Palmer by Diacon v. Farmers Ins. Exchange

• Decision Date: 18 November 1993
• Docket Number: No. 91-523,91-523
• Citation: 261 Mont. 91,861 P.2d 895
• Parties: David Alaric PALMER, a Protected Person, by Martha Rose DIACON, his Conservator, Plaintiff and Respondent, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant.
• Court: Montana Supreme Court

Page 895

861 P.2d 895

261 Mont. 91

David Alaric PALMER, a Protected Person, by Martha Rose DIACON, his Conservator, Plaintiff and Respondent, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant.

No. 91-523.

Supreme Court of Montana.

Submitted Dec. 10, 1992.

Decided Oct. 18, 1993.

Rehearing Denied Nov. 18, 1993.

William Conklin & L.D. Nybo (argued), Conklin, Nybo & Leveque, Great Falls, for defendant and appellant.

Dennis Patrick Conner (argued), Great Falls, and John C. Risjord (argued), Risjord & James, Overland Park, KS, for plaintiff and respondent.

Randy J. Cox, Boone, Karlberg & Haddon, Missoula, Dana L. Christensen, Murphy, Robinson, Heckathorn & Phillips, Kalispell, an Robert F. James (argued), James, Gray & McCafferty, Great Falls, for amicus curiae.

McDONOUGH, Justice.

This is an appeal from an order based on a jury verdict and a judgment of $750,000 in compensatory damages and $750,000 in punitive damages against Farmers Insurance Exchange (Farmers) for breach of the covenant of good faith and fair dealing (bad faith). We reverse and remand for a new trial.

This action arose in conjunction with a claim by Palmer, the insured, against Farmers, the insurer, for uninsured motorist benefits. Palmer's claim ensued after a no-vehicle-contact motorcycle accident on June 10, 1984. Farmers requested that the court bifurcate the uninsured motorist claim from the bad faith claim and stay discovery proceedings concerning bad faith until the uninsured motorist claim was resolved. The court granted Farmers' request on August 21, 1986.

The uninsured motorist claim proceeded to trial in March of 1987. The jury found an uninsured motorist liable for Palmer's injuries. We affirmed the verdict and judgment on appeal. Palmer by Diacon v. Farmers Ins. Exch. (1988), 233 Mont. 515, 761 P.2d 401.

The bad faith action was revived in the fall of 1988 and the case went to trial on March 4, 1991. After the jury verdict, the trial judge approved the punitive damage award and entered judgment against Farmers. Farmers filed a motion for either a judgment notwithstanding the verdict or a new trial. The motion was deemed denied. This appeal followed.

The pertinent issues on appeal are:

1. Whether the District Court erred by denying Farmers' motion for directed verdict.

2. Whether the District Court erred in admitting evidence from the underlying trial.

3. Whether Farmers is entitled to a new trial because the District Court ordered Farmers to produce, and later allowed into evidence, correspondence between Farmers and its attorneys who defended the underlying uninsured motorist lawsuit.

A. Whether the attorney-client privilege applies to first-party bad faith cases in which the insurer's attorney did not represent the interests of the insured in the underlying case.

B. Whether Farmers' claim file contained material subject to attorney-client privilege.

C. Whether Farmers voluntarily waived its attorney-client privilege.

D. Whether evidence of privileged communications is admissible against the holder of the privilege after the court erroneously compelled its discovery.

E. Whether the admission of privileged materials into evidence prevented Farmers from having a fair trial, thus entitling it to a new trial.

4. Whether the District Court erred in ordering the production of work-product materials and then allowing the materials into evidence.

A. Whether the District Court erred in ordering Farmers to produce the work-product materials in its claim files.

B. Whether the District Court erred in determining that one of Farmers' former defense attorneys waived the protection of the work-product doctrine by making testimonial use of certain work-product materials.

5. Whether the District Court erred by admitting evidence of the litigation tactics of Farmers' attorneys and of Farmers' decision to appeal.

A. Whether evidence of an insurer's post-filing conduct, such as litigation strategy and tactics in defending the underlying suit, is admissible in a bad faith action based on the insurer's decision to deny coverage.

B. Whether an insurer's decision to appeal the verdict in the underlying case is admissible as evidence in a subsequent bad faith action.

From the inception of the proceedings, Palmer has maintained that an unidentified tractor and semitrailer (the truck) crossed the centerline and ran his motorcycle off the road. Farmers denied the uninsured motorist claim in February of 1986, after a witness told a Farmers' claims adjuster that the truck was in its own lane. A few days later Palmer filed suit against Farmers for denying the claim and for bad faith.

Pursuant to a motion to compel, the court ordered production of Farmers' entire claim file during discovery on the bad faith claim. The court also ruled that Farmers was not required to produce materials dated after October, 26, 1988, the date Palmer notified Farmers that he intended to proceed with the bad faith claim. However, the materials dated prior to October 26, 1988 included confidential reports sent to Farmers by the attorneys who represented it in the uninsured motorist case.

On February 21, 1989, Farmers produced its claim file under court order. At that point, nothing had transpired in the bad faith action, except Palmer's motion to compel and a letter from Farmers' attorney Bill Gregoire to Palmer's attorney. The letter stated that Farmers would have to obtain new counsel for the bad faith trial because Farmers would likely call him and Farmers' other attorneys, Marvin Smith and James Walsh, as witnesses in the bad faith trial.

Equipped with attorney Gregoire's confidential reports to Farmers, Palmer deposed several of Farmers' employees who had worked on the uninsured motorist case. Among the persons that Palmer questioned using the privileged materials was Bud Rausch, Farmers' branch claims supervisor. Neither Rausch nor any of the other deponents had been designated as expert witnesses at the time of their depositions.

At a deposition on September 13, 1989, Palmer's attorney cross-examined Rausch extensively on five of the letters Farmers Farmers identified its prospective expert witnesses on July 18, 1990, in an answer to an interrogatory. Farmers identified Frank Weedman and Bud Rausch as potential expert witnesses. In addition, Farmers identified attorneys Smith, Walsh, and Gregoire as potential witnesses in the bad faith trial. The answer also stated: "If called as witnesses, those individuals will not be examined regarding their confidential privileged communications to the defendant regarding that underlying suit or the instant bad faith action."

                received from its attorney Gregoire and on events which transpired during preparation for trial and during trial.   Palmer made similar use of Gregoire's letters to Farmers when he deposed a Farmers' claims representative on February 16, 1990, and Farmers' investigator on February 19, 1990
                

Farmers hired Weedman as an expert witness regarding reasonable insurance industry practice on March 8, 1990, a year after Farmers produced its claim file for Palmer. Farmers sent a copy of the same claim file to Weedman for his review. Shortly thereafter, Farmers filed a motion for return of privileged communications.

Nine months later, one week before trial, the District Court ruled on the motion for return of privileged communications. The court ruled that neither the attorney-client privilege nor the work-product doctrine apply in first-party bad faith actions, and therefore, Palmer was entitled to Farmers' entire claim file. The court then ruled that Farmers had waived the privilege because the experts it intended to call at trial based their opinions on a review of the entire claim file, including attorney correspondence.

At trial, most of Palmer's case-in-chief involved evidence concerning the underlying trial and Farmers' post-filing conduct. The evidence included the strategy and litigation tactics of Farmers' attorneys who defended the underlying case and testimony from the underlying trial.

In questioning Bud Rausch, the first witness at trial, Palmer introduced into evidence and read nine of the reports consisting of confidential communications between Farmers and its former attorneys. After the reports had been disclosed to the jury, Farmers called its former attorneys as witnesses to explain their actions in defending the underlying uninsured motorist case. Near the end of the trial, Farmers offered the complete claim file into evidence to rebut Palmer's use of selected portions of the privileged materials.

Farmers made a motion for a directed verdict at the end of Palmer's case-in-chief. The court denied the motion. Farmers renewed the motion at the close of all of the evidence with a stipulation from Palmer that the earlier motion and arguments were deemed repeated. The court accepted the form of the motion and again denied it.

This opinion will refer to additional facts where they are pertinent to the discussion.

Our review of the District Court's conclusions of law is plenary; we determine whether the court's conclusions are correct. We review discretionary acts of the District Court to determine whether the court abused its discretion. Steer Inc. v. Dept. of Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

I.

Did the District Court err by denying Farmers' motion for a directed verdict?

This is a borderline issue, considering the closeness of the questions of fact in the underlying case. See Palmer by Diacon, 761 P.2d at 404. But, given the standard for granting a directed verdict, we conclude that the District Court did not commit reversible error by denying Farmers' motion for a directed verdict.

This case arose before the legislature enacted § 33-18-242, MCA, which appears to have codified our common law standard of liability for bad faith in denying insurance coverage. Under Montana common law, an insurer cannot be held liable for bad faith in denying a...