FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS December 22, 2014
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
SENECA INSURANCE COMPANY,
INC., a foreign corporation,
Plaintiff-Appellant/Cross-Appellee,
v.
Nos. 13-6284 and 14-6002
WESTERN CLAIMS, INC., a for profit
Oklahoma corporation; LOU BARBARO,
individually and as agent and employee of
Western Claims, Inc.,
Defendants-Appellees/Cross-Appellants.
_________________________________
Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. 5:12-CV-00141-HE)
Murray E. Abowitz, Abowitz, Timberlake & Dahnke, P.C., Oklahoma City, Oklahoma,
for Plaintiff-Appellant/Cross-Appellee, Seneca Insurance Company.
Maurice G. Woods, II, McAtee and Woods, P.C., Oklahoma City, Oklahoma, for
Defendants-Appellees/Cross Appellants, Western Claims, Inc., et al.
Before GORSUCH, MURPHY, and MORITZ, Circuit Judges.
MORITZ, Circuit Judge.
Seneca Insurance Company paid $1 million to settle a lawsuit in which its insured
alleged Seneca had mishandled insurance claims for hail damage to the insured’s
property. Seeking to recoup the costs of defending and settling the lawsuit, Seneca
brought this action for implied equitable indemnity and negligence against its insurance
adjuster, Western Claims, Inc., and Western Claims’ agent Lou Barbaro (together
“Western Claims”).
The district court allowed Western Claims to discover and admit as evidence at
trial correspondence containing advice from Seneca’s lawyers regarding the underlying
hail damage claim and litigation. It concluded Seneca put the advice at issue in this
lawsuit, thereby waiving any attorney-client privilege or work-product protection. The
jury ultimately found in Western Claims’ favor.
In this appeal, Seneca seeks a new trial, arguing the district court erred in
concluding Seneca put the legal advice at issue. Western Claims cross appeals,
contending that even if the district court erred, Western Claims is nevertheless entitled to
judgment as a matter of law on both of Seneca’s claims.
Exercising jurisdiction under 28 U.S.C. § 1291, we conclude that because Seneca
cited “advice of counsel” to justify settling with its insured in the underlying action,
Seneca could not shield that advice from Western Claims. Because we affirm the district
court’s conclusion that Seneca waived any attorney-client privilege or work-product
protection, we do not reach Western Claims’ cross appeal.
BACKGROUND
Seneca hired Western Claims to investigate a claim by Route 66 Trader Market
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d/b/a Laser Expedition for wind and hail damage to buildings Seneca insured. Western
Claims assigned adjuster Lou Barbaro to investigate the claim.
Barbaro inspected Route 66’s buildings and concluded the buildings had sustained
hail damage but the metal roof on Route 66’s large, flea-market-style building had not
been damaged. Barbaro estimated Route 66’s net claim to be about $1,081. Seneca
promptly issued a check to Route 66 for that amount and closed its file.
Nearly eight months later, Route 66 asked Seneca to reopen Route 66’s hail
damage claim based on a new estimate from Route 66’s roofing contractor indicating the
roof of the large building had sustained hail damage in the amount of $759,607.77.
Seneca refused to pay, insisting the roof had not been damaged.
Route 66 eventually sued Seneca, Western Claims, and Barbaro in Oklahoma state
court, claiming all three had mishandled its claims. Against Seneca, Route 66 alleged
breach of insurance contract, bad faith, and fraud, seeking extra-contractual and punitive
damages.
During the Route 66 litigation, John Mrakovcic, Seneca’s Claims Examiner,
prepared and distributed a Large Loss Report to several individuals, including Frank
Donahue, Seneca’s Vice President of Claims, and Marc Wolin, Seneca’s Chief Operating
Officer. The loss report suggested a settlement range of $200,000 to $500,000, and a
potential jury verdict range of $300,000 to $1,500,000, while establishing reserves for the
suit at $345,000. Seneca later obtained an estimate for replacing the large metal roof, and
paid Route 66 $151,685.17, the undisputed amount of the damage minus the applicable
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deductibles. This payment did not, however, resolve Route 66’s claims for extra-
contractual and punitive damages.
For assistance defending the Route 66 lawsuit, Seneca sought advice from two
attorneys in separate firms, James N. Isbell and Murray E. Abowitz. About the time
Mrakovcic issued his loss report, he received correspondence from Isbell detailing
Seneca’s handling of Route 66’s damage claim, summarizing Oklahoma law regarding
Route 66’s bad faith claim, and making suggestions regarding Seneca’s appraisal or
replacement options. Isbell also suggested Seneca’s failure to pay Route 66’s damage
claim could be viewed as unreasonable and unjustified, leaving Seneca vulnerable to
Route 66’s bad faith claim, and therefore punitive damages.
About four months later, Mrakovcic received correspondence from Abowitz
highlighting Seneca’s potential vulnerabilities and identifying several potential flaws
with both Seneca’s and Western Claims’ handling of Route 66’s claim. In his
correspondence, Abowitz advised that even Seneca’s “best defense,” i.e., attributing all
the bad faith conduct to Barbaro, would not allow it to escape liability on Route 66’s bad
faith claim. He further warned that if a jury found Seneca acted in bad faith, it might
award punitive damages, which would be difficult to shift to Western Claims. Ultimately,
Abowitz recommended Seneca avoid an adverse jury verdict and possible punitive
damages by settling the Route 66 litigation and then suing Western Claims and Barbaro
to recover the cost of settlement, blaming them for mishandling Route 66’s claims.
Consistent with Abowitz’s advice, after Route 66 voluntarily dismissed its claims
against Western Claims and Barbaro, Seneca settled with Route 66 for $1 million in “new
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money.” Seneca then filed this suit asserting implied equitable indemnity and negligence
claims against Western Claims and Barbaro. Specifically, Seneca alleged Barbaro caused
any mishandling of Route 66’s claims by misleading Seneca to conclude Route 66’s roof
had sustained no hail damage. Seneca sought to recover the $1 million it had paid to
settle the Route 66 litigation, plus $64,079.14 in costs it incurred defending the suit.
In discovery, Seneca disclosed a claim note that stated Seneca had settled the
Route 66 litigation for “$1 million dollars new money” “on advice of Counsel.” Western
Claims then filed a motion seeking to compel Seneca to produce, among other things,
documents Seneca relied on in settling the Route 66 litigation. Seneca responded,
claiming attorney-client privilege and work-product protection justified its refusal to
produce the Isbell and Abowitz correspondence. Over Seneca’s objection, the district
court granted Western Claims’ motion to compel.
Shortly before trial and again at trial, Seneca moved to prohibit Western Claims
from introducing the Isbell and Abowitz correspondence. Seneca reiterated its assertion
that the documents were subject to attorney-client privilege and work-product protection.
The district court denied both motions, finding Seneca had placed the advice at issue. The
district court later admitted the correspondence for the limited purpose of establishing
Seneca’s reasons for settling the Route 66 litigation and the basis for the amount of the
settlement.
At trial, Mrakovcic testified he relied on the Isbell and Abowitz correspondence
in handling the Route 66 claim. Further, Mrakovcic testified that Gregory Crapanzano,
Seneca’s Vice President of Property Claims, told him Seneca settled the Route 66
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litigation for $1 million based on Abowitz’s advice. Crapanzano also testified that his
“conversations with counsel” as well as “conversations with the home office” and his
superiors led him to conclude that $1 million was a “reasonable settlement” because a
jury might have awarded Route 66 $2.5 million.
Donahue, Seneca’s Vice President of Claims, and Wolin, its Chief Operating
Officer, both testified they relied on “advice of counsel”—particularly Abowitz’s
advice—in settling the Route 66 litigation for $1 million instead of the $200,000 to
$500,000 range suggested in the loss report.
At the close of Seneca’s case-in-chief, the district court granted Western Claims’
Rule 50 motion for judgment as a matter of law as to Seneca’s equitable indemnity claim.
However, the court permitted Seneca’s negligence claim to go to the jury, which
ultimately found in favor of Western Claims.
Seneca appeals the district court’s decision allowing Western Claims to discover
and introduce as evidence at trial the Isbell and Abowitz correspondence. Western Claims
conditionally cross appeals the district court’s denial of its Rule 50 motion as to Seneca’s
negligence claim.
DISCUSSION
Seneca argues the district court erred in concluding Seneca waived its attorney-
client privilege and work-product protection as to the Isbell and Abowitz correspondence.
We review district court decisions regarding waiver of attorney-client privilege and
work-product protection for abuse of discretion. Frontier Ref., Inc. v. Gorman-Rupp Co.,
136 F.3d 695, 699 (10th Cir. 1998). But we review the district court’s underlying factual
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findings for clear error and its rulings on purely legal questions de novo. Thiessen v. Gen.
Elec. Capital Corp., 267 F.3d 1095, 1112 (10th Cir. 2001).
I. “At-Issue” Waiver of Attorney-Client Privilege
Because this diversity suit arises under Oklahoma law, Oklahoma law governs the
contours of the attorney-client privilege. Fed. R. Evid. 501. As we summarized in
Frontier Refining, Inc. v Gorman-Rupp Co.,136 F.3d 695 (10th Cir. 1998), courts
generally apply one of three approaches to determine whether a litigant has waived the
attorney-client privilege:
The first of these general approaches is the “automatic waiver” rule, which
provides that a litigant automatically waives the privilege upon assertion of
a claim, counterclaim, or affirmative defense that raises as an issue a matter
to which otherwise privileged material is relevant. See Independent Prods.
Corp. v. Loew’s Inc., 22 F.R.D. 266, 276-77 (S.D.N.Y. 1958) (originating
“automatic waiver” rule); see also FDIC v. Wise, 139 F.R.D. 168, 170-71
(D. Colo. 1991) (discussing Independent Productions and “automatic
waiver” rule). The second set of generalized approaches provides that the
privilege is waived only when the material to be discovered is both relevant
to the issues raised in the case and either vital or necessary to the opposing
party’s defense of the case. See Black Panther Party v. Smith, 661 F.2d
1243, 1266-68 (D.C. Cir. 1981) (balancing need for discovery with
importance of privilege), vacated without opinion, 458 U.S. 1118, 102 S.
Ct. 3505, 73 L. Ed. 2d 1381 (1982); Hearn v. Rhay, 68 F.R.D. 574, 581
(E.D. Wash. 1975) (setting forth three-factor test, which includes relevance
and vitality prongs). Finally, several courts have recently concluded that a
litigant waives the attorney-client privilege if, and only if, the litigant
directly puts the attorney’s advice at issue in the litigation. See, e.g., Rhone-
Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 863-64 (3d Cir.
1994) (adopting restrictive test and criticizing more liberal views of
waiver).
136 F.3d at 699-700 (emphasis added).
The Oklahoma Supreme Court has not definitively adopted any of these
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approaches, but the parties agree Oklahoma courts would apply some version of the
second approach, i.e., the Hearn test. See Aplt. Br. 14-17; Aplt./Cross-Aplee. Resp. &
Reply 5; Aplee./Cross-Aplt. Principal & Resp. Br. 20-22; see also Gilson v. State, 8 P.3d
883, 908-09 (Okla. Crim. App. 2000) (applying version of Hearn test); see also Lindley
v. Life Invs. Ins. Co. of Am., 267 F.R.D. 382, 392-393 (N.D. Okla. 2010), aff’d in part as
modified, 08-CV-0379-CVE-PJC, 2010 WL 1741407 (N.D. Okla. Apr. 28, 2010)
(applying Hearn test).
Under the Hearn test, “at-issue” waiver requires—
(1) assertion of the privilege was 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.
Frontier, 136 F.3d at 701 (quoting Hearn, 68 F.R.D. at 581) (formatting altered;
emphasis and brackets in original).
Here, Western Claims argues Seneca’s assertion of attorney-client privilege
undoubtedly resulted from affirmative acts by Seneca—i.e., Seneca filed suit against
Western Claims to recover the cost of the Route 66 settlement and then relied on “advice
of counsel” as a basis for its settlement with Route 66.
Further, Western Claims asserts that the Isbell and Abowitz correspondence is
relevant to the reasonableness of the Route 66 settlement because the correspondence
explains Seneca’s rationale for settling as well as the amount of the settlement. Seneca
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concedes that to succeed on its indemnity and negligence claims, it was required to prove
the “underlying reasonableness of” its settlement with Route 66. See Aplt./Cross-Aplee.
Resp. & Reply, at 6; see also Caterpillar Inc. v. Trinity Indus., Inc., 134 P.3d 881, 885
(Okla. Civ. App. 2005) (stating party is entitled to indemnity for cost of settlement when
indemnitor is legally liable and settlement was reasonable and in good faith); cf. St. Paul
Reins. Co. v. Club Servs. Corp., 30 F. App’x 834, 836 (10th Cir. 2002) (holding insurer
could recover from its agent the cost of settling insured’s lawsuit for mishandling her
insurance application to the extent the agent caused the insurer’s alleged damages (citing
Washington v. Mechanics & Traders Ins. Co., 50 P.2d 621, 624 (Okla. 1935); Okla. Stat.
tit. 23, § 61)) (unpublished).
Seneca contends, however, that this application of the first two prongs of the
Hearn test creates a “meaningless threshold” that would allow admission of any
potentially relevant advice from an attorney. Seneca’s argument both misapprehends the
crucial “affirmative act” requirement and downplays its conduct in this action. Here,
Seneca affirmatively put at issue its attorney’s advice by invoking “advice of counsel” to
support its claims in this litigation. Thus, the first two prongs of the Hearn test were met
in this case.
Focusing on the third Hearn prong, Seneca contends its assertion of attorney-client
privilege would not have denied Western Claims access to information “vital” to its
defense because the information in the Isbell and Abowitz correspondence was available
through other sources. Seneca argues Frontier controls this question.
In Frontier, the plaintiff, Frontier Refining, Inc., settled personal injury claims
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resulting from an explosion at its refinery. Frontier Refining then sued Gorman-Rupp for
implied equitable indemnity alleging a defective Gorman-Rupp pump caused the
explosion that resulted in the personal injuries. Frontier, 136 F.3d at 699. Finding the
advice of Frontier Refining’s counsel relevant to determining the reasonableness of the
personal injury settlements, the district court allowed Gorman-Rupp to discover and
admit at trial Frontier Refining’s counsel’s files from the underlying personal injury suits.
Id. at 701.
A panel of this court reversed, holding “[m]ere relevance . . . is not the standard”
for determining at-issue waiver. Instead, the panel held the “information must also be
‘vital,’ which necessarily implies the information is available from no other source.” Id.
The panel further concluded that because “Gorman-Rupp had access to information
regarding the reasonableness of the settlement and Frontier’s motivations for settling
through witnesses other than Frontier’s attorneys,” the “privileged and protected
information at issue was not truly ‘vital’ to Gorman-Rupp’s defense.” Id. at 701-02.
Seneca contends Frontier’s holding requires reversal because, like Gorman-Rupp,
Western Claims had access to information regarding the reasonableness of the Route 66
settlement from sources other than the Isbell and Abowitz correspondence. This case,
however, differs significantly from Frontier in that the “other sources”—namely
Seneca’s officers—generally did not rely on their own reasons for settling with Route 66
for $1 million. Instead, they chose to rely on “advice of counsel” to justify the
reasonableness of the settlement.
In contrast, in Frontier, the company “did not rely on the [attorney] work product
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in any manner to justify its right to recovery or to respond to Gorman-Rupp’s defense
that the initial settlements were not reasonable.” Id. at 704. And nothing in the Frontier
decision suggests the company relied on attorney-client-privileged advice to justify the
settlements.
Indeed, in Frontier the court framed the issue as whether “Frontier had waived its
attorney-client privilege in bringing th[e] indemnity action against Gorman-Rupp.” Id. at
700 (emphasis added). Here, Seneca not only sued Western Claims, it expressly relied on
“advice of counsel” as a reason—if not the primary reason—for settling the Route 66
lawsuit for $1 million.
Further, allowing Seneca to rely on “advice of counsel” to establish the
reasonableness of the Route 66 settlement while excluding the contents of that advice
would violate the well-established principle that “attorney-client communications cannot
be used both as a sword and a shield.” See Motley v. Marathon Oil Co., 71 F.3d 1547,
1552 (10th Cir. 1995); see also Frontier, 136 F.3d at 700 (bringing indemnity suit does
not impliedly waive attorney-client privilege unless plaintiff asserts reliance on advice of
counsel to prove reasonableness of underlying settlement); EDWARD J. IMWINKELRIED,
THE NEW WIGMORE: EVIDENTIARY PRIVILEGES, § 6.12.4 (2014) (noting thrust of “in
issue” doctrine is that party’s privilege cannot be used as both shield and sword).
Based on the facts and circumstances of this case, we conclude the district court
did not abuse its discretion in concluding Seneca waived attorney-client privilege as to
the Isbell and Abowitz correspondence.
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II. “At-Issue” Waiver Of Work-Product Protection
Although attorney-client privilege and work-product doctrine are separate and
distinct concepts, neither the parties nor the district court distinguished between the two
for purposes of determining at-issue waiver. Like the attorney-client privilege, “a litigant
cannot use the work product doctrine as both a sword and shield by selectively using the
privileged documents to prove a point but then invok[e] the privilege to prevent an
opponent from challenging the assertion.” Frontier, 136 F.3d at 704. For the reasons
stated above, Seneca waived work-product protection by putting the correspondence at
issue.
CONCLUSION
The district court’s judgment is affirmed.
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