Understand Privilege Issues Before Relying On “Advice Of Counsel” Defense
An insurance company hired a claims adjuster to investigate an insured’s claim and the adjuster estimated the net claim to be only $1,081. The insurance company paid that amount, but after the insured later learned that its damages could be closer to $1 million, the insured brought suit against the insurance company and the adjuster, including for claims of extra-contractual and punitive damages. The insurance company eventually settled the case for $1 million and then sued the adjuster for equitable indemnity and negligence. In discovery, the insurance company disclosed a claim note stating that it had settled the underlying litigation with the insured for “$1 million dollars new money … on advice of Counsel.” The adjuster filed a motion to compel seeking the documents the insurance company relied on in settling the underlying litigation that formed the advice of counsel and the U.S. District Court for the Western District of Oklahoma granted the motion over the insurance company’s attorney-client privilege and work product assertions.
After the jury returned a verdict against the insurance company, the insurance company appealed claiming that the district court improperly concluded that the insurance company waived its attorney-client and work product protections. The Tenth Circuit found that the district court did not abuse its discretion in ordering that the documents be discovered. Applying Oklahoma law, which was not clear on the waiver issue, the court predicted that Oklahoma would apply some version of the Hearn privilege waiver test, which requires the following for waiver to apply: 1) assertion of the privilege to be the result of some affirmative act, such as filing suit, by the asserting party; 2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and 3) application of the privilege would have denied the opposing party access to information vital to [its] defense.
In this case, the Tenth Circuit emphasized that the insurance company explicitly placed the advice of counsel at issue, and specifically relied on “advice of counsel” (as opposed to its own reasons) to justify the reasonableness of its $1 million settlement in the underlying litigation. The court concluded that to allow the insurance company to withhold that information in discovery would offend the well-established principle that the attorney-client privilege (or work product) cannot be used both as a sword and a shield.
