Thursday, February 12, 2015

Implied Waiver of Attorney-Client Privilege in Arizona Bad Faith Cases: Is It a “Magical Admission” Standard?

By: Julie E. Maurer
A recent Arizona Court of Appeals decision, Everest Indemnity Ins. Co. v. the Hon. John Rea, Judge of Sup. Ct. of State of Ariz., No. 1 CA-SA 14-0094, 2015 WL 195450 (Ariz. Ct. App. Jan. 15, 2015), addresses the attorney-client privilege at issue in bad faith cases. This fact-intensive Special Action decision suggests that with additional factual inquiry, nothing has changed under Arizona law, at least for now. 

In the Everest decision of January 15, 2015, the Arizona Court of Appeals examined whether an insurer implicitly waived attorney-client privilege by asserting subjective good faith belief as a defense. At the trial court level, the insureds brought an action against their liability insurer alleging bad faith because Everest entered into a settlement agreement to their detriment. The trial court ordered Everest to produce attorney-client communications. The Court of Appeals then accepted special action jurisdiction, and granted Everest relief from production of the privileged documentation.

In Everest, the insureds argued that the attorney-client privilege was waived because Everest asserted “subjective good faith” in defending the bad faith claim—thus, Everest should be required to produce otherwise privileged attorney-client communications. While Everest admitted that it consulted with its counsel in assessing whether or not to settle the underlying matter, Everest asserted that its ultimate decision was based on its own subjective beliefs, and not the direction of counsel. 

The court in Everest provided that the assertion of a subjective good faith defense, along with consultation of counsel, does not, in and of itself, waive attorney-client privilege under Arizona law. Rather, a more detailed factual inquiry and, thus, specific admission from a defendant is required before such attorney-client privilege will be waived: “[t]o waive the privilege something more is required. Under Lee [State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52 (2000)], the attorney-client privilege is impliedly waived only when the litigant asserts a claim or defense that is dependent upon the advice or consultation of counsel.”[1] 

While the dissent to the Everest decision asserts that the Majority “essentially enforces, to borrow from Justice Feldman, a ‘magical admission’ standard that requires a party to formally state it actually relied on counsel before the attorney-client privilege can be impliedly waived,”[2] another reading of the Everest decision supports that the Majority merely requires a more pointed factual inquiry by plaintiffs to waive attorney-client privilege in bad faith actions.

One thing is certain: the future appears to be uncertain in Arizona as to how long, or if, the holding of State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52 (2000) will remain.
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