Insurers are sometimes asked by their insureds for a copy of the claim file, which may include sensitive information such as coverage analysis (by in-house or outside counsel), adjuster notes regarding claim value, SIU/surveillance reports, or liability opinions. Claims adjusters and lawyers defending insurers need to know when the claim file must be produced, what can be withheld from production, how to document the withholding, and which practices during the claims adjustment process will best protect insurer confidences if the insured later makes a bad-faith claim.
This need is particularly acute for insurers in Washington, following the 2013 case of Cedell v. Farmers Ins. Co. of Washington.[i] In Cedell, Farmers’ insureds made a claim for fire loss of their home. After unsuccessful settlement negotiations, the insureds brought suit alleging bad faith and moved to compel production of Farmers’ entire claim file. The key question before the Washington Supreme Court was whether Farmers could redact (delete or withhold) information under the attorney-client and work-product privileges.
The Cedell Court created a presumption that no attorney-client privilege exists in the claims adjustment process where the insured raises a first-party bad faith claim. Put differently, an insured who brings a first-party bad faith claim is presumptively entitled to discover the entire claim file. The presumption may only be overcome by the insurer showing a judge privately (“in camera”) that in the redacted portions of the file, its attorney was not engaged in the “quasi-fiduciary tasks” of investigating and evaluating the claim, but rather was providing the insurer with coverage opinions or advice as to its own potential liability.
The impact of Cedell on insurers in Washington is difficult to overstate. Local federal courts say it broadens the scope of discoverable information in insurance disputes.[ii] Some publications by the defense bar have been less diplomatic, e.g., an “Assault On The Most Sacred Privilege Of All.”[iii] There are limits to its reach, however. Cedell’s holding, and the insurer’s obligation to produce entire claim files, is based on the insurer’s “quasi-fiduciary” duties to its insured. Thus, generally it does not apply to third-party bad faith actions, where the insurer is sued by someone other than its own insured.[iv] Cedell also does not apply to UIM claims because “the provision of UIM coverage is by nature adversarial.”[v] It does not apply when the insurer is not a party to a suit.[vi]
Still, with the entire claim file presumed discoverable where bad faith is alleged, insurers must proactively seek to protect privileged information from being disclosed. Best practices throughout the claims process (regardless of whether litigation has begun, or whether the insured has yet requested the claim file) include the following:
- Properly label all attorney correspondence, including emails. “Attorney-client privileged” is good, but “Attorney’s Legal Advice to Client Insurer as to Client’s Potential Liability” is better. An introductory sentence citing Cedell may be best of all; for example, “This is a communication from an attorney to the client insurance company reflecting the mental impressions of the attorney regarding coverage and/or potential liability of the insurance company, and does not constitute claim investigation or evaluation. It should be considered attorney-client PRIVILEGED and NOT PRODUCED. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 698-99, 295 P.3d 239 (2013).”
- Keep separate claim-investigation files and coverage/bad-faith files.[vii]
- Refrain from asking coverage/bad-faith counsel to perform claim investigation tasks.
- When in doubt, use the phone instead of creating written correspondence.
- If the claim is not yet in litigation, it may not be clear whether the insured is making a bad faith claim. Cedell does not address whether an insurer needs to produce its file prior to the insured making a formal bad faith complaint. Even if the insurer elects to produce its file, in the absence of pending litigation, there is no judge available to perform an in camera review of the insurer’s withheld documents. Still, the best practice may be to describe the withheld documents using a privilege log, which should include the date, attorney author, recipients, and content of each document withheld.
The consequences for failing to follow these practices may be severe. Washington’s Insurance Fair Conduct Act (“IFCA”)[viii] authorizes hefty penalties for unreasonable denials or settlements of a first-party claim, including treble damages and attorney fees. Washington’s Consumer Protection Act (“CPA”)[ix] also authorizes treble damages and attorney fees. A CPA claim can be based on a violation of one of the unfair claim handling regulations because even a single claim impacts the public interest.[x] Given this litigation climate, insurers should demonstrate their awareness of and compliance with Cedell from a claim’s inception.
[i] 176 Wn.2d 686, 698-99, 295 P.3d 239 (2013).
[ii] See Everest Indem. Ins. Co. v. QBE Ins. Co., 980 F. Supp. 2d 1273, 1279 (W.D. Wash. 2013) (collecting cases).
[iv] A third party claimant usually may not bring a direct action against a defendant’s insurer. Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 393, 715 P.2d 1133 (1986). But an insured defendant who believes that its insurer has failed to settle the insured’s claim within policy limits may, as part of settlement, assign the insured’s bad faith claim to the plaintiff, who can then sue the insurer. See, e.g., Murray v. Aetna Cas. & Sur. Co., 61 Wn.2d 618, 379 P.2d 731 (1963). In such cases the plaintiff would be entitled to the claim file because the plaintiff is standing in the shoes of the insured. A third party claimant may also sue a defendant’s insurer for intentional torts such as misrepresentations during settlement negotiations. Dussault ex rel. Walker-Van Buren v. Am. Int’l Grp., Inc., 123 Wn. App. 863, 869-70, 99 P.3d 1256 (2004).
[v] Barry v. USAA, 98 Wn. App. 199, 205, 989 P.2d 1172 (1999).
[vi] A non-party insurer generally may assert work-product privilege over production of its claim file. See, e.g., Heidebrink v. Moriwaki, 104 Wn.2d 392, 402, 706 P.2d 212 (1985) (an insured’s statement to his insurance carrier is generally protected from discovery as work product).
[vii] “Where an attorney is acting in more than one role, insurers may wish to set up and maintain separate files so as not to co-mingle different functions.” Cedell, 176 Wn.2d at 699 n. 5.
[viii] RCW 48.30, et seq.
[ix] RCW 19.86 et seq.
[x] See, e.g., Carolina Cas. Ins. Co. v. Omeros Corp., Case No. C12–287–RAJ, 2013 WL 1561963, at *3 (W.D. Wash. Apr. 12, 2013) (“[t]he Cedell court grounded its ruling in the quasi-fiduciary duty of an insurer to its insured, along with the public policy interest in regulating the business of insurance”).