for anything but the Shapley file. Inthepresent case,the court orderedproductionof the Smith firm's work-product files without discriminating as towhether the materials contained therein were ordinary work product or opinion work product. However, the immunity from discovery given to opinion work product cannot be waived as easily as the immunity given to ordinary work product. The standards for waiver by testimonial use of the work product differ between opinion and ordinary work product. Waiver by testimonial use does not apply to opinion work product unless the witnessdirectlydiscloses his or her mental impressions. See In re Martin Marietta Corp. (4th Cir. 1988), 856 F.2d 619, 625. With ordinary workproduct, once awitness makes testimonial use of the files, the witness implicitly waives the protections of the work-product doctrine with respect to factual matters covered in the testimony of the witness. Martin Marietta CorD., 856 F.2d at 625;Nobles, 422 U.S. at 239. In this case, Palmer's attorney challenged witness Rausch to explainwhy Farmershired Dr. Shapleyas anaccident reconstruction expert but failed to have him testify in the uninsured motorist trial. Rauschwas not the one who made the decision and could not address the question, so Farmers called its former attorneyJames Walsh to explain why Shapley was not called as a witness.Walsh testified concerning his dealings with Shapley, the general nature and calculationshe requested Shapley to make, and Shapleylsconclusions. Walsh testified that he decided there was

no need to call Shapley because his opinions were consistentwith those of Palmer's expert. Walsh thus directly disclosed his mental impressions concerninghis decision not to call Shapleyas awitness. By doing so he waived the immunity for his mental impressions contained in the Smith firm's Shapley files. In addition to discussing Shapley,Walsh referred to the dirt bikers and their observation 

### of the speed of the motorcycle. He stated that,based on Shapley's calculations, Farmersknewearly on that speed was not a factor in the accident. Walsh also referred to the credibility of witness Atchison. Walshdid not,however, testifyto the substance of any of the work product inhis file,nor did he refer to any of thematerials in his firm's work product files. In fact,he stated that he did not rely on any of the firm's files in testifying, rather he remembered what happened at trial. He testified on crossexamination that he was unfamiliar with the content of most of his firmls witness filesbecause, for themost part, theywere prepared and used by Gregoire. Walsh did not disclosehis orhispartners' mental impressions concerning those witnesses. In addition, Walsh did not make testimonial use of the Smith firm's files regarding those witnesses. Walsh merely referred to facts brought out in theunderlying trial. Therefore,Walsh's testimony did not waive the work-product doctrine's protection of his mental impressions,nor did his testimony implicitly waive the protection of factual matters pertaining to those witnesses. The Court's order requiring the disclosure of certain work product materials of the Farmers1 attorneys and especially of attorney Gregoire and the use of such materials in cross examination of attorney Walsh placed Farmers in the prejudicial position of having to explain such private thoughts, impressions, notes, etc., which were clearly work product. We conclude that the admission of certain work product into evidence materially affected Farmers' substantive rights and prevented Farmers from having a fair trial. See 5 25-11-102(1), MCA. On these grounds, we vacate the District Court's order and judgment and remand for a new trial.

Did the District Court err in admitting evidence of the litigation tactics of Farmers1attorneys and of its decision to appeal? Prior to trial and again on the first day of trial, Farmers made a motion in limine to exclude evidence of the conduct of Farmers' attorneys in defending the underlying uninsured motorist

case and of Farmers1decision to appeal the judgment in that case. The District Court denied the motion and allowed Palmer to introduce evidence of the litigation strategy and tactics Farmers' attorneys used in defending the uninsured motorist case and of Farmers' decision to appeal the judgment in that case.A. Is 

### evidence of an insurer's post-filing conduct, such as 

### litigation strategy and tactics in defending the underlying suit, admissible in a bad faith action? Farmers contendsthatafter litigationcommenced,theparties assumed adverse positions, and events occurring after that time could not form the basis 

### of either a common law or a statutorybad faith claim. Farmers further contends that allowing a jury to consider evidence of 

### litigation conduct isextremely prejudicial to



### an insurer's 

### right to defend against a 

### claim it believes lacks merit. Palmer, on the other hand, contends that "conduct during the trial was highly relevant to establish that both the initial investigation and denial were incomplete and erroneous and that Farmersf

### course of 

### conduct continued by attempting to cover up 

### the true facts belatedly discovered." Courts haveheld, and

### we agree,that an insurer's duty todeal fairly and not to withhold payment of valid claims does not end when an insured files a 

### complaint against the 

### insurer. See, 

### e.g., White 

### v. Western Title Ins. 

### Co. (Cal. l985), 710 P.2d 309, 317. 

### Several courts have considered whether evidence of an insurer's conduct during litigation of the underlying suit is 

### admissible in



### a subsequent bad 

### faith action. After examining the reasoning of courts that have considered the 

### issue, we conclude that the 

### continuingduty of 

### good faithdoes not necessarily render evidence of an 

### insurer's post-filing conduct admissible. See 

### Palmerv. Ted Stevens Honda, Inc. (Cal.App. 1987), 238 

### Cal.Rptr. 363, 366-69; 

### White, 710 P.2d 

### at 317 (as 

### interpreted by 

### both Nies v. NationalAuto. & Casualty Ins. Co. (Cal.App.1988), 245 Cal.Rptr. 518, 523- 25, and California Physicians' v. Superior Ct. (Cal-App.1992), 12 Cal.Rptr.2d, 95,99-100). Indeed,courts rarely should allow such evidence and we have adopted a balancing test for those rare circumstances. Publicpolicy favorsthe exclusion of evidence of an insurer's post-filing litigation conduct in at least two respects. First, permitting such evidence isunnecessary because during the initial action, trial courts can assure that defendants do not act improperly. Next, and more importantly, the introduction of such evidence hinders the right to defend and impairs access to the courts. The Rules of Civil Procedure control the litigation process and, in most instances, provide adequate remedies for improper conduct during the litigation process. Once the parties have assumed adversarial roles, it is generally for the judge in the underlying case and not a jury to determine whether 

### aparty should be penalized for bad faith tactics. Ted Stevens Honda, 238 Cal.Rptr. 363, 369, (citing White, 710 P.2d at 325 (Lucas, J., concurring and dissenting)). 

### An attorney in litigation is ethicallybound to represent the client zealously within the frameworkprovided by statutes and the Rules of Civil Procedure. These procedural rules define clear boundaries of litigation conduct. If a defense attorney exceeds the boundaries, the judge can strike the answer and enter judgment for the plaintiff, enter summary judgment for the plaintiff, orimpose sanctions on the attorney. See White, 710 P.2d at 325, (Lucas, J., concurring and dissenting). There is no need to penalize insurers when their attorneys represent them zealously within the bounds of litigation conduct. To allow a jury to find that an insurer acted in bad faithby zealouslydefending itself is to impose such a penalty. Themost seriouspolicy consideration in allowing evidence of the insurer's post-filing conduct is that it punishes insurers for pursuing legitimate lines of defense and obstructs their right to contest coverage of dubious claims. As discussed below, if defending a questionable claim were actionable as bad faith, it would impair the insurer's right to a zealous defense and even its right of access to the courts. Allowing evidence of litigation strategies and tactics would expose the insurer's entire defense in a coverage action to scrutiny by the jury,unless the insurer won the underlying suit. The jury then, with the assistance of hindsight, and without the assistance of insight into litigation techniques, could "second guess the defendant's rationales for taking a particular course." White, 710 P.2d at 324 (Lucas,

### J., concurring and dissenting). In addition, the jury could consider evidence of the defendant's litigation strategy and tactics without any showing that the insurer's conduct was technically improper. Thus, insurers would be reluctant to contest coverage of questionable claims. The case at hand exemplifies the warning given by Justice Lucas in his dissent to White. Justice Lucas warned thatpermitting evidence of the post-filing conduct of the insurer's attorneys would allow juries to impose liability for litigation tactics which are in and of themselves proper, merely because a jury may conclude that the strategy and tactics in and of themselves amounted to bad faith. See 

### white, 710 P.2d at 323-24 n.4 (Lucas,J., concurring and dissenting). In this case, as inWhite, the plaintiff did not contend that insurer's tactics in and of themselves were improper, rather the implicit claim was that the litigation strategy and tactics amounted to bad faith. The jury was allowed to consider Farmers1 legitimate defense strategy and proper litigation tactics as evidence of bad faith,when the relevant inquiry should have been whether Farmers' had a reasonable basis for denying the claim. To permit evidence of insurers1 litigation strategies and tactics is to impede insurers' access to the courts and right to defend, because it makes them reluctant to contest coverage of questionable claims. "Free access to the courts is an important and valuable aspect of an effective system of jurisprudence,and a party possessing a colorable claim must be allowed to assert it without fear of suffering a penalty more severe than typically imposed on defeatedparties.I1 White, 710 P.2d at 324 (Lucas,J., concurring and dissenting) (quoting Young v. Redman (Cal.App. 1976), 128 Cal.Rptr. 86, 93). Public policy dictates, therefore, that courts must use extreme caution in deciding to admit such evidence even if it is relevant to the insurer's initial decision to deny the underlying claim.

### Thisbrings us 

### to another crucial point, the relevance of the insurer's post-filing conduct. Ingeneral,an 

### insurer's litigation 

### tactics and strategy in defending a claim 

### are not relevant to the insurer's decision to deny coverage. Indeed, if the insuredmust 

### rely on evidence of 

### the insurer's post-filing conduct to

### prove bad 

### faith in denial of coverage,questions arise as to the

### validity of the insured's initial claim of bad faith. One court has gone so far 

### as to 

### hold that I1oncelitigation has commenced, the actions taken in its defense are 

### not, in our view, 

### probative of 

### whether defendant in bad faith denied the contractual lawsuit.I1 

### Ted Stevens Honda, 238 

### Cal.Rptr. at 368. After 

### the 

### onset of 

### litigation, an insurer begins to concentrate 

### on supporting the decisions that 

### led it to deny the claim. The insurer relies heavily on its attorneys using common litigation strategies and tactics to defend 

### against a debatable 

### claim. Consequently,actions taken after an insured files suit

are at 

### best marginally probative of the insurer's decision to 

### deny coverage. See 

### Randy Papetti, Note, Insurer's Dutv of 

### Good Faith in the Context of Liticration, 60 Geo. 

### Wash. L.Rev. 1931, 1972 (1992). 

### In some instances, however, evidence of the insurer's post

### filing conduct may 

### bear on 

### the reasonableness of the 

### insurer's decision and its state of mind when it evaluated and denied the underlying claim, Therefore, we do not impose a 

### blanket prohibition on such evidence.We believe the correct approach is to strike abalance between deterring improper conduct by the insurer and allowing insurers to defend themselves against spurious claims. Rule 403, M.R.Evid., provides for thatbalance. When the insurer's post-filing conduct has some relevance, the court must weigh its probative value against the inherently high prejudicial effect of such evidence, keeping inmind the insurer's fundamental right to defend itself. See Rule 403, M.R.Evid. ; White, 710 P.2d at 324 n.5 (Lucas, J., concurring and dissenting). The following comment on the relevance of post-filing conduct expresses our position on the issue. When evaluated through the prism of the substantive law, an insurance company's postfiling conduct,particularly its litigation conduct, has little relevance to proving that the insurer's prefiling actions resulted in the wrongful denial of policy benefits. Litigation, in almost all cases, does not commence until after the policyholder's claim has been denied or the insurer has failed to respond to a policyholder's claim within a sufficient amount of time. In contrast, the actual tort occurs, or does not occur, contemporaneously with the 'wrongful denial of ~overage'~--an act that occurs well before any improper litigation conduct takes place. Damages likelywill be incurred after the wrongful denial of a claim as a result of the continued deprivation of policy benefits, but the tort itself occurs when the contract is breached unreasonably. Thus, courts that merely inquire into the reasonableness of a defendant insurer's postfiling conduct itself fail to recognize that, inmost cases, the onlypossible relevance of such evidence is to reinforce or expose the unreasonableness of the original denial of coverage. Improperpostfiling conduct,nomatter how unreasonable, israrelyactionable in and of itself under the rubric of bad faith tort action. When analyzins the relevance of an insurer's postfilins conduct.therefore. theurouer inuuirv should be into the extent to which such conduct casts lisht on the reasonableness of the oriqinal denial of the policyholderrsclaim.

### Insurer's Duty of Good Faith, 60 

### Geo. 

### wash. L.Rev. at 1969-70. (Emphasisadded.) 

### AfteranalyzingFarmersfpost-filingconduct,we find

### that the prejudicial nature faroutweighsany relevance of 

### the conduct. The following

### examples illustratehow 

### Palmerused evidencewith little or no relevance to prejudice the 

### jury against Farmers. First, Farmers reimbursed

### keywitnessAtchison for 

### lost wages and expenses incurred in traveling to the accident scene to 

### help him remember,and Farmers' attorneys better understand, the events

on the day of 

### the accident. Palmer's counsel 

### implied to the jury 

### that this conduct constituted a bribe for changing his testimony. Farmers' attorneys also invited other witnesses to view the

scene. Farmers invited the 

### dirt bikers as well 

### as the deputy sheriffs and the highway patrol officer who investigated the accident. 

### The Meagher County Attorney accompanied the officer. Palmer's attorney implied through his questioning that this socalled Iffirmingup1'sessionwas somehow unethical or illegal. The 

### "firming upn 

### session, and questions regarding it, have little 

### orno probative value. Implications of unethical or illegal behavior are inherently prejudicial, especially 

### in a 

### bad faith



### case. The prejudicial effect of the evidence far outweighs any possible 

### probative 

### value. Furthermore, Palmer's attorney, over objection, criticized witness Rausch for not alerting the jury that witnessAtchison had changedhis story

### aboutwhether themotorcycle had

### passed behind 

### or in front of the truck. Through his questioning 

### in the bad 

### faithtrial, Palmer's attorney insinuated that Farmershad an obligation to 

### alert:the 

### jury intheunderlying trial thatAtchison had changed parts of his description of the accident. Inaddition,Palrnerfsattorneys continually challenged Rausch to explain and defend the comments and conduct of Famers' counsel indefending theunderlying 

### case. Rauschwas unable to explain to the 

### jury all of the intricacies of the defense attorneys' actions and strategies carrying out discovery, obtaining witness statements,taking depositions,preparing fortrial,and conducting trial. Nor was Rausch equipped to explainmotions to compel, 

### why Farmers was reluctant to produce work product for Palmer, and why Farmers did not call one of its expert witnesses in theunderlying trial. Only the attorneys could explain these circumstances. Last,defenseattorneyGregoirewascross-examined extensively

on his role in meeting with Atchison and cross-examining other witnesses at trial and indepositions. Palmer's attorney suggested to the jury that Gregoire asked an investigator to I1tail1l

### a witness,not to see 

### if she stayedwith Palmer's family,but to "get

some dirt on her." A11 of this evidence was prejudicial because it allowed the jury to secondguess Farmersfattorneys and to consider legitimate defense strategy and proper litigation tactics as evidence of bad faith. The evidence does not relate 

### to the reasonablenessof the original denial of the policyholdertsclaim, and therefore, has little 

### or no relevance. Thus, the District Court erred 

### by admitting evidence of Farmersfattorneysfpost-filing conduct.In the bad faith trial, Palmer introduced other post-filing conduct of Farmerst attorneys. We need not rule 

### on its admissibility because

### we are remanding for a new trial. 

### The trial judge can inquire into the extent towhich the conduct casts light

on the reasonableness of Farmersf original denial of Palmer's uninsured motorist claim. 

### If the conduct is sufficiently related to Fanners' denial of the claim, the judge can then determine whether the probative value of the evidence outweighs its prejudicial effect, keeping in mind Fannerst right to defend its denial of a questionable claim.

B. Is an insurer's decision to appeal 

### the verdict in the underlying case admissible 

### as evidence in a subsequent bad faithactionbased on the insurerf sdecision todeny coverage? 

### Farmers contendsthatpost-judgment conduct isnot admissible

as evidence of bad faith, Specifically, Farmers argues that Ifno bad faith occurred by virtue of the fact that Farmers appealed the jury verdict." We agree. 

### This Court, and not a jury, is in the best position to determine the

### merits of appeals to

### this Court. As discussed above, sanctionsareavailable for frivolous litigationtactics, including the filing of a frivolous appeal. We agreewith the followinganalysisby theCalifornia Supreme Court: Although there are 

### many contexts in which jury determinations may be superior to those of trial or appellate judges, the determinationof the frivolousness of an appeal 

### is 

### not one. 

### And the potential 

### "chilling effectnon appeals 

# . . .would be greatly exacerbated 

### if every appellant faced the prospect that 

### a jury might impose additional damages--compensatoryandpunitive--ina subsequent actionbased on itsassessment ofhis orher motive in prosecuting the appeal.

Colemanv. Gulf Ins. Group (Cal. 1986), 718 P.2d 77, 81. We hold that the District Court's decision to admit evidence of Farmers' decision to appeal the jury verdict was erroneous and prejudiced Farmers. SUMMARY The District Court did not err in denying Farmers' motion for

a directed verdict. However, Farmers is entitled to a new trial for two distinct reasons. First, the court compelled discovery of materials subject to the attorney-client privilege and then admitted thematerials into evidence. Second,the court compelled discovery of work product without an adequate showing by the plaintiff and then admitted the materials into evidence. The admission of certain undiscoverable work product into evidence prejudiced Farmers and prevented it from having a fair trial, as did theadmissionofmaterial subjectto attorney-clientprivilege. Farmers is thus entitled to a new trial. Farmers listed several other issues for our review. However,

we are not considering them because on remand they might arise in



### a different context, if at all.JusticesJustice Terry N. Trieweiler dissenting. I dissent from the opinion of the majority. Any group of people who, without a qualm, would take $1.5 million from a severely brain damaged man who can no longer

care for himself in order to protect the secretmaneuverings of a few lawyers, ought to have a better familiarity with the record than is demonstrated by the majority's opinion. After carefully reviewing the record, 

### I conclude that the majority opinion has distorted the rulings of the District Court; ignored andwasted hours of conscientious serviceby the jurorswho served in this case; and unjustly treated the victim whose efforts to reclaim some modicum of dignity have been dealt a severe set-backby this decision. Ihaveno quarrel with attorney-clientprivilege,nor thework product doctrine. Under the appropriate circumstances, those principles provide a necessary shield from exposure of an attorney's candid communications andmental impressions. However, this opinion does not limit these worthwhile privileges to their intended defensive purpose. It allows them to be used as an offensive spear for the selective benefit of the insurer and its attorneys. It allows an insurer to selectively use records from its file which serve its self-interest, while denying its own policy holder an opportunity to search those same files for materials which are inconsistent. It allows the attorneys of an insurer to offer self-serving opinions andmental impressions,but

### denies the attorney for a policy holder the opportunity to effectively cross-examine the insurer's attorney by knowing what his or her opinions or impressions were at an earlier time when decisions were made which were adverse to the policy holder's interest and may have been a violation of our laws. Neither the attorney-client privilege, nor the work product doctrine, were intended for such selective application as is permitted by the majority's opinion. To fully understand the injustice of this opinion, it is necessarytounderstand the actual events which led to the District Court's decision compelling production of Farmers' records. However, it is difficult to glean those events from the majority opinionwhich, to a large extent, simply sets forth as fact those arguments made in Farmers' brief. Therefore, what follows is a

more complete statement of the facts relevant to the legal issues raised on this appeal. In considering these facts, it should be kept in mind that exceptions to attorney-client privilege and the work product doctrine exist where the party invoking the privilege intends to call his attorney as a witness or defend against a claim that he actedunreasonablyby assertingthathe acted inrelianceon advice of counsel. Another exception to the work product doctrine relating to mental impressions and opinions exists in a bad faith case, like this one,where the mental impressions and opinions of the defendant are the primary issue in the case.David Palmer was severely injured on June 10, 1984,when the motorcycle that he was operating was forced off the road by a semi-truck and trailer that have never been identified. He notified Farmers Insurance Exchange, from whom he had purchased uninsured motorist coverage, of the incident within a short time after the accident. However, his policy had an exclusion for accidents caused without contact between the two vehicles. Farmers' investigation consisted of an interview with thepassenger on Palmer's motorcycle and a review of the investigating highway patrolman's report. Therewere no other witnesses to the accident, and because of the exclusion, nothing further was done to investigate the claim until over a year later. On June 19, 1985, we decided McGlynn

### v. SafecoInsurance Company

### of America (1985), 216 Mont. 379, 701 P.2d 735. In that case,we held that the exclusion relied on by Farmers was void as a matter of public policy. Following our decision inMcClynn, Farmers referred this case to the law firm of Smith,Walsh, Clark and Gregoire for further investigation and advice. From that point on, additional investigation was done by Bruce Vassar, the law firm's investigator, and was reported to Farmers by members of the firm. It was the law firm's investigation and reports to Farmers which led to Farmers' final rejection of Palmer's claim in February 1986. In fact, that rejection was communicated to Palmer's attorney by Marvin Smith, amember of the law firm. Following the denial of his claim,Palmer fileda complaint in the DistrictCourton 

### February 26, 1986,

### allegingthathe was 

### entitled to coverage for his 

### injuriesand that Farmershad 

### actedunreasonablyand

### was guilty of bad 

### faith when it denied his claim. In 

### its answer, Farmers denied that 

### it had acted in bad faith



### or violated any reasonable settlementpractices. However, by that 

### time the conduct of 

### Farmers' own employees,and the 

### conduct of its attorneys and their investigator, were 

### so interrelated that 

### they could not, forpractical purposes, be 

### separated with regard to the 

### issue of 

### whether or not the claim had been reasonably denied. On May 8, 

### 1986, the 

### District Court, pursuant to our decision inFodev.FannersInsuranceExchange 

### (1986), 221Mont. 282, 719 

### P.2d 414, 

### bifurcatedplaintiff's claimsand ordered that the

### underlying claim for 

### coverage pursuant to the uninsuredmotorist contract shouldbe 

### tried first,and thatanybad faith shouldbe considered after that

case was 

### resolved by settlement or 

### judgment. The contract 

### claimwent 

### to trial 

### onMarch 9, 

### 1987,and a jury rendered 

### its verdict in favor of Palmer on March 13, 

### 1987. Bill Gregoire and Jim Walsh represented 

### Farmers at that trial. Following trial, Gregoire advised 

### Farmers that he 

### thought there were several technical bases forappeal to the 

### SupremeCourt, but 

### also advised the 

### company that 

### even if the 

### case was 

### reversedby the 

### Supreme Court, a second jury would probably return the 

### same verdict in favor 

### of Palmer. Farmers chose to 

### proceed with the appeal anyway, 

### reasoningthat 

### if 

### itwas successful

### onappeal,

### there

### would be some benefit to the bad faith claim which was still pending. On September 13, 1988, 

### this Court rendered its decision affirming the judgment of the District Court. On October 26, 1988, 

### Palmer's attorney advised Farmers1 attorney thathe was ready toproceedwith thebad faith claim. In response to that notice, Gregoire,whowas still actingas Farmers1 attorney, and who had complete authority to waive any privilege that his clientcould claim (seeDrimmerv.Appleton 

### (S.D.N.Y. 1986), 

### 628

F. 

### Supp. 1249), wrote the following letter to Palmer's attorney: Dear Dennis: As we explained over the telephone, we do not believe that we can continue to represent Farmers Insurance Exchange inthe actionyouhave filed. There seemstobe little question but that Marvin Smith, Jim Walsh, and myself will be witnesses in the action that is presently pending in the District Court. We would assume that you and Mr. Risjord would likewise be witnesses. At thatpoint in time, the only remaining issue tobe decided in thebifurcated claimwaswhether Farmershad acted reasonably or 

### inbad faith when it denied plaintiff's claim for payment pursuant to his uninsured motorist policy. The information that Farmers relied on, and the impressions and opinions of its employees regarding its obligationsto its insured, became theprimary issues that remained in the litigation. Farmers' claims adjusters, its attorneys, and their investigator acted in concert. There was no way to separate Farmers1 impressions or opinions from its attorneys1 impressions. There was no way to critique whetherFarmers acted reasonably without considering the advice it relied upon from its attorneys. It is for these reasons that the Ninth Circuit Court of Appeals in a similar case has held that work product may be discovered in insurance bad faith claims. In Holmgrenv.StateFarmMutualAutomobileInsuranceCompany (9thcir

# . 1992)

## , 976 F.2d 573, State Farmwas suedpursuant to 5 33-18-201(2), (4), (6), and (13), MCA, of Montana's Unfair Trade PracticesAct. Judgment

was entered for the plaintiff. On appeal, State Farm argued that the district court erred when it ordered the company to produce, and thenadmittedas evidence,handwritten memoranda drafted during the litigation of the underlying personal injury claim. The memoranda contained notes written by State Farm's adjuster fixing

a range of values for plaintiff's claim which were far above any amount offered by State Farm. State Farm argued that the notes constituted opinion work product which was protected under Rule 26(b)(3), Fed.R.Civ.P. Our corresponding rule is identical. The Ninth Circuit disagreed. In affirming the district court, it held that: We agree with the several courts and commentators that have concluded that opinion work product may be discovered and admitted when mental impressions are at ksue in a case and the need for the material is compelling. See, e.g., Bio-Rad Labs., Znc. 

### v. Pharmacia, Znc., 130 F.R.D. 116, 122 (N.D.Ca1. 1990);Reavis[v.Metropolitanfioperty &LiabilityIns. Co.], 117 F.R.D. [160,] 164 [S.D.Cal. 19871 ; Handgards, Znc. v. Johnson &Johnson, 413 

### F

# . supp

# . 926, 932-33 (N.D.Ca1. 1976); Bird 

### v. Penn Cent. Co., 61 F.R.D. 43, 47 (E.D.Pa. 1973); 4 J. Moore, Federal Practice 9 26.64 [3.-21, at 26-385 & n.8 (2d ed. 1991); J. Anderson et al., The Work Product Doctrine, 68 Cornell L.Rev. 760,

### 831-37 (1983). Butsee 

### 8 C. Wright & 

### A. Miller, Federal Practice and Procedure: Civil 

### 5 2022, at 188 n.97, 193, 

## s 2026, at 229-32 (1970). Both elements are met here. In a bad faith insurance claim settlement case, the "strategy, mental impressions and opinion of the [insurer's] agents concerning the handling of the claim are directly at issue." Reavk, 

### 117 F.R.D. at 164. Further, Holmgren's need for the exhibits was compelling. Montana permits insureds and third party claimants to proceed under 

### 5 33-18-201 against an insurer for bad faith in the settlement process. See 

### Mont. Code Ann. 5 

### 33-18-242 (1979) (applicabletoclaimsarisingafter July 1,1987); Klaudtv.Flink, 

### 202 Mont. 247, 658 P.2d 1065, 1067 (1983), overruledonothergrounds, Fode

### v. Farmers

### Ins.Exch.

## , 22

### 1Mont

# . 2

### 82, 719 P.2d 414 (1986). Unless the information is available elsewhere, a plaintiff may be able to establish 

### a compelling need for evidence inthe insurer's claim file regarding the insurer's opinion of the viability and value of the claim. We review the question on a case-by-casebasis.

InHandgards, 

### "the lawyers whomanaged and supervised the former litigation for the defendants [were] being called as witnesses to express their opinions as to the merits of the prior suits.I1 Handgards, 

### 413 F.Supp. at 931. This comment, and others like it in "at issuevg cases, isapractical acknowledgment of the factthat, in bad faith settlement cases, insurers may call their adjusters to testify to their opinions as to the lack of viability of the underlying claim. When an insurer chooses to remain mute on the subject, the plaintiff is not foreclosed from developing the same evidence.

TheHolrngren 

### decision referstomental impressionsand opinions of the insurer's agents. In that case, the agents were adjusters. In 

### this case, the agents were adjusters and attorneys. Farmers attorneyswere involved inthe investigationand evaluationof this

case long before there was any lawsuit filed by Palmer. Their

### opinions, advice, and mental impressions cannot be separated from those of Farmersfadjusters in the evaluation of the reasons for denying plaintiff's claim. The majority adopts Farmers' position that even if work product protection did not apply under these circumstances, the communications from Farmersf attorneys, which were included in Farmers' claims file,were protected by attorney-client privilege. However,Farmerswaived any claimtoattorney-client privilegewhen it advised Palmer, through Gregoire, that its attorneys would be called as witnesses in the bad faith case. In discussing exceptions to the work product doctrine, the Ninth Circuit, inHolmgren, relied on Handgards,Inc.

### v.Johnson &

### Johnson

(N.D.Ca1. 1976), 413 

### F. Supp. 926. 

### In addition to discussing the work product doctrine, that decision also dealt with a claim of attorney-client privilege under circumstances similar to those in this case. InHandgards, thedefendantwas accused of filing patent infringement suits against theplaintiff inbad faith as part of a conspiracy to restrain trade andmonopolize the disposableplastic glove industry. Theplaintiff learnedthat the defendant intended to call the lawyers who had handled the prior complaints as witnesses on its behalf. The plaintiff, therefore, sought discovery of any documents generatedby these attorneyswhichwould indicate their purpose for filing the suits. The defendant objected, based upon 

### a claim of attorney-client privilege. The district courtheld thatby listingthe attorneys aswitnesses, the

### defendant had injected the advice of counsel as a defense, and thereby, waived the attorney-client privilege. It reasoned as follows: By putting their lawyers on the witness stand in ordertodemonstrate that theprior lawsuitswerepursued on the basis of competent legal advice and were, therefore,brought in good faith, defendants will waive the attorney-client privilege as to communications relating to the issue of the good-faith prosecution of thepatent actions. Garjinkle

### v.ArcataNationalCop., [64

### F

# . R

# . D

# . 688 

### (S.D.N.Y. 1974)l 

# . . .; 8 

### Wigmore, Evidence § 2327 

### (McNaughtonrev. 1961). Handgards, 413 F. 

### Supp. at 929. 

### That district court also discussed defendant's objection to production of these materials on work product grounds. It held that: The principal issue in the case at bar is the good faith of the defendants in instituting and maintaining the prior patent litigation against plaintiff. Plaintiff's success in the instant action depends on a showing that defendants pursued the prior suits knowing they would be unsuccessful on the merits. Since the lawyers whomanaged and supervisedthe former litigation for the defendants are being called as witnesses to express their opinions as to the merits of the prior suits and the validity of the underlying patents, plaintiff has a particularized and compelling need for the production of the relevant work product of these attorneys. Without discovery of the work product, plaintiff will be unable to ascertainthebasis and facts upon which the opinions of these witnesses are based. This will undoubtedly impair plaintiff's ability for effective cross-examination on a crucial issue. Handgards, 413 

### F. supp. at 931. 

### Similarly (E.D.WiS. 1987 

### calling their

## ,inLeybold-HeraeusTechnologies,Inc.

### v.MidwestInstrument Company ')

## , 118 

### F.R.D. 609, 

### the district court held that by

attorneys as witnesses the plaintiff waived theattorney-client privilege. In that case, both attorneys were listed for the purpose of testifying that the actions against the defendanthad been commenced ingood faith. However, theplaintiff sought to protect certain documents generated by those same attorneys based on the attorney-client privilege. The district court rejected that argument and held that: Uponnaming twoof theirattorneysaswitnesses, LHT and LHG assumed the risk that their claim of attorney-client communication and/or attorney work product would be abrogated. It is difficult for this Court to anticipate the parameters of the testimony of these two (2) attorneys, but certainly Minco would be disadvantaged in cross-examining them, if it does not have available the basis for their testimony. Accordingly, this Court is of the view that many of the documents which Attorneys Hemmingway and Zapfe participated in, either as a recipient of communication or the communicator as to prior art or as to the good faithbelief in thevalidity of the patents in question and the good faith in maintaining the lawsuits of both thepresent litigationand the Leco case, should be made available for discovery to Minco.

This Court agrees with Minco's assertion that LHT-LHG cannot selectively disclose portions of privileged communications or give testimony favorableto themselves, without concomitant disclosure of other unfavorable portions of the privileged communications relating 

### to the same subject. 

### SeeHandgards,Inc.

### v.Johnson& 

### Johnson, 413 F.Supp. at 929; 

### TeachersIm., Etc. 

### v. Shamrock BroadcastingCo., 521 F-Supp. 638, 641 (S.D.N.Y. 1981); 

### First FederalSavings&

### Loan

### v. Oppenheim,Appel,Dixon &

### Co.

## , 1.10 F

# . R.D

# . 557, 567 (S.D.N.Y. 1986);

### Duplun Cop.

### v.DeeringMilliken,Inc., 397 F.Supp. at 1161. 

### Leybold-HeraeusTech., 118 F.R.

### D. at 614. Therefore, when the only remaining issue was whether or not Farmers had acted reasonably based on the information that 

### waswithin its knowledge, and when, furthermore, Farmers notified plaintiff that its attorneys would be called as witnesses to establish that it acted reasonably, attorney-clientprivilegewith regard tothoseattorneys*communicationsto Farmerswaswaived and

a specific exception to thework product doctrine was established. The propriety of the District Court's order compelling disclosure of Farmers' claims filewas furtherestablishedby later developments. On September 13, 1989,plaintiff tookthedeposition of Bud Rausch, defendant's branch claims supervisor who was in chargeof reviewing plaintiff's claim. Hewas obviously a critical witness with regard to the issue of whether or not defendanthad a reasonablebasis for denying Palmer's claim. Rauschtestified that the selective manner in which Farmers documented statements from witnesses was based on advice of counsel. He stated that their decision to retain a reconstruction expert,butthen not call that expert at trial, was based on advice of counsel. He even stated that Farmers' claims office had originally decided to pay plaintiff's claim but then changed its mind, based on a conversationwith Marvin Smith who based his recommendationon the investigation being conductedby the law firm*sinvestigator. Rausch gave the following unequivocal testimony which established that the only way Farmers could defend against plaintiff's claim was based on advice of counsel: Q. Okay. And youhave already told us, and 

### Iwill ask you again, in case you want to change your mind about this, in your initial conclusion to decline the case, in February 1986, you relied on not only

### the investigation, but the opinions and advice of the law firm Smith, Baillie, and Walsh? A. 

### That is true. Q. 

### And you continued to rely on their work on the trial and interviewing of the witnesses and their opinions during the trial about trial strategy? A. They were the only firm they had employed at the time. We almost had to. Q. 

### Well,youdid rely on it,whetheryouhad to ornot? A. 

### That's correct. The majority opinion attempts to excuse Rausch's testimony based on the contrived argument that since Farmers had not pled "adviceof counsel1'as an affirmative defense, it was not a basis for waiving the attorney-clientprivilege. However, the important fact is that the claims person employed by Farmers who was principally responsible for denying plaintiff's claim testified that he did sobased on the advice of his attorneys. There was no way for plaintiff todeterminewhetherhe did so reasonably without knowing the substance of that advice. The only way to know the substance of that advicewas to produce the claims file, including the correspondence which included the advice. The majority's distinction between Rausch's testimony and an affirmative defense is a distinction without a difference. If therewas any question about thepurpose forwhich Farmers1 attorneys would be called as witnesses, that question was finally resolved when Farmerswas compelledby order of the District Court toanswerplaintiff's written interrogatories. The interrogatories

### had been submitted by plaintiff prior to the underlying contract case,but had never been answered by Farmers. Finally, on July 9, 1990,pursuant to the District Court's order dated June 18, 

### 1990, Farmers provided the following answer to Interrogatory No. 1 

### of plaintiff's third set of written interrogatories: Subject to the foregoing objections and without waiving the same, defendant states that Marvin Smith, James Walsh, and Bill Gregoire do have relevant knowledge concerning their actions in preparing the defense of defendanttoplaintiff'sunderlyinglawsuitfor uninsured motorist benefits and regarding what happened at the trial of that case. Any of them may be called as witnesses for the defendant as to those essentially factual matters. If called as witnesses, those individuals will not be examined regarding their confidential privileged communications to defendant regarding thatunderlying suit,or the instantbad faith action. Thedefendantalso listedBillings attorneySteveHarmanas an expert, and in response to plaintiff's InterrogatoryNo. 6 

### stated that:Steve Harman is also expected to testify concerning the defense efforts by the lawyers for Farmers Insurance Exchange in defending and trying the underlying case and whether those efforts were reasonable under the circumstances of that case. It is clear from these answers, that defendant intended to call its attorneys as witnesses and that they intended to testify regarding their conduct in handling the case. Their conduct in handling the case is inseparable, as a factual matter, from the conductwhich gave rise todefendant's denial ofplaintiff'sclaim. It is equally clear that Farmers intended to call an expert to testify regarding the reasonableness of its attorneys' conduct,while at the same time denying plaintiff any access to the contemporaneous records kept regarding those attorneys' conduct. The majority opinion dismisses these answers to the interrogatories, without fully quoting from them, by pointing out Farmers' self-serving statement that the witnesses would not be called for the purpose of disclosing confidential privileged information. In essence, the majority has held that Farmers and its attorneys can arbitrarilydecide which of their communications are privileged and which are not, and testify to those matters which are favorableto Farmers*defense while precludingplaintiff fromdiscovering anymatters which might be unfavorable to Farmers' defense. Suchadenial of meaningful cross-examination offendsany notion of due process with which I am familiar. Some mention should also be made of the manner in which Farmersactually defended itself at the time of trial. Plaintiff's

case was relatively brief. He called Bud Rausch, his treating physician, his mother, and Lee Wise, an expert regarding the issue of bad faith. Farmers' defense, however, consisted completely of testimony from its former lawyers and their investigator, as well

as an expert consultant who based his testimony on a review of Farmers' claims file, including the reports issued to Farmers by its attorneys. Vassar testified about the investigation he conducted; the witnesses he contacted; the substance of what hewas told by those

### witnesses: and the difficulties he encountered when dealing with the investigating highway patrolman. Walsh testified that he assisted Gregoixe as one of the defense attorneys representing Farmers intheunderlying trial. He gave extensive testimony about the expertwitness that Farmershad consulted andwhat that expert's conclusionswere, even though the witness had not been called in the underlying trial. He gave his opinion aboutwhy theywere able todefend during the trialwithout calling an expertwitness, and evaluated the testimony of Farmers' principal factual witness in the underlying trial. Gregoire, who also represented Farmers in the underlying trial, testified extensively about tactical decisions and his evaluation of witness testimony in the underlying case. He testified about his interviews with witnesses; his investigation; andhispersonal evaluation of themerits ofplaintiff's underlying claim. He explained how his firm arrived at the evaluationwhich led to the denial of plaintiff's claim. He explained theirmental processesasthey gatheredsometimescontradictory informationfrom various witnesses, and told why some witnesses had greater credibility, inhis mind, than others. Hewas allowed to give his personal evaluation of various experts who testified in the underlying case, and repeatedly read from testimony in that case and then gave his analysis of the testimony. He conceded that Farmers spent $100,000 

### to defend plaintiff's underlying claim for$50,000,

### and explained at length why it was reasonable to spend twice asmuch asplaintiff was claiming in an effort todefeathim. Frank Weedman was a retired claims representative for State FarmAuto Insurance Company who was called by Farmers as an expert to give his opinion that Farmers had acted reasonably. He testified that he had been retained by George Dalthorp, Farmers' attorney in Billings, to testify on numerous previous occasions. He acknowledged that in forming his opinion it was necessary for him to review Farmers' claims file, including correspondence from Farmers' law firm to the claims department. If it was necessary forWeedman to consult the file, how could itbe any lessnecessary for plaintiff's attorneys to have the same information? It is clear from the November 15, 1988, correspondence, defendant's answers to interrogatories,Rausch's deposition, and the testimony that was actually given at trial, that defendant's attorneys were always intended to be the principal factor in Farmers' defense. Yet Farmerswould have foistedthat testimonyon the court and jurywithout anymeaningful opportunity forplaintiff to cross-examine these witnesses. The majority, by this opinion, has approved of that trial tactic. In doing so, the majority opinion also suggests that the DistrictCourt turned over the Smith law firm's litigation fileson

awholesale basis without any justification for doing so. Nothing could be further from the truth. The District Court's original order compelling production of Farmers' files compelled productionof only those files generated prior to the time that plaintiff's bad faith complaint was pursued. It did not include any of the Smith Firm's litigation files. However, afterWalshwas called to testify on behalf of defendant,plaintiff's attorney requested the court to order production of those witness files referredto during Walsh's testimony. Plaintiff argued that Walsh waived any privilege pertaining to those files as a result of his testimony. Defense counsel conceded that there was a waiver of any privilege concerning defendant's expert witness file, but disagreed that there was a waiver with regard to any other witness. After listening to arguments, the ~istrictCourt agreed that the privilege had not been waived with regard to the Smith Firm's entire file. The following conversation took place: THE COURT: That's where thedifficultycomes in iswhere do you draw the parameters on what's happened? And I would just suggest that Mr. Walsh collect his files and show it to counsel, and if there has to be an in camera inspection,we'll do that. 

### MR. CONKLIN: Collect what files,your honor? THE COURT: The files relative to his testimony. It is a ratherbroad testimony,asMr. Risjordhaspointed out. Speed, the truckbeing on the right side of the road. I mean, you're getting right into the guts of the case.

THE COURT: 

### I am going to request that

# -- and 

### I don't know how your files how, but would you collect those files and show them toMr. Nybo and Mr. Conklin sometime this afternoon, and then we will have to sort through this.THE COURT: 

### Produce it to your counsel for Farmers Insurance Exchange, Mr. Nybo and Mr. Conklin. In that way we can sort through it, okay? That's the only way that I

# -- and then we can go from there. You are going to produce 

## -- you are going to go through the file and produce to counsel for the plaintiff those matters that youhave no question about that havebeen waived. And I take it then the matters that you have a question about 

## -- you are going to reserve that for an in camera inspection. As the actual transcript shows, the District Court was very circumspect and cautious about ordering the production of attorneys' files,while at the same time recognizing that it would be inherently unfair to allow Farmers' attorney to testify about his mental impressionswhile protecting the actual record of those impressions fromdiscoverybyplaintiff. TheDistrictJudge stated that when Walsh took the stand: That placed the advice of counsel squarely at issue in these proceedings. To rule any other way, it is this Court's opinion,would create a very obvious unfairness in this case. Therewould be no way for counsel for the plaintiff to adequately cross-examineMr. Walsh in terms of his testimony that took place yesterday. Most importantly, the court stated that: The court's ruling is not to be interpreted as a general broad ruling. The ruling is, of necessity, limited to only the testimony that was transcribed yesterday concerning Mr. Walsh's testimony. In other words, counsel isonly allowed to get into those areas that were testified toby Mr. Walsh, and I am limiting this ruling narrowlyto that testimony. Theentire file isnot open. It is only open in regard to the matters that were testified to. The District Court then ordered that Walsh's testimony 

### be transcribed. The following day the District Judge went through that testimony line-by-line with counsel forboth parties so that

### adeterminationcould bemade as to the exact extent of thewaiver. As a 

### result of that line-by-line examination, he ordered that all information regarding the expert witnesses that Walsh worked with be produced; he ordered production of information from witnesses thatWalsh talked to aboutplaintiff's speed; he ordered that files whichhad todowithwitnessesAtcheson and Diaconbe produced; and he ordered thatVassar8snotes be produced since he had testified. Finally, the District Judge made it clear that if there was something the parties could not agree on, they could contact the court for an in camera inspection because the court,at that time, did not know what was in the Smith firm's files. After that hearing, the court recessed for the production of the records indicated. After that recess, defendant's attorneys pointed out that there were 32 

### subfiles in the Smith Firm's litigation records and that some of them had been produced and others were not produced. However, no further request was made by attorneys for defendant for an in camera review of any disputed files. The impression created inthemajority opinion thatwholesale production of the Smith Firm's file was ordered, without any in camera review, is a total distortion of the procedure followed by the District Court. At every step of the proceedings in this case, the District Court ordered the minimal amount of disclosure that could be permitted without denying plaintiff a meaningful opportunity to develop the issue with which the case was concerned, and

### cross-examine the witnesses that defendant intended to call. The 

### District Court's 

### orders were a

### model of restraint and 

### should serve

as an example for future bad faith litigation, rather than be 

### the majority s excuse for 

### reversing another major verdict against another insurance company found to have abused its insured. 

### either is 

### it correctto concludethat defendanthas 

### satisfied the burden 

### imposed by 5 25-11-102, MCA, 

### for reversal of 

### the District Court judgment. Even 

### if themajority concluded that the original communications which were the subject of 

### the District Court's order for production were privileged and should not have been 

### produced, there was nothing contained in those records which



### were prejudicial to defendant. Almost all of 

### the information in the 

### correspondence from the attorneys to 

### Farmers was a factual explanation or legal analysis of why Fanners 

### was justified in denying plaintiffIs 

### claim. If 

### the majority had reviewed these 

### records, it would be 

### clear to them that production of the records

was not prejudicial to defendant. In fact, the majority of the information included

### inthose reports

### was relieduponby 

### Farmers 

### in defense of the bad faith case. Finally, 

### I dissent from that 

### part 

### of the majority opinion which holds that an 

### insurer's decision to appeal theverdict in an underlying case is not admissible 

### as evidence of bad faith. The 

### insurer has a 

### continuing obligation topay a 

### claim when liability is reasonably 

### clear, and the fact that 

### it may have a 

### technical basis 

### for retrying a 

### case does not establish 

### as a 

### matter of 

### law

### that there is a reasonable issue about liability. The more reasonable approach to this issue is that adapted by Montana's Federal District Court in

### Kyrhsv.Aetna

### LifeandCasuallyCompany (D. 

### Mont

# . 1986), 624 

### F. Supp. 1130. In that case, Aetna moved the Federal District Court to strike that part of plaintiff's complaint which alleged thatAetna acted inbad faithand solely for thepurpose of delay in appealing the underlying personal injury verdict to the Supreme Court of Montana. In 

### denying that 

### motion, the court held 

### that: 

### Evidence thatan appealwas taken inbad faith isneither inconsistent with the general tort principles expressed by theMontana SupremeCourt, nor is it inconsistent with the legislative intent expressed in g 

### 33-18-201(6), MCA, 

### The statute speaks generally in terms of flclaims, but does not indicate that llclaim@l is to be 

### given anything but its ordinary meaning, which includes "cause of action. Aetnats

### jurisdictional 

### argument fails 

### for the 

### same reasons. section 33-18-201 would be 

### stripped of its effectiveness 

### if it did not allow the court to consider all stages of the negotiation and litigation process. Appeal is but one part of that process. Rule 32, 

### M.R.App.P., does not alter this conclusion; it merely gives the Montana Supreme Court authority to 

### award Itpropergf damages if it "is satisfied from the record and thepresentation of theappeal1# that theappealwas taken for purposes of delay only. This rule does not deprive a 

### trial court, state or federal, of jurisdiction to consider the motive behind a 

### decision to appeal as one factor in a 

### claim for bad faith against 

### an insurance company. At 

### the appellate level, the decision that an 

### appeal is frivolous is based purely on the trial record and on the appellate briefs and arguments. In a bad 

### faith action, it becomes a question for 

### the jury, 

### tobe 

### considered in view ofall theplaintiff's evidenceof the insurer's conduct in negotiations from start to finish. Of course, 

### if there 

### is sufficient evidence to 

### show a good-faith basis for the appeal 

### as a matter 

### of law, an appropriate motion for directed verdict may be

### entertained. See, St.Paul

### Fire&

### Marine

### Ins.Co.

### v. Curnkhzy, [2

### 04] 

### Mont. [350], 665 

### P.2d 223 

### (1983). Similarly,Aetna's position thatplaintiffls claims constitutea 88chilling effect8* onAetnaWs rightof access to the courts iswithoutmerit. Parties to a state suit in Montana are free to appeal an adverse decision to the state supreme court: review is not discretionary. In this case, the subjectmatter of AetnaVsappeal was the underlying malpractice action, and the issue concerned theproper standard of causation. The subject matter of the instant action is the conductof Aetna throughout the pendency of plaintiff's malpractice claim--prior to, during, and after trial. The issue of Aetna8sbad faith in claims settlement practices is a jury question, and the jury should consider all the facts of the case in reaching its verdict. Montana has enacted a broad legislative scheme for the regulation of insurance companies in accordance with federal law and with the Montana Constitution. Kyriss, 

### 624 F. Supp. at 1133. Likewise, in this case, Farmers has a duty pursuant to 

### 5 33-18-201, MCA, to effect prompt settlement of claims where liability is reasonably clear. That obligation did not end when plaintiff's complaintwas filed. Itcontinued throughthependency of that claim and following judgmentby the District Court. Insurance companies have tremendous resources with which to

use litigation and appealstodrain their insureds financiallyand leverage settlements which are otherwise unreasonable based upon the facts of the claim. Whether or not Farmers did that in this

casewas a factual issue forthe jurytodecide. Furthermore,that issue was resolved by the jury in this case based on facts which were not evident to the Supreme Court from the record on appeal fromtheunderlying trial. Therefore,any sanctionthat this Court could have imposed based on the record in that appeal was not

### adequate to deter an appeal taken solely for the purpose of unreasonably delaying payment of plaintiff's claim. This decision is 

### a serious blow to those who believe in the statutory obligation that insurance companies have to treat their insureds in a reasonablemanner. It is an evenmore seriousblow to thosewho believe thatwhen oneparty calls awitness, our rules of discovery were intended to provide the other party with a reasonableopportunitytocross-examinethatwitnessbydiscovering the factual bases for that witness's opinions and conclusions. The practical effect of this decision is that insurers can delegate their statutory obligationto investigate claims to a law firm, they can deny those claims based on the advice of that law firm, and then, when the company is accused of violating Montana law by denying the claim unreasonably, the insurer can defend on the basis that it relied on the firm's investigation and advice, while the plaintiff is denied an opportunity to discover the substance of that advice or what the investigationdisclosed. As 

### sure as night followsday, this opinon will spawn a series of "Palmer" seminars around the State where claims adjusters for insurance companies are taught how tomistreat their insuredswith impunityby running the records of theirmistreatment through law firms which will be glad to assist with their investigation 

### for a fee. Themajority opinionrepresentsa classic exampleof the legal profession taking care of its own at the expense of everyone else.

### Hopefully, with the passage of 

### time, this decision will become a relic 

### of an unenlightened period in 

### this Court's history when the rights of 

### individuals were less 

### important than the rights of 

### insurance companies and those law firms that 

### represented them. However, that will not be much conso3ation to the ~istrict 

### Court or jurors who gave so 

### generously of 

### their time to do the 

### right thing in this case. 

### And, itwill 

### not domuch good for David 

### Palmerwho, at 

### least briefly, thought the lawwas 

### bigger than 

### his insurance company. For these 

### reasons, I

### dissent from the

### majority opinion.

JusticeWilliam E, 

### Hunt, Sr., joins inthe foregoingdissent.