SOUTH CAROLINA SUPREME COURT ANSWERS CERTIFIED QUESTION AS TO AN INSURER’S WAIVER OF ATTORNEY-CLIENT PRIVILEGE IN BAD FAITH TORT ACTION

By: Elizabeth Wieters, Esq.

This past week, the South Carolina Supreme Court answered a certified question from the U.S. Court of Appeals for the Fourth Circuit concerning an insurer’s waiver of attorney-client privilege in a bad faith action in In re: Mt. Hawley Ins. Co., Op. No. 27892 (S.C. Sup. Ct. filed June 12, 2019) (Shearouse Adv. Sh. No. 24 at 9). The Court ultimately adopted the approach provided in State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169 (Ariz. 2000), which the Supreme Court characterized as the “middle road” in determining the test for waiver of attorney-client privilege in a bad faith action.

The certified question posed to the Court from the Fourth Circuit was as follows: “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 short answer, responded the South Carolina Supreme Court, is no. The Court found that this narrow question presented an “untenable proposition that mere denial of liability in a pleading constitutes a waiver of the attorney-client privilege.”

However, the Court determined the matter merited further analysis, as it found the Fourth Circuit’s in camera review of the privileged documents in the related federal action was based on more than mere denial liability in the insurer’s answer. In the bad faith suit, pending in United States District Court, District of South Carolina, the parties found themselves in a discovery dispute over the insurer’s attorney-client privileged documents. The insurer disputed that the documents were protected and the privilege had not been waived because the insurer put them “at issue” in the case by denying liability in a bad faith action. The District Court utilized an analysis set forth in Hearn v. Ray which it found to be consistent with South Carolina law. 68 F.R.D. 574 (E.D. Wash. 1975). In Hearn, the court articulated the voluntary injection approach – whereby if the insurer “voluntarily injects” an issue in the case, it voluntarily waives privilege without necessarily pleading advice of counsel as an affirmative defense.

As a result, the South Carolina Supreme Court determined it necessary to provide a framework to be applied in questions of waiver of attorney-client privilege specific to tort actions by insureds against insurers for bad faith refusal to provide coverage. In its analysis, the Court sought to balance public policy of protecting the sanctity of attorney-client privilege with the public interest of holding insurance companies accountable for bad faith.

The Court discussed three approaches. One minority approach employs an aggressive position that privilege does not extend to any communications in furtherance of any crime or tort, therefore, the entire pre-denial claim file is discoverable. The Court rejected this formula as it minimized the value of attorney-client privilege.

On the other end of the spectrum, some jurisdictions uphold attorney-client privilege regardless of the insurer’s reliance on the privileged communication in making its position in the bad faith action. The Court again rejected this approach as it failed to strike a balance between protecting privileged communications and justice.

Ultimately, the Court adopted what it called a “middle-ground approach” and held the answer is fact specific and to be analyzed on a case-by-case basis. The Court found State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169 (Ariz. 2000) instructive and determined that an insurer may waive attorney-client privilege without expressly pleading the advice of counsel defense. If the advice of counsel is implied as the basis for the insurer’s position, the insurer impliedly waives attorney-client privilege. In this respect, the insurer cannot use reliance upon a reasonable investigation into the law as both a shield and a sword in rendering its position. However, the waiver must be “distinct and unequivocal.”

As a result, the South Carolina Supreme Court adopted the Lee framework, emphasized the sanctity of the attorney-client privilege, and established the prerequisite that the party seeking the waiver establish a prima facie showing of bad faith.

In re: Mt. Hawley Ins. Co., Op. No. 27892 (S.C. Sup. Ct. filed June 12, 2019) (Shearouse Adv. Sh. No. 24 at 9).