Single Man v. Farmers Ins. Co. Of Wash., 38921-5-II.

• Decision Date: 03 August 2010
• Docket Number: No. 38921-5-II.,38921-5-II.
• Citation: 237 P.3d 309,157 Wash.App. 267
• Court: Washington Court of Appeals
• Parties: Bruce CEDELL, a single man, Respondent, v. FARMERS INSURANCE COMPANY OF WASHINGTON, doing business in the State of Washington, Appellant.

157 Wash.App. 267

237 P.3d 309

Bruce CEDELL, a single man, Respondent,

v.FARMERS INSURANCE COMPANY OF WASHINGTON, doing business in the State of Washington, Appellant.

No. 38921-5-II.

Court of Appeals of Washington,Division 2.

Aug. 3, 2010.

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

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

BRIDGEWATER, P.J.

¶ 1 Farmers Insurance Company (Farmers) appeals from trial court orders compelling discovery, imposing sanctions against Farmers, and finding that an insurance company does not have a right to attorney-client privilege in a first-party-insurer claim for bad faith. We hold that an insurance company has a right to attorney-client privilege in a first-party-insurer claim for bad faith absent showing an established exception to the privilege applies, such as fraud. Further, we hold that the trial court abused its discretion by requiring an in-camera review without Cedell first establishing a sufficient factual basis of fraud. We reverse, remand, and vacate the orders compelling discovery, awarding sanctions and attorney fees because Bruce Cedell did not meet his burden of showing fraud in order to overcome the attorney-client privilege.

FACTS

¶ 2 This case arose from a claim for accidental fire damage to Cedell's home under a Farmers' policy. A year after the fire, Farmers had still not paid Cedell's claim so he filed suit, alleging that Farmers (1) failed to acknowledge pertinent communications; (2) failed to conduct a prompt investigation of his claim; (3) failed to act promptly, fairly, and equitably; (4) engaged in unfair and/or deceptive acts or practices; (5) effectively denied his claim by delaying action; and (6) acted unreasonably in denying his claim for coverage and/or payment of benefits. ¹ Farmers had hired Ryan Hall, an attorney, to assist it making a coverage determination.

¶ 3 Cedell sent Farmers interrogatories and a request for production of documents, including Farmers' case file on Cedell's claim. Farmers responded by providing a heavily redacted copy of the case file and included a privilege log, which cited attorney-client privilege and work product as the basis for over 200 redactions and withholdings. ² In addition, Farmers declined to answer multiple interrogatories because of attorney-client privilege and work product. Cedell then filed a motion to compel, arguing that attorney-client privilege and work product did not apply in bad faith litigations.

¶ 4 Farmers responded, arguing that it had a right to the protections of attorney-client privilege and work product even when a plaintiff alleged bad faith. It also sought a protective order preventing discovery of all privileged communications.

¶ 5 The trial court found that (1) Cedell was not home at the time of the fire, (2) the fire department and Farmers' fire investigator concluded the fire was accidental, (3) Farmers knew the fire left Cedell homeless, (4) a Farmers' adjuster appraised the value at $56,498.84, (5) another adjuster estimated the damage at $70,000 in building and $35,000 in 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. Citing Escalante v. Sentry Ins. Co., 49 Wash.App. 375, 393, 743 P.2d 832 (1987), review denied, 109 Wash.2d 1025 (1988), overruled on other grounds by Ellwein v. Hartford Accident & Indem. Co., 142 Wash.2d 766, 15 P.3d 640 (2001), the trial court found these facts adequate to support a good faith belief that Farmers engaged in wrongful conduct sufficient to invoke the fraud exception to the attorney-client privilege. The trial court ordered an in-camera review of Farmers' redacted documents.

¶ 6 After conducting an in-camera review, the trial court found that

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.^{[ 3 ]} 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.

CP at 487. The trial court found Farmers' claims of attorney-client privilege without merit. The trial court also found that Cedell was entitled to Farmers' work product. The trial court ordered Farmers to provide Cedell with all documents that it withheld and/or redacted based on attorney-client privilege and work product. The trial court also imposed sanctions and awarded Cedell attorney fees for Farmers' failure to provide the information.

¶ 7 We granted Farmers' motion for discretionary review and an emergency stay.

ANALYSIS

I. Attorney-Client Privilege

¶ 8 Farmers argues that the trial court abused its discretion by ordering the disclosure of confidential and privileged information with no basis to invoke the fraud exception to the attorney-client privilege.

¶ 9 In the attorney-client privilege context, we review the trial court's determination to permit or deny discovery for abuse of discretion. Barry v. USAA, 98 Wash.App. 199, 204, 989 P.2d 1172 (1999). But we review de novo the trial court's interpretation of the privilege statute. Drewett v. Rainier Sch., 60 Wash.App. 728, 731, 806 P.2d 1260, review denied, 117 Wash.2d 1003, 815 P.2d 266 (1991).

¶ 10 Parties may obtain discovery regarding any matter, not privileged, relevant to the subject matter of the pending action. CR 26(b)(1). A party may serve on another party a request to produce documents that constitute or contain matters within the scope of CR 26(b) and that are in the possession, custody, or control of the party on whom the request is served. CR 34(a)(1). If a party disagrees with the scope of production requested during discovery, it must move for a protective order and cannot withhold discoverable materials. Wash. State Physicians Ins. Exch. & Ass'n v. Fisons Corp., 122 Wash.2d 299, 354, 858 P.2d 1054 (1993).

¶ 11 The attorney-client privilege, codified in RCW 5.60.060(2), provides that an attorney or counselor shall not, without the consent of his or her client, be examined as to any communication made by the client to him or her, or his or her advice given in the course of professional employment. Former RCW 5.60.060(2)(a) (2007). In general, this privilege protects confidential attorney-client communications from discovery or public disclosure so that clients will not hesitate to speak freely and fully inform their attorneys of all relevant facts. Escalante, 49 Wash.App. at 393, 743 P.2d 832.

A. Insurance Companies are Entitled to Attorney-Client Privilege in a Bad Faith Action

¶ 12 Cedell argues that there is no right to attorney-client privilege in a first-party-insured bad faith claim because it is not supposed to be an adversarial situation and because information about the insurance company's reasoning and claim handling is central to a bad faith claim.

¶ 13 In Escalante, the plaintiffs sued Sentry Insurance for bad faith, among other claims, for failure to pay an underinsured motorist (UIM) claim. Escalante, 49 Wash.App. at 379-80, 743 P.2d 832. The Escalantes sent interrogatory requests that sought, relevantly, general information and materials related to Sentry's evaluation of the Escalantes's claim. Escalante, 49 Wash.App. at 393, 743 P.2d 832. Sentry objected based on the attorney-client privilege and work product. Escalante, 49 Wash.App. at 393, 743 P.2d 832. The trial court denied the Escalantes's motion to compel. Escalante, 49 Wash.App. at 381, 743 P.2d 832. On appeal, the Escalantes argued that the attorney-client privilege did not protect information relevant to a bad faith claim. Escalante, 49 Wash.App. at 393, 743 P.2d 832.

¶ 14 First, the Escalante court recognized the general attorney-client privilege rule codified by RCW 5.60.060(2). Escalante, 49 Wash.App. at 393, 743 P.2d 832. The court then acknowledged the “fraud” or “civil fraud” exception to the privilege. Escalante, 49 Wash.App. at 394, 743 P.2d 832. The court held that the fraud or civil fraud exception could be invoked only when the insured presented a prima facie showing of bad faith tantamount to civil fraud. Escalante, 49 Wash.App. at 394, 743 P.2d 832. The court did not hold, however, that there was no attorney-client privilege in a bad faith lawsuit.

¶ 15 In Barry, an insured sued her insurance company, USAA, for bad faith for failure to pay a UIM claim. Barry, 98 Wash.App. at 202, 989 P.2d 1172. During discovery, she requested documents including reports from the claims adjuster and correspondence from the attorney who handled the UIM claim. Barry, 98 Wash.App. at 202, 989 P.2d 1172. When USAA did not comply, Barry moved to compel production. Barry, 98 Wash.App. at 203, 989 P.2d 1172. The trial court found that Barry failed to establish sufficient wrongful conduct to invoke the fraud exception to the attorney-client privilege and declined to inspect the claims file. Barry, 98 Wash.App. at 202-03, 989 P.2d 1172.

¶ 16 On appeal, the court first examined whether Barry had sought any privileged materials. Barry, 98 Wash.App. at 204, 989 P.2d 1172. The court held that “it is a well-established principle in bad faith actions brought by an insured against an insurer under the terms of an insurance contract that communications between the insurer and the attorney are not privileged with respect to the insured.” Barry, 98 Wash.App. at 204, 989 P.2d 1172 (citing Baker v. CNA Ins. Co., 123 F.R.D. 322, 326 (D.Mont.1988); Silva v. Fire Ins. Exch., 112 F.R.D. 699 (D.Mont.1986); Escalante, 49 Wash.App. at 394, 743 P.2d 832). The court agreed with the Silva ⁴ court: “ ‘The time-worn claims of work product and...