Washington Supreme Court Makes it Dangerous to Involve Lawyers in Claims Handling

March 4, 2013 -- The Supreme Court of Washington, in a 5-4 decision, resolved two issues in ways that will limit insurers’ right to invoke the attorney-client privilege "in the claims adjusting process." 

First, the court established a presumption that the privilege does not protect communications about claims from subsequent disclosure in a first-party bad faith suit.  Under this ruling, the privilege could still apply where it did before--to communications in which the attorney provides "counsel as to [the insurer’s] own potential liability."  But insurers will now have to make an affirmative showing (sometimes by in camera review) that the lawyer was acting in this way, rather than functioning as a claims adjustor by investigating or processing the claim. 

Second, the court ruled that the "fraud exception" to the attorney-client privilege does not require a showing of "actual fraud":  For purposes of the exception, a bad faith attempt to defeat a meritorious insurance claim is "tantamount to civil fraud."  Consequently, even where an insurer has rebutted the new presumption and established that the privilege applies, its attorney-client communications must be disclosed, if "a reasonable person would have a reasonable belief" that "an act of bad faith . . . has occurred."  The trial court will make this determination in an in camera review.  In future bad faith cases, therefore, Washington courts will be making important determinations about the merits of the underlying claim whenever issues of privilege arise, and they will do so in a way that gives a significant advantage to insured plaintiffs.