No. 89-178
IN THE SUPREME COURT OF THE STATE OF MONTANA
1989
STATE, ex rel., UNITED STATES FIDELITY
AND GUARANTY COMPANY,
Relator,
-vs-
THE MONTANA SECOND JUDICIAL DISTRICT
COURT, SILVER BOW COUNTY; and the
HONORABLE ARNOLD OLSEN, Presiding
Judge,
Respondent .
ORIGINAL PROCEEDING:
COUNSEL OF RECORD:
For Relator:
Robert J. Emmons argued, Great Falls, Montana
For Respondent:
Ross P. Richardson argued, Butte, Montana
For Amicus Curiae:
Robert F. James argued; James, Gray & McCafferty,
(Farmers Union Mutual Ins., Natl. Assoc. of Independent
Insurers, Natl. Farmers Union Prop. & Cas. Co.),
Great Falls, Montana
Randy J. Cox argued; Boone, Karlberg & Haddon,
(Montana Defense Trial Lawyers), Missoula, Montana
FILED
illiam Conklin argued & Allen P. Lanning, (State
arm Mutual Auto. Ins. Co.), Great Falls, Montana
NOV 15 1989
Submitted: September 25, 1989
Decided: November 15, 1989
Filed:
I
1
Clerk '"'--" '
Justice Fred J. Weber delivered the Opinion of the Court.
This petition for writ of supervisory control arises
from an order by the District Court of the Second Judicial
District, Silver Row County, Montana, ordering United States
Fidelity and Guaranty Company (USF&G) to produce its entire
claims file, including production of letters between USF&G
and its attorney. USFCG seeks the writ. We accept jurisdic-
tion, vacate the order of the District Court, and remand for
entry of an appropriate protective order.
The issues presented for our review are:
1. Is issuance of a writ of supervisory control appro-
priate regarding a motion to compel discovery?
2. Is correspondence between USF&G and its attorneys,
which occurred after litigation was commenced, privileqed
from disclosure in a bad faith action filed after resolution
of the underlying claim?
The facts giving rise to this case began on June 11,
1986, when a truck owned by Gray Rock Trucking, an insured of
USF&G, ran off the road, down an embankment, and collided
with the home of John and Sharlene Montoya. This occurred in
Butte, Montana.
The house was an older home in which Mrs. Montoya had
lived all her life. The Montoyas had done extensive remodel-
ing. As a result of the impact, the house was knocked off
its foundation, the foundation was cracked, and support beams
were disturbed. The Montoyas had to move out of their house.
A claims adjuster, Mike McNabb, investigated the acci-
dent for USF&G. Additionally, USF&G retained the law firm of
Gough, Shanahan, Johnson, and Waterman to represent its
insured, Gray Rock Trucking, in this matter. In attempting
to settle the damage claim there were disputes over inspec-
tion and appraisal of the house. The Montoyas hired an
attorney, Patrick McGee. Settlement discussions between Mr.
McGee and counsel for USF&G began in the fall of 1986 and the
Montoyas filed the damage action on March 25, 1987. That
claim was settled December 17, 1987.
On April 25, 1988 the Montoyas filed the present action
based on the Unfair Trade Practices Act, S 33-18-201 (2) (3)
and (6), MCA, which states:
Unfair claim settlement practices prohibited.
No person may, with such frequency as to indicate a
general business practice, do any of the following:
(2) fail to acknowledge and act reasonably prompt-
ly upon communications with respect to claims
arising under insurance policies;
(3) fail to adopt and implement reasonable stan-
dards for the prompt investigation of claims aris-
ing under insurance policies;
(6) neglect to attempt in good faith to effectuate
prompt, fair, and equitable settlements of claims
in which liability has become reasonably clear;
The complaint alleges that USF&G failed in its statutory duty
to "acknowledge and act reasonably promptly" and that it
failed to adopt and implement reasonable standards for prompt
investigation of claims. It further alleges that USF&G acted
fraudulently, oppressively, maliciously and outrageously
toward the Montoyas. The damages requested include general,
special, and punitive.
On April 25, 1988, the Montoyas requested that USF&G
produce its entire claims file, including "all written commu-
nications or memoranda of communications between the Defen-
dant and its attorney." Defendants moved for a protective
order asserting the attorney-client privilege and work
product rule as to five letters. However, two of these
letters have been produced by defendant, leaving three let-
ters presently at issue. The three letters at issue are
communications from the Gough, Shanahan, Johnson and Waterman
firm to USF&G. These letters were written April 12, August
11, and December 10, of 1987, after the damage action was
filed. In the motion for a protective order, USF&G offered
to produce the documents for in-camera review by the District
Court. However, the co,urt did not review the documents.
Following oral argument and consideration of briefs, the
District Court denied USF&G1s motion for a protective order.
USF&G petitions this Court for a writ of supervisory control,
requesting that these letters be protected.
Is issuance of a writ of supervisory control appropriate
regarding a motion to compel discovery?
The standard for issuance of a writ has been stated as
follows:
Supervisory control is proper to control the course
of litigation when the lower court has made a
mistake of law or willfully disregarded the law so
that a gross injustice is done and there is no
adequate remedy by appeal; also, to prevent extend-
ed and needless litigation.
Continental Oil v. Elks Nat. Foundation (Mont. 1989), 767
P.2d 1324, 1326, 46 St.Rep. 121, 123. See also Rule 17(a),
M.R.App.P., stating that:
The supreme court is an appellate court but it is
empowered by the constitution of Montana to hear
and determine such original and remedial writs as
may be necessary or proper to the complete exercise
of its jurisdiction. The institution of such
original proceedings in the supreme court is some-
times justified by circumstances of an emergency
nature, as when a cause of action or a right has
arisen under conditions making due consideration in
the trial courts and due appeal to this court an
inadequate remedy, or when supervision of a trial
court other than by appeal is deemed necessary or
proper.
Although interlocutory review of discovery orders is not
favored, State ex rel. Guar. Ins. v. Dist. Court (Mont.
1981), 634 P.2d 648, 38 St-Rep. 1682, the writ will issue in
an appropriate case. - - State ex rel. Burlington
See, e.g.,
Northern v. Dist. Ct. (Mont. 1989), ,
P.2d - 46 St.Rep.
1625 (writ issued because an order placed a party at a sig-
nificant disadvantage in litigating the merits of a case);
Kuiper v. Dist. Court (Mont. 1981), 632 P.2d 694, 38 St.Rep.
1288 (writ issued to determine whether district court proper-
ly granted a protective order); Jaap v. Dist. Court of Eighth
Judicial Dist. (Mont. 1981), 623 P.2d 1389, 38 St.Rep. 280
(writ issued where district court exceeded its jurisdiction
by allowing defendant's attorney to privately interview
plaintiff's physicians). A case by case analysis must be
employed in determining whether supervisory control should be
accepted. State ex rel. Deere and Co. v. Dist. Court (19861,
224 Mont. 384, 730 P.2d 396.
In the present case the District Court has ordered
production of communications which clearly implicate the
attorney-client privilege. Whether these are discoverable in
the context of bad faith insurance litigation is an issue of
first impression in Montana. Defendants have exhausted their
remedies in District Court. We have examined the three
letters and conclude that if USF&G is required to disclose
these letters the harm would be irreparable and the remedy of
appeal inadequate. We conclude that issuance of the writ is
necessary in this case.
Is correspondence between USF&G and its attorneys, which
occurred after litigation was commenced, privileged from
disclosure in a bad faith action filed after resolution of
the underlying claim?
The District Court ordered production of letters written
by the Gough firm to the insurer, USF&G. We begin by estab-
lishing that these communications are within the context of
an attorney-client relationship. It is well established that
the attorney hired by the insurer to represent its insured,
actually is representing both the insurer and the insured.
- - American Mutual Liability Ins. Co. v. Superior
See, e.g.,
Court (1974), 113 Cal.Rptr. 561, 571-72; Rogers v. Robson,
Masters, Ryan, Brumund, Etc. (Ill. 1979), 392 N.E.2d 1365,
1370; Longo v. American Policyholders' Ins. Co. (N.J. Super.
1981), 436 A.2d 577, 579. This concept of dual or joint
representation has been widely acknowledged, and sanctioned
by the courts. In Jessen v. O'Daniel (D.Mont. 1962), ,210
F.Supp. 317, Judge Jameson stated:
Under an insurance contract, however, the insurer
initially employs the attorney to represent the
interests of both the insured and the insurer.
(Emphasis in original).
Jessen, 210 F.Supp. at 331-32.
We approved of this statement by Judge Jameson in Safeco
Ins. Co. v. Ellinghouse (1986), 223 Mont. 239, 252-53, 725
P. 2d 217, 226, and implicitly acknowledged this cornmonality
of interest. Absent a conflict of interest, the attorney
hired by the insurance company to defend its insured, repre-
sents both. The letters at issue, therefore, written by the
Gough firm to USF&G were attorney-client communications.
Communications between an attorney and the client have
traditionally been privileged from disclosure:
The attorney-client privilege is the oldest of the
privileges for confidential communications known to
the common law. 8 J. Wigmore, Evidence S 2290
(McNaughton rev. 1961). Its purpose is to encour-
age full and frank communication between attorneys
and their clients and thereby promote broader
public interests in the observance of law and
administration of justice. The privilege recogniz-
es that sound legal advice or advocacy serves
public ends and that such advice or advocacy de-
pends upon the lawyer's being fully informed by the
client. As we stated last Term in Trammel v.
United States, 445 U.S. 40, 51 (1980): "The
lawyer-client privilege rests on the need for the
advocate and counselor to know all that relates to
the client's reasons for seeking representation if
the professional mission is to be carried out."
And in Fisher v. United States, 425 U.S. 391, 403
(1976), we recognized the purpose of the privilege
to be "to encourage clients to make full disclosure
to their attorneys." This rationale for the privi-
lege has long been recognized by the Court, see
Hunt v. Blackburn, 128 U.S. 464, 470 (1888) (privi-
lege "is founded upon the necessity, in the inter-
est and administration of justice, of the aid of
persons having knowledge of the law and skilled in
its practice, which assistance can only be safely
and readily availed of when free from the conse-
quences or the apprehension of disclosure").
Upjohn Co. v. United States (1981), 449 U.S. 383, 389, 101
S.Ct. 677, 682, 66 L.Ed.2d 584, 591.
In Montana this privilege has been codified in §
26-1-803, MCA, which provides:
(1) An attorney cannot, without the consent
of his client, be examined as to any communication
made by the client to him or his advice given to
the client in the course of professional
employment.
(2) A client cannot, except voluntarily, be
examined as to any communication made by him to his
attorney or the advice given to him by his attorney
in the course of the attorney's professional
employment.
This Court applied this statute to bar production of
communications between Goodyear Tire Company and its attorney
in Kuiper. In that case we followed the rule that communi-
cations to which the attorney-client privilege is applicable
are not discoverable. See generally Kuiper, 632 P.2d at 699.
A recent case from the Ninth Circ-uit, Admiral Ins. v.
U.S. Dist. Court for Dist. of Ariz. (9th Cir. 1989), 881 F.2d
1486, discussed at length the discoverability of
attorney-client communications. Although the case did not
involve bad faith litigation, we conclude that its stated
principles apply to the present issue. It enumerated the
essential elements of the privilege as follows:
Where legal advice of any kind is sought
from a professional legal advisor in his
capacity as such,
the communications relating to that purpose,
made in confidence
by the client,
are at this instance permanently protected
from disclosure by himself or by the legal
adviser,
unless the protection be waived.
Admiral Ins., 881 F.2d at 1492.
Admiral Ins. involved securities fraud allegations
against Admiral Ins. Co. Plaintiffs were investors. Attor-
neys hired by Admiral in anticipation of litigation deposed
two of Admiral's corporate officers. Plaintiffs sought
production of the interview statements because the two offi-
cers asserted the Fifth Amendment and refused to cooperate
when plaintiff deposed them. Plaintiffs contended they were
entitled to these statements since they had no other means to
obtain this information. The district court ordered the
interview statements produced.
The Ninth Circuit reversed, holding that an unavailabil-
ity exception is inconsistent with the nature and purpose of
the privilege, and that the privilege is not to be confused
with the work product rule, stating:
While the work-product rule protects a client's
investment in his attorney's labor to prevent
unfair exploitation, the privilege protects commu-
nications between client and counsel to encourage
the client to be forthcoming with his attorney so
that appropriate legal advice can be offered. As
Professor Saltzburg explained:
The principal difference between the
attorney-client privilege and the work product
doctrine, in terms of the protections each
provides, is that the privilege cannot be
overcome by a showing of need, whereas a
showing of need may justify discovery of an
attorney's work product.
Saltzburg, Corporate and Related Attorney-Client
Privilege: A Suggested Approach, 12 Hofstra,
L.Rev. 279, 299 (1984).
Admiral Ins., 881 F.2d at 1494-95.
* * *
The attorney-client privilege, like all other
evidentiary privileges, may obstruct a party's
access to the truth. Although it may he inequita-
ble that information contained in privileged mate-
rials is available to only one side in a dispute, a
determination that communications or materials are
privileged is simply a choice to protect the commu-
nication and relationship against claims of compet-
ing interests. Any inequity in terms of access to
information is the price the system pays to main-
tain the integrity of the privilege. An unavail-
ability exception is, therefore, inconsistent with
the nature and purpose of the privilege.
Admiral Ins., 881 F.2d at 1494.
In summary, Admiral Ins. held that the attorney-client
privilege is to be distinguished from the protection given
attorney work product. Whereas a showing of need may over-
come the immunity given to work product, no showing of need
can be invoked to overcome the privilege. It noted the
policy underlying the privilege which is to encourage the
client to be open and frank with the attorney, and to enable
the attorney to provide the best possible legal advice and to
encourage the client to act in accordance with the law.
While recognizing that the privilege denies access to these
communications, the court held that the legal system's need
for the privilege outweighs an asserted need for the informa-
tion. We conclude that the reasoning of the Ninth Circuit in
Admiral Ins. is compelling and correct. We therefore adopt
its reasoning.
Plaintiffs contend that the privilege must give way in
the context of bad faith litigation because the plaintiff
must be able to determine whether the insurance company had a
good faith basis for its decision. They urge that the requi-
site information includes knowledge of reliance on advice of
counsel, and that if discovery is not permitted in the
present case it will render the Unfair Trade Practices Act
ineffectual. Plaintiff contends that the nature of the cause
of action should control discoverability. We disagree and
conclude that it is the nature of the relationship which is
determinative.
Plaintiffs contend that their inability to discover
these communications will impede the policy behind the Unfair
Trade Practices Act. We conclude that the opposite is true.
The attorney-client privilege allows for an honest, careful
and prompt analysis by qualified persons. This enables the
insurer to evaluate and settle a claim expeditiously and in
this way furthers the policy behind the Act. The free flow
of information between the attorney and client equally bene-
fits the claimant because it is this kind of communication
which results in the settlement of most insurance claims.
Normally, all communications between attorney and cli-
ent, including conversations and phone calls, are
memorialized in writing. If these writings are all poten-
tially discoverable, the impact on an attorney's ability to
fully advise a client would be devastating. An insurance
company must have an honest and candid evaluation of a case,
possibly including a "worst case scenario." A concern by the
attorney that communications would be discoverable in a bad
faith suit would certainly chill open and honest communica-
tion. An attorney's inability to communicate freely with the
client would impede all communications and could diminish the
attorney's effectiveness. It could also impede settlements.
We conclude that the need for the privilege outweighs any
alleged need of the plaintiffs.
Plaintiffs rely on two decisions by Montana Federal
District Courts, In re Bergeson (D.Mont. 1986), 112 F.R.D.
692, and Silva v. Fire Ins. Exchange (D.Mont. 1986), 112
F.R.D. 699, for their contention that the privilege must give
way in bad faith insurance litigation. These decisions both
involved a bad faith allegation by an insured against his own
insurance company. They were thus " first-party suits. The
I'
federal courts allowed discovery of attorney-client communi-
cations. The present case is a "third-party" suit since the
plaintiff is a claimant rather than the insured. However,
plaintiff contends that the same rule should apply.
We reject plaintiff's contention for two reasons.
First, whether this information would be discoverable in
first party bad faith litigation has not been decided by this
Court. Second, there is a valid distinction between a first
party suit and a third party suit in insurance litigation.
See, Baker v. CNA Ins. Co. (D.Mont. 1989) 123 F.R.D. 322.
The relationship between the insurance company and its in-
sured is fiduciary. No fiduciary relationship exists between
an insurance company and a third party claimant, and an
adversarial relationship may exist. Thus plaintiff's
argument is unpersuasive.
Plaintiff urges an exception to the privilege based on
other theories such as civil fraud, citing Escalante v.
Sentry Ins. (Wash.App. 1987), 743 P.2d 832, and United Ser-
vices Automobile Assn. v. Werly (Alaska 1974), 526 P.2d 28.
Both of these cases involved third party bad faith claims
against an insurance company. The courts in these cases
allowed the privilege to be defeated upon a prima facie
showing of fraud after an in camera review. We reject the
reasoning of those cases, which would extend the civil fraud
exception to bad faith allegations. The civil fraud excep-
tion to the attorney-client privilege has traditionally been
invoked where an attorney or client is involved in unlawful
or criminal cond.uct, or future fraudulent activity. 2 J.
Weinstein, Evidence S 503 (d)(1)(01); Annot., 31 ALR 4th 458.
We agree with the Florida Co,urt in Kujawa v. Manhattan
Nat. Life Ins. Co. (Fla. 1989), 541 So.2d 1168, a bad faith
insurance case, wherein the court stated that the "legisla-
ture in creating the bad faith cause of action did not evince
an intent to abolish the attorney client privilege and work
product immunity." Kujawa, 541 So.2d at 1169.
As a final argument, plaintiffs contend that USF&G
waived the right to claim the privilege by its production of
other letters between itself and the Gough firm. Specifical-
ly, they note that a letter which was produced contained a
reference to the August 11 letter. They urge therefore that
USF&G waived its right to claim that the letter of August 11
is privileged. While it is true that the privilege may be
waived (S 26-1-803, MCA), we do not agree that by the insur-
er's production of certain correspondence, it waived its
right to withhold other correspondence. Nor does the refer-
ence to the August 11 letter require production of that
letter. See generally 8 Wigmore, Evidence § 2327 (McNaughton
Rev. 1961).
We decline to accept plaintiff's legal theories which
would sweep aside the privilege. As stated by the
Admiral Ins. court, the exception urged by plaintiff would
either "destroy the privilege or render it so tenuous and
uncertain that it would be 'little better than no privilege
at all. ' Upjohn, 449 U.S. at 353, 101 S.Ct. at 661."
Admiral Ins., 881 F.2d at 1495. As should be apparent from
our analysis, we have concluded that a balancing of the
interests of all parties requires a conclusion that the
attorney-client privilege must remain inviolate. We vacate
the District Court's denial of USF&G8s motion for a protec-
tive order, and remand for entry of an appropriate protective
order in regard to the three letters.
We Concur:
No. 89-178
I N THE SUPREME COURT O F THE S T A T E O F MONTANA
1989
S T A T E , ex r e l . , U N I T E D S T A T E S F I D E L I T Y
AND GUARANTY COMPANY,
Relator,
-vs-
THE MONTANA SECOND J U D I C I A L D I S T R I C T
COURT, S I L V E R BOW COUNTY; and t h e
HONORABLE ARNOLD O L S E N , P r e s i d i n g
Judge,
Respondent.
O R I G I N A L PROCEEDING:
COUNSEL O F RECORD:
For R e l a t o r :
R o b e r t J . E m r n o n s argued, G r e a t F a l l s , M o n t a n a
For R e s p o n d e n t :
R o s s P. R i c h a r d s o n argued, B u t t e , M o n t a n a
For A m i c u s C u r i a e :
R o b e r t F. J a m e s argued; J a e s , G r a y & M c C a f f e r t y ,
3
( F a r m e r s U n i o n M u t u a l ~ n s , j , $ ~ r e aF a l l s , M o n t a n a
t
R a n d y J . C o x argued; B o o n e , K a r l b e r g & H a d d o n ,
(Montana Defense T r i a l Lawyers), Missoula, Montana
W i l l i a m C o n k l i n argued & A l l e n P . L a n n i n g , ( S t a t e
F a r m M u t u a l A u t o . I n s . Co.), G r e a t F a l l s , M o n t a n a
Submitted: September 25, 1989
Decided: November 15, 1 9 8 9
IN THE SUPREME COURT OF THE STATE OF MONTPA ,
0 m
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No. 89-178 3 rn =;
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STATE ex rel. UNITED STATES
FIDELITY AND GUARANTY COMPANY,
Relator,
THE SECOND JUDICIAL DISTRICT
OF THE STATE OF MONTANA, IN
AND FOR THE COUNTY OF SILVER
BOW, and HONORABLE ARNOLD
OLSEN, Presiding judge,
Respondent.
Relator and amici curiae have filed herein a petition for
rehearing in this cause, asking this Court to delete a certain
statement from the opinion filed in this cause on November 15,
1989. No objections to the petition for rehearing have been filed.
ACCORDINGLY, IT IS HEREBY ORDERED that the following para-
graph, which begins on page 11 and ends on page 12 of this Court's
Opinion of November 15, 1989, is deleted:
We reject plaintiff's contention for two
reasons. First, whether this information
would be discoverable in first party bad faith
litigation has not been decided by this Court.
Second, there is a valid distinction between
a first party suit and a third party suit in
insurance litigation. See, Baker v. CNA Ins.
Co. (D. Mont. 19891, 123 F.R.D. 322. The
relationship between the insurance company and
its insured is fiduciary. No fiduciary rela-
tionship exists between an insurance company
and a third party claimant, and an adversarial
relationship may exist. Thus plaintiff's
argument is unpersuasive.
I T I S FURTHER ORDERED that the deleted paragraph is replaced
by the following paragraph:
We reject plaintiff's contention for two
reasons. First, whether this information
would be discoverable in first party bad faith
litigation has not been decided by this Court.
Second, there is a valid distinction between
a first party suit and a third party suit in
insurance litigation. See, Baker v. CNA Ins.
Co. ( D . Mont. 1989), 1 2 3 F . R . D . 3 2 2 .
Let remittitur issue forthwith.
&
DATED this 4 -- day of January, 1990.
We concur:
Justices