Opinion ID: 2585318
Heading Depth: 2
Heading Rank: 1

Heading: State Farm's contention

Text: ¶ 13 An important preliminary question, and thus our first concern, is to determine State Farm's position in defending this casea question on which there has been considerable disagreement between counsel, the trial judge, and the court of appeals. It is also a matter on which there was and is considerable disagreement in the briefs and in oral argument before this court. After reviewing the record, we think that the best characterization of State Farm's defense is that given by State Farm itself: State Farm made clear both here and below that its defense has both objective and subjective components because the defense necessarily mirrors plaintiffs' claims, which themselves have both objective and subjective components. Once again, State Farm asserts that its conduct was objectively reasonable and subjectively reasonable and in good faith because of what its policies, the statute and the case law actually said (not what State Farm's lawyers said they said), and because of what its personnel actually knew and did (not what State Farm's lawyers told them to do). State Farm's Response to Plaintiffs' Motion for Reconsideration (in the Court of Appeals), at 3 (emphasis added). State Farm's position in this court is essentially the same. Its defense will include what its personnel actually knew and did but not because of what its lawyers advised. Response to Petition for Review, at 5. ¶ 14 State Farm had its agents evaluate the lawpolicy provisions, statutes, and cases. As part of that evaluation, the agents were informed by counsel. On the basis of this evaluation, including, we must suppose, the information gained from counsel, State Farm's agents denied the claims in good faith based on their view of the law, not because of what its lawyers advised. We note, of course, that State Farm does not claim perhaps, in honesty, could not  that the lawyers' advice formed no part of the evaluation. State Farm also does not claim that the information provided by the lawyers was not included in the evaluation process but only that it did not do what it did because of what its lawyers advised. Given these avowals, we believe the trial judge was well within his discretion in concluding that advice of counsel was a part of the basis for State Farm's defense. What State Farm knew about the law obviously included what it learned from its lawyers. ¶ 15 The question before us is whether, having alleged that its actions were objectively and subjectively reasonable and in good faith based on its evaluation of the lawan evaluation that included advice of counsel, State Farm may then raise the privilege as a bar to prevent discovery of the information in the possession of its employees and managers when they made the subjective determination and concluded that the law permitted them to reject Plaintiffs' claims. Of course, State Farm is not liable for bad faith just because hindsight shows its employees were wrong. On the other hand, State Farm is liable for bad faith if the evidence shows its employees could not or did not reasonably believe that the first-party stacking claims could be rejected within the bounds of the law. See Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 237 ¶ 20, 995 P.2d 276, 279 ¶ 20 (2000). [3] The information in question is very relevant and materialwhat information could be more important to determining what these employees and managers actually knew and reasonably believed than the advice they obtained from counsel with respect to the validity of stacking claims? But there is more than relevance and materiality needed to find a waiver, for communications with counsel are almost always very relevant and material. We conclude that under the Hearn test, in cases such as this in which the litigant claiming the privilege relies on and advances as a claim or defense a subjective and allegedly reasonable evaluation of the lawbut an evaluation that necessarily incorporates what the litigant learned from its lawyerthe communication is discoverable and admissible. ¶ 16 Thus, we agree with the court of appeals that before a waiver can be implied, a Hearn -like requirement of an affirmative act of putting the privileged materials at issue is necessary. See Lee, 197 Ariz. at 354 ¶ 24, 4 P.3d at 409 ¶ 24. We also agree that mere denial of the allegations in the complaint, or an assertion that the denial was in good faith, is not an implied waiver. See id. at 354-55 ¶ 25, 4 P.3d at 409-10 ¶ 25. But in this case, State Farm advances its own interpretation of the law as a defense, including what its employees knew, prior to Lindsey, in making that evaluation. True, State Farm does not claim that it rejected the stacking claims because of its lawyers' advice, but it does not deny that what its employees knew included information from the lawyers. ¶ 17 As will be seen from our cases, there is no question that express reliance on an advice-of-counsel defense would constitute an implied waiver under almost any test. See also 1 JOHN W. STRONG, McCORMICK ON EVIDENCE § 93, at 373 (5th ed.1999). The question here is whether and when an assertion short of an express advice-of-counsel defense waives the privilege. Hearn, of course, found a waiver of privilege, despite the government's disavowal of reliance on an advice-of-counsel defense, because the government had affirmatively claimed a qualified immunity, thus putting in issue the question of disregard of settled, undisputable law. 68 F.R.D. at 581-82 n. 5.