• Bob Siems

Privilege and Claim Files in Bad Faith Litigation

Bad Faith litigation often involves fighting over privilege. Insureds want Insurer’s complete claim files. That is where Insurers bury the bodies. Insurers prefer that their body dumping grounds not be inspected.

Insurer’s best argument against handing over claim files is attorney-client privilege. That privilege is the sacredest cow of all lawyering; lawyers regard it as part of their essential function. Insurers therefore try to protect their claim file by sending as much of it as possible to lawyers. Eventually someone concluded that if their lawyers did the claims handling, the entire file would be privileged.

Most modern courts do not think so. The modern rule is that attorney-client privilege only applies to communications with lawyers about lawyering. You cannot hire an attorney to do claims adjusting and still assert the privilege. See, e.g., Cedell v. Farmers Ins. Co. of Washington, 176 Wash. 2d 686, 699, 295 P.3d 239, 246 (2013). Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc., 119 A.D.3d 492, 990 N.Y.S.2d 510, 511 (App. Div. 2014) (denying privilege for attorneys hired to write a coverage opinion because they were “primarily engaged in claims handling —an ordinary business activity for an insurance company.”)

Maryland has not taken a position yet, but its present statutory/regulatory scheme apparently preserves privilege intact. Under Md. Code Ann., Ins. § 27-1001(d)(4), insurers must give insureds a copy of all documents including the claim file (except, strangely, their written response to the allegations of bad faith) unless they can show “good cause”. The statute does not define good cause, but COMAR elaborates. Under COMAR, Insurers file a claims log and all withheld documents with their response for in-camera review. COMAR Withholding for “good cause” means withholding under a recognized privilege where “the reason asserted for its withholding is not consistent with Insurance Article, §27-1001.” COMAR Read narrowly, that means Insurers cannot tell the MIA that it wants to withhold documents because they show bad faith. But attorney-client privilege is not inconsistent with §27-1001, so it presumably survives completely intact.

How does this work in practice:

Some attorneys say the MIA lets insurers redact almost everything. I did not have that experience when I brought a 27-1001 complaint. I found the redactions very light.

For obvious reasons, however, I do not know how justified they were. But I have no reason to believe they were not justified.

Should Maryland follow the trend to limit attorney-client privilege in bad faith matters?

My gut feeling is yes. The national trend makes sense. And if we’re going to have first party bad faith suits, we might as well do them right.

But will Maryland? No. Comparative negligence makes more sense too and is more universal, but we haven’t adopted that yet. I do not have high hopes.

#InsuranceBadFaith #CivilProcedure #AttorneyClientPrivilege

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