Opinion ID: 1263765
Heading Depth: 1
Heading Rank: 5

Heading: Claim File Documents

Text: The circuit court required Allstate to release 66 documents that Allstate alleged were protected by the attorney-client privilege and/or work product doctrine. The burden of establishing the attorney-client privilege or the work product exception, in all their elements, always rests upon the person asserting it. Syl. pt. 4, State ex rel. USF & G v. Canady, 194 W.Va. 431, 460 S.E.2d 677 (1995). Moreover, we have recognized that [a]s the attorney-client privilege and the work product exception may result in the exclusion of evidence which is otherwise relevant and material and are antagonistic to the notion of the fullest disclosure of the facts, courts are obligated to strictly limit the privilege and exception to the purpose for which they exist. Id. at 438, 460 S.E.2d at 684. However, the importance of obtaining full disclosure of the facts must be balanced with a client's need to speak freely with his or her attorney so that he or she may obtain quality advice. Id. at 438-39, 460 S.E.2d at 684-85 (recognizing that it is `the function of a court to mediate between [these two competing interests,] assigning, so far as possible, a proper value to each' (citation omitted)). Furthermore, acknowledging the apparent tension between the substantial deference normally accorded to a circuit court's discovery rulings and the preference to bar privileged materials from discovery, we have held that [w]hen a circuit court's discovery ruling with respect to privileged materials will result in the compelled disclosure of those materials, a hard and more stringent examination will be given... to determine if the circuit court abused its discretion. Syl. pt. 5, Id. The facts of this particular case do not fit neatly within the analytical framework designed for traditional application of the attorney-client privilege/work product doctrine. The present issue, which is also one of first impression for this court, involves the question of whether Allstate, as the insurer, can assert the attorney-client privilege/work product doctrine in a third-party bad faith action, to prevent Ms. Thoburn from obtaining specific documents from the file of Allstate's insured, Mr. Mirandy. [12] Particularly noteworthy, however, is the fact that Ms. Thoburn secured a release from Mr. Mirandy which permitted Ms. Thoburn access to his file. Our analysis begins by reviewing the decisions of other jurisdictions which have decided this issue. Generally, courts have recognized two broad categories of bad faith settlement actions against insurers: [13] first-party bad faith actions and third-party bad faith actions. The terms first-party and third-party have distinctively different meanings in the context of bad faith settlement actions against insurers. For definitional purposes, a first-party bad faith action is one wherein the insured sues his/her own insurer for failing to use good faith in settling a claim brought against the insured or a claim filed by the insured. [14] A third-party bad faith action is one that is brought against an insurer by a plaintiff who prevailed in a separate action against an insured tortfeasor. [15] In the bad faith action against the insurance company the third-party alleges the insurer insurance company engaged in bad faith settlement in the first action against the insured tortfeasor. [16] See Palmer by Diacon v. Farmers Ins. Exchange, 261 Mont. 91, 861 P.2d 895, 905 (Mont.1993). The principles that are discussed in this opinion with respect to the attorney-client privilege and work product rule apply exclusively to third-party bad faith settlement actions against insurers. [17] In third-party bad faith actions against insurers, there is a split of authority among the jurisdictions addressing the issue as to the application of the attorney-client privilege/work product rule. Therefore, we shall examine and discuss each position. 1. The Minority View The minority view, held by only one jurisdiction, addresses the attorney-client privilege and the work product rule together and concludes that they do not attach to the file of an insured in a third-party bad faith action against an insurer. Therefore, the entire file of an insured is accessible to discovery in a third-party bad faith suit against an insurer. The minority rule was clearly articulated in Dunn v. National Security Fire & Casualty Co., 631 So.2d 1103 (Fla.App. 5 Dist.1993). [18] The trial court in Dunn denied the plaintiff access to the claim file of an insured during a third-party bad faith suit against the insured's insurer. One of the reasons for the denial was the potential violation of the attorney-client privilege/work product rule. The appellate court observed, as an initial matter, that the communication in the insured's claim file should be viewed in two ways: post-judgment communication and prejudgment communication. As to post-judgment communication in a claim file, Dunn held that memos or documents in the file after date of the judgment can be obtained with a showing of good cause. Dunn, 631 So.2d at 1109 (emphasis in original) (citation omitted). While Dunn did not expressly hold that the attorney-client privilege/work product rule had no application to post-judgment communication, it is apparent by the good cause showing that neither privilege automatically attaches to post-judgment communication. Dunn's response to prejudgment claim file communication was unequivocal. The opinion held: In bad faith suits against insurance companies for failure to settle within the policy limits, all materials in the insurance company's claim file up to the date the judgment in the underlying suit are obtainable, and should be produced when sought by discovery.... Discovery of the insurer's claim file and litigation file is allowed in a bad faith case over the objections of the insurer that production of the file would violate the work product or attorney/client privilege. The rationale is because the injured third party stands in the shoes of the insured party in a third party bad faith case and the insurer owed a fiduciary duty to its insured. Dunn, 631 So.2d at 1109 (citations omitted). We do not hesitate in rejecting the minority approach to the issue of whether an insurer has standing to invoke the attorney-client privilege and work product rule in an attempt to prevent disclosure of the contents of an insured's file in a third-party bad faith action. The minority position is unsound. It seriously undermines the relationship between an insured and insurer. By overemphasizing a party's right to obtain disclosure of evidence to prove a third party claim of bad faith, the minority neglects the importance of full and frank consultation between a client and a legal advisor [without] the fear of compelled disclosure of information. State ex rel. USF & G v. Canady, 194 W.Va. at 438, 460 S.E.2d at 684. 2. The Majority View While the majority of courts have developed separate standards regarding the application of attorney-client privilege and the work product rule in third-party bad faith actions, they have generally concluded that an insurer has standing to assert the attorney-client privilege or the work product rule in an effort to prevent disclosure of the contents of the file of its insured in a third-party bad faith action against the insurer. This view opines that [i]t is well established that the attorney hired by the insurer to represent its insured, actually is representing both the insurer and the insured. State ex rel. USF & G Company v. The Montana Second Judicial District Court, 240 Mont. 5, 783 P.2d 911, 913 (Mont.1989), citing American Mutual Liability Ins. Co. v. Superior Court, 38 Cal.App.3d 579, 113 Cal.Rptr. 561 (1974); Rogers v. Robson, 74 Ill.App.3d 467, 30 Ill. Dec. 320, 392 N.E.2d 1365 (1979); Longo v. American Policyholders' Ins. Co., 181 N.J.Super. 87, 436 A.2d 577 (1981). In Jessen v. O'Daniel, 210 F.Supp. 317, 331-332 (D.Mont.1962) the court stated that [u]nder an insurance contract ... the insurer initially employs the attorney to represent the interests of both the insured and the insurer. (Emphasis in original). Having set forth the general rationale behind the majority's conclusions regarding the application of the attorney-client privilege and the work product rule in third-party bad faith actions, we address the specific doctrines in turn, beginning with the attorney-client privilege. a. The Attorney Client Privilege. The court in State ex rel. USF & G Company v. The Montana Second Judicial District Court, supra, stated best the position taken by the majority in attaching the attorney-client privilege to the file of an insured in a third-party bad faith action against an insured. [19] The court stated: Normally, all communications between attorney and client, including conversations on phone calls, are memorialized in writing. If these writings are all potentially discoverable, the impact on an attorney's ability to fully advise a client would be devastating. An insurance company must have an honest and candid evaluation of a case, possibly including a worst case scenario. A concern by the attorney that communications would be discoverable in a bad faith suit would certainly chill open and honest communication. An attorney's inability to communicate freely with the client would impede all communications and could diminish the attorney's effectiveness. It could also impede settlements. State ex rel. USF & G Company v. The Montana Second Judicial District Court, 783 P.2d at 916. [20] See also Campbell v. State Farm Mut. Auto. Ins. Co., 840 P.2d 130 (Utah Ct.App.1992). This Court is not persuaded by the majority view to the extent that it provides an insurer with all the protections of the attorney-client privilege with respect to an insured's claim file in third-party bad faith actions. We believe that the majority view seriously impedes a third-party's ability to prove a bad faith claim. Thus, it does not strike the necessary balance between a client's need to speak freely with his or her attorney and the importance of obtaining full disclosure of the facts in third-party bad faith litigation. See State ex rel. USF & G v. Canady, 194 W.Va. at 438-39, 460 S.E.2d at 684-85. Having rejected the minority view earlier in this opinion, we now find it necessary to craft a more practical approach to the discovery of documents held by an insurer in a claim file related to one of its insured. Such an approach must adequately protect the attorney/client relationship; yet, provide third parties with a reasonable opportunity to prove the elements of a claim for bad faith. To reach this more practical approach, we believe that a middle ground must be established between the minority and majority positions on this issue. First, it must be recognized that the majority view artificially clothes an insurer with the attorney-client privilege. [21] The majority view reasons that the insurer hires the attorney to represent both the insured and insurer. In reality, the insurer actually hires the attorney to represent the insured. Even so, we believe that an insurer should be permitted a quasi attorney-client privilege with respect to the claim file of an insured in a third-party bad faith action. Especially where, as here, the insured has executed a release of the claim file to a third-party suing an insurer in a bad faith action. [22] We therefore hold that in a third-party bad faith action where an insured has signed a release of his/her claim file to a third-party litigant, an insurer may raise a quasi attorney-client privilege to communication in the insured's claim file. The quasi attorney-client privilege belongs to the insurer, not the insured, and may be waived only by the insurer. Second, we must carefully articulate the parameters of the quasi attorney-client privilege herein established. As an initial matter, we note that an attempt to protect from disclosure documents in a claim file that were prepared prior to the filing of a third-party's underlying suit against the insured is properly maintained by asserting the work product rule, which will be discussed in the next section. Consequently, we hold that all communications in an insured's claim file that were generated prior to the filing date of a third-party's underlying complaint against the insured are not protected by the quasi attorney-client privilege. All communications in an insured's claim file generated on and after the filing date of a third-party's complaint against an insured, are presumptively quasi attorney-client privilege communications. Furthermore, we note that prior to the filing of a third-party's underlying suit against the insured, the majority of documents in the claim file would not fulfill the elements required to gain protection under the attorney-client privilege. Conversely, after the filing of the underlying suit, the number of documents subject to the attorney-client privilege radically increases. While a general request for discovery of documents prepared prior to the underlying suit against the insured may be appropriate, as most of those documents would be undisputably discoverable, we believe such a general request made with respect to documents prepared after the filing of the underlying suit would unduly burden the court by requiring it to examine a multitude of documents that would ultimately be subject to the attorney-client privilege. We therefore hold that where a third-party has obtained a release from the insured giving the third-party access to all communications in the insured's claim file, in order for the third-party to seek discovery of communications in the claim file generated on or after the date the third-party filed his/her complaint against the insured, the third-party must provide some reasonable description of each communication he/she seeks that was generated on or after the date the third-party filed his/her complaint against the insured. In other words, the third-party may not merely request all communication in the claim file generated on or after the filing date of the complaint against the insured. [23] Thereafter, if the insurer raises the quasi attorney-client privilege to such specifically requested communication, the insurer must prove the elements of the traditional common law attorney-client privilege for each communication it seeks to shield from discovery through assertion of the quasi attorney-client privilege. [24] The trial court must then make an independent determination for each communication the insurer seeks to shield from discovery. If the trial court determines that some or all of the specifically requested communication has been shown to satisfy the elements of the traditional common law attorney-client privilege, then such communication is protected from disclosure by the quasi attorney-client privilege. We note, however, that if the insurer fails to establish all the elements of the traditional common law attorney-client privilege for any specifically requested communication, such communication must be produced to the third-party. [25] Traditional attorney-client privileged material is virtually undiscoverable under Rule 26(b) of the West Virginia Rules of Civil Procedure. [26] However, applying such complete protection to documents subject to the quasi attorney-client privilege herein created for the unique situation presented by third-party bad faith suits is inequitable. Often, the plaintiff in a third-party bad faith suit has no reasonable means of proving his or her claim without the benefit of certain documents contained in the claim file. In order to temper this unduly harsh result, and to advance the balance between the competing interests of full disclosure of the facts and open attorney-client communication, we hold that a third party may, in some instances, obtain discovery of documents found to be protected by the quasi attorney-client privilege. To obtain such documents, the third-party must show a compelling need for each communication that has been found to be protected from disclosure by the quasi attorney-client privilege. [27] To satisfy the quasi attorney-client privilege compelling need test, the third-party must show that (1) the specifically requested protected communication cannot reasonably be obtained elsewhere and (2) that the specifically requested protected communication could reasonably be interpreted by the fact finder as tending to prove an element of the bad faith cause of action or (3) that the specifically requested protected communication could reasonably be used to lead to the discovery of facts that tend to prove an element of the bad faith cause of action. Any protected communication for which the third-party satisfies the quasi attorney-client privilege compelling need test must be produced to the third-party. [28] b. The Work Product Rule. At the outset, we note that the work product rule traditionally operates to protect documents prepared in anticipation of litigation. See, e.g., Syllabus point 7, State ex rel. United Hosp. Center, Inc. v. Bedell, 199 W.Va. 316, 484 S.E.2d 199 (1997) (To determine whether a document was prepared in anticipation of litigation and, is therefore, protected from disclosure under the work product doctrine, the primary motivating purpose behind the creation of the document must have been to assist in pending or probable future litigation.). Thus, in the context of third-party bad faith litigation, the rule necessarily applies only to documents prepared prior to the initiation of the third-party's underlying suit against the insured. [29] The majority of courts allow an insurer to invoke the work product rule when documents are sought from an insured's file by a third-party in a bad faith action against the insurer. The court in Askew v. Hardman, 918 P.2d 469 (Utah 1996), [30] succinctly outlined the majority's guidelines for permitting the work product rule to be invoked by an insurer seeking to prevent disclosure of documents in an insured's file to a third-party suing an insurer in a bad faith action. The Askew court stated: ... The question remains, however, to what extent documents in an insurance claim file can qualify for work-product protection. In considering whether documents in an insurance claim file are prepared in anticipation of litigation, courts have taken one of three general positions. Some courts have held that unless a document is prepared by an attorney, the document is not subject to work-product protection. See, e.g., Thomas Organ Co. v. Jadranska Slobodna Plovidba, 54 F.R.D. 367, 372 (N.D.Ill.1972).... Some courts have taken the position that all documents in an insurance claim file are prepared in anticipation of litigation, without regard to the facts of each case or the particular documents at issue. See, e.g., Ashmead v. Harris, 336 N.W.2d 197, 201 (Iowa 1983); Harriman v. Maddocks, 518 A.2d 1027, 1033-34 (Me.1986).... A growing number of courts have adopted a case-by-case approach, taking into consideration various factors to determine whether documents in an insurance claim file were prepared in anticipation of litigation. See, e.g., Spaulding v. Denton, 68 F.R.D. 342, 345-46 (D.Del.1975) (considering facts of each case to determine purpose of documents); Basinger v. Glacier Carriers, Inc., 107 F.R.D. 771, 774 (M.D.Pa.1985) (same); Haynes v. Anderson, 597 So.2d 615, 619 (Miss.1992) ([C]ourts should consider `the nature of the documents, the nature of the litigation [and investigation], the relationship between the parties, and any other fact peculiar to the case.' (alteration in original) (quoting Pete Rinaldi's Fast Foods v. Great American Ins., 123 F.R.D. 198, 202 (M.D.N.C.1988))). In light of ... our previous cases, we find the case-by-case approach more sound in determining whether documents in an insurance claim file were prepared in anticipation of litigation. The trial court should consider the nature of the requested documents, the reason the documents were prepared, the relationship between the preparer of the document and the party seeking its protection from discovery, the relationship between the litigating parties, and any other facts relevant to the issue. Askew, 918 P.2d at 473-474. See, Humphreys v. Caldwell, 888 S.W.2d 469 (Tex. 1994) (per curiam). [31] With respect to the work product rule, we believe the position taken by the Supreme court of Utah in Askew, represents a viable and fair initial approach to documents in an insured's claim file that were generated prior to the date the third-party filing his/her underlying complaint against the insured. We, therefore, hold that in a third-party bad faith action where an insured has signed a release of his/her claim file to a third-party litigant, [32] documents in the insured's claim file that were generated prior to the filing date of a third-party's complaint against an insured are, upon a proper showing, protected by the work product rule. An insurer may raise the work product rule with respect to any document it believes is protected from disclosure by the work product rule. The work product rule belongs to the insurer and may be waived only by the insurer. [33] We need to now carefully set out the boundaries of the work product rule as it applies to an insurer with respect to a third-party bad faith suit. As explained above with regard to the attorney-client privilege, prior to the filing of a third-party's underlying suit against the insured, the majority of documents in the claim file would likewise presumptively not fulfill the elements required to gain protection under the work product rule. Because the work product rule would presumptively apply to only a limited number of documents, if any, there would be little burden placed upon the court to conduct an examination of the documents for which the rule is evoked by the insurer. Thus, a general request for production of documents prepared prior to the filing of the suit against the insured is appropriate. Where a third-party has obtained a release from the insured giving the third-party access to all pre-litigation documents in the insured's claim file, in order for the third-party to seek discovery of such documents the third-party need only make a general discovery request for such documents. If the insurer raises the work product rule with respect to any of the pre-litigation documents, the insurer must prove the elements of the work product rule for each document [34] it seeks to shield from discovery through assertion of the work product rule. Following the criteria set forth in Askew v. Hardman , we hold additionally that when a trial court presiding over a third-party bad faith action makes its determination of whether a document was prepared in anticipation of litigation, the trial court should consider the nature of the requested documents, the reason the documents were prepared, the relationship between the preparer of the document and the party seeking its protection from discovery, the relationship between the litigating parties, and any other facts relevant to the issue. If the trial court determines that some or all of the requested pre-litigation documents have been shown to be protected from disclosure by the work product rule, then such documents are protected from disclosure by the work product rule. [35] Nevertheless, a third-party may obtain documents deemed protected by the work product rule only upon showing that he/she has a substantial need of the materials in the preparation of his/her case and that he/she is unable without undue hardship to obtain the substantial equivalent of the materials by other means. [36] To satisfy the work product rule substantial need and undue hardship tests, the third-party must show that a witness is no longer available for questioning, or is hostile and refuses to give a statement, or a witness has faulty memory. [37] Any protected document for which the third-party satisfies the work product rule substantial need and undue hardship tests must be produced to the third-party. 3. Application of the Quasi Attorney-Client Privilege and the Work Product Rule to This Case We have determined that an insurer has standing to raise a quasi attorney-client privilege and the work product rule in an attempt to prevent disclosure of the contents of a claim file of an insured who has executed a release of the claim file to a third-party litigating a bad faith action against the insurer. Therefore, in the instant proceeding Allstate has standing to raise the quasi attorney-client privilege and work product rule in an attempt to prevent disclosure of 66 documents found in its insured's claim file. In view of the tests announced in this opinion, we prohibit the circuit court from releasing any of the 66 claim file documents until the circuit court has applied the appropriate tests set out in this opinion. On remand, the trial court must initially divide the documents into two categories: (1) documents generated before the date Ms. Thoburn filed her complaint against Mr. Mirandy, and (2) documents generated on and after the date Ms. Thoburn filed her complaint against Mr. Mirandy. Next, all pre-litigation claim file documents must go through the work product rule analysis; while all of the other claim file documents must go through the quasi attorney-client privilege analysis. [38] C.