Ever since the Washington Supreme Court’s 2013 decision in Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), insurance coverage attorneys have been struggling to define the exact parameters of the Cedell ruling in order to safeguard the attorney-client privilege as to the communications between the insurer and its counsel. As a brief background, the Washington Supreme Court held in Cedell that there is a presumption of no attorney-client privilege in a lawsuit involving bad faith claims handling. However, an insurer can overcome the presumption of no attorney-client privilege by showing that its counsel provided legal advice regarding the insurer’s potential liability under the policy and law, and did not engage in any quasi-fiduciary activities, i.e. claims handling activities, such as investigating, evaluating, adjusting or processing the insured’s claim.
Since Cedell, various trial courts have held that the following activities by an insurer’s counsel constitute quasi-fiduciary conduct that do not overcome the presumption of no attorney-client privilege, resulting in an order to produce documents and/or to permit the deposition of the insurer’s counsel:
- Insurer’s attorney being the primary or sole point of contact with the insured for the insurer;
- Insurer’s attorney requesting documents from the insured that are relevant to the investigation of the claim;
- Insurer’s attorney communicating directly with the insured or the insured’s counsel regarding claims handling issues or payments;
- Insurer’s attorney interviewing witnesses for purposes of the investigation of the claim;
- Insurer’s attorney conducting an examination under oath of the insured;
- Insurer’s attorney drafting proposed or final reservation of rights letter or denial letter to the insured; and
- Insurer’s attorney conducting settlement negotiations in an underlying litigation.
Conversely, some trial courts have held that the following activities by an insurer’s counsel are not quasi-fiduciary activities, in that insurer’s counsel is providing legal advice and opinion, resulting in a valid assertion of the attorney-client privilege:
- Insurer’s attorney drafting a coverage opinion on the insurer’s own potential liability, such as whether or not the insured is entitled to coverage under the policy and law;
- Insurer’s attorney drafting a response to an insured’s Insurance Fair Conduct Act (“IFCA”) Notice.
With respect to drafting a response to an insured’s IFCA Notice, however, there are cases that have held that such an activity is a quasi-fiduciary one, to the extent the insurer’s counsel was also involved in claims-handling activities, such as drafting a proposed denial letter and/or coverage position/Reservation of Rights letter to the insured.
Recently, in Young v. Safeco Ins. Co. of America, 2022 WL 1404650 (W.D. Wash. May 4, 2022), the Western District Court of Washington provided additional clarification on what qualifies as a quasi-fiduciary activity in terms of an IFCA Notice response drafted by insurer’s counsel. In Young, the insured made a claim to Safeco under a Landlord Protection Policy as a result of the tenant, who was found deceased in the insured’s rental property, making modifications to the property without the insured’s permission. The insured sought coverage for renovations due to the tenant’s vandalism and for biohazard damage from the decomposition of the deceased tenant’s body. Safeco initially denied coverage. Subsequently, however, in the IFCA Notice response, Safeco’s coverage counsel advised the insured’s counsel that Safeco would like “to cure” its breach by accepting coverage, that the two losses appeared to be “two separate claims”, that Safeco would “set up a second claim to address the renovations[,]” and asked the insured to provide an estimate to repair the renovations to the rental property at issue. Id. at *3. The Court further noted that the insurer’s coverage counsel wrote to insured’s counsel to dispute whether the estimate provided by the insured included damage to the rental property not covered by the policy, outlined the coverage and exclusions contained in that policy (similar to what would be in a Reservation of Rights letter or coverage position letter sent to the insured), and requested a second inspection of the rental property, none of which pertained to the provision of legal advice or counsel to the insurer. Id. Rather, the Court characterized such tasks as the insurer’s renewed attempts to evaluate and process the insured’s vandalism claim. Id. The Court ordered the production of documents that had originally been redacted as attorney-client privilege.
In light of the Young case, it appears that an IFCA Notice response drafted by insurer’s counsel should not include anything that could be construed as pertaining to claims-handling, i.e. a reversal of coverage position and a request for additional information related to a claim. Moreover, it is recommended that any communications with the insured about the claim, i.e. a dispute the insured’s estimate including non-covered damage or to request an inspection, should be done by the adjuster, not the insurer’s counsel, in order to protect the attorney-client privilege as to the communications between the insurer and its counsel.
Another recent case that deserves attention is Water’s Edge, A Condominium Owners Association v. Affiliated FM Insurance Company, 2022 WL 3054209 (W.D. Wash. August 2, 2022). In Water’s Edge, the Federal District Court for the Western District of Washington ordered the deposition of the insurer’s counsel as the Court found that the counsel had engaged in claims processing and handling (quasi-fiduciary) tasks by reviewing, on behalf of the insurer, the documents that Water’s Edge submitted to the insurer in support of its claim; participating in the investigation into the nature and extent of the property damage; and drafting the denial letter on behalf of the insurer. Id. at *3. The deposition of insurer’s counsel was limited to those three categories.
At first glance, this decision seems to indicate that reviewing materials submitted by the insured would qualify as a quasi-fiduciary task. However, we believe that context is important in this regard – in Water’s Edge, the documents were reviewed presumably to draft the denial letter, which has already been established as a quasi-fiduciary activity. As a result, to the extent the insurer’s counsel is reviewing insured’s documents in order to draft anything other than a coverage opinion that outlines and evaluates the insurer’s potential legal liability under the policy, then such activity could presumably be deemed as claims-handling. If insurer’s counsel is reviewing the insured’s documents for purposes of coverage assessment and drafting a coverage opinion, such conduct and all documents related to that conduct would be protected by the attorney-client privilege.
There is some ambiguity in the Water’s Edge decision with respect to the Court’s identification of insurer’s counsel’s participation in the investigation into the nature and extent of the damage as a quasi-fiduciary task. Generally, an analysis of the “nature” of damage is conducted in order to assess coverage under the policy, i.e. is the damage covered property damage or precluded under an exclusion? An analysis of the “extent” of damage, though, would presumably involve some aspect of claims handling in that it generally addresses the repair costs of damage. We can only hope that other decisions will eventually shed some light on the issue of “nature” versus “extent” of damage.
This area of the law is ever-evolving and complex. If you have questions about the implications of Cedell or any of the cases discussed herein, or have any general questions in regard to pending insurance claims and compliance with Washington insurance law, please feel free to contact our office.