From the Desk of Kyle Riley: In this case, a federal court applied the Washington Supreme Court’s holding in Cedell v. Farmers to actions brought under third-party insurance policies. Cedell clarified the scope of the attorney-client privilege and work product doctrine in first-party bad faith claims brought against insurers. The Cedell court did not specify whether the new standard only applied to third-party insurance policies.
Claims Pointer: Insurers should be aware that the presumption created by Cedell v. Farmers, that an insurer’s claim file is discoverable, absent a showing by the insurer that the communications were not merely investigatory or evaluative in nature, may now be applied to third-party claims. When an attorney is hired to investigate, negotiate, or evaluate a third-party claim, the insurer should consider maintaining separate files: one for the fact investigation, and one for the liability or coverage evaluation. Keeping these files separate may help to overcome the presumption that such materials are discoverable.
Carolina Cas. Ins. Co. v. Omeros Corp., 2013 U.S. Dist. LEXIS 53225 (April 12, 2013).
Omeros Corporation (“Omeros”) filed a lawsuit against its insurer, Carolina Casualty Insurance Corporation (“Carolina Casualty”), alleging that Carolina Casualty wrongfully denied coverage for a lawsuit filed against Omeros’ former chief financial officer, Richard Klein. Carolina Casualty sought a declaratory judgment as to the propriety of its coverage and defense decisions with respect to that suit. As part of the litigation, Omeros requested copies of Carolina Casualty’s claim file for the Klein suit. Carolina Casualty refused to turn over the file, citing the attorney-client privilege and the work product doctrine.
Carolina Casualty’s refusal came shortly after the Washington Supreme Court issued its opinion in Cedell v. Farmers, in the Supreme Court of the State of Washington, No. 85366-5, — P3d —- (February 21, 2013) (en banc). That case clarified the scope of the attorney-client privilege and work product doctrine, as they relate to insurance claim files. In Cedell, the Supreme Court held that when an insured brings a first-party bad faith claim, the attorney-client privilege and work product doctrine are presumed not to apply to claim-adjustment communications. The insurer can overcome this presumption by showing that the communications were not related to “the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability . . . .” Carolina Casualty attempted to distinguish its case from Cedell because the dispute in that case arose from a bad faith claim from a first-party insured.
The Court rejected Carolina Casualty’s argument, ruling that the Cedell standard applies to first and third-party bad faith claims. The Court reasoned that the Cedell court’s holding was grounded in good public policy and those considerations were not limited to first-party claims. Specifically, the Cedell court found that the insurer-insured relationship is quasi-fiduciary in nature, and therefore the insurer owes a duty of good faith to the insured. The Omeros court stated that these considerations are just as important in third-party claims. Accordingly, the court ordered Carolina Casualty to supplement its arguments with a detailed explanation of why the attorney-client privilege should apply. Omeros would then be given the opportunity to confer with Carolina Casualty to reassess the discovery requests. If, after meeting, the parties were still unable to agree on whether the requested materials should be produced, Carolina Casualty could submit the disputed documents for in camera review.
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