The Washington Court of Appeals, Division II, reversed and remanded a trial court's order compelling discovery, imposing sanctions against Farmer Insurance Company of Washington ("Farmers"), and finding that Farmers did not have a right to attorney-client privilege in a first party insurance claim for bad faith.
Contrary to the trial court's ruling, the Court of Appeals held that an insurance company has a right to attorney-client privilege in a first party insurance claim for bad faith absent an insured showing an established exception to the privilege applies, such as fraud. The Court of Appeals further held that the trial court abused its discretion by requiring an in-camera review of documents without the insured first establishing a sufficient factual basis of fraud.
This case arose out of dispute between Bruce Cedell and Farmers as a result of Mr. Cedell's claim for insurance coverage for his residential fire loss. Approximately one year after the fire, Farmers had not paid for Mr. Cedell's claim, so he filed suit against Farmers alleging bad faith, including various violations of the Washington Administrative Code. During the ensuing litigation, Mr. Cedell propounded interrogatories and requests for production, including a request for Farmers' claims file. Farmers provided Mr. Cedell with a heavily redacted copy of the claims file and included a privilege log, which asserted the attorney-client and work product privileges as the basis for redactions and withholding certain documents. In addition, Farmers objected to and declined to answer multiple interrogatories on the basis of the attorney-client and work product privileges. Thereafter, Mr. Cedell filed a motion to compel and argued that the attorney-client privilege and work product privilege do not apply in bad faith litigation. Farmers disagreed and requested a protective order to prevent discovery of all privileged communications.
Reversing the trial court's order compelling discovery and allowing an in-camera review of withheld documents, the Court of Appeals held that insurance companies are entitled to assert the attorney-client privilege in a bad faith action. In part, the Court relied upon a prior ruling in Escalante v. Sentry Insurance Co. in which the Escalante court determined that the fraud exception to the attorney-client privilege may only be invoked when the insured presents a prima facie showing of bad faith tantamount to civil fraud. 49 Wn. App. 375, 743 P.2d 832 (1987).
Moreover, the Court of Appeals ruled that the trial court abused its discretion by ordering an in-camera review of the claim file because Mr. Cedell had not first made a prima facie showing that the fraud exception applied. The Court explained that contrary to Mr. Cedell's arguments, proving the nine elements of fraud is different than proving bad faith. In order to qualify for the fraud exception to the attorney-client privilege, the insured must show actual fraud, not just bad faith. According to the Court, although the trial court found a factual showing of bad faith, it did not find a factual showing of fraud, and as a result, abused its discretion in ordering an in-camera review.
For these reasons, the Court of appeals vacated the trial court's order compelling discovery, awarding attorney fees, and imposing sanctions against Farmers.
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