THE
ADVICE OF COUNSEL DEFENSE IN THE INSURANCE BAD FAITH CASE
INTRODUCTION
In the handling of claims for benefits, insurers often utilize either
in-house staff attorneys or outside counsel to provide advice or
assistance. Such advice or assistance can range from legal advice rendered
by outside counsel concerning discrete legal issues that arise from a
claim, to the actual handling and decision-making of a claim by staff
attorneys in defending liability claims against insured. It can even
include defending arbitrations in uninsured motorist claims. When the
processing of the claim results in a bad faith action, the role of the
attorney in the handling of the claim becomes an issue.
In such cases, insurers recognize that the "advice of
counsel" defense may become applicable. This defense states that the
fact that an insurer turned to an attorney for legal advice may be
evidence of the good faith of the insurer in handling the claim.
LIMITATIONS ON ADVICE OF COUNSEL DEFENSE
However, the insurer must recognize that the defense is not a complete
defense that would allow an insurer to prevail in a bad faith case as a
matter of law. It is only evidence that a jury may consider as to whether
an insurer has acted in bad faith.
Thus, the fact that an insurer has turned to outside counsel to render
a coverage opinion may be persuasive evidence that the insurer acted in
good faith to obtain a legal opinion rather than rely upon the arguably
biased opinions of unqualified in-house claims personnel.
However, the fact that an insurer has employed an outside, but captive
law firm, to handle the arbitration of an uninsured motorist claim, for
example, may not be persuasive evidence of the insurer’s good faith
since the captive law firm lacks the appearance of impartiality that
outside counsel may present to a jury in a bad faith case.
ADVICE OF COUNSEL DEFENSE WAIVES ATTORNEY-CLIENT PRIVILEGE
The greatest drawback to the use of the advice of counsel defense is
that it results in a waiver of the attorney-client and attorney work
product privileges.
Communications between the insurer and its attorney are typically
privileged under the attorney/client privilege and protected from
discovery. In addition, the attorney work product privilege protects the
attorney’s own impressions, conclusions, and opinions from discovery as
well.
Such protections may be important because attorneys often memorialize
ideas or opinions that are contrary to the ultimate decision made by the
insurer which has led to the accusation of bad faith. While it is the
responsibility of counsel to investigate and discuss even contrary
opinions in advising its clients, the memorialization of such opinions are
often fertile ground for cross-examination by counsel for the insured.
Accordingly, the use of the advice of counsel defense must be done
judiciously.
While use of the advice of counsel defense waives the attorney-client
privilege, there may be an argument that it does not necessarily waive the
attorney-work product privilege that will give an attorney’s
impressions, conclusions, and opinions an absolute privilege. However,
there is currently no case law to that effect.
EVIDENTIARY PROBLEMS IN BAD FAITH TRIALS
A decision to not use the advice of counsel defense in cases where
attorneys have been extensively involved in the decision making of the
insurer, including cases where the attorneys have actually made the
decisions, can make the presentation of the defense case to the jury
problematic if the attorney cannot fully explain his or her reasoning to
the jury without breaching client confidences and waiving the
attorney/client or attorney work product privilege. In such cases, the
jury is left with a defense that cannot be fully explained due to the use
of the privileges.
Inexperienced claims personnel may be forced to explain the legal
reasoning of his or her counsel to a jury. Such testimony may have mixed
results with a jury.
ADVICE OF COUNSEL DEFENSE WHERE CLAIM DENIED IN ERROR
Thus, the best example of the use of the advice of counsel defense is
in cases where the insurer subsequently concludes that its decision to
deny a claim was in error. In such cases, the insurer can argue that it
relied upon the advice of counsel in good faith in denying the claim.
Furthermore, waiver of the privileges does not present the daunting
evidentiary problems discussed above.
However, even in those cases, the usefulness of the advice of counsel
defense is limited if the attorney is an in-house or captive counsel.
USE OF THE DEFENSE BALANCED AGAINST WAIVER OF PRIVILEGE
Use of the advice of counsel defense in cases where the insurer has
concluded that its decision to deny a claim was correct must be weighed
against the possible harm that may result from the resulting waiver of the
attorney-client privilege and possible attacks on the attorney work
product privilege.
Accordingly, it appears that the defense is best used when the insurer
concedes that its claim denial was in error, but made in good faith.
EFFECT OF DEFENSE ON DISCOVERY
Interrogatories and requests for admission may be utilized by counsel
for insureds to ferret out a possible advice of counsel defense. Use of
such discovery requests early in the litigation may force the insurer to
assert the defense prematurely. As noted above, use of the advice of
counsel defense by insurers has its drawbacks and should be utilized
selectively. The court may uphold a discovery request seeking facts
concerning an advice of counsel defense made toward the end of discovery.
The appropriate approach by the courts toward the timing of these kinds
of discovery requests is to refuse to compel an insurer to respond to such
discovery requests, but permit the insured to move to strike the
affirmative defense of advice of counsel if the insurer has failed to
answer the discovery requests in a timely manner. This allows the insurer
to reserve its right to utilize the advice of counsel defense, but puts
the burden of its use on the insurer to prove that it has permitted the
insured to conduct discovery on the defense in a timely manner.
