NOVEMBER 2013 BAD FAITH CASES: PLAINTIFF’S BAD FAITH CLAIM POTENTIALLY GAVE AN INSURER THE ABILITY TO PIERCE ATTORNEY-CLIENT PRIVILEGE WHERE IT CAN ESTABLISH NO LESS INTRUSIVE SOURCE EXISTS ON THE SUBJECTS OF SETTLEMENT DEMANDS, OFFERS, OR THE REJECTION OF SETTLEMENT DEMANDS OR OFFERS ON AN IMPLIED WAIVER THEORY, BUT IT FIRST HAD TO ATTEMPT DISCOVERY WITHOUT ASKING ABOUT PRIVILEGED COMMUNICATIONS (New Jersey Appellate Division)
Plaintiff, her husband, and their minor children were involved in a car crash in which their vehicle was hit head-on by the other driver. Plaintiff and her children brought suit against the other driver. The driver carried a half-million dollar policy, which was ultimately offered to settle all claims, less the property damage payments already made.
The offer was refused and the case proceeded to trial. Prior to trial, the injured parties accepted an assignment of rights from the driver to pursue a bad faith claim against his insurer in return for releasing him from any judgment exceeding his policy limit. They were awarded a total of $17.5 million at trial.
After the minor plaintiffs filed their bad faith action, the insurer took plaintiff’s deposition. Disputes arose as to what information was protected by the attorney-client privilege since plaintiff and her children were represented by different counsel in both the underlying and bad faith suits.
On a motion by the insurer, the trial court ordered plaintiff’s continued deposition and disallowed any objection on the grounds of privilege to questions concerning settlement demands, offers, or the rejection of settlement demands or offers. Plaintiff appealed the order claiming the insurer failed to demonstrate appropriate grounds for piercing the privilege. The insurer argued that it could pierce the privilege because it had a legitimate need to reach the evidence sought to be shielded, and that the information could not be secured from any less intrusive source.
On appeal, the court affirmed, disallowing plaintiff’s ability to assert the attorney-client privilege regarding settlement demands, offers, and rejections, because, based on the transcript, it appeared the insurer had been thwarted from legitimately inquiring about non-privileged information.
The court found the insurer could only establish the “need prong” to pierce the privilege where a constitutional right is at stake, or a party has explicitly or implicitly waived the privilege. While no constitutional right is at stake in a bad faith claim, the court found “when an insured pursues a bad faith claim, the likelihood that she would have settled the case for the policy limits is “in issue,” and, therefore,… [the insured] has “implicitly waived” the privilege as to communications regarding her knowledge of the settlements offers and demands, and whether she would or would not have accepted a settlement for the full policy limits,” thereby establishing the “need prong.”
Nevertheless, the court held the insurer failed to establish questioning plaintiff about actual communications she had with counsel was the least intrusive method of obtaining the needed information. The opportunity still existed for the insurer to show plaintiff the written settlement offers and ask her questions as to what she knew about the offers, rather than inquiring into privileged communications.