Major Decision: South Carolina Rejects At-Issue Waiver for Simply Denying Bad-Faith Liability
In a first-impression legal issue that the Fourth Circuit certified to it, the 
South Carolina Supreme Court held that an insurer does not waive the attorney–client privilege in a bad-faith tort action by simply denying liability or affirmatively asserting that it acted in good faith.
But the Court also opined that at-issue waiver applies when the insurer expressly—or impliedly—relies on a legal evaluation to deny an insured’s claim. In re: Mt. Hawley Ins. Co., 829 S.E.2d 707 (S.C. 2019). You may read the opinion here.
Bad-Faith Claim and the Answer
Subjected to a construction-defect lawsuit, ContraVest Construction Co. (C3) filed a claim with its excess commercial carrier, Mount Hawley Insurance Company. Mt. Hawley denied the claim and C3, after settling the underlying lawsuit, filed a bad-faith tort action against Mt. Hawley for its claim denial.
Mt. Hawley filed an Answer, which you may read here, denying bad-faith liability. It did not affirmatively assert that it acted in good faith by relying on any legal evaluation.
C3 asked for Mt. Hawley’s claims files for all of C3’s claims under excess liability policies. Mt. Hawley refused to produce portions of the files protected by the attorney–client privilege.
C3 responded that Mt. Hawley placed the privileged communications at issue—and therefore waived the privilege—by denying that it acted in bad faith.
The District Court, adopting the Magistrate Judge’s R&R (available here), held that Mt. Hawley waived the privilege over claims-file materials by denying bad-faith liability in its Answer. Read the District Court’s opinion, 273 F. Supp. 3d 607 (D.S.C. 2017), here.
Certification
Mt. Hawley filed a petition for writ of mandamus to the Fourth Circuit and asked the federal appellate court to certify the question to the South Carolina Supreme Court. The Fourth Circuit, in an Order available here, certified this narrow question:
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?
Three Approaches
The Supreme Court reviewed three at-issue waiver approaches taken by various courts around the country.
First, a “substantial minority” of jurisdictions hold that, like the crime–fraud exception, the privilege does not apply to communications made in furtherance of a tort such as bad-faith claim denial. Under this rule, the entire pre-denial claims file is discoverable.
Second, some jurisdictions apply the privilege unless the insurer expressly relies upon privileged communications in defending a bad-faith claim. These jurisdictions, led by the Third Circuit’s opinion in Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851 (CA3 1994), reject any implied privilege waiver in this context.
Mt. Hawley argued strongly for the Rhone-Poulenc approach, claiming “the attorney–client privilege is under attack” at oral argument.
Third, other jurisdictions, led by the Arizona Supreme Court’s opinion in State Farm Mut. Auto. Ins. v. Lee, 13 P.3d 1169 (Ariz. 2000), and adopted by the Restatement (Third) of the Law Governing Lawyers, § 80, engage in a case-by-case analysis. Here, the insurer waives the privilege if it expressly or impliedly asserts that it based its denial decision on law and facts as informed by legal counsel.
Untenable Proposition
The Supreme Court provided two answers to the Fourth Circuit’s single question.
First, the Court rejected the “untenable proposition” that an insurer waives the attorney–client privilege by merely denying liability in its Answer.
Second, the Court went further and adopted the Arizona and Restatement approach, holding that an insurer waives the privilege over claims-file materials if it based its claim denial on (1) a good-faith belief that the law supported the denial and (2) its subjective belief following a legal evaluation.
The Court added a requirement not found in Arizona or the Restatement: the plaintiff–insured must make a prima facie showing of bad faith.
POP Analysis
The insurer won the specific battle, but did it lose the ultimate war? It seems clear that simply denying bad-faith conduct or asserting good-faith conduct, without something more, is insufficient to constitute privilege waiver.
The broader question, then, is what is the “something more.” Certainly waiver occurs when the insurer expressly relies upon legal advice to prove a good-faith denial, but Mt. Hawley’s lasting effect is the implied-waiver concept.
The Court attempted to limit its holding, noting that conferring with counsel and making coverage evaluations based on that advice does not waive the privilege.
Privilege waiver, rather, occurs when the insurer asserts that its claim denial was the result of a reasonable belief that the law permitted the decision and a subjective belief based on a legal evaluation.
Washington Court Rejects Corporate Attorney–Client Privilege for Hospital’s Physician–Agent
A Washington appellate court has handed healthcare providers and their 
lawyers another privilege blow. Following privilege-restricting opinions in 2014 and 2016, a court rejected the functional-equivalent doctrine and ruled that the attorney–client privilege does not permit ex parte communications between a hospital’s lawyer and its physician–agent.
The privilege is non-existent even though the physician–agent had an office at the hospital and the hospital was responsible for his actions. Hermanson v. MultiCare Health System, Inc., 2019 WL 4021900 (Wash. Ct. App. Aug. 27, 2019) You may read the decision here.
Privilege Backdrop
Two significant Washington Supreme Court privilege rulings form the backdrop for assessing the Hermanson decision. In Youngs v. PeaceHealth, 316 P.3d 1035 (Wash. 2014), which I examined in this post and this Medical Monitor article, the court allowed but restricted a hospital lawyer’s ex parte privileged communications with non-party physician–employees.
And in Newman Highland Sch. Dist., 381 P.3d 1188 (Wash. 2016), which I examined in this post, the 5–4 divided court refused to apply the attorney–client privilege to a corporate lawyer’s communications with former employees. Notably, the court rejected the privilege because there is no principal–agency relationship once the employer–employee relationship ends.
Hermanson presented an issue influenced but unaddressed by Youngs and Newman: does the corporate attorney–client privilege apply to a non-employee hospital agent?
Should I Have Not Said That?
While allegedly driving with a BAL of 330mg/dL, Doug Hermanson unsurprisingly hit a parked car and then slammed into a power pole. Hermanson’s head penetrated the windshield, and EMTs transported him to Tacoma General Hospital, owned by MultiCare Health System, Inc., where Dr. David Patterson treated him.
Law-enforcement officers appeared at Tacoma General and apparently learned of Hermanson’s elevated BAL from some healthcare provider.
Employees, Agents, and Offices
In an effort to address the lack of adult-trauma services in the Tacoma area, MultiCare and other corporate and governmental hospital systems created Trauma Trust, a non-profit entity, to provide trauma services for the hospitals.
Trauma Trust maintains its office at Tacoma General and employs physicians who provide trauma services. Although employed by Trauma Trust, the physicians are agents of MultiCare, and MultiCare is responsible for the medical services they provide.
Dr. Patterson, Hermanson’s treating trauma physician, is a Trauma Trust employee but has an office at Tacoma General and is MultiCare’s agent.
The Privilege Issue
Hermanson sued MultiCare and various unidentified MultiCare employees, but not Dr. Patterson, for defamation and violating his physician–patient privilege. When Hermanson’s lawyers sought Dr. Patterson’s deposition, defense counsel sought a protective order under Youngs seeking approval of having ex parte privileged communications with the trauma doctor.
Ruling
The trial court rejected MultiCare’s privilege argument, finding Youngs inapplicable because Dr. Patterson was not MultiCare’s employee. On appeal, MultiCare argued that the attorney–client privilege should protect its lawyer’s discussions with Dr. Patterson because he is MultiCare’s agent, even if not an employee, and because the functional-equivalent doctrine permits it.
The appellate court, in a 2–1 decision, rejected these interrelated arguments.
First, the two-judge majority ruled that Newman foreclosed an “expansion” of the attorney–client privilege “beyond the employer–employee relationship.” Yet, the Newman court expressly tethered its privilege rejection to the termination of the employer–employee relationship, noting that “this generally terminates the agency relationship.”
Second, although briefly discussing federal courts’ adoption of the functional-equivalent doctrine, the appellate court dismissed the principle with little-to-no analysis, stating simply that Washington courts have not adopted the federal approach.
The Dissent
The dissenting judge recognized the majority’s imperfect analysis. The judge convincingly distinguished Newman, highlighting the significant difference between rejecting the privilege for non-agent former employees and rejecting it for existing agents. The judge emphasized the privilege’s sustaining principles and saw “no compelling justification for departing from those principles simply because [Dr. Patterson] is an agent but not a formal employee.”
The dissent instead advocated adopting the functional-equivalent doctrine, which would allow a corporate healthcare provider’s lawyer to have ex parte privileged communications, consistent with Youngs, with individuals who are the functional equivalent of an employee.
Whether a formal employee or an agent, Dr. Patterson was acting on MultiCare’s behalf—his office was in the building—and was “no different in any relevant respect from an employee of MultiCare.”
POP Analysis
For corporate healthcare providers, the Youngs, Newman, and Hermanson trilogy produces a maze-like privilege environment. If a patient sues the corporate entity over its individual healthcare providers’ actions, then the entity’s lawyer may hold ex parte privileged discussions with employed non-party providers, subject to the Youngs restrictions. The lawyer cannot hold privileged discussions with non-employed providers or former employee–providers.
What are Tacoma-area hospitals that rely on Trauma Trust’s physicians to do in light of Hermanson? Do away with the Trauma Trust concept because hospitals must employ the doctors to secure privilege? Is it proper for the physician to retain separate counsel, enter into a common–interest agreement with the hospital and its separate counsel, and share privileged information in that manner?
One can reasonably and persuasively argue that the Newman and Hermanson dissents have the better, more practical view of the corporate attorney–client privilege. Here’s hoping the Washington Supreme Court has the chance to review Hermanson and, in the process, provide clear guidance on the scope and application of the corporate attorney–client privilege to employees and agents, both past and present.