Cedell v. Farmers Ins. Co. of Wash., 85366–5.

CourtUnited States State Supreme Court of Washington
Writing for the CourtWE CONCUR: JAMES M. JOHNSON
Citation176 Wash.2d 686,295 P.3d 239
PartiesBruce CEDELL, a single man, Petitioner, v. FARMERS INSURANCE COMPANY OF WASHINGTON, doing business in the State of Washington, Respondent.
Docket NumberNo. 85366–5.,85366–5.
Decision Date21 February 2013

176 Wash.2d 686
295 P.3d 239

Bruce CEDELL, a single man, Petitioner,
FARMERS INSURANCE COMPANY OF WASHINGTON, doing business in the State of Washington, Respondent.

No. 85366–5.

Supreme Court of Washington,
En Banc.

Argued Sept. 22, 2011.
Decided Feb. 21, 2013.

[295 P.3d 241]

Stephen Lyle Olson, Olson Zabriskie Campbell, Montesano, WA, for Petitioner.

Curt E.H. Feig, Michael A. Guadagno, Nicoll Black & Feig PLLC, Seattle, WA, for Respondent.

Bryan Patrick Harnetiaux, Attorney at Law, Spokane, WA, George M. Ahrend, Ahrend Albrecht PLLC, Ephrata, WA, for Amicus Curiae on behalf of Washington State Association.

Stewart Andrew Estes, Keating, Bucklin & McCormack, Inc., P.S., Michael Barr King, Justin Price Wade, Carney Badley Spellman PS, Seattle, WA, for Amicus Curiae on behalf of Washington Defense Trial Lawyers.

Pamela A. Okano, Michael Simpson Rogers, Reed McClure, Seattle, WA, for Amicus Curiae on behalf of Washington Association of Mutual.


[176 Wash.2d 690]¶ 1 Bruce Cedell's home was destroyed by fire. After being unresponsive for seven months, his insurer threatened to deny coverage and made a take it or leave it one time offer for only a quarter of what the court eventually found the claims to be worth. Cedell brought suit alleging bad faith. The company resisted disclosing its claims file, among other things, and Cedell moved to compel production. After a hearing and a review of the claims file in camera, the trial court granted Cedell's motion. On interlocutory review, the Court of Appeals held that the attorney-client privilege applies to a bad

[295 P.3d 242]

faith claim by a first party insured, that the fraud exception to the attorney-client privilege requires a showing of actual fraud, and that the trial court erred in reviewing Cedell's claims file in camera because Cedell had not made a sufficient prima facie showing of fraud. Cedell v. Farmers Ins. Co. of Wash., 157 Wash.App. 267, 269–70, 237 P.3d 309 (2010). The Court of Appeals vacated the trial court's sanctions and discovery orders. This case turns on the application and scope of the attorney-client privilege in a claim for insurance bad faith. We affirm in part, reverse in part, and remand to the trial for further proceedings consistent with this opinion.


¶ 2 Cedell insured his home in Elma with Farmers Insurance Company of Washington (Farmers) for over 20 years. [176 Wash.2d 691]In November 2006, when Cedell was not at home, a fire broke out in his bedroom. His girl friend, Ms. Ackley, called the fire department and carried their two month old child outside. The fire completely destroyed the second story of the home. Ackley claimed that a candle had started the fire.

¶ 3 The Elma Fire Department concluded that the fire was “likely” accidental. Clerk's Papers (CP) at 477. Farmers' fire investigator found “no physical evidence supporting an incendiary origin” and agreed with the fire department that a candle was “a possible, or even probable, source of ignition ... consistent with the remaining physical evidence.” Id. at 482. He stated that Ackley's “admission that she lit a ‘flower candle’ on the headboard” was “consistent with the acute burn patterns seen to the headboard and mattress,” explaining that “[c]andles with foreign objects imbedded are frequent causes of accidental fires when the objects, such as dried flowers, substantially alter the candle's burning characteristics.” Id. Farmers, nevertheless, delayed its coverage determination, noting that Ackley (who was not an insured) had given inconsistent statements.1 Cedell alleges that Farmers ignored repeated phone calls and that he was forced to file a claim with the office of the insurance commissioner and ultimately, eight months after the fire, hire an attorney to elicit action from his insurer.

¶ 4 In January 2007, a Farmers adjuster estimated that Farmers' exposure would be about $70,000 for the house and $35,000 for its contents. A few months later, a Farmer's estimator, Joe Mendoza, concluded that the fire-related damage to the residence alone was about $56,498. Farmers hired an attorney, Ryan Hall, to assist in making a coverage determination. Hall examined Cedell and Ackley under oath. In July 2007, Hall sent Cedell a letter stating that the origin of the fire was unknown and that Farmers might deny coverage based on a delay in reporting and Ackley's [176 Wash.2d 692]and Cedell's inconsistent statements about the fire.2 The letter extended to Cedell a one-time offer of $30,000, good for 10 days. Cedell tried unsuccessfully to contact Farmers about the offer during the 10 days, but no one from Farmers returned his call.

¶ 5 In November 2007, Cedell sued Farmers, alleging, among other things, that it acted in bad faith in handling his claim. In response to his discovery requests, Farmers produced a heavily redacted claims file, asserting that the redacted information was not relevant or was privileged. Farmers also declined to answer some of Cedell's interrogatories on the ground of attorney-client privilege, including Cedell's question of why it “gave Bruce Cedell 10 days to either accept or reject the above offer.” CP at 5.

¶ 6 Cedell filed a motion to compel. Relying on Soter v. Cowles Publ'g Co., 131 Wash.App. 882, 895, 130 P.3d 840 (2006), aff'd,162 Wash.2d 716, 174 P.3d 60 (2007), Cedell contended that “the claim of privilege and work product in bad faith litigation is severely limited and does not apply” to the insurer's

[295 P.3d 243]

benefit in a bad faith action by a first party insured. CP at 2–3. Cedell moved for disclosure or, in the alternative, for an in camera review of the files. Farmers opposed the motion, argued that Cedell had to make an initial showing of civil fraud to obtain the full claims file, and sought an order “protecting from discovery all privileged communication with its counsel Ryan Hall.” CP at 363; Verbatim Report of Proceedings (VRP) (Feb. 23, 2009) at 14.

¶ 7 Judge David Edwards held a hearing to consider the competing motions. He concluded that the insured was not required to make a showing of civil fraud before the claims file could be released, but instead merely “some foundation [in] fact to support a good faith belief by a reasonable person that [ ] there may have been wrongful conduct [176 Wash.2d 693]which could invoke the fraud exception.” VRP (Feb. 23, 2009) at 20–21 (citing Escalante v. Sentry Ins. Co., 49 Wash.App. 375, 743 P.2d 832 (1987), overruled on other grounds by Ellwein v. Hartford Accident & Indem. Co., 142 Wash.2d 766, 15 P.3d 640 (2001), overruled by Smith v. Safeco Ins. Co., 150 Wash.2d 478, 78 P.3d 1274 (2003)). Judge Edwards found that (1) Cedell was not home at the time of the fire, (2) the fire department and Farmers' fire investigator had concluded the fire was accidental, (3) Farmers knew the fire had left Cedell homeless, (4) a Farmers adjuster appraised the damage to the house at $56,498.84, (5) another adjustor estimated the damage at $70,000 for the house and $35,000 for its contents, (6) Farmers made a one-time offer of $30,000 with an acceptance period that fell when Hall was out of town, (7) Farmers threatened to deny Cedell coverage and claimed he misrepresented material information without explanation, and (8) the damage to the house was eventually valued at over $115,000 and more than $16,000 in code updates. The judge found these facts “adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to invoke the fraud exception set forth in Escalante to the attorney-client privilege had occurred” and ordered the claim files produced for an in camera review. CP at 494–95; VRP at 21. He also awarded Cedell his attorney fees for the motion, capped at $2,500, and assessed punitive sanctions against Farmers of $5,000, payable to the court.

¶ 8 After reviewing the documents in camera, Judge Edwards, relying on Barry v. USAA, 98 Wash.App. 199, 205, 989 P.2d 1172 (1999), revised his view of what was required to release an unredacted claim file in a first party bad faith action:

In the context of a claim arising from a residential fire, the insurer owes the insured a heightened duty—a fiduciary duty, which by its nature is not, and should not be, adversarial. Under such circumstances, the insured is entitled to discover the entire claims file kept by the insured without exceptions for any claims of attorney-client privilege.

176 Wash.2d 694]CP at 487. He ordered Farmers to provide Cedell with all documents that it had withheld or redacted based on the attorney-client privilege, increased the sanctions payable to Cedell to $15,000, and increased the sanctions payable to the court to $25,000.

¶ 9 The Court of Appeals granted discretionary interlocutory review and reversed. The Court of Appeals found that “a factual showing of bad faith” was insufficient to trigger an in camera review of the claims file. Cedell, 157 Wash.App. at 278, 237 P.3d 309. The court below impliedly found that a showing that the insurer used the attorney to further a bad faith denial of the claim was not sufficient grounds to pierce the attorney-client privilege. Id. at 276–78, 237 P.3d 309.

¶ 10 We granted review. The Washington State Association for Justice Foundation, the Washington Defense Trial Lawyers, and the National Association of Mutual Insurance Companies submitted briefs as amici curiae.

A. Standard Of Review

¶ 11 We review a trial court's discovery orders for abuse of discretion. T.S. v. Boy Scouts of Am., 157 Wash.2d 416, 423, 138 P.3d 1053 (2006) (citing John Doe v. Puget Sound Blood Ctr., 117 Wash.2d 772, 778, 819 P.2d 370 (1991)). We will reverse a trial court's discovery rulings “only ‘on a clear showing’ that the court's exercise of

[295 P.3d 244

discretion was ‘manifestly unreasonable, or exercised on untenable grounds, or for untenable reasons.’ ” Id. (quoting State ex rel. Carroll v. Junker, 79 Wash.2d 12, 26, 482 P.2d 775 (1971)). If...

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