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, 

The Honorable Thomas M. McKittrick, Judge presiding. 

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, 1993 
Justice R. C. McDonough delivered the Opinion of the Court, 

This is an appeal from an order based 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 fair dealing (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 

claim and stay discovery proceedings concerning bad faith until the 

uninsured motorist claim was resolved. 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 the verdict 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 judge approved the punitive damage award and entered judgment 

against Farmers. Farmers filed a motion for either a judgment 

notwithstanding the verdict or a new trial. The motion was deemed 

denied. This appeal followed. 

The pertinent issues on appeal are: 

2 
1. Whether the District Court erred by denying Farmers' 

motion for directed verdict. 

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 into evidence, correspondence between Farmers and 

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-client privilege. 

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 

evidence prevented Farmers from having a fair trial, 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. Whether the District Court erred in ordering Farmers 

to produce the work-product materials in its claim files. 

B. Whether the District Court erred in determining that 

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 the District Court erred by 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 centerline and ran his motorcycle off the road. Farmers denied 

the uninsured motorist claim in February of 1986, after a witness 

told a Farmersv claims adjuster that the truck was 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 attorneys who 

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, as witnesses 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, 

Farmersf branch claims supervisor. Neither Rausch nor any of the 

other deponents had been designated as expert witnesses at the time 

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 

during preparation for trial and during trial. Palmer made 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,3 Gregoire 

as potential witnesses in the bad faith trial. The answer also 

stated: "If called as witnesses, those individuals will not be 

examined regarding their confidential privileged communications to 

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'ers sent a 
copy 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, Palmer was entitled to Farmers1 entire 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 claim file, including attorney correspondence. 

At trial, most of Palmer's case-in-chief involved evidence 

concerning the underlying trial and Farmers1 post-filing conduct. 

The evidence included the strategy and litigation tactics of 

Farmers1 attorneys who defended the underlying case and testimony 

from the underlying trial. 

In questioning Bud Rausch, the first witness at trial, Palmer 

introduced into evidence and read nine 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 underlying uninsured 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 arguments were 

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 error by denying Farmers1 motion for a directed 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. Tynes v. Bankers 

7 
Life Co. (1986), 224 Mont. 350, 364, 730 P.2d 1115, 1124. As we 

have stated, "[i]t is generally held 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 the parties and their legal rights. The insured counterclaimed, 

alleging that the insurer acted in bad faith by bringing the 

declaratory judgment action instead of payingthe claim. 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 file a declaratory judgment action to obtain a determination of 

the validity, continuance or coverage of the insurance policy, 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, and 
therefore, 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 from witnesses before Farmers 

denied the claim gave it a reasonable basis for denying the claim. 

Witness Atchison told a claims investigator that, contrary to 

Palmer's assertion, a truck did not run Palmer'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 truck was 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. It matched the description 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 them before they came upon the 

accident. 

Farmers argues that the statements of Atchison and the dirt 

bikers gave it a reasonable basis for denying the claim as a matter 
of 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 

motorist policy would not coverthe accident unless another vehicle 

ran Palmer off the road, the witnesses' statements appear at first 

glance to provide a reasonable basis for denying the claim. 

Palmer, however, counters that it was unreasonable for Farmers 

to rely on Atchison's statements because Atchison was an unreliable 

witness. Palmer points out that Atchison kept changing details of 

his story, such as the exact speed of the motorcycle 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 it was unreasonable for 

Farmers to deny coverage based on Atchison's information because 

Atchison changed details of his story. The credibility of Atchison 

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 this gives another reasonable explanation of the 

speeding motorcycle seen by the dirt bikers. However, there is no 

evidence that Farmers knew of this witness' statement when it 

denied the claim. 

In a jury trial, a judge may 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 defendant moves for a 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. Cremer Rodeo Land & Livestock Co. (3979), 181 

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

sufficient to withdraw a case from the jury is whether reasonable 

people could draw different conclusions fromthe evidence. 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 Farmersf motion for directed verdict. In 

reviewing the courtf s denial of Farmersf motions, we apply the 

common-law standard for holding an insurer liable for bad 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 the witnesses. It is for the jury to determine the 

probative value of the evidence and draw inferences from the 

evidence, and then determine whether Farmers had a reasonable basis 

for denying the claim. 
We hold that Cumiskev does not require the District Court to 

grant a directed verdict for Farmers. We further hold that the 

court did not commit reversible error by concluding that reasonable 

people could draw different conclusions about whether Farmers' had 

a reasonable basis for contesting Palmer'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 tendency to make 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 judges have 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 

12 
show whether 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 

reasonable basis 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, correspondence between Farmers and its 

attorneys who defended the underlying uninsured motorist lawsuit, 

thus entitling Farmers to a new trial? 

In a request for production of documents on February 26, 1986, 

Palmer requested Farmers' "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 agents and attorneys, concerning plaintiff's 

claim for uninsured motorist benefits." 

Sometime later, Palmer moved to compel discovery of Farmers' 

claim files developed in investigating and defending the uninsured 

motorist suit. Farmers produced everything in its files, except 

for correspondence between 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 

13 
they were protected by attorney-client privilege. Farmers objected 

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 for such materials in preparation of its bad 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. 

Farmers points out that the bad faith trial should have centered on 

whether the infomation it had when it denied Palmer's claim 

constituted a reasonable basis for contesting the claim. Farmers 

contends that by admitting privileged materials, the court allowed 

Palmer to focus much of the bad faith case on the litigation 

tactics defense counsel used in preparing for the underlying 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) , (citing Upjohn Co. v. United States (l98l), 449 U.S. 383, 

Another important policy 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 advice will later be used against the client. We approve 

of the Missouri Supreme Court's recognition of this policy, 

articulated as follows: 

As long as our society recognizes 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 (quoting Sedler & Simeone, Comment, Privileqes in the Law 

of Evidence: The Realities of Attornev-Client Confidences, 24 Ohio 

St.L.J. 1, 3 (1963)). With these policies in mind, 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 

faith cases in which the insurer's attorney did 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-party bad 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: 

Baker v. CNA Ins. Co. (D.Mont. 1988), 123 F.R.D. 322. We disagree. 

16 
One type of first-party bad faith action involves dual 

representation by the attorney. Judge William Jameson first 

expressed the concept of dual representation as follows: "Under an 

insurance contract, however, the insurer initially employs the 

attorney to represent the interests of both the insured and the 

insurer.I1 Jessen v. 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 file prepared forthe underlying lawsuit, because the insurer 

created the file primarily 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). 

The present case is a distinct type of first-party action. 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. The 
attorneys 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 the cause of 

action, controls whether communications between attorney and 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 attorney did not represent the interests of the 

insured in the underlying case. That is tbe nature of the 

relationship here; therefore, the attorney-client privilege applies 

in this case. 

B. Did Farmers1 file contain material subject to 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 "confidential reportstt concerning the pending 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 evaluated 
witnesses, 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 in the course of 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. 

The privilege of non-disclosure is not lost merely because the 

communications contain relevant nonlegal considerations. Union Oil 

Co. of Calif. v. Dist. Ct. (1972), 160 Mont. 229, 236, 503 P.2d 

1008, 1012. The protection applies unless 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 

obtain new 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 Farmers produced the 

privileged material under court order. Notably, all of the alleged 

waivers occurred after the court compelled discovery and Palmer had 

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 regarding the contents of the privileged correspondence 

at the deposition of Bud Rausch, Farmers' branch claims supervisor. 

In so arguing, Palmer overlookedthe following continuing objection 

made by Farmersr attorney at the beginning of the deposition. 

*'[I]n order to preserve our objections, I wish to state 

a general and continuing objection to any and all 
reference to and questioning regarding documents frornthe 

claim files of Farmers Insurance Exchange, 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 protection afforded by Rule 26 (b) 3 of the Montana 

Rules of Civil Procedure. And also, because a great many 

of such documents constitute communications between 

defendant and its attornevs and are ~rivileaed under the 

attornev-client privileqe, I: have a second obi ect ion. 

(Emphasis added. ) 

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's claim. 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.) SpectraPhysics v. 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 Farmersf decision 

to deny Palmer's claim. Although Farmers listened to the 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 

Palmerrs bad faith claim. Therefore, Palmer's contention that 
Farmers waived its privilege by relying on advice of counsel is 

lacking in mejrit. 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 a hearing on the morning 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 on which communications Palmer wanted 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 

subjects of the privileged information. Under the circumstances of 
this 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 ~armers and its attorneys Smith, Walsh, 

Clarke, and Gregoire, Farmers had done nothing that could be 

interpreted as a voluntary relinquishment of its right to claim the 

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 

voluntarily divulge the specific confidential material 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 a voluntary 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-client privilege 

applicable to the communications between Farmers and its attorneys. 

D. Is evidence of privileged communications admissible against 

the holder of the privilege if the court erroneously compelled 

its discovery? 
The District Court in this 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 found that Palmer demonstrated a substantial need 

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 the work-product doctrine. A showing of need cannot 

defeat the attorney-client privilege, whereas a showing of need may 

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 foster the attorney-client relationship by enabling 

attorneys to provide the best advice possible to their clients and 

encourage the clients to act within the law. The privilege 

furthers this purpose by encouraging clients to give information to 

their attorneys without fear that it will later be used against 

them. 

The privilege also furthers this purpose by allowing attorneys 

to give candid advice to clients without fear that later it can be 

used against the client. Our statute reflects this policy by 

including as privileged communications any advice from the attorney 

to the client given within the professional relationship. See 5 

26-1-803, MCA. 

The Montana Rules of Evidence promote the policies underlying 

the attorney-client privilege by providing that "[a] claim of 
privilege 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 

compels discovery of privileged material. "The remedy provided is 

that the privilege may be subsequently claimed and the disclosed 

subject matter made inadmissible. Rule 504, M.R. Evid. , Commission 

Comments. 

Rule 504 was intended for this situation, in which the holder 

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 from having a fair trial, thus entitling it to 

a new trial? 

The District Court misconstrued the law when it ordered 

Farmers to produce privileged material and admitted the privileged 

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 the underlying 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 

contraryto the recommendation of their attorneys was a substantial 

element in Palmer's proof of Farmerst bad faith in investigating 

and settling Palmer's claim. Palmer claimed the retention of such 
an expert and his opinion would 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 in which 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 the materials into evidence? 

On February 16, 1989, the District Court ordered production of 

all Farmers1 claim file materials 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 second week of trial, the court ordered Farmers1 former 

2 6 
defense counsel to produce the firm's witness files to Palmer's 

counsel. Farmers contends that the ~istrict Court erred in 

ordering production of these materials 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 remanding based 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? 

In response to Palmer's motion to compel discovery of Farmers' 

claim file, Farmers objected to producing any materials 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 file were 

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 expect bad faith litigation and investigations are not made with 

the expectation of such litigation. 

In the present case, Farmers does not seek the protection of 

the work-product doctrine for materials prepared between the time 

it opened the claim file and October 8, 1985. Therefore, we need 

not rule on whether the doctrine applies to materials 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-product doctrine. 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. 

Ordinary work product is discoverable 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 

other party's representative (including the other party'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 a privileged area within which 

he can analyze and prepare his client's case." United States v. 

Nobles (1975), 422 U.S. 225, 238, 45 L.Ed. 141, 154, 95 S.Ct. 2160, 

2170. Because of this purpose, 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 

the mental impressions, conclusions, opinions, or legal theories of 

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 court provide greater protection for opinion work 

product than for ordinary work product. See Nobles, 422 US. at 

This Court has endorsed the following rationale concerning the 

greater protection granted to opinion work product: 

It is clear that opinion work product is entitled to 

substantially greater protection than ordinary work 

product. Therefore, unlike ordinary work product, 

opinion work product cannot be discovered upon 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 opinion work product stems from the 

concern that there may be rare situations, yet 

unencountered by this court, where weighty considerations 

of public policy and a proper administration of justice 

would militate against the nondiscovery of an attorney's 
mental 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 should remain immune from discovery. 

Kui~er, 632 P.2d at 701-02 (citation omitted). 

Several courts, including the Ninth Circuit Court of Appeals, 

have designated a rare and extraordinary circumstance when opinion 

work product is discoverable. We agree with the reasoning of those 

courts which have held that opinion work product is discoverable 

when the mental impression is directlv at issue in the case and the 

need for the material is compelling. See, e.g., Holmgren v. 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" we mean that the mental impressions actually are 

the issue in the case. To meet the "compelling needs1 requirement, 

the party seeking discovery must demonstrate that weighty 

considerations of public policy and the administration of justice 

outweigh the need to protect the mental impressions of the opposing 

party's attorneys or its representatives. See Kui~er, 632 P.2d at 

701-02. 

In a bad faith case, such as the present 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 

directly at issue. The basis for denying such a claim lies only in 

the mental impressions of those representatives of the insurer who 

31 
decided 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, the District Court ordered production of Farmers' entire 

claim file. Farmers' claims agents and a branch claims supervisor 

made the decision to deny coverage, so their mental 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 

impressions of a ~artv are directly at issue in the case. However, 

because of the possibility of a rare and extraordinary circumstance 

in which the mental impressions should not be discovered, we 

decline to rule that the compelling need requirement is 

automatically met in such cases. 

The work-product doctrine, however, protects materials 

containingthe mental impressions of Farmers' attorneys. The court 

ruled that when attorney Walsh took the stand, Farmers placed 

advice of counsel squarely at issue in the proceedings. 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 to deny coverage in this case. Therefore, attorney mental 
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 

substantial need and undue hardship. On remand, it is incumbent on 

Farmers to show which materials included in the District Court's 

order contain opinion work product. The court then must 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 the materials. 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 

immunity by making testimonial use of the materials at trial. On 

the other hand, Farmers argues that, except for his testimony 

33 
regarding expert witness Dr. Shapley, Walsh only generally 

mentioned four other witnesses. Therefore, Farmers argues, Walsh 

did not waive the protection of the work-product doctrine for 

anything but the Shapley file. 

In the present case, the court ordered production of the Smith 

firm's work-product files without discriminating as to whether 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 witness directly discloses his or her mental impressions. See 

In re Martin Marietta Corp. (4th Cir. 1988), 856 F.2d 619, 625. 

With ordinary work product, once a witness 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 

explain why Farmers hired Dr. Shapley as an accident reconstruction 

expert but failed to have him testify in the uninsured motorist 

trial. Rausch was not the one who made the decision and could not 

address the question, so Farmers called its former attorney James 

Walsh to explain why Shapley was not called as a witness. 
Walsh testified concerning his dealings with Shapley, the 

general nature and calculations he requested Shapley to make, and 

Shapleyls conclusions. Walsh testified that he decided there was 

no need to call Shapley because his opinions were consistent with 

those of Palmer's expert. 

Walsh thus directly disclosed his mental impressions 

concerning his decision not to call Shapley as a witness. 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, Farmers knew early on 

that speed was not a factor in the accident. Walsh also referred 

to the credibility of witness Atchison. 

Walsh did not, however, testify to the substance of any of the 

work product in his file, nor did he refer to any of the materials 

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 

f irmls witness files because, for the most part, they were prepared 

and used by Gregoire. 

Walsh did not disclose his or his partners' 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 the 
underlying 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 Farmers1 attorneys 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 Farmers1 decision 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 contends that after litigation commenced, the parties 

assumed adverse positions, and events occurring after that time 

could not form the basis of either a common law or a statutory bad 

faith claim. Farmers further contends that allowing a jury to 

consider evidence of litigation conduct is extremely 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 have held, and we agree, that an insurer's duty to deal 

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 

continuing duty of good faith does not necessarily render evidence 

of an insurer's post-filing conduct admissible. See Palmer v. 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. National 
Auto. & 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. 

Public policy favors the exclusion of evidence of an insurer's 

post-filing litigation conduct in at least two respects. First, 

permitting such evidence is unnecessary 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 a party 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 ethically bound to represent the 

client zealously within the framework provided 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, or 
impose 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 faith by zealously defending itself is 

to impose such a penalty. 

The most serious policy 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 that 
permitting 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 in White, 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 defeated parties.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. 
This brings us to another crucial point, the relevance of the 

insurer's post-filing conduct. In general, 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 insured must 

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 I1once litigation 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 postfiling 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 a balance between 

deterring improper conduct by the insurer and allowing insurers to 

defend themselves against spurious claims. Rule 403, M.R.Evid., 

provides for that balance. 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 in mind 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 likely will 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, in most cases, the only possible relevance of such 

evidence is to reinforce or expose the unreasonableness 

of the original denial of coverage. Improper postfiling 

conduct, no matter how unreasonable, is rarely actionable 

in and of itself under the rubric of bad faith tort 

action. When analyzins the relevance of an insurer's 

postfilins conduct. therefore. the urouer inuuirv should 

be into the extent to which such conduct casts lisht on 

the reasonableness of the oriqinal denial of the 

policyholderrs claim. 
Insurer's Duty of Good Faith, 60 Geo. wash. L.Rev. at 1969-70. 

(Emphasis added.) 

After analyzing Farmersf post-filing conduct, we find that the 

prejudicial nature far outweighs any relevance of the conduct. The 

following examples illustrate how Palmer used evidence with little 

or no relevance to prejudice the jury against Farmers. 

First, Farmers reimbursed key witness Atchison 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 Iffirming up1' session was somehow unethical or illegal. 

The "firming upn session, and questions regarding it, have 

little or no 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 witness Atchison had 

changed his story about whether the motorcycle had passed behind or 

in front of the truck. Through his questioning in the bad faith 
trial, Palmer's attorney insinuated that Farmers had an obligation 

to alert: the jury in the underlying trial that Atchison had changed 

parts of his description of the accident. 

In addition, Palrnerfs attorneys continually challenged Rausch 

to explain and defend the comments and conduct of Famers' counsel 

in defending the underlying case. Rausch was 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 for trial, and conducting 

trial. Nor was Rausch equipped to explain motions to compel, why 

Farmers was reluctant to produce work product for Palmer, and why 

Farmers did not call one of its expert witnesses in the underlying 

trial. Only the attorneys could explain these circumstances. 

Last, defense attorney Gregoire was cross-examined extensively 

on his role in meeting with Atchison and cross-examining other 

witnesses at trial and in depositions. Palmer's attorney suggested 

to the jury that Gregoire asked an investigator to I1tail1l a 

witness, not to see if she stayed with Palmer's family, but to "get 

some dirt on her." 

A11 of this evidence was prejudicial because it allowed the 

jury to second guess Farmersf attorneys and to consider legitimate 

defense strategy and proper litigation tactics as evidence of bad 

faith. The evidence does not relate to the reasonableness of the 

original denial of the policyholderts claim, and therefore, has 

little or no relevance. Thus, the District Court erred by 

admitting evidence of Farmersf attorneysf post-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 to which 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 

faith action based on the insurerf s decision to deny coverage? 

Farmers contends that post-judgment conduct is not 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, 

sanctions are available for frivolous litigation tactics, including 

the filing of a frivolous appeal. 

We agree with the following analysis by the California Supreme 

Court: 

Although there are many contexts in which jury 

determinations may be superior to those of trial or 

appellate judges, the determination of the frivolousness 

of an appeal is not one. And the potential "chilling 

effectn on appeals . . . would be greatly exacerbated if 

every appellant faced the prospect that a jury might 

impose additional damages--compensatory and punitive--in 
a subsequent action based on its assessment of his or her 

motive in prosecuting the appeal. 

Coleman v. 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 the materials 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 the admission of material subject to attorney-client privilege. 

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. 
Justices 
Justice 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 secret maneuverings 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 and wasted hours of conscientious service by the jurors who 

served in this case; and unjustly treated the victim whose efforts 

to reclaim some modicum of dignity have been dealt a severe 

set-back by this decision. 

I have no quarrel with attorney-client privilege, nor the work 

product doctrine. Under the appropriate circumstances, those 

principles provide a necessary shield from exposure of an 

attorney's candid communications and mental 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 and mental 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 

necessary to understand 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 

opinion which, 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 

acted unreasonably by asserting that he acted in reliance on 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 the passenger 

on Palmer's motorcycle and a review of the investigating highway 

patrolman's report. There were 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. Safeco Insurance 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 in McClynn, 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, a member of the law firm. Following the 

denial of his claim, Palmer filed a complaint in the District Court 
on February 26, 1986, alleging that he was entitled to coverage for 

his injuries and that Farmers had acted unreasonably and 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 settlement practices. 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, for practical 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 

in Fodev. FannersInsuranceExchange (1986), 221 Mont. 282, 719 P.2d 414, 

bifurcated plaintiff's claims and ordered that the underlying claim 

for coverage pursuant to the uninsured motorist contract should be 

tried first, and that any bad faith should be considered after that 

case was resolved by settlement or judgment. 

The contract claim went to trial on March 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 for appeal to the Supreme Court, 

but also advised the company that even if the case was reversed by 

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

verdict in favor of Palmer. Farmers chose to proceed with the 

appeal anyway, reasoning that if it was successful on appeal, 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 that he was ready to proceed with the bad faith claim. In 

response to that notice, Gregoire, who was still acting as Farmers1 

attorney, and who had complete authority to waive any privilege 

that his client could claim (see Drimmerv. 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 in the action you have filed. There seems to be 

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 that point in time, the only remaining issue to be decided 

in the bifurcated claim was whether Farmers had acted reasonably or 

in bad 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 obligations to its insured, became the primary 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 whether 
Farmers 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 

Holmgren v. State Farm Mutual Automobile Insurance Company (9th cir . 1992 ) , 97 6 

F.2d 573, State Farm was sued pursuant to 5 33-18-201(2), (4), (6), 

and (13), MCA, of Montana's Unfair Trade Practices Act. Judgment 

was entered for the plaintiff. On appeal, State Farm argued that 

the district court erred when it ordered the company to produce, 

and then admitted as 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 

& Liability Ins. Co.], 117 F.R.D. [160,] 164 [S.D.Cal. 19871 ; 

Handgards, Znc. v. Johnson & Johnson, 4 13 F . supp . 9 2 6, 9 3 2 -3 3 

(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). But see 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) (applicable to claims arising after July 1, 1987) ; 

Klaudtv. Flink, 202 Mont. 247, 658 P.2d 1065, 1067 (1983), 

overruled on other grounds, Fode v. Farmers Ins. Exch. , 2 2 1 Mont . 2 8 2, 

719 P.2d 414 (1986). Unless the information is available 

elsewhere, a plaintiff may be able to establish a 

compelling need for evidence in the 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-case basis. 

In Handgards, "the lawyers who managed 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, is a practical acknowledgment of the fact that, 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. 

The Holrngren decision refers to mental impressions and opinions 

of the insurer's agents. In that case, the agents were adjusters. 

In this case, the agents were adjusters and attorneys. Farmers 

attorneys were involved in the investigation and evaluation of this 

case long before there was any lawsuit filed by Palmer. Their 
opinions, advice, and mental impressions cannot be separated from 

those of Farmersf adjusters 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, Farmers waived any claim to attorney-client privilege when 

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, in Holmgren, 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. In Handgards, the defendant was accused of filing patent 

infringement suits against the plaintiff in bad faith as part of a 

conspiracy to restrain trade and monopolize the disposable plastic 

glove industry. The plaintiff learned that 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 generated by these attorneys which would 

indicate their purpose for filing the suits. The defendant 

objected, based upon a claim of attorney-client privilege. The 

district court held that by listing the attorneys as witnesses, 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 

order to demonstrate that the prior lawsuits were pursued 

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 

the patent actions. Garjinkle v. Arcata National Cop., [ 64 F . R . D . 688 (S.D.N.Y. 1974)l . . .; 8 Wigmore, Evidence § 2327 

(McNaughton rev. 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 who managed and supervised the 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 ascertain the basis 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 

, in Leybold-Heraeus Technologies, Inc. v. Midwest Instrument Company 

') , 118 F.R.D. 609, the district court held that by 

attorneys as witnesses the plaintiff waived the 
attorney-client privilege. In that case, both attorneys were 

listed for the purpose of testifying that the actions against the 

defendant had been commenced in good faith. However, the plaintiff 

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: 

Upon naming two of their attorneys as witnesses, 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 

faith belief in the validity of the patents in question 

and the good faith in maintaining the lawsuits of both 

the present litigation and 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 favorable to 

themselves, without concomitant disclosure of other 

unfavorable portions of the privileged communications 

relating to the same subject. See Handgards, Inc. v. Johnson & 

Johnson, 413 F. Supp. at 929 ; Teachers Im., Etc. v. Shamrock 

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

Federal Savings & 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-Heraeus Tech., 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 was 
within its knowledge, and when, furthermore, Farmers notified 

plaintiff that its attorneys would be called as witnesses to 

establish that it acted reasonably, attorney-client privilege with 

regard tothose attorneys* communications to Farmers was waived and 

a specific exception to the work product doctrine was established. 

The propriety of the District Court's order compelling 

disclosure of Farmers' claims file was further established by later 

developments. On September 13, 1989, plaintiff tookthe deposition 

of Bud Rausch, defendant's branch claims supervisor who was in 

charge of reviewing plaintiff's claim. He was obviously a critical 

witness with regard to the issue of whether or not defendant had a 

reasonable basis for denying Palmer's claim. Rausch testified 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 

conversation with Marvin Smith who based his recommendation on the 

investigation being conducted by the law firm*s investigator. 

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 you have already told us, and I will 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, you did rely on it, whether you had to or not? 

A. That's correct. 

The majority opinion attempts to excuse Rausch's testimony 

based on the contrived argument that since Farmers had not pled 

"advice of counsel1' as an affirmative defense, it was not a basis 

for waiving the attorney-client privilege. 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 so based on the advice of his attorneys. There was no 

way for plaintiff to determine whether he did so reasonably without 

knowing the substance of that advice. The only way to know the 

substance of that advice was 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 there was any question about the purpose for which Farmers1 

attorneys would be called as witnesses, that question was finally 

resolved when Farmers was compelled by order of the District Court 

to answer plaintiff'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 

defendant to plaintiff's underlying lawsuit for 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 that underlying suit, or the instant bad faith 

action. 

The defendant also listed Billings attorney Steve Harman as an 

expert, and in response to plaintiff's Interrogatory No. 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 

conduct which gave rise to defendant's denial of plaintiff's claim. 

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 arbitrarily decide which of their communications 

are privileged and which are not, and testify to those matters 

which are favorable to Farmers* defense while precluding plaintiff 

from discovering any matters which might be unfavorable to Farmers' 

defense. Such a denial of meaningful cross-examination offends any 

notion of due process with which I am familiar. 

Some mention should also be made of the manner in which 

Farmers actually 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 he was 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 in the underlying trial. He 

gave extensive testimony about the expert witness that Farmers had 

consulted and what that expert's conclusions were, even though the 

witness had not been called in the underlying trial. He gave his 

opinion about why they were able to defend during the trial without 

calling an expert witness, 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; 

and his personal evaluation of the merits of plaintiff's underlying 

claim. He explained how his firm arrived at the evaluation which 

led to the denial of plaintiff's claim. He explained their mental 

processes as they gathered sometimes contradictory information from 

various witnesses, and told why some witnesses had greater 

credibility, in his mind, than others. He was 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 as much as plaintiff was claiming in an effort to defeat him. 

Frank Weedman was a retired claims representative for State 

Farm Auto 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 

for Weedman to consult the file, how could it be any less necessary 

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 Farmers would have foisted that testimony on 

the court and jury without any meaningful opportunity for plaintiff 

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 

District Court turned over the Smith law firm's litigation files on 

a wholesale 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 production 
of 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, after Walsh was called to 

testify on behalf of defendant, plaintiff's attorney requested the 

court to order production of those witness files referred to 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 ~istrict Court 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 the difficulty comes in is where 

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 rather broad testimony, as Mr. Risjord has pointed out. 

Speed, the truck being 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 to Mr. 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 

you have no question about that have been 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 impressions while protecting the actual record of those 

impressions from discovery by plaintiff. The District Judge 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. There would be no way for counsel for the 

plaintiff to adequately cross-examine Mr. 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 is only allowed to get into those areas that were 

testified to by Mr. Walsh, and I am limiting this ruling 

narrowly to that testimony. The entire file is not 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 for both parties so that 
a determination could be made as to the exact extent of the waiver. 

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 

that Walsh talked to about plaintiff's speed; he ordered that files 

which had to do with witnesses Atcheson and Diacon be produced; and 

he ordered that Vassar8s notes 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 in the majority opinion that wholesale 

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 correct to conclude that defendant has satisfied 

the burden imposed by 5 25-11-102, MCA, for reversal of the 

District Court judgment. Even if the majority 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 plaintiff Is 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 in those reports was relied upon by 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 the verdict in an 

underlying case is not admissible as evidence of bad faith. The 

insurer has a continuing obligation to pay 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 Kyrhs v. Aetna Life and Casually Company (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 that Aetna acted in bad faith and solely for the purpose of 

delay in appealing the underlying personal injury verdict to the 

Supreme Court of Montana. In denying that motion, the court held 

that : 

Evidence that an appeal was taken in bad faith is neither 

inconsistent with the general tort principles expressed 

by the Montana Supreme Court, 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 

the presentation of the appeal1# that the appeal was 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, to be 

considered in view of all the plaintiff's evidence of 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 that plaintiffls claims 

constitute a 88chilling effect8* on AetnaWs right of access 

to the courts is without merit. 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 subject matter of AetnaVs appeal was the 

underlying malpractice action, and the issue concerned 

the proper standard of causation. The subject matter of 

the instant action is the conduct of Aetna throughout the 

pendency of plaintiff's malpractice claim--prior to, 

during, and after trial. The issue of Aetna8s bad 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 complaint was filed. It continued through the pendency 

of that claim and following judgment by the District Court. 

Insurance companies have tremendous resources with which to 

use litigation and appeals to drain their insureds financially and 

leverage settlements which are otherwise unreasonable based upon 

the facts of the claim. Whether or not Farmers did that in this 

case was a factual issue for the jury to decide. 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 

from the underlying trial. Therefore, any sanction that 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 reasonable manner. It is an even more serious blow 

to those who believe that when one party calls a witness, our rules 

of discovery were intended to provide the other party with a 

reasonable opportunity to cross-examine that witness by discovering 

the factual bases for that witness's opinions and conclusions. 

The practical effect of this decision is that insurers can 

delegate their statutory obligation to 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 investigation disclosed. 

As sure as night follows day, this opinon will spawn a series 

of "Palmer" seminars around the State where claims adjusters for 

insurance companies are taught how to mistreat their insureds with 

impunity by running the records of their mistreatment through law 

firms which will be glad to assist with their investigation for a 

fee. 

The majority opinion represents a classic example of 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, it will not do much good for David 

Palmer who, at least briefly, thought the law was bigger than his 

insurance company. 

For these reasons, I dissent from the majority opinion. 

Justice William E, Hunt, Sr., joins in the foregoing dissent.