Can There Be <i>Implicit Waiver</i> of Attorney-Client Privilege in Insurance Bad Faith Actions? South Carolina Supreme Court Answers That QuestionIn June, the South Carolina Supreme Court addressed waiver of the attorney-client privilege in bad faith refusal to provide coverage cases and found that, under South Carolina law, an insurer that asserts its subjective understanding of the law, as informed by counsel, as a defense to a bad faith claim may implicitly waive the privilege with respect to those attorney-client communications.

In In re Mt. Hawley Insurance Company, the insured sued its excess commercial liability insurer, Mt. Hawley Insurance Company, for bad faith after Mt. Hawley refused to defend the insured in a construction defect action. As a defense, Mt. Hawley asserted that it acted in good faith. The insured sought discovery into the reasons why Mt. Hawley denied coverage. Mt. Hawley claimed that certain portions of the requested discovery included communications that were protected by the attorney-client privilege, and after finding that the insured had made a prima facie showing of bad faith, the United States District Court for the District of South Carolina ordered that the documents be produced for an in camera review. In response, Mt. Hawley sought a writ of mandamus from the Court of Appeals for the Fourth Circuit to vacate the district court’s order. The Fourth Circuit certified the following question to the South Carolina Supreme Court: “Does South Carolina law support application of the ‘at issue’ exception to attorney-client privilege such that a party may waive the privilege by denying liability in its answer?”

The South Carolina Supreme Court quickly disposed of the question certified by the Fourth Circuit, answering the question in the negative and finding that the mere denial of liability or assertion of good faith in a bad faith cause of action does not waive the attorney-client privilege. The court, however, did decide to fully analyze the issue of when the attorney-client privilege is placed “at issue” and thereby potentially waived in a bad faith case, in part because the parties asserted that the certified question did not accurately reflect the posture of the case below.

In determining the proper framework to be used when presented with this issue, the South Carolina Supreme Court noted the varying approaches other jurisdictions have taken when determining whether the attorney-client privilege is waived in a bad faith action. The court noted that the minority approach takes the most restrictive view of the use of the attorney-client privilege and found that the privilege does not extend to communications in furtherance of a crime or tort, including an insurance claim for bad faith. On the opposite end of the spectrum, the court noted that other courts have rejected the idea of an implied waiver of the attorney-client privilege and found that the privilege exists absent a direct, express reliance by the client on the privileged communication in making out its claim or defense.

Opting for a more middle-ground approach, the South Carolina Supreme Court adopted the framework created in Arizona in State Farm Mutual Automobile Insurance Co. v. Lee. Under that approach, the attorney-client privilege may be implicitly waived on a factual, case-by-case determination where (1) the insurer defends a bad faith claim on the basis of its subjective and allegedly reasonable understanding of the law and (2) that understanding necessarily involves what the insurer learned from its counsel. In addition to the two requirements announced in Lee, the South Carolina Supreme Court also adopted a third requirement: The party seeking waiver of the attorney-client privilege must also make a prima facie showing of bad faith in order for the privilege to be waived.

Notably, the court’s opinion does not change the analysis used when an insurer asserts its objective reading of the policy at issue as a defense to a bad faith claim. Nevertheless, despite the fact that the South Carolina Supreme Court provided an extra layer of protection for insurers asserting a subjective understanding of the law as a defense in bad faith actions, insurers and counsel should be aware of this new ruling and of the risk of implicit waiver of the attorney-client privilege. This risk should be kept in mind both when attorneys are communicating with their clients throughout the claims handling process and when formulating defenses to bad faith claims.