Bad Faith Discovery

WDC Journal Edition: Winter 2012
By: Janet E. Cain, Peterson, Johnson & Murray, S.C.

First party insurance claims are often coupled with claims of bad faith against an insurance company. The two claims are typically bifurcated, and more often than not, the entire case is settled before trial. However, when the underlying case is resolved but the bad faith claim remains, an insured routinely demands the insurer’s entire claim file and its attorney’s entire litigation file. Since a bad faith claim examines the insurer’s conduct in handling the insured’s claim, insureds argue that they are entitled to all documents produced during the pendency of the claim. These files, however, contain privileged documents which insurers should refuse to produce as they are protected by the attorney client privilege and work product doctrine. No Wisconsin Appellate Court has examined the scope of discovery in a bad faith case, and therefore discovery disputes are inevitable.

Wisconsin Cases Have Not Addressed the Scope of Discovery in Bad Faith Actions.

Dahmen v. American Family Ins. Co.[1] addressed the question of whether a claim for underinsured motorist (UIM) benefits and a claim for bad faith should be bifurcated and discovery stayed on the bad faith claim pending resolution of the UIM claim. The court of appeals ultimately determined that bifurcation and stay was appropriate. However, the Dahmen court did not specifically address the scope of discovery that would be allowed in the bad faith claim, as that issue was not before it. Nevertheless, the Dahmen court did state, in dicta, that in a bad faith claim, the Dahmens would be entitled to discovery of American Family’s work product and attorney-client material; however, without an analysis of the work product doctrine and attorney-client privilege, the Dahmen court’s language cannot be relied on as authoritative. This issue of discovery of attorney-client privileged documents and work product documents in a bad faith case has not been addressed head-on by any Wisconsin court.

The recent Wisconsin Supreme Court decision in Brethorst v. Allstate[2] also makes mention of discovery of attorney-client privileged material and work product material in a bad faith case, but does not directly address the propriety or scope of such discovery. The two issues that the supreme court addressed in Brethorst were: (1) whether a finding of wrongful denial of benefits is a condition precedent to proceeding with discovery in a first party bad faith claim; and (2) if so, whether the trial court errs if it refuses to grant the insurance company's motion to bifurcate the issues for discovery.[3] The supreme court did not address what discovery was appropriate in a bad faith case. The Brethorst court's discussion of the attorney-client privilege and work product doctrine is limited to repeating language from the Dahmen case, and a footnote which again is based on Dahmen. The Brethorst court did not analyze the scope of discovery, it just reiterated the Dahmen court's cursory comments. Brethorst addressed issues of when discovery may be had in a first party bad faith claim. It did not address issues of what discovery was appropriate.

The only Wisconsin case wherein any attempt was made to address discovery in a bad faith case is Farmers Auto Ins. Ass'n v. Union Pacific R. Co.,[4] wherein the court stated:

Undoubtedly Donabauer would love to scour through Farmers’ files in an attempt to find some dirt. Indeed, his lawyer told the circuit court as much during the hearing on Farmers’ motion for summary judgment on the bad faith claim: “Mr. Donabauer went to the Farmers Insurance Company and said this is what I believe my house is worth. Based on the fact that they disagreed with him, he should have an opportunity to take a look at exactly why is it that Farmers disagreed with him.” But absent an objectively unreasonable response to an insured’s offer of settlement, we are left with a mere legitimate disagreement, which, as we have seen, is not enough to state a cause of action on the objective aspect of a bad faith claim. See Mowry, 129 Wis. 2d at 516, 385 N.W.2d at 180. Accordingly, the circuit court quite appropriately granted summary judgment to Farmers on Donabauer’s bad faith claim without permitting Donabauer to rummage through Farmers’ files because irrespective of what Donabauer may have found, Farmers’ response to Donabauer's replacement value position was objectively reasonable.[5]

Dahmen, Brethorst, and Farmers Auto Ins. have made mention of the issue of the scope of bad faith discovery, but have provided no analysis or definitive answer as to what is discoverable.

The Attorney-Client Privilege and Work Product Doctrine in Wisconsin Deserve Protection.

In Wisconsin, the seminal case with respect to the attorney-client privilege and work product doctrine is State ex rel. Dudek v. Circuit Court for Milwaukee County.[6] Although not a bad faith case, Dudek provides an in-depth analysis of the attorney-client privilege and work product doctrine, and recognizes the importance of both to the integrity of our system of justice. With respect to the attorney-client privilege, the supreme court quoted from an earlier Wisconsin case, Jacobi v. Podevels,[7] and then commented on the rule as follows:

One of the fundamental policies of our law, and one which dominates in the absence of a special policy arising in particular types of situations, is that the judicial system and rules of procedure should provide litigants with full access to all reasonable means of determining the truth. Secrecy of communications between one person and his attorney is one of the exceptions. It is based upon recognition of the value of legal advice and assistance based upon full information of the facts and the corollary that full disclosure to counsel will often be unlikely if there is fear that others will be able to compel a breach of the confidence.
The policy choice of the rule is clear. The administration of justice is thought best promoted by a rule which encourages clients to reveal the facts fully to their attorneys. By encouraging revelation of the facts to the attorney, the privilege is also calculated to serve the basic objective of the jurisprudential system. Without the rule, parties would not reveal all of the facts because of a fear of detriment or embarrassment. It is better to have otherwise concealed facts within the knowledge of the person charged with the direction of the lawsuit, even though he must not reveal the communication, than to have those facts or opinions buried within the knowledge of the client. This is because the lawyer, by application of professional skill, can best make use of what he has learned has really happened and prepare proper defenses to aspects of the case detrimental to his client. Although the communication may not be revealed unless the client so wishes, the result of the privilege is a more informed resolution of the controversy, at least in the aggregate number of cases.[8]

The attorney-client privilege is also statutory. Wisconsin Stat. § 905.03, entitled "Lawyer-Client Privilege," reads as follows:

(2) General rule of privilege. A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client: between the client or the client's representative and the client's lawyer or the lawyer's representative; or between the client's lawyer and the lawyer's representative; or by the client or the client's lawyer to a lawyer representing another in a matter of common interest; or between representatives of the client or between the client and a representative of the client; or between lawyers representing the client.

As stated in Dudek, the privilege encourages clients to reveal facts fully to their attorneys, which results in a more informed resolution of the controversy. Insurance companies have every right to assume that communications with counsel are protected by this longstanding privilege. There has been no exception carved out for cases wherein bad faith is alleged. Clients should be allowed to communicate freely with their counsel with respect to all aspects of the claims being asserted against them. They should not have to withhold information for fear that the attorney-client privilege may not apply. Open communication best serves the search for the truth, which is the ultimate goal of our system of justice. If insurers are stripped of their right to rely on the attorney-client privilege, that privilege, as we know it, no longer exists. It is unacceptable that such a critical component of Wisconsin law could be disregarded simply by a mere allegation of bad faith.

With respect to the work product doctrine, the Dudek court adopted the rationale of the United States Supreme Court in Hickman v. Taylor,[9] and stated:

From Hickman, … we conclude that a lawyer's work product consists of the information he has assembled and the mental impressions, the legal theories and strategies that he has pursued or adopted as derived from interviews, statements, memoranda, correspondence, briefs, legal and factual research, mental impressions, personal belief, and other tangible or intangible means.
This broad definition of lawyer's work product requires that most materials, information, mental impressions and strategies collected and adopted by a lawyer after retainer and in preparation of litigation and relevant to the possible issues be initially classified as work product of the lawyer and not subject to inspection or discovery unless good cause for discovery is shown.[10]

The Dudek court noted that lawyers should be able to develop legal and factual theories without interference from opposing counsel, and allowing discovery of this information would deter lawyers from developing their theories.[11] Dudek held that work product is usually privileged, and not subject to discovery, except where good cause is shown.[12] An exception to the rule must be based on necessity, prejudice, injustice, or hardship.[13] The court stated that if a matter is classified as work product due to the fact that it reflects mental impressions of the investigating attorney, "only a showing of nonavailability after diligent search and of great prejudice to preparation could justify an order for production.”[14]

Many claim file documents reflect mental impressions, legal theories, and strategy to be employed in both the underlying case and the alleged bad faith case. There is no case law holding that work product is discoverable simply because a party alleges bad faith on the part of an insurance company. It is difficult to imagine anything more damaging to a litigant's case than allowing the other side to discover its strategy or its analysis of relevant facts or law.

These fundamental privileges have been afforded to litigants for decades, if not centuries, in Wisconsin. The fact that an insured has cried "bad faith" is not a sufficient basis to throw long standing, well founded principles of law away.

Other Jurisdictions Have Upheld the Attorney-Client Privilege and Work Product Doctrine in Bad Faith Actions.

Courts from other jurisdictions have addressed this issue, and provide persuasive authority in bad faith discovery disputes. A recent case addressing discovery of attorney-client privileged information in a bad faith case is Genovese v. Provident Life & Accident Ins. Co.,[15] a decision by the Florida Supreme Court, wherein the court upheld the sanctity of the attorney-client privilege in a first party bad faith case. The court stated that "[t]he purpose of the attorney-client privilege is to encourage clients to make full disclosure to their attorneys,"[16] The court further noted that "the purpose of the privilege is to 'encourage full and frank communication' between the attorney and the client," and "this significant goal of the privilege would be severely hampered if an insurer were aware that its communications with its attorney, which were not intended to be disclosed, could be revealed upon request by the insured."[17]

In another recent case, Cedell v. Farmers Ins. Co. of Wash.,[18] the Court of Appeals of Washington held that an insurance company has a right to attorney-client privilege in a first-party claim for bad faith absent showing an established exception to the privilege. The court noted that the attorney-client 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.”[19] The plaintiff in that case argued that the insurer had no right to claim attorney-client privilege in a first-party bad faith case because information about the insurer's reasoning and claim handling was central to the bad faith claim. The court rejected this argument and instead held that the privilege was valid unless the fraud exception applied.

In State ex rel. Allstate v. Madden,[20] a bad faith action, the plaintiff sought documents authored by Allstate Insurance Company’s in-house and defense counsel. Allstate objected on the grounds that the documents constituted attorney-client privileged material and work product material. The trial court determined that the documents were not protected, holding that those privileges did not protect an insurer’s files in a first-party bad faith action. The Supreme Court of West Virginia disagreed. The court first discussed the attorney-client privilege, as follows:

The attorney-client privilege was developed as a means of protecting the confidential relationship shared between a client and his/her counsel. “Originating at common law, the attorney-client privilege ‘has as its principal object the promotion of full and frank discourse between attorney and client so as to ensure sound legal advice or advocacy.’” To shield evidence from disclosure based upon this privilege, certain enumerated criteria must be satisfied:

In order to assert an attorney-client privilege, three main elements must be present: (1) both parties must contemplate that the attorney-client relationship does or will exist; (2) the advice must be sought by the client from that attorney in his capacity as a legal advisor; (3) the communication between the attorney and client must be identified to be confidential. [21]

The court went on to hold that in a first-party claim, the attorney-client privilege is not automatically waived.[22]

Protection of Privileged Material is Necessary to Prevent Irreparable Harm.

These cases recognize that an insurer's communication with its counsel is to be protected from discovery. If attorney-client privileged communications were discoverable in a bad faith case, the effect would be to stifle communication between the insurance company and its counsel. Certainly an insurance company, like any other litigant, should be allowed to speak freely with its counsel in order to determine its best course of action regarding a claim or a lawsuit.

While non-privileged documents in an insurer’s claim file are fair game, allowing discovery of privileged documents would substantially harm the insurer. Allowing discovery of such materials could result, for example, in candid comments made by an insurer's employees in an attempt to determine the best manner in which to handle the claim, which were never intended to be disclosed to anyone else, losing protection merely because the plaintiff claims bad faith. A client has an expectation that communications with counsel are privileged to the full extent allowed by law. If those communications are subject to disclosure, an insurer has lost its right to fully and openly confer with counsel.

Similarly, in-house or outside counsel will develop theories, mental impressions, and strategies which are reduced to writing. They do not expect nor intend these writings to be used in a bad faith case against the insurer. If these documents are subject to disclosure, the insurer has lost its right to rely on its attorneys for their legal expertise.

The objective of the attorney-client privilege is to maintain open communication between attorney and client. The objective of the work product doctrine is to protect an attorney's mental impressions and strategies. When could the public policy behind the attorney-client privilege be more important than during the pendency of a lawsuit? And when are the mental impressions and strategies of a party more deserving of protection than when made while that party is defending itself in court?

These questions have yet to be directly addressed by any appellate court in Wisconsin. Until the issue comes before the court of appeals or supreme court, defendants in bad faith cases should strenuously object to producing entire claim files and attorney’s files simply because there is an allegation of bad faith. All litigants—including insurance companies accused of bad faith—are entitled to rely on their long standing, basic rights to the attorney client privilege and the work product doctrine.

[1] 2001 WI App 198, 247 Wis. 2d 541, 635 N.W. 2d 1.

[2] 2011 WI 41, 334 Wis. 2d 23, 798 N.W.2d 467.

[3] Id., ¶ 4.

[4] 2008 WI App 116, 313 Wis. 2d 93, 756 N.W. 2d 461, aff'd by 2009 WI 73, 319 Wis. 2d 52, 768 N.W. 2d 596.

[5] Id., ¶ 28.

[6] 34 Wis. 2d 559, 150 N.W. 2d 387 (1967).

[7] 23 Wis. 2d 152, 127 N.W. 2d 73 (1964).

[8] Dudek, 34 Wis. 2d at 578-579.

[9] 329 U.S. 495 (1947).

[10] Dudek, 34 Wis. 2d at 589.

[11] Id. at 590.

[12] Id. at 591.

[13] Id.

[14] Id.

[15] 74 So. 3d 1065 (Fla. 2011).

[16] Id. at 1067 (citing Fisher v. United States, 425 U.S. 391, 403 (1976)).

[17] Id. at 1068.

[18] 237 P. 3d 309 (Wash. App. 2010) (petition for review granted).

[19] Id., ¶ 11.

[20] 601 S.E. 2d 25 (W. Va. 2004).

[21]1 Id. at 33-34 (internal citations omitted).

[22] Id. at 34.