Opinion ID: 1309235
Heading Depth: 1
Heading Rank: 5

Heading: asserting the crime-fraud exception in insurance bad faith cases

Text: The question of whether a plaintiff may invoke the crime-fraud exception, to obtain privileged communications in an insurance bad faith case, has never been squarely addressed by this Court. The majority of courts that have been confronted with the question have held that the crime-fraud exception may be invoked in insurance bad faith litigation. See Freedom Trust v. Chubb Group of Ins. Cos., 38 F.Supp.2d 1170 (C.D.Ca.1999) (first-party bad faith); Ekeh v. Hartford Fire Ins. Co., 39 F.Supp.2d 1216 (N.D.Ca.1999) (third-party bad faith); Ferrara & DiMercurio v. St. Paul Mercury Ins. Co., 173 F.R.D. 7 (D.Mass.1997) (first-party bad faith); Ring v. Commercial Union Ins. Co., 159 F.R.D. 653 (M.D.N.C.1995) (first-party bad faith); United Servs. Auto. Ass'n v. Werley, 526 P.2d 28 (Alaska 1974) (first-party bad faith); State Farm Fire & Cas. Co. v. Superior Court, 54 Cal.App.4th 625, 62 Cal.Rptr.2d 834 (1997) (first-party bad faith); Escalante v. Sentry Ins., 49 Wash.App. 375, 743 P.2d 832 (1987) (third-party bad faith), disapproved on other grounds by Ellwein v. Hartford Acc. and Indem. Co., 142 Wash.2d 766, 15 P.3d 640 (2001). At least one court has expressly declined to allow the crime-fraud exception to be used to obtain attorney-client communication in an insurance bad faith case. See State v. Second Judicial Dist. Court, 240 Mont. 5, 783 P.2d 911, 916 (1989) (We reject the reasoning of those cases, which would extend the civil fraud exception to bad faith allegations.). Application of the crime-fraud exception in bad faith litigation has been justified on the grounds that attorney-client communications should not be protected when they pertain to ongoing or future fraudulent conduct by the insurer. Escalante, 743 P.2d at 842. In other words, Escalante has determined that the traditional justification for invoking the crime-fraud exception extends to bad faith litigation. I agree with Escalante insofar as I conceive of no legitimate reason for refusing to extend the crime-fraud exception to bad faith litigation. The decision in United Services Automobile Association v. Werley, 526 P.2d 28 (Alaska 1974), provides a good illustration of the type of proof found to be acceptable for establishing the fraud component of the crime-fraud exception to the attorney-client privilege in an insurance bad faith action. Werley involved a first-party bad faith action brought against an insurer. The plaintiff, who was injured in an auto accident, filed a bad faith claim when his insurer refused to provide uninsured motorist coverage. [14] During discovery, the plaintiff requested documents that the insurer claimed were protected from disclosure by the attorney-client privilege. The trial court ordered the documents be turned over to the plaintiff. The insurer filed a petition with the Alaska Supreme Court seeking review of the trial court's order requiring disclosure of privileged information. The Alaska Supreme Court found that, while the documents were protected by the attorney-client privilege, the plaintiff had produced sufficient evidence to satisfy the fraud exception. In affirming the trial court's decision, Werley held that the plaintiff's prima facie evidence of fraudulent conduct consists of a demonstration that the [two] defenses urged by [the insurer] in opposition to his claim for $30,000 were, on their face, devoid of any merit. Werley, 526 P.2d at 33. In other words, under Werley an insurer's allegedly tortious conduct in asserting bad faith defenses against a claim for coverage constitute[s] `civil fraud,' and ... the attorney-client privilege [will] not protect communications between an attorney and her client relating to that fraud. Munn v. Bristol Bay Hous. Auth., 777 P.2d 188, 195 (Alaska 1989). In view of the foregoing, I concur.