Insurance Company’s Privilege Claims Fall Victim To Crime-Fraud Exception In Colorado Federal Court
Earlier this month, a magistrate judge for the U.S. District Court for the District of Colorado, relying on the crime-fraud exception to the attorney-client privilege, significantly curtailed an insurance company’s claims of privilege.
While working in the course and scope of his employment, Person A was killed in a vehicle accident by a car driven by Person B. Person A’s estate brought a wrongful death action against Person B that settled for $100,000, the limits of Person B’s insurance policy. While the wrongful death suit was pending, Person A’s estate also made a demand on Person A’s employer’s insurer for uninsured motorist coverage up to policy limits of $1 million.
Two weeks after the settlement between Person A’s estate and Person B, the employer’s insurer filed a declaratory judgment action invoking Colorado’s “one civil action” provision of the state’s wrongful death statute barring a second action claiming uninsured motorist benefits after the dismissal with prejudice of a previous wrongful death action. The estate filed a counterclaim that alleged fraud, specifically contending that the insurer’s attorneys “fraudulently induced [the estate] into believing that their request for [uninsured motorist] benefits would be honored and paid” in the wake of the mediated settlement of the underlying wrongful death action, that the estate settled those claims “acting … in detrimental reliance upon [the insurer’s] misrepresentations false statements,” and that the insurer “intended to fraudulently induce [the estate] to take steps that [the insurer] could later attempt to use to its benefit in refusing to pay the [] benefits to which [the estate] have been and are entitled.”
After the insurer withheld a number of documents as attorney-client privileged, the estate filed a motion to compel seeking communications between the insurer and its outside counsel. Though the court explained that the documents would ordinarily be subject to the attorney-client privilege, here the estate had carried its burden of showing “evidence [sufficient] to support a good faith belief by a reasonable person” that the insurer made misrepresentations to the estate. Specifically, the court found that the insurer, working in concert with outside counsel, knew the estate had made a formal claim for uninsured motorist benefits against it, knew the amount the estate could recover from Person B’s insurer would not make the estate whole, and thus understood it could avoid significant financial exposure by inducing the estate’s settlement with Person B and then invoking the “one civil action” rule. The facts supported a reasonable person’s good faith belief that the insurer “knowingly withheld information that was critical to the [estate’s] decision-making on how best to preserve a future [uninsured motorist] claim that everyone agreed was meritorious.” The court thus ordered production of the communications based on the crime-fraud exception.
