Insurer Waives Privilege by Asserting Reasonable Basis for Coverage Denial in Bad Faith Litigation

Applying South Carolina law, the United States District Court for the District of South Carolina has held that an insurer waived the attorney-client and work-product privileges for communications between the insurer and its coverage counsel prior to the insurer’s denial of coverage where the insurer asserts in a later bad faith suit that it had a reasonable basis to deny coverage. East Bridge Lofts Prop. Owners Assoc. v. Crum & Forster Spec. Ins. Co., No. 14-2567 (D.S.C. June 3, 2015).

A claimant and the insured property owners’ association filed suit against an insurer for alleged bad faith failure to settle a claim, which resulted in a $55 million judgment against the insured. As a defense, the insurer asserted that it had a reasonable basis for denying coverage for the underlying suit. The claimant and the insured sought production of communications between the insurer and its coverage counsel as well as the coverage counsel’s work product. The insurer moved to quash a subpoena duces tecum to its counsel asserting that the communications with its counsel were protected from disclosure by the attorney-client privilege and that its coverage counsel’s work product was prepared in anticipation of litigation.

The court held that the insurer waived the attorney-client and work product privilege, stating that, “where an insurer in a bad faith claim asserts an affirmative defense that it acted reasonably and in good faith, the insurer puts at issue the evidence it had before it at the time it denied the claim, including communications with counsel relevant to its statement of mind.” The court clarified, however, that the waiver applied only to privileged documents created prior to the insurer’s coverage denial because evidence arising after a coverage denial is irrelevant to the propriety of the insurer’s pre-denial conduct.