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We wanted to alert you to a recent Washington Supreme Court case that alters the scope of the attorney client relationship between an insurer and coverage counsel. In Cedell v. Farmers Ins. Co. of Washington, --Wn. – (February 21, 2013), the Washington Supreme Court created a presumption of no attorney-client privilege for "first party" insured's claiming bad faith in the handling and processing of claims, other than UIM claims. The Court was addressing a first party property damage case, but used prior cases as precedent and used language indicating a broader application of the new rule. The Court stated: “We start from the presumption 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. . . . However, the insurer may overcome the presumption of discoverability by showing 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; for example, whether or not coverage exists under the law.” The presumption can be overcome "upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function." Prior Court decisions have applied the “quasi-fiduciary function” in the context of general liability insurance cases where there is a claim of bad faith. Therefore, the Cedell case may be read to apply to general liability as well as first party property damage cases. Furthermore, the term "first party" is used throughout the opinion to refer to claims made by an insured against his own insurance carrier, not just first party as opposed to a third party liability insured. This is similar to the use of the term "first party" by the Washington Legislature in the Insurance Fair Claims Act.

There are a few items to keep in mind regarding this case. First, an argument could be made that the relationship between an insurer and its insured is different in a liability versus first party property claim. As noted above, however, the Court does not rely on this distinction, and its use of broad language when referring to the “quasi-fiduciary function” is a significant concern. Second, the Court itself notes that the new rule does not apply when an attorney is providing the insurer with an opinion regarding whether coverage exists. It seems most likely that the attorney-client privilege would be deemed waived when the attorney is participating in the investigation and especially the negotiation of the claim with the insured. The Court does not say that an attorney should not be performing these tasks, only that the attorney-client privilege would likely not apply should the insured bring an action for bad faith claims handling against the insurer. Third, even in situations where the attorney was providing coverage advice, the Cedell decision creates a procedure whereby in camera review of those communications by a judge may be required if the insured can show that a reasonable person would believe that there has been bad faith ”tantamount to a civil fraud.”