South Carolina Answers Certified Question For Attorney Client Privilege In Bad Faith Refusal to Defend
The South Carolina Supreme Court, on certified question from the Fourth Circuit, has decided whether an insurer waives the attorney-client privilege when it denies liability in a “bad faith” case.
The issue arose out of a construction defect lawsuit when the insurer failed to defend its insured, a contractor. After settling out of the case personally, the policyholder contractor sued the carrier for bad faith refusal to defend. In discovery, the policyholder sought the carrier claim file including correspondence between the carrier and its coverage attorneys. The Insurer claimed privilege over those communications, but the Insured argued that the Insurer’s denial of liability for bad faith and its affirmative defense of “good faith” resulted in waiver of the attorney-client privilege. The discovery dispute ultimately found its way to the SC Supreme Court.
A client does not waive the attorney-client privilege simply by bringing or defending a lawsuit; rather, waiver requires the additional interjection of the issue of advice of counsel (either expressly or implicitly) by the client. In other words, whether or not “advice of counsel” is raised as an affirmative defense, if the client defends based on the affirmative theory that the client’s mental state at the time at issue (such as when the Insurer denied the Insured’s claim) was based on an evaluation of the law and the facts then existing, such would equate to putting the legal evaluation “at issue” and thus result in a waiver of the privilege.
“a client does not waive the privilege simply by bringing or defending a lawsuit. “
In reaching its conclusion, the Court relied heavily on an approach adopted by Arizona in the case State Farm Mutual Automobile Insurance Co. v. Lee.