Does Counsel’s Coverage Denial Letter to Insured Waive Privilege for Underlying Coverage Opinion?

The West Virginia Supreme Court of Appeals confronted an interesting issue—whether an insurer’s lawyer waives the attorney–client privilege for his coverage opinion by sending a coverage denial letter directly to the insured.  The Court answered with an emphatic “No.”  Montpelier U.S. Ins. Co. v. Bloom, 757 S.E.2d 788 (W. Va. 2014).  You may read the decision here.

Property Damage

A property owner sued B&B Transit alleging that it caused a landslide that damaged their property.  B&B notified its insurer of the claim, and the insurer retained coverage counsel to determine whether the policy provided coverage for the landslide allegations.

Coverage counsel then prepared a coverage opinion letter to the insurer.  Counsel later explained, in writing, the coverage decision to the insured without enclosing the coverage opinion.  Counsel stated—using coverage lingo—that the policy had a subsidence exclusion that did not cover property damage “arising out of or aggravated by the subsidence of land as a result of a landslide.”

Bad-Faith Claim

In a subsequent bad-faith claim, B&B sought disclosure of counsel’s coverage opinion, arguing that counsel’s letter explaining the coverage decision resulted in waiver of the attorney–client privilege for the coverage opinion.

The W. Va. Supreme Court found this argument “novel,” noting that B&B did not cite to, “nor have we found, any case in the country that has held that the attorney–client privilege does not apply to a coverage opinion letter when an insurer communicates the gist of the recommendation contained in the letter to the insured.”

Court’s Analogy

The Court analogized this novel issue to cases where insureds sought coverage opinion letters as part of the insurer’s claims file.  And it distinguished cases where an attorney acted as a claims adjuster on the initial claim determination.

The Court concluded that the attorney–client privilege protects from disclosure coverage counsel’s coverage opinion letter and that counsel’s communication of the coverage decision to the insured does not constitute privilege waiver.  Insurance coverage counsel facing this type of discovery dispute now have support from the West Virginia Supreme Court.