A federal court decision out of the District of Washington highlights the potential pitfalls of discovery against insurers related to bad faith claims and claims administration.

In Hopkins v. State Farm Mutual Auto. Ins. Co., 2016 U.S. Dist. LEXIS 169591 (W.D. Wa. Dec. 6, 2016), the plaintiff was injured in an automobile accident with the defendant’s insured in 2011. The plaintiff required surgery and made multiple demands for the $25,000 policy limit in 2014. The plaintiff provided a notice of intent to sue in 2015, after which the defendant insurer tendered $25,000 to the plaintiff, but declined to resolve plaintiff’s bad faith claim. The plaintiff brought a bad faith lawsuit against the insurer shortly thereafter. 

The plaintiff requested documents related to the insurer’s claims processing in discovery. The insurer declined to produce an internal report and related documents because they were ostensibly made in response to the “threat of bad faith litigation” and were, therefore, protected work product generated in anticipation of litigation. The plaintiff moved to compel. 

The court granted the plaintiff’s motion and ordered the production of all claims-related documents produced prior to the defendant’s payment of the $25,000. The court disagreed with the insurer’s contention that the report was made in anticipation of a possible bad faith lawsuit, finding instead that the reason the report had been generated was because the claim was still open more than four years from the date of the accident. The court concluded: “To hold that an insurance company’s work product is protected because there is a possibility of a bad faith lawsuit, especially prior to the claim being settled, creates a perverse incentive for insurance companies to act in bad faith. An insurance company cannot create the necessity of a bad faith lawsuit, and then protect itself from discovery by claiming the prospect of bad faith litigation.” The court also held that communications and work product regarding a reservation of rights letter drafted by the insurer’s legal counsel “relates to claims administration” and, consequently, was “not protected from discovery.”

The court’s decision is consistent with the law of some states, wherein the “the application of attorney-client privilege and work-product protection is severely limited in the context of an insurance bad faith claim” and the starting presumption of the court is that “there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant.” 

The rationale behind this rule is that an “insured needs access to the insurer’s file maintained for the insured in order to discover facts to support a claim of bad faith,” and that “to permit a blanket privilege in insurance bad faith claims because of the participation of lawyers hired or employed by insurers would unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices.” Thus, courts in some jurisdictions will liberally permit discovery of an insurer’s files, even those involving or created by attorneys, unless the insurer can overcome the presumption of discoverability by showing that its “attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability.” 

The Hopkins decision underscores an insurer’s need to be cautious in relying on the attorney-client or work product privileges when evaluating a claim. The inclusion of an attorney in the claims handling process may not necessarily mean that documents produced in the process are privileged. Insurers should also be aware that documents created after the receipt of demand letters threatening legal action will not necessarily be treated as having been generated in response to the “threat of bad faith litigation” and, therefore, may not be afforded a work product protection in discovery.