NO. 91-523
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
DAVID ALARIC PALJ4ER, a Protected Person,
by Martha Rose Diacon, his Conservator, -. .
Plaintiff and
-v-
FARMERS INSURANCE EXCHANGE,
Defendant and
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Thomas M. McKittrick, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
William Conklin 6r L.D. Mybo (argued), Conklin, N y b o
& Leveque, Great Falls, Montana
For Respondent:
Dennis Patrick (argued), Great Falls,
Conner
Montana; and John C. (argued) , R i s j o r d &
Risjord
James, Overland Park, Kansas
For Amicus :
Randy J, Cox, Boone, Karlberg & Haddon, Missoula,
Montana: Dana L. Christensen, Murphy, Robinson,
Heckathorn & Phillips, Kalispell, Montana; anRobert
F. James (argued), James, Gray & McCafferty, Great
Falls, Montana
Submitted: December 10, 1992
Decided: October 18, 1993
Filed:
Justice R. C. McDonough delivered the Opinion of the Court,
This is an appeal from an order based on a jury verdict and a
judgment of $750,000 in compensatory damages and $750,000 in
punitive damages against Farmers Insurance Exchange (Farmers) for
breach of the covenant of good faith and fair dealing (bad faith).
We reverse and remand for a new trial.
his action arose in conjunction with a claim by Palmer, the
insured, against Farmers, the insurer, for uninsured motorist
benefits. Palmer's claim ensued after a no-vehicle-contact
motorcycle accident on June 10, 1984. Farmers requested that the
court bifurcate the uninsured motorist claim from the bad faith
claim and stay discovery proceedings concerning bad faith until the
uninsured motorist claim w a s resolved. The court granted Farmers'
request on August 21, 1986.
The uninsured motorist claim proceeded to trial in March of
1987. The jury found an uninsured motorist liable for Palmer s
injuries. We affirmed the verdict and judgment on appeal. Palmer
by Diacon v. Farmers Ins. Exch. (1988), 233 Mont. 515, 761 P.2d
401.
The bad faith action was revived in the fall of 1988 and the
case went to trial on March 4, 1991. After the jury verdict, the
trial judge approved the punitive damage award and entered judgment
against Farmers. Farmers filed a motion for either a judgment
notwithstanding the verdict or a new trial. The motion was deemed
denied. This appeal followed.
The pertinent issues on appeal are:
2
1. Whether the District Court erred by denying Farmers'
motion for directed verdict.
2. Whether the District Court erred in admitting evidence
from the underlying trial.
3. Whether Farmers is entitled to a new trial because the
District Court ordered Farmers to produce, and later
allowed into evidence, correspondence between Farmers and
its attorneys who defended the underlying uninsured
motorist lawsuit.
A. Whether the attorney-client privilege applies to
first-party bad faith cases in which the insurer's
attorney did not represent the interests of the insured
in the underlying case.
B. Whether Farmers' claim file contained material
subject to attorney-client privilege.
C. Whether Farmers voluntarily waived its attorney-
client privilege.
D. Whether evidence of privileged communications is
admissible against the holder of the privilege after the
court erroneously compelled its discovery.
E. Whether the admission of privileged materials into
evidence prevented Farmers from having a fair trial, thus
entitling it to a new trial.
4. Whether the District Court erred in ordering the
production of work-product materials and then allowing
the materials into evidence.
A. Whether the District Court erred in ordering Farmers
to produce the work-product materials in its claim files.
B. Whether the District Court erred in determining that
one of Farmersr former defense attorneys waived the
protection of the work-product doctrine by making
testimonial use of certain work-product materials.
5. Whether the District Court erred by admitting evidence of
the litigation tactics of Farmers' attorneys and of
Farmers' decision to appeal.
A. Whether evidence of an insurer's post-filing
conduct, such as litigation strategy and tactics in
defending the underlying suit, is admissible in a bad
faith action based on the insurer's decision to deny
coverage.
B. Whether an insurer's decision to appeal the verdict
in the underlying case is admissible as evidence in a
subsequent bad faith action.
From the inception of the proceedings, Palmer has maintained
that an unidentified tractor and semitrailer (the truck) crossed
the centerline and ran his motorcycle off the road. Farmers denied
the uninsured motorist claim in February of 1986, after a witness
told a Farmersv claims adjuster that the truck was in its own lane.
A few days later Palmer filed suit against Farmers for denying the
claim and for bad faith.
Pursuant to a motion to compel, the court ordered production
of Farmers' entire claim file during discovery on the bad faith
claim. The court also ruled that Farmers was not required to
produce materials dated after October, 26, 1988, the date Palmer
notified Farmers that he intended to proceed with the bad faith
claim. However, the materials dated prior to October 26, 1988
included confidential reports sent to Farmers by the attorneys who
represented it in the uninsured motorist case.
On February 21, 1989, Farmers produced its claim file under
court order. At that point, nothing had transpired in the bad
faith action, except Palmer's motion to compel and a letter from
Farmers' attorney Bill Gregoire to Palmer's attorney. The letter
stated that Farmers would have to obtain new counsel for the bad
faith trial because Farmers would likely call him and Farmers'
other attorneys, Marvin Smith and James Walsh, as witnesses in the
bad faith trial.
Equipped with attorney Gregoire's confidential reports to
Farmers, Palmer deposed several of Farmers' employees who had
worked on the uninsured motorist case. Among the persons that
Palmer questioned using the privileged materials was Bud Rausch,
Farmersf branch claims supervisor. Neither Rausch nor any of the
other deponents had been designated as expert witnesses at the time
of their depositions.
At a deposition on September 13, 1989, Palmer's attorney
cross-examined Rausch extensively on five of the letters Farmers
received from its attorney Gregoire and on events which transpired
during preparation for trial and during trial. Palmer made similar
use of Gregoire's letters to Farmers when he deposed a Farmers'
claims representative on February 16, 1990, and Farmers'
investigator on February 19, 1990.
Farmers identified its prospective expert witnesses on July
18, 1990, in an answer to an interrogatory. Farmers identified
Frank Weedman and Bud Rausch as potential expert witnesses. In
addition, Farmers identified attorneys Smith, Walsh, an,3Gregoire
as potential witnesses in the bad faith trial. The answer also
stated: "If called as witnesses, those individuals will not be
examined regarding their confidential privileged communications to
the defendant regarding that underlying suit or the instant bad
faith action."
Farmers hired Weedman as an expert witness regarding
reasonable insurance industry practice on March 8, 1990, a year
after Farmers produced its claim file for Palmer. Farm'erssent a
copy of the same claim file to Weedman for his review. Shortly
thereafter, Farmers filed a motion for return of privileged
communications.
Nine months later, one week before trial, the District Court
ruled on the motion for return of privileged communications. The
court ruled that neither the attorney-client privilege nor the
work-product doctrine apply in first-party bad faith actions, and
therefore, Palmer was entitled to Farmers1 entire claim file. The
court then ruled that Farmers had waived the privilege because the
experts it intended to call at trial based their opinions on a
review of the entire claim file, including attorney correspondence.
At trial, most of Palmer's case-in-chief involved evidence
concerning the underlying trial and Farmers1 post-filing conduct.
The evidence included the strategy and litigation tactics of
Farmers1 attorneys who defended the underlying case and testimony
from the underlying trial.
In questioning Bud Rausch, the first witness at trial, Palmer
introduced into evidence and read nine of the reports consisting of
confidential communications between Farmers and its former
attorneys. After the reports had been disclosed to the jury,
Farmers called its former attorneys as witnesses to explain their
actions in defending the underlying uninsured motorist case. Near
the end of the trial, Farmers offered the complete claim file into
evidence to rebut Palmer's use of selected portions of the
privileged materials.
Farmers made a motion for a directed verdict at the end of
Palmer's case-in-chief. The court denied the motion. Farmers
renewed the motion at the close of all of the evidence with a
stipulation from Palmer that the earlier motion and arguments were
deemed repeated. The court accepted the form of the motion and
again denied it.
This opinion will refer to additional facts where they are
pertinent to the discussion.
Our review of the District Court's conclusions of law is
plenary; we determine whether the court's conclusions are correct.
We review discretionary acts of the District Court to determine
whether the court abused its discretion. Steer Inc. v. Dept. of
Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.
Did the District Court err by denying Farmers' motion for a
directed verdict?
his is a borderline issue, considering the closeness of the
questions of fact in the underlying case. See Palmer bv Diacon,
761 P.2d at 404. But, given the standard for granting a directed
verdict, we conclude that the District Court did not commit
reversible error by denying Farmers1 motion for a directed verdict.
This case arose before the legislature enacted 9 33-18-242,
MCA, which appears to have codified our common law standard of
liability for bad faith in denying insurance coverage. Under
Montana common law, an insurer cannot be held liable for bad faith
in denying a claim if the insurer had a reasonable basis for
contesting the claim or the amount of the claim. Tynes v. Bankers
7
Life Co. (1986), 224 Mont. 350, 364, 730 P.2d 1115, 1124. As we
have stated, "[i]t is generally held that an insurer is entitled to
challenge a claim on the basis of debatable law or facts and will
not be liable for bad faith or punitive damages for denying
coverage if its position is not wholly unreasonable." Safeco Ins.
Co. v. Ellinghouse (1986), 223 Mont. 239, 248, 725 P.2d 217, 223;
see also St. Paul Fire & Marine Ins. Co. v. Cumiskey (1983), 204
Mont. 350, 665 P.2d 223: 5 33-18-242(5), MCA.
Farmers cited Cumiskev to support its position that the court
should have granted its motion for a directed verdict. In
Cumiskev, an insurer filed a declaratory judgment action, asking
the court to interpret the policy and determine the relationships
of the parties and their legal rights. The insured counterclaimed,
alleging that the insurer acted in bad faith by bringing the
declaratory judgment action instead of payingthe claim. Cumiskev,
665 P.2d at 226-27.
The trial court granted a directed verdict in favor of the
insurer. We upheld the court because in a proper case, an insurer
may file a declaratory judgment action to obtain a determination of
the validity, continuance or coverage of the insurance policy, the
extent of liability, or the insurer's duty under the policy.
Cumiskev, 665 P.2d at 227. We held that filing a declaratory
judgment action under appropriate circumstances does not
necessarily constitute bad faith. See Cumiskey, 665 P.2d at 227.
In this case, Farmers contested liability, contending that
Palmer's accident was not caused by another motorist, and
therefore, Palmer's uninsured motorist policy did not cover the
accident. Cumiskev does not require the court to grant a directed
verdict under the facts of this case.
Farmers also contends that the District Court should have
granted its motion for a directed verdict because Farmers had a
reasonable basis to deny coverage. To support its contention,
Farmers argues that statements taken from witnesses before Farmers
denied the claim gave it a reasonable basis for denying the claim.
Witness Atchison told a claims investigator that, contrary to
Palmer's assertion, a truck did not run Palmer's motorcycle off the
road. In a later deposition, Atchison adhered to his story,
stating that from the time he first saw the truck until the
motorcycle went off the road, the truck never left its own lane.
In all of his statements, Atchison never deviated from his
testimony that the truck was in its own lane and did not run Palmer
off the road.
In addition, Farmers obtained statements from some dirt
bikers. They reported seeing a motorcycle speeding down the
highway at full throttle about one-half mile from the accident
scene. It matched the description of Palmer's motorcycle. Shortly
thereafter, they came across Palmer's motorcycle along with Palmer
and his passenger in the ditch. According to the dirt bikers, no
other speeding motorcycles went past them before they came upon the
accident.
Farmers argues that the statements of Atchison and the dirt
bikers gave it a reasonable basis for denying the claim as a matter
of law. Under the law, if Farmers had a reasonable basis upon
which to deny the claim, it cannot be found to have acted in bad
faith. Tvnes, 730 P.2d at 1124. Because Palmer's uninsured
motorist policy would not coverthe accident unless another vehicle
ran Palmer off the road, the witnesses' statements appear at first
glance to provide a reasonable basis for denying the claim.
Palmer, however, counters that it was unreasonable for Farmers
to rely on Atchison's statements because Atchison was an unreliable
witness. Palmer points out that Atchison kept changing details of
his story, such as the exact speed of the motorcycle before it left
the road and whether he saw the motorcycle as it left the road or
merely a cloud of dust. Palmer argues that it was unreasonable for
Farmers to deny coverage based on Atchison's information because
Atchison changed details of his story. The credibility of Atchison
is, therefore, a question of fact in this case.
Palmer supplied another witness who was riding a motorcycle
similar to Palmer's. The witness testified that he and his wife
were speeding on the same road at about the time of the accident.
Palmer argues that this gives another reasonable explanation of the
speeding motorcycle seen by the dirt bikers. However, there is no
evidence that Farmers knew of this witness' statement when it
denied the claim.
In a jury trial, a judge may direct a verdict in favor of the
party entitled thereto when the case presents only questions of
law. Section 25-7-302, MCA. When a defendant moves for a directed
verdict, the court views only the evidence presented by the
plaintiff and views it in the light most favorable to the
plaintiff. Cremer v. Cremer Rodeo Land & Livestock Co. (3979), 181
Mont. 87, 91, 592 P.2d 485, 488. A court may not withdraw a case
from the jury, unless the conclusion requested by the defendant
must follow from the evidence as a matter of law and the plaintiff
cannot recover under any view that could reasonably be drawn from
the evidence. Cremer, 592 P.2d at 488.
The test for determining whether the evidence is legally
sufficient to withdraw a case from the jury is whether reasonable
people could draw different conclusions fromthe evidence. If only
one canclusion is reasonably proper, a directed verdict is
appropriate. Cremer, 592 P.2d at 488.
Here, the court evidently concluded that more than one
conclusion was reasonably proper based on the evidence.
Consequently, it denied Farmersf motion for directed verdict. In
reviewing the courtf denial of Farmersf motions, we apply the
s
common-law standard for holding an insurer liable for bad faith in
denying a claim. Under that standard, an insurer cannot be held
liable if the insurer had a reasonable basis for contesting the
claim. Tvnes, 730 P.2d at 1124.
In this case, there is conflicting evidence concerning the
credibility of the witnesses. It is for the jury to determine the
probative value of the evidence and draw inferences from the
evidence, and then determine whether Farmers had a reasonable basis
for denying the claim.
We hold that Cumiskev does not require the District Court to
grant a directed verdict for Farmers. We further hold that the
court did not commit reversible error by concluding that reasonable
people could draw different conclusions about whether Farmers' had
a reasonable basis for contesting Palmer's claim. Accordingly, the
court did not err in denying Farmers' motion for a directed
verdict.
Did t h e D i s t r i c t Court err i n admitting evidence from the
underlying trial and other irrelevant evidence?
Because we are reversing on other grounds and remanding for a
new trial, we will not rule on the particulars relative to this
issue. However, some comment is necessary because the District
Court admitted into evidence a large quantity of material relating
to the underlying uninsured motorist trial.
Relevant evidence is flevidencehaving any tendency t o make the
existence of any fact that is of consequence to the determination
of the action more probable or less probable than it would be
without the evidence." Rule 401, M.R.Evid. Trial judges have the
discretion to determine the relevancy and admissibility of
evidence, Dahlin v . Holmquist (1988), 235 Mont. 17, 20, 766 P.2d
239, 241. However, the admission of irrelevant evidence is an
abuse of discretion and warrants a new trial if it affects the
substantial rights of a party. Dahlin, 766 P.2d at 241.
Material from the underlying trial tending to show what
Fanners knew or should have known at the time it made the decision
to deny the claim is relevant. In addition, material tending to
12
show whether or not such knowledge supports a reasonable basis for
denying the claim is relevant. See Rule 401, M.R.Evid. However,
evidence from the underlying trial that is not related to Farmersf
basis for denying the claim is not relevant.
The essential issue in this case is whether Farmers had a
reasonable basis for denying the claim. Any evidence that does not
relate to facts of consequence to this issue is not relevant.
111.
Did the District Court erroneously order Farmers to produce, and
later allow into evidence, correspondence between Farmers and its
attorneys who defended the underlying uninsured motorist lawsuit,
thus entitling Farmers to a new trial?
In a request for production of documents on February 26, 1986,
Palmer requested Farmers' "entire file on the accident described in
the Complaint filed herein, including but not limited to any and
all documents relating to plaintiff's claim for uninsured motorist
benefits. " Palmer also requested from Farmers, " [a]ny and all
correspondence between you, your agents and attorneys and
plaintiff, plaintiff's agents and attorneys, concerning plaintiff's
claim for uninsured motorist benefits."
Sometime later, Palmer moved to compel discovery of Farmers'
claim files developed in investigating and defending the uninsured
motorist suit. Farmers produced everything in its files, except
for correspondence between Farmers and its attorneys and materials
dated after October 8, 1985, the date Palmer's attorney threatened
to sue for bad faith if Farmers did not pay Palmer's claim.
Farmers objected to producing exhibits consisting of
confidential attorney-client communications on the grounds that
13
they were protected by attorney-client privilege. Farmers objected
to producing other exhibits on the grounds that they were immune
from discovery under the work-product: rule. The court ordered
Farmers to produce the attorney-client communications.
In an order dated February 16, 1989, the court ruled that
"defendant's assertion of the attorney-client privilege with
respect to those claim file documents which constitute
communications between it and its counsel is overcome by
plaintiff's need for such materials in preparation of its bad faith
case against defendant.'l
On February 21, 1989, pursuant to court order, Farmers
produced all claim file materials dated before October 26, 1988.
Among the materials were several letters from Farmersf defense
attorney Gregoire, including eight letters marked "confidential
reports." Over continuing objections by Farmers, the District
Court allowed into evidence these letters and other correspondence
between Farmers and its attorneys who defended the underlying
uninsured motorist case.
Farmers argues that it did not have a fair trial because the
District Court admitted this; privileged material into evidence.
Farmers points out that the bad faith trial should have centered on
whether the infomation it had when it denied Palmer's claim
constituted a reasonable basis for contesting the claim. Farmers
contends that by admitting privileged materials, the court allowed
Palmer to focus much of the bad faith case on the litigation
tactics defense counsel used in preparing for the underlying trial,
in conducting the trial itself, and in recommending and pursuing
the subsequent appeal. Therefore, Farmers argues, it is entitled
to a new trial. We agree.
The fundamental purpose of the attorney-client privilege is to
enable the attorney to provide the best possible legal advice and
encourage clients to act within the law. The privilege furthers
this purpose by freeing clients from the consequences or the
apprehension of disclosing confidential information, thus
encouraging them to be open and forthright with their attorneys.
State ex rel. United States Fidelity and Guaranty Co. v. Second
Judicial Dist. Ct. (1989), 240 Mont. 5, 10, 783 P.2d 911, 914
(USF&G), (citing Upjohn Co. v. United States (l98l), 449 U.S. 383,
Another important policy behind the attorney-client privilege
is to foster the attorney-client relationship by ensuring that
attorneys are free to give accurate and candid advice without fear
that the advice will later be used against the client. We approve
of the Missouri Supreme Court's recognition of this policy,
articulated as follows:
As long as our society recognizes that advice as to
matters relating to the law should be given by persons
trained in the law--that is, by lawyers--anything that
materially interferes with that relationship must be
restricted or eliminated, and anything that fosters the
success of that relationship must be retained and
strengthened. The relationship and the continued
existence of the giving of legal advice by persons
accurately and effectively trained in the law is of
greater societal value, it is submitted, than the
admissibility of a piece of evidence in a particular
lawsuit. Contrary to the implied assertions of the
evidence authorities, the heavens will not fall if all
relevant and competent evidence cannot be admitted.
State ex rel. Great Am. Ins. Co. v. Smith (Mo. l978), 574 S.W.2d
379, 383 (quoting Sedler & Simeone, Comment, Privileqes in the Law
of Evidence: The Realities of Attornev-Client Confidences, 24 Ohio
St.L.J. 1, 3 (1963)). With these policies in mind, we will apply
the statutes and rules to the particular contentions of the
parties.
A. Does the attorney-client privilege apply to first-party bad
faith cases in which the insurer's attorney did n t represent
o:
the insured's interests in the underlying case?
Palmer contends that all correspondence between Farmers and
its former attorneys is discoverable because the attorney-client
privilege does not apply in first-party bad faith actions such as
this one. We previously held that the attorney-client privilege
applies in the context of third-party bad faith actions, but we
have not determined whether the privilege applies in first-party
bad faith litigation. USF&G, 783 P.2d at 916.
For definitional purposes, a third-party bad faith action is
one in which the plaintiff is a third-party claimant rather than
the insured. In a first-party bad faith action the plaintiff is
the insured. There are different types of first-party bad faith
actions.
Palmer argues that this Court has made a distinction between
third-party and first-party bad faith actions. Palmer argues,
based on federal district court cases, that the attorney-client
privilege does not apply in first-party bad faith cases. See
Bergeson v. National Surety Corp. (D.Mont. 1986), 112 F.R.D. 692:
Baker v. CNA Ins. Co. (D.Mont. 1988), 123 F.R.D. 322. We disagree.
16
One type of first-party bad faith action involves dual
representation by the attorney. Judge William Jameson first
expressed the concept of dual representation as follows: "Under an
insurance contract, however, the insurer initially employs the
attorney to represent the interests of both the insured and the
insurer.I1 Jessen v. O'Daniel (D.Mont. 1962), 210 F.Supp 317, 331-
32; see also Ellinuhouse, 725 P.2d at 226; USF&G, 783 at 913-14.
First-party bad faith cases involving dual representation
often arise after a third-party claimant obtains a judgment in
excess of policy limits and the insured later sues the insurance
company for failure to settle within policy limits. In these
cases, courts have held that the insured is entitled to the entire
claim file prepared forthe underlying lawsuit, because the insurer
created the file primarily on behalf of the insured. E.g., Baker,
123 F.R.D. at 326. The rationale courts use to abrogate the
attorney-client privilege in such cases is that one joint client
(the insurer) cannot assert the privilege against another joint
client (the insured). See, e.g. Baker, 123 F.R.D. at 325-26; see
also 22 A.L.R.2d 659 5 3; 4 A.L.R.4th 765 (annotations concerning
applicability of attorney-client privilege in dual representation
cases).
The present case is a distinct type of first-party action. In
this type of action, the claimant and the insurer are in adverse
positions from the outset of the underlying case. Farmers stepped
into the shoes of the unidentified third party motorist when it
denied Palmer coverage under his uninsured motorist policy. The
attorneys who represented Farmers in the uninsured motorist case
have not represented Palmer, therefore the dual representation
reasoning does not apply in this case.
The nature of the relationship, not the nature of the cause of
action, controls whether communications between attorney and client
can be discovered. USF&G, 783 P.2d at 915. Tbe attorney-client
privilege protects communications in first-party bad faith cases
when the insurer's attorney did not represent the interests of the
insured in the underlying case. That is tbe nature of the
relationship here; therefore, the attorney-client privilege applies
in this case.
B. Did Farmers1 file contain material subject to attorney-client
privilege?
The subject matter and author of each exhibit is critical in
determining whether the attorney-client privilege prevents its
discovery. Absent a voluntary waiver or an exception, the
privilege applies to all communications from the client to the
attorney and to all advice given to the client by the attorney in
the course of the professional relationship. Kuiper v. Dist. Ct.
of the Eighth Judicial Dist. (1981), 193 Mont. 452, 461, 632 P.2d
694, 699; see also 6 26-1-803, MCA.
The portion of Farmers1 file produced under court order
contained "confidential reportstt
concerning the pending litigation
from Farmers' attorney Gregoire to Farmers. The reports
constituted advice from Gregoire to Farmers on many matters
relating to Palmer's claim. In the reports, Gregoire evaluated
witnesses, evaluated the trial, advised Farmers concerning his
investigation and trial preparation, advised Farmers on his
opinions of defense and trial strategy, advised Farmers on the
prospect for a successful defense, and advised Farmers on post-
trial negotiations and on grounds for appeal.
The reports clearly contain advice given to Farmers by its
attorney in the course of the attorney's professional relationship.
The attorney-client privilege protects Farmers from disclosing
those reports and any other correspondence sent in the course of
the professional relationship with its attorneys. See Kui~er,632
P.2d at 699.
The privilege of non-disclosure is not lost merely because the
communications contain relevant nonlegal considerations. Union Oil
Co. of Calif. v. Dist. Ct. (1972), 160 Mont. 229, 236, 503 P.2d
1008, 1012. The protection applies unless the communications fall
within some exception to the privilege or Farmers voluntarily
waived the privilege.
C. Did Farmers voluntarily waive its attorney-client privilege?
Palmer contends that Farmers waived its attorney-client
privilege before the court ordered production of the privileged
correspondence. According to Palmer, Farmers waived the privilege
when Farmers' attorney Gregoire sent a letter dated November 15,
1988, to Palmer's attorney, stating that Farmers would have to
obtain new counsel for the bad faith trial because he and Farmers'
other attorneys, Smith and Walsh, might be called as witnesses in
the trial. Palmer argues that after Gregoire sent the letter,
Palmer was entitled to discover the bases of the testimony and
opinions those attorneys would present to the jury-
This argument has no merit for two reasons. First, the
attorney-client privilege belongs to the client and an attorney
cannot waive it without consent of the client. See 5 26-1-803,
MCA; Rule 503, M.R.Evid. Second, Farmers did not list the
attorneys as witnesses until July 18, 1990, over a year after the
court ordered Farmers to produce the privileged materials. Even
then, Farmers stated that the attorneys would testify to factual
matters, but would not testify regarding confidential privileged
information.
Palmer further contends that Farmers voluntarily waived its
attorney-client privilege several times after Farmers produced the
privileged material under court order. Notably, all of the alleged
waivers occurred after the court compelled discovery and Palmer had
made extensive use of the privileged materials in preparing his
case. Palmer's arguments are inconsequential because Farmers did
not voluntarily release the attorney communications--the court
ordered it to do so. We will, however, address each of Palmerrs
arguments in turn.
Palmer asserts that Farmers did not object to his cross-
examination regarding the contents of the privileged correspondence
at the deposition of Bud Rausch, Farmers' branch claims supervisor.
In so arguing, Palmer overlookedthe following continuing objection
made by Farmersr a t t o r n e y at the beginning of the deposition.
* [ ] order to preserve our objections, I wish to state
'In
a general and continuing objection to any and all
reference to and questioning regarding documents frornthe
claim files of Farmers Insurance Exchange, pertaining to
Mr. Palmer's claims in their several, various versions,
which documents we produced over objection and pursuant
to the court's order compelling production, dated
February 16, 1989. Defendant's objections are that such
documents are immune from discovery under the work-
product protection afforded by Rule 26 (b)3 of the Montana
Rules of Civil Procedure. And also, because a great many
of such documents constitute communications between
defendant and its attornevs and are ~rivileaedunder the
attornev-client privileqe, I have a second obiection.
:
(Emphasis added. )
Farmers thus preserved its objection to Palmerrs use of the
privileged materials, and nothing in Rausch's deposition acted as
a waiver of Farmers' attorney-client privilege.
Palmer next contends that Farmers waived its attorney-client
privilege by relying on advice of counsel in its decision to deny
Palmer's claim. However, mere reliance on an attorney's advice is
not the crucial factor. The attorney-client privilege applies
lgunlessthe insurer directly relies on advice of counsel as a
defense to the bad faith charse." (Emphasis added.) Spectra-
Physics v. Superior Court (Cal.App. 1988), 244 Cal.Rptr. 258, 261;
see also ~ransamerica~ i t l eIns. Co. v . Superior Court (Gal-App.
Upon cross-examination in his deposition and at trial, Bud
Rausch stated that advice of counsel influenced Farmersf decision
to deny Palmer's claim. Although Farmers listened to the advice of
counsel in deciding to deny Palmer's uninsured motorist claim,
Farmers did not directly rely on advice of counsel as a defense to
Palmerrs bad faith claim. Therefore, Palmer's contention that
Farmers waived its privilege by relying on advice of counsel is
lacking in mejrit. See Svectra-Phvsics, 244 Gal-Rptr. at 261.
Palmer next contends that Farmers did not object at trial to
the admission of privileged communications. On the contrary,
during a hearing on the morning of trial, Farmers made a continuing
objection to use of the privileged materials as evidence. The
court granted the request for a continuing objection so that at
trial Farmers1 attorney would not have to get up and object
continually, whenever privileged material was discussed or offered
into evidence. Thereafter, Farmers was not required to state
specific attc~rney-clientprivilege objections to each exhibit.
Palmer next contends that at trial Farmers made an
"unequivocal and thorough waiver of purported attorney-client
privilege.'I During arguments over the relevance of some
communicatiors between Farmers and its attorneys, the discussion
focused on which communications Palmer wanted to examine. Farmers
counsel stated, " t s
I' already been waived. I'
ts already been
produced." Taken in context, this statement is not a waiver,
rather it is a comment that there were no attorney-client
communications left that had not been produced under court order.
Palmer next contends that Farmers made multiple waivers by
naming attorneys as witnesses, by furnishing their communications
to experts who then testified with regard to them, by permitting
their insured to testify to communications without objection, and
by calling their attorneys to the witness stand to testify to the
subjects of the privileged information. Under the circumstances of
this case, these actions do not constitute a waiver of the
attorney-client privilege.
One thing is clear. At the time the District Court abrogated
Farmers' attorney-client privilege and ordered production of
Farmers' claim file and all confidential attorney-client
communications between ~armers and its attorneys Smith, Walsh,
Clarke, and Gregoire, Farmers had done nothing that could be
interpreted as a voluntary relinquishment of its right to claim the
privilege.
As a general rule, "[a] person upon whom these rules confer a
privilege against disclosure waives the privilege if the person .
. . voluntarily discloses or consents to disclosure of any
significant part of the privileged matter." Rule 503, M.R.Evid.
Mere reference to privileged reports is not enough to waive the
attorney-client privilege. To have waived the privilege by
disclosing privileged communications, Farmers would have had to
voluntarily divulge the specific confidential material contained in
the reports. See Union Oil Co. of Calif., 503 P.2d at 1012-13.
Once the court erroneously abrogated Farmers' attorney-client
privilege by compelling discovery of the confidential reports, it
was too late for a voluntary waiver to occur and Farmers' claim of
privilege was not defeated. See Rule 504, M.R.Evid. Farmers,
therefore, did not voluntarily waive the attorney-client privilege
applicable to the communications between Farmers and its attorneys.
D. Is evidence of privileged communications admissible against
the holder of the privilege if the court erroneously compelled
its discovery?
The District Court in this case compelled discovery of all the
materials dated after October 26, 1988, in the claim file,
including materials subject to attorney-client privilege. In so
ruling, the court found that Palmer demonstrated a substantial need
for the materials and would incur undue hardship in obtaining the
substantial equivalent of those privileged materials.
The District Court seems to have confused the attorney-client
privilege with the work-product doctrine. A showing of need cannot
defeat the attorney-client privilege, whereas a showing of need may
overcome the immunity from discovery given to an attorney's work
product. USF&G, 783 P.2d at 915.
As discussed above, the purpose of the attorney-client
privilege is to foster the attorney-client relationship by enabling
attorneys to provide the best advice possible to their clients and
encourage the clients to act within the law. The privilege
furthers this purpose by encouraging clients to give information to
their attorneys without fear that it will later be used against
them.
The privilege also furthers this purpose by allowing attorneys
to give candid advice to clients without fear that later it can be
used against the client. Our statute reflects this policy by
including as privileged communications any advice from the attorney
to the client given within the professional relationship. See 5
26-1-803, MCA.
The Montana Rules of Evidence promote the policies underlying
the attorney-client privilege by providing that "[a] claim of
privilege is not defeated by a disclosure which was compelled
erroneously . ... '1 Rule 504, M.R.Evid. This rule provides a
remedy for the holder of a privilege when a court erroneously
compels discovery of privileged material. "The remedy provided is
that the privilege may be subsequently claimed and the disclosed
subject matter made inadmissible. Rule 504, M.R. Evid. , Commission
Comments.
Rule 504 was intended for this situation, in which the holder
of a privilege was compelled to disclose privileged matters
pursuantto court order. Rule 504, M.R.Evid., Commission Comments.
Evidence of the privileged communications between Fanners and its
attorneys was not admissible against Farmers merely because the
court erroneously compelled its discovery.
E. Did the admission of privileged materials into evidence
prevent Farmers from having a fair trial, thus entitling it to
a new trial?
The District Court misconstrued the law when it ordered
Farmers to produce privileged material and admitted the privileged
material into evidence. An example of the prejudicial effect of
the disclosure of the correspondence between Farmers and their
attorneys, was the attorneysv analysis and recommendations to
Farmers relative to the underlying case being dangerous to Farmers
and the need for the retention of an accident reconstruction
expert. The alleged failure to timely retain such an expert
contraryto the recommendation of their attorneys was a substantial
element in Palmer's proof of Farmerst bad faith in investigating
and settling Palmer's claim. Palmer claimed the retention of such
an expert and his opinion would have refuted any statements relied
on by Fanners that Palmer was speeding. The attorneys' analysis
and recommendations and Farmers' reaction to them was brought out
thoroughly in the direct examination by Palmer's attorney of
Farmers' branch claim supervisor as an adverse witness. Such
correspondence was also noted extensively in Palmer's attorneys'
final argument as evidence of bad faith and failure to timely and
properly investigate the claim. This error also helped Palmer to
focus his case on the trial preparation strategy and litigation
tactics of Farmers' attorneys, rather than on whether Farmers had
a reasonable basis for denying liability. In issue V below, we
further discuss how evidence of Farmers' litigation tactics and
strategy prejudiced Farmers.
The admission of privileged correspondence into evidence
materially affected Farmers1 substantial rights and prevented
Farmers from having a fair trial. See § 25-11-102(1), MCA.
Therefore, we vacate the District Court's order and judgment and
remand for a new trial in which Farmers can reassert its attorney-
client privilege. See Rule 504, M.R.Evid., Commission Comments.
IV.
Did the District Court err in ordering the production of work-
product materials and then allowing the materials into evidence?
On February 16, 1989, the District Court ordered production of
all Farmers1 claim file materials dated after October 26, 1988, the
date of a letter from Palmer's attorney to Farmers' attorney
expressing that Palmer would proceed with the bad faith action.
During the second week of trial, the court ordered Farmers1 former
26
defense counsel to produce the firm's witness files to Palmer's
counsel. Farmers contends that the ~istrict Court erred in
ordering production of these materials on the grounds that some of
the materials were immune from discovery under the work-product
doctrine. We agree.
W e are remanding because of errors involving t h e issue of
attorney-client privilege, but we are also remanding based on this
issue because the admission of certain work-product materials
affected Farmers' substantial rights and prevented it from having
a fair trial. See § 25-11-102 (1), MCA.
A. Did the District Court err by ordering Farmers to produce the
work-product materials in its claim file?
In response to Palmer's motion to compel discovery of Farmers'
claim file, Farmers objected to producing any materials dated after
October 8, 1985. On that date, Palmer's attorney threatened to sue
for bad faith if Farmers denied Palmer's claim. Farmers argues
that, after that date, the unprivileged materials in the file were
prepared in anticipation of litigation, thus were subject to the
work-product doctrine.
The work-product doctrine protects materials prepared in
anticipation of litigation, even though litigation is not in
progress. Rule 26(b) ( 3 ) , M.R.Civ.p. Normally, claim files are
commenced in anticipation of litigation and an investigation must
be geared toward the eventuality of litigation. For that reason,
we have held that work-product protection applies from the time a
claim file is opened. Kui~er,632 P.2d at 701.
In a bad faith case, however, the investigation is not geared
toward ultimate bad faith litigation from the time the insurer
opens a claim file. At that time, the insurer would have no reason
to expect bad faith litigation and investigations are not made with
the expectation of such litigation.
In the present case, Farmers does not seek the protection of
the work-product doctrine for materials prepared between the time
it opened the claim file and October 8, 1985. Therefore, we need
not rule on whether the doctrine applies to materials dated during
that time period.
Materials prepared after Palmer's attorney threatened to sue
for bad faith if Farmers denied Palmer's claim, however, were
prepared with an eye toward eventual bad faith litigation.
Therefore, any materials dated after October 8, 1985, are subject
to the work-product doctrine. Materials in the files dated after
that date, therefore, are discoverable only upon the required
showing discussed below.
In the February 16, 1989 order, the court found: I1[a]fter
considering the arguments of counsel and the court deeming itself
fully advised, the court finds that plaintiff had made a
satisfactory showing that he has substantial need of defendant's
claim file materials for the preparation of plaintiff's bad faith
case against defendant and that plaintiff is unable without undue
hardship to obtain the substantial equivalent of those materials,
thus overcoming defendant's work-product obje~tion.~~
As discussed above, if materials in the files are privileged
because they are confidential attorney-client communications, they
are immune from discovery. However, materials consisting of work
product prepared in anticipation of litigation or in another
related case have a qualified immunity from discovery under the
work-product doctrine. See Rule 26(b)(3), M.R.Civ.l?. The immunity
offered by the doctrine is only a qualified immunity because work
product is discoverable in certain circumstances.
The immunity offered by the work-product doctrine depends on
the type of work product being sought. There are two basic types
of work product. First, there is ordinary work product, which
relates to factual matters. Next, there is opinion work product,
which relates to mental impressions, opinions, conclusions, or
legal theories. See Rule 26(b)(3), M.R.Civ.P.
Ordinary work product is discoverable to the extent that it is
not privileged and is 'relevant to the subject matter involved in
the pending action." Rule 2 6 ( b ) ( l ) , M.R.Civ.P. However, a party
can discover ordinary work product "prepared in anticipation of
litigation or for trial or for another party or by or for that
other party's representative (including the other party's attorney,
consultant, surety, indemnitor, insurer, or, agent) only upon a
showing that the party seeking discovery has substantial need of
the materials in the preparation of the party's case and that the
party is unable without undue hardship to obtain the substantial
equivalent of the materials by other means. Rule 26 (b)(3),
M.R.Civ.P.
"At its core, the work-product doctrine shelters the mental
processes of the attorney, providing a privileged area within which
he can analyze and prepare his client's case." United States v.
Nobles (1975), 422 U.S. 225, 238, 45 L.Ed. 141, 154, 95 S.Ct. 2160,
2170. Because of this purpose, opinion work product is subject to
additional protection by the court.
The Montana Rules of Civil Procedure provide this protection
by stating that in ordering discovery of work product upon the
required showing, "the court shall protect against disclosure of
the mental impressions, conclusions, opinions, or legal theories of
an attorney or other representative of a party concerning the
litigation." Rule 26(b) (3), M.R.Civ.P. This Rule does not
absolutely preclude discovery of opinion work product, rather it
mandates that the court provide greater protection for opinion work
product than for ordinary work product. See Nobles, 422 U S . at
This Court has endorsed the following rationale concerning the
greater protection granted to opinion work product:
It is clear that opinion work product is entitled to
substantially greater protection than ordinary work
product. Therefore, unlike ordinary work product,
opinion work product cannot be discovered upon a showing
of substantial need and an inability to secure the
substantial equivalent of the materials by alternate
means without undue hardship. [See Rule 26(b) (3),
M.R.Civ.P.1 In our view, opinion work product enjoys a
nearly absolute immunity and can be discovered only in
very rare and extraordinary circumstances. See Hickman
v. Tavlor, supra. Our unwillingness to recognize an
absolute immunity for opinion work product stems from the
concern that there may be rare situations, yet
unencountered by this court, where weighty considerations
of public policy and a proper administration of justice
would militate against the nondiscovery of an attorney's
mental impression. [Actually, the special protection
Rule 26(b) (3) gives to opinion work product is broader
and protects the mental impressions of an attorney or
other representative of a party concerning the
litigation.] Absent such compelling showing, the ...
opinion work product should remain immune from discovery.
Kui~er,632 P.2d at 701-02 (citation omitted).
Several courts, including the Ninth Circuit Court of Appeals,
have designated a rare and extraordinary circumstance when opinion
work product is discoverable. We agree with the reasoning of those
courts which have held that opinion work product is discoverable
when the mental impression is directlv at issue in the case and the
need for the material is compelling. See, e.g., Holmgren v. State
Farm Mut. Auto. Ins. Co. (9th Cir. 1992), 976 F.2d 573, 577:
Handgards, Inc. v. Johnson & Johnson (N.D.Ca1. 1976), 413 F.Supp.
926, 932-33.
To clarify the terms we use in this test, by 8*directlyat
issue in the case" we mean that the mental impressions actually are
the issue in the case. To meet the "compelling needs1requirement,
the party seeking discovery must demonstrate that weighty
considerations of public policy and the administration of justice
outweigh the need to protect the mental impressions of the opposing
party's attorneys or its representatives. See Kui~er,632 P.2d at
701-02.
In a bad faith case, such as the present case, where the issue
is whether the insurer had a reasonable basis for denying the
claim, the mental impressions and opinions of the insurer are
directly at issue. The basis for denying such a claim lies only in
the mental impressions of those representatives of the insurer who
31
decided to deny the claim. Consequently, a party may discover the
opinion work product of the representatives whose mental
impressions are directly at issue, but only upon a showing of
compelling need bevond the substantial need/undue hardship test
required by Rule 26(b)(3), M.R.Civ.P., for ordinary work product.
See Holmqren, 976 F.2d at 577.
Here, the District Court ordered production of Farmers' entire
claim file. Farmers' claims agents and a branch claims supervisor
made the decision to deny coverage, so their mental impressions and
opinions are directly at issue in this case; therefore, materials
containing the insurer's mental impressions are discoverable on a
showing of compelling need.
It is difficult to envision a circumstance in which the
compelling need requirement would not be met when the mental
impressions of a ~ a r t vare directly at issue in the case. However,
because of the possibility of a rare and extraordinary circumstance
in which the mental impressions should not be discovered, we
decline to rule that the compelling need requirement is
automatically met in such cases.
The work-product doctrine, however, protects materials
containingthe mental impressions of Farmers' attorneys. The court
ruled that when attorney Walsh took the stand, Farmers placed
advice of counsel squarely at issue in the proceedings. Farmers,
however, did not rely on advice of counsel as a defense to the bad
faith charge. The insurer, not the attorneys, made the ultimate
decision to deny coverage in this case. Therefore, attorney mental
impressions and opinions are not directly at issue, so the
threshold requirement of the test for discoverability of opinion
work product is not met. As a result, materials that contain the
mental impressions and opinions of Farmers1 former attorneys are
immune from discovery under the work-product doctrine, unless a
waiver occurred.
The District Court erred by ordering Farmers to produce all
claim file materials dated after October 26, 1988, on a showing of
substantial need and undue hardship. On remand, it is incumbent on
Farmers to show which materials included in the District Court's
order contain opinion work product. The court then must apply the
law to each exhibit to determine whether it is discoverable. If
part of an exhibit is discoverable, the court must redact the
undiscoverable portions of the materials. See Kui~er,632 P.2d at
B. Did the District Court err in determining that one of Farmers'
former defense attorneys waived the protection of the work-
product doctrine by making testimonial use of certain work-
product materials?
In addition to ordering production of Farmers1 claim files,
the District Court, during the course of the trial, ordered
Farmers1 former attorneys from the law firm of Smith, Walsh,
Clarke, and Gregoire (the Smith firm) to produce several of the
firm's witness files. The court specified certain files on named
witnesses and any files that had anything to do with speed.
Palmer argues that attorney Walsh waived the work-product
immunity by making testimonial use of the materials at trial. On
the other hand, Farmers argues that, except for his testimony
33
regarding expert witness Dr. Shapley, Walsh only generally
mentioned four other witnesses. Therefore, Farmers argues, Walsh
did not waive the protection of the work-product doctrine for
anything but the Shapley file.
In the present case, the court ordered production of the Smith
firm's work-product files without discriminating as to whether the
materials contained therein were ordinary work product or opinion
work product. However, the immunity from discovery given to
opinion work product cannot be waived as easily as the immunity
given to ordinary work product.
The standards for waiver by testimonial use of the work
product differ between opinion and ordinary work product. Waiver
by testimonial use does not apply to opinion work product unless
the witness directly discloses his or her mental impressions. See
In re Martin Marietta Corp. (4th Cir. 1988), 856 F.2d 619, 625.
With ordinary work product, once a witness makes testimonial use of
the files, the witness implicitly waives the protections of the
work-product doctrine with respect to factual matters covered in
the testimony of the witness. Martin Marietta CorD., 856 F.2d at
625; Nobles, 422 U.S. at 239.
In this case, Palmer's attorney challenged witness Rausch to
explain why Farmers hired Dr. Shapley as an accident reconstruction
expert but failed to have him testify in the uninsured motorist
trial. Rausch was not the one who made the decision and could not
address the question, so Farmers called its former attorney James
Walsh to explain why Shapley was not called as a witness.
Walsh testified concerning his dealings with Shapley, the
general nature and calculations he requested Shapley to make, and
Shapleyls conclusions. Walsh testified that he decided there was
no need to call Shapley because his opinions were consistent with
those of Palmer's expert.
Walsh thus directly disclosed his mental impressions
concerning his decision not to call Shapley as a witness. By doing
so he waived the immunity for his mental impressions contained in
the Smith firm's Shapley files.
In addition to discussing Shapley, Walsh referred to the dirt
bikers and their observation of the speed of the motorcycle. He
stated that, based on Shapley's calculations, Farmers knew early on
that speed was not a factor in the accident. Walsh also referred
to the credibility of witness Atchison.
Walsh did not, however, testify to the substance of any of the
work product in his file, nor did he refer to any of the materials
in his firm's work product files. In fact, he stated that he did
not rely on any of the firm's files in testifying, rather he
remembered what happened at trial. He testified on cross-
examination that he was unfamiliar with the content of most of his
firmlswitness files because, for the most part, they were prepared
and used by Gregoire.
Walsh did not disclose his or his partners' mental impressions
concerning those witnesses. In addition, Walsh did not make
testimonial use of the Smith firm's files regarding those
witnesses. Walsh merely referred to facts brought out in the
underlying trial. Therefore, Walsh's testimony did not waive the
work-product doctrine's protection of his mental impressions, nor
did his testimony implicitly waive the protection of factual
matters pertaining to those witnesses.
The Court's order requiring the disclosure of certain work
product materials of the Farmers1 attorneys and especially of
attorney Gregoire and the use of such materials in cross
examination of attorney Walsh placed Farmers in the prejudicial
position of having to explain such private thoughts, impressions,
notes, etc., which were clearly work product.
We conclude that the admission of certain work product into
evidence materially affected Farmers' substantive rights and
prevented Farmers from having a fair trial. See 5 25-11-102(1),
MCA. On these grounds, we vacate the District Court's order and
judgment and remand for a new trial.
Did the District Court err in admitting evidence of the litigation
tactics of Farmers1 attorneys and of its decision to appeal?
Prior to trial and again on the first day of trial, Farmers
made a motion in limine to exclude evidence of the conduct of
Farmers' attorneys in defending the underlying uninsured motorist
case and of Farmers1 decision to appeal the judgment in that case.
The District Court denied the motion and allowed Palmer to
introduce evidence of the litigation strategy and tactics Farmers'
attorneys used in defending the uninsured motorist case and of
Farmers' decision to appeal the judgment in that case.
A. Is evidence of an insurer's post-filing conduct, such as
litigation strategy and tactics in defending the underlying
suit, admissible in a bad faith action?
Farmers contends that after litigation commenced, the parties
assumed adverse positions, and events occurring after that time
could not form the basis of either a common law or a statutory bad
faith claim. Farmers further contends that allowing a jury to
consider evidence of litigation conduct is extremely prejudicial to
an insurer's right to defend against a claim it believes lacks
merit.
Palmer, on the other hand, contends that "conduct during the
trial was highly relevant to establish that both the initial
investigation and denial were incomplete and erroneous and that
Farmersf course of conduct continued by attempting to cover up the
true facts belatedly discovered."
Courts have held, and we agree, that an insurer's duty to deal
fairly and not to withhold payment of valid claims does not end
when an insured files a complaint against the insurer. See, e.g.,
White v. Western Title Ins. Co. (Cal. l985), 710 P.2d 309, 317.
Several courts have considered whether evidence of an insurer's
conduct during litigation of the underlying suit is admissible in
a subsequent bad faith action. After examining the reasoning of
courts that have considered the issue, we conclude that the
continuing duty of good faith does not necessarily render evidence
of an insurer's post-filing conduct admissible. See Palmer v. Ted
Stevens Honda, Inc. (Cal.App. 1987), 238 Cal.Rptr. 363, 366-69;
White, 710 P.2d at 317 (as interpreted by both Nies v. National
Auto. & Casualty Ins. Co. (Cal.App. 1988), 245 Cal.Rptr. 518, 523-
25, and California Physicians' v. Superior Ct. (Cal-App.1992), 12
Cal.Rptr.2d, 95, 99-100). Indeed, courts rarely should allow such
evidence and we have adopted a balancing test for those rare
circumstances.
Public policy favors the exclusion of evidence of an insurer's
post-filing litigation conduct in at least two respects. First,
permitting such evidence is unnecessary because during the initial
action, trial courts can assure that defendants do not act
improperly. Next, and more importantly, the introduction of such
evidence hinders the right to defend and impairs access to the
courts.
The Rules of Civil Procedure control the litigation process
and, in most instances, provide adequate remedies for improper
conduct during the litigation process. Once the parties have
assumed adversarial roles, it is generally for the judge in the
underlying case and not a jury to determine whether a party should
be penalized for bad faith tactics. Ted Stevens Honda, 238
Cal.Rptr. 363, 369, (citing White, 710 P.2d at 325 (Lucas, J.,
concurring and dissenting)).
An attorney in litigation is ethically bound to represent the
client zealously within the framework provided by statutes and the
Rules of Civil Procedure. These procedural rules define clear
boundaries of litigation conduct. If a defense attorney exceeds
the boundaries, the judge can strike the answer and enter judgment
for the plaintiff, enter summary judgment for the plaintiff, or
impose sanctions on the attorney. See White, 710 P.2d at 325,
(Lucas, J., concurring and dissenting). There is no need to
penalize insurers when their attorneys represent them zealously
within the bounds of litigation conduct. To allow a jury to find
that an insurer acted in bad faith by zealously defending itself is
to impose such a penalty.
The most serious policy consideration in allowing evidence of
the insurer's post-filing conduct is that it punishes insurers for
pursuing legitimate lines of defense and obstructs their right to
contest coverage of dubious claims. As discussed below, if
defending a questionable claim were actionable as bad faith, it
would impair the insurer's right to a zealous defense and even its
right of access to the courts.
Allowing evidence of litigation strategies and tactics would
expose the insurer's entire defense in a coverage action to
scrutiny by the jury, unless the insurer won the underlying suit.
The jury then, with the assistance of hindsight, and without the
assistance of insight into litigation techniques, could "second
guess the defendant's rationales for taking a particular course."
White, 710 P.2d at 324 (Lucas, J., concurring and dissenting). In
addition, the jury could consider evidence of the defendant's
litigation strategy and tactics without any showing that the
insurer's conduct was technically improper. Thus, insurers would
be reluctant to contest coverage of questionable claims.
The case at hand exemplifies the warning given by Justice
Lucas in his dissent to White. Justice Lucas warned that
permitting evidence of the post-filing conduct of the insurer's
attorneys would allow juries to impose liability for litigation
tactics which are in and of themselves proper, merely because a
jury may conclude that the strategy and tactics in and of
themselves amounted to bad faith. See white, 710 P.2d at 323-24
n.4 (Lucas, J., concurring and dissenting).
In this case, as in White, the plaintiff did not contend that
insurer's tactics in and of themselves were improper, rather the
implicit claim was that the litigation strategy and tactics
amounted to bad faith. The jury was allowed to consider Farmers1
legitimate defense strategy and proper litigation tactics as
evidence of bad faith, when the relevant inquiry should have been
whether Farmers' had a reasonable basis for denying the claim.
To permit evidence of insurers1 litigation strategies and
tactics is to impede insurers' access to the courts and right to
defend, because it makes them reluctant to contest coverage of
questionable claims. "Free access to the courts is an important
and valuable aspect of an effective system of jurisprudence, and a
party possessing a colorable claim must be allowed to assert it
without fear of suffering a penalty more severe than typically
imposed on defeated parties.I1 White, 710 P.2d at 324 (Lucas, J.,
concurring and dissenting) (quoting Young v. Redman (Cal.App.
1976), 128 Cal.Rptr. 86, 93). Public policy dictates, therefore,
that courts must use extreme caution in deciding to admit such
evidence even if it is relevant to the insurer's initial decision
to deny the underlying claim.
This brings us to another crucial point, the relevance of the
insurer's post-filing conduct. In general, an insurer's litigation
tactics and strategy in defending a claim are not relevant to the
insurer's decision to deny coverage. Indeed, if the insured must
rely on evidence of the insurer's post-filing conduct to prove bad
faith in denial of coverage, questions arise as to the validity of
the insured's initial claim of bad faith. One court has gone so
far as to hold that I1once litigation has commenced, the actions
taken in its defense are not, in our view, probative of whether
defendant in bad faith denied the contractual lawsuit.I1 Ted
Stevens Honda, 238 Cal.Rptr. at 368.
After the onset of litigation, an insurer begins to
concentrate on supporting the decisions that led it to deny the
claim. The insurer relies heavily on its attorneys using common
litigation strategies and tactics to defend against a debatable
claim. Consequently, actions taken after an insured files suit
are at best marginally probative of the insurer's decision to deny
coverage. See Randy Papetti, Note, Insurer's Dutv of Good Faith
in the Context of Liticration, 60 Geo. Wash. L.Rev. 1931, 1972
(1992).
In some instances, however, evidence of the insurer's post-
filing conduct may bear on the reasonableness of the insurer's
decision and its state of mind when it evaluated and denied the
underlying claim, Therefore, we do not impose a blanket
prohibition on such evidence.
We believe the correct approach is to strike a balance between
deterring improper conduct by the insurer and allowing insurers to
defend themselves against spurious claims. Rule 403, M.R.Evid.,
provides for that balance. When the insurer's post-filing conduct
has some relevance, the court must weigh its probative value
against the inherently high prejudicial effect of such evidence,
keeping in mind the insurer's fundamental right to defend itself.
See Rule 403, M.R.Evid. ; White, 710 P.2d at 324 n.5 (Lucas, J.,
concurring and dissenting).
The following comment on the relevance of post-filing conduct
expresses our position on the issue.
When evaluated through the prism of the substantive law,
an insurance company's postfiling conduct, particularly
its litigation conduct, has little relevance to proving
that the insurer's prefiling actions resulted in the
wrongful denial of policy benefits. Litigation, in
almost all cases, does not commence until after the
policyholder's claim has been denied or the insurer has
failed to respond to a policyholder's claim within a
sufficient amount of time. In contrast, the actual tort
occurs, or does not occur, contemporaneously with the
'wrongful denial of ~overage'~--an act that occurs well
before any improper litigation conduct takes place.
Damages likely will be incurred after the wrongful denial
of a claim as a result of the continued deprivation of
policy benefits, but the tort itself occurs when the
contract is breached unreasonably. Thus, courts that
merely inquire into the reasonableness of a defendant
insurer's postfiling conduct itself fail to recognize
that, in most cases, the only possible relevance of such
evidence is to reinforce or expose the unreasonableness
of the original denial of coverage. Improper postfiling
conduct, no matter how unreasonable, is rarely actionable
in and of itself under the rubric of bad faith tort
action. When analyzins the relevance of an insurer's
postfilins conduct. therefore. the urouer inuuirv should
be into the extent to which such conduct casts lisht on
the reasonableness of the oriqinal denial of the
policyholderrs claim.
Insurer's Duty of Good Faith, 60 Geo. wash. L.Rev. at 1969-70.
(Emphasis added.)
After analyzing Farmersf post-filing conduct, we find that the
prejudicial nature far outweighs any relevance of the conduct. The
following examples illustrate how Palmer used evidence with little
or no relevance to prejudice the jury against Farmers.
First, Farmers reimbursed key witness Atchison f o r lost wages
and expenses incurred in traveling to the accident scene to help
him remember, and Farmers' attorneys better understand, the events
on the day of the accident. Palmer's counsel implied to the j u r y
that this conduct constituted a bribe for changing his testimony.
Farmers' attorneys also invited other witnesses to view the
scene. Farmers invited the dirt bikers as well as the deputy
sheriffs and the highway patrol officer who investigated the
accident. The Meagher County Attorney accompanied the officer.
Palmer's attorney implied through his questioning that this so-
called Iffirmingup1'session was somehow unethical or illegal.
The "firming upn session, and questions regarding it, have
little or no probative value. Implications of unethical or illegal
behavior are inherently prejudicial, especially in a bad faith
case. The prejudicial effect of the evidence far outweighs any
possible probative value.
Furthermore, Palmer's attorney, over objection, criticized
witness Rausch for not alerting the jury that witness Atchison had
changed his story about whether the motorcycle had passed behind or
in front of the truck. Through his questioning in the bad faith
trial, Palmer's attorney insinuated that Farmers had an obligation
to alert:the jury in the underlying trial that Atchison had changed
parts of his description of t h e accident.
In addition, Palrnerfsattorneys continually challenged Rausch
to explain and defend the comments and conduct of Famers' counsel
in defending the underlying case. Rausch was unable to explain to
the jury all of the intricacies of the defense attorneys' actions
and strategies carrying out discovery, obtaining witness
statements, taking depositions, preparing for trial, and conducting
trial. Nor was Rausch equipped to explain motions to compel, why
Farmers was reluctant to produce work product for Palmer, and why
Farmers did not call one of its expert witnesses in t h e underlying
trial. Only the attorneys could explain these circumstances.
Last, defense attorney Gregoire was cross-examined extensively
on his role in meeting with Atchison and cross-examining other
witnesses at trial and in depositions. Palmer's attorney suggested
to the jury that Gregoire asked an investigator to I1tail1l a
witness, not to see if she stayed with Palmer's family, but to "get
some dirt on h e r . "
A11 of this evidence was prejudicial because it allowed the
jury to second guess Farmersf attorneys and to consider legitimate
defense strategy and proper litigation tactics as evidence of bad
faith. The evidence does not relate to the reasonableness of the
original denial of the policyholderts claim, and therefore, has
little or no relevance. Thus, the District Court erred by
admitting evidence of Farmersf attorneysf post-filing conduct.
In the bad faith trial, Palmer introduced other post-filing
conduct of Farmerst attorneys. We need not rule on its
admissibility because we are remanding for a new trial. The trial
judge can inquire into the extent to which the conduct casts light
on the reasonableness of Farmersf original denial of Palmer's
uninsured motorist claim. If the conduct is sufficiently related
to Fanners' denial of the claim, the judge can then determine
whether the probative value of the evidence outweighs its
prejudicial effect, keeping in mind Fannerst right to defend its
denial of a questionable claim.
B. Is an insurer's decision to appeal the verdict in the
underlying case admissible as evidence in a subsequent bad
faith action based on the insurerfs decision to deny coverage?
Farmers contends that post-judgment conduct is not admissible
as evidence of bad faith, Specifically, Farmers argues that Ifno
bad faith occurred by virtue of the fact that Farmers appealed the
jury verdict." We agree.
This Court, and not a jury, is in the best position to
determine the merits of appeals to this Court. As discussed above,
sanctions are available for frivolous litigation tactics, including
the filing of a frivolous appeal.
We agree with the following analysis by the California Supreme
Court:
Although there are many contexts in which jury
determinations may be superior to those of trial or
appellate judges, the determination of the frivolousness
of an appeal is not one. And the potential "chilling
effectn on appeals ... would be greatly exacerbated if
every appellant faced the prospect that a jury might
impose additional damages--compensatory and punitive--in
a subsequent action based on its assessment of his or her
motive in prosecuting the appeal.
Coleman v. Gulf Ins. Group (Cal. 1986), 718 P.2d 77, 81. We hold
that the District Court's decision to admit evidence of Farmers'
decision to appeal the jury verdict was erroneous and prejudiced
Farmers.
SUMMARY
The District Court did not err in denying Farmers' motion for
a directed verdict. However, Farmers is entitled to a new trial
for two distinct reasons. First, the court compelled discovery of
materials subject to the attorney-client privilege and then
admitted the materials into evidence. Second, the court compelled
discovery of work product without an adequate showing by the
plaintiff and then admitted the materials into evidence. The
admission of certain undiscoverable work product into evidence
prejudiced Farmers and prevented it from having a fair trial, as
did the admission of material subject to attorney-client privilege.
Farmers is thus entitled to a new trial.
Farmers listed several other issues for our review. However,
we are not considering them because on remand they might arise in
a different context, if at all.
Justices
Justice Terry N. Trieweiler dissenting.
I dissent from the opinion of the majority.
Any group of people who, without a qualm, would take
$1.5 million from a severely brain damaged man who can no longer
care for himself in order to protect the secret maneuverings of a
few lawyers, ought to have a better familiarity with the record
than is demonstrated by the majority's opinion.
After carefully reviewing the record, I conclude that the
majority opinion has distorted the rulings of the District Court;
ignored and wasted hours of conscientious service by the jurors who
served in this case; and unjustly treated the victim whose efforts
to reclaim some modicum of dignity have been dealt a severe
set-back by this decision.
I have no quarrel with attorney-client privilege, nor the work
product doctrine. Under the appropriate circumstances, those
principles provide a necessary shield from exposure of an
attorney's candid communications and mental impressions. However,
this opinion does not limit these worthwhile privileges to their
intended defensive purpose. It allows them to be used as an
offensive spear for the selective benefit of the insurer and its
attorneys. It allows an insurer to selectively use records from
its file which serve its self-interest, while denying its own
policy holder an opportunity to search those same files for
materials which are inconsistent. It allows the attorneys of an
insurer to offer self-serving opinions and mental impressions, but
denies the attorney for a policy holder the opportunity to
effectively cross-examine the insurer's attorney by knowing what
his or her opinions or impressions were at an earlier time when
decisions were made which were adverse to the policy holder's
interest and may have been a violation of our laws.
Neither the attorney-client privilege, nor the work product
doctrine, were intended for such selective application as is
permitted by the majority's opinion.
To fully understand the injustice of this opinion, it is
necessary to understand the actual events which led to the District
Court's decision compelling production of Farmers' records.
However, it is difficult to glean those events from the majority
opinion which, to a large extent, simply sets forth as fact those
arguments made in Farmers' brief. Therefore, what follows is a
more complete statement of the facts relevant to the legal issues
raised on this appeal.
In considering these facts, it should be kept in mind that
exceptions to attorney-client privilege and the work product
doctrine exist where the party invoking the privilege intends to
call his attorney as a witness or defend against a claim that he
acted unreasonably by asserting that he acted in reliance on advice
of counsel. Another exception to the work product doctrine
relating to mental impressions and opinions exists in a bad faith
case, like this one, where the mental impressions and opinions of
the defendant are the primary issue in the case.
David Palmer was severely injured on June 10, 1984, when the
motorcycle that he was operating was forced off the road by a
semi-truck and trailer that have never been identified. He
notified Farmers Insurance Exchange, from whom he had purchased
uninsured motorist coverage, of the incident within a short time
after the accident. However, his policy had an exclusion for
accidents caused without contact between the two vehicles.
Farmers' investigation consisted of an interview with the passenger
on Palmer's motorcycle and a review of the investigating highway
patrolman's report. There were no other witnesses to the accident,
and because of the exclusion, nothing further was done to
investigate the claim until over a year later.
On June 19, 1985, we decided McGlynn v Safeco Insurance Company o
. f
America (1985), 216 Mont. 379, 701 P.2d 735. In that case, we held
that the exclusion relied on by Farmers was void as a matter of
public policy. Following our decision in McClynn, Farmers referred
this case to the law firm of Smith, Walsh, Clark and Gregoire for
further investigation and advice. From that point on, additional
investigation was done by Bruce Vassar, the law firm's
investigator, and was reported to Farmers by members of the firm.
It was the law firm's investigation and reports to Farmers
which led to Farmers' final rejection of Palmer's claim in February
1986. In fact, that rejection was communicated to Palmer's
attorney by Marvin Smith, a member of the law firm. Following the
denial of his claim, Palmer filed a complaint in the District Court
on February 26, 1986, alleging that he was entitled to coverage for
his injuries and that Farmers had acted unreasonably and was guilty
of bad faith when it denied his claim.
In its answer, Farmers denied that it had acted in bad faith
or v i o l a t e d any reasonable settlement p r a c t i c e s . However, by that
time the conduct of Farmers' own employees, and the conduct of its
attorneys and their investigator, were so interrelated that they
could not, for practical purposes, be separated with regard to the
issue of whether or not the claim had been reasonably denied.
On May 8, 1986, the District Court, pursuant to our decision
in Fodev. FannersInsuranceExchange (1986), 221 Mont. 282, 719 P.2d 414,
bifurcated plaintiff's claims and ordered that the underlying claim
for coverage pursuant to the uninsured motorist contract should be
tried first, and that any bad faith should be considered after that
case was resolved by settlement or judgment.
The contract claim went to trial on March 9, 1987, and a jury
rendered its verdict in favor of Palmer on March 13, 1987. Bill
Gregoire and Jim Walsh represented Farmers at that trial.
Following trial, Gregoire advised Farmers that he thought
there were several technical bases for appeal to the Supreme Court,
but also advised the company that even if the case was reversed by
the Supreme Court, a second jury would probably return the same
verdict in favor of Palmer. Farmers chose to proceed with the
appeal anyway, reasoning t h a t if it was successful on appeal, there
would be some benefit to the bad faith claim which was still
pending.
On September 13, 1988, this Court rendered its decision
affirming the judgment of the District Court.
On October 26, 1988, Palmer's attorney advised Farmers1
attorney that he was ready to proceed with the bad faith claim. In
response to that notice, Gregoire, who was still acting as Farmers1
attorney, and who had complete authority to waive any privilege
that his client could claim (see Drimmerv. Appleton (S.D.N.Y. 1986), 628
F. Supp. 1249), wrote the following letter to Palmer's attorney:
Dear Dennis:
As we explained over the telephone, we do not believe
that we can continue to represent Farmers Insurance
Exchange in the action you have filed. There seems to be
little question but that Marvin Smith, Jim Walsh, and
myself will be witnesses in the action that is presently
pending in the District Court. We would assume that you
and Mr. Risjord would likewise be witnesses.
At that point in time, the only remaining issue to be decided
in the bifurcated claim was whether Farmers had acted reasonably or
in bad faith when it denied plaintiff's claim for payment pursuant
to his uninsured motorist policy. The information that Farmers
relied on, and the impressions and opinions of its employees
regarding its obligations to its insured, became the primary issues
that remained in the litigation. Farmers' claims adjusters, its
attorneys, and their investigator acted in concert. There was no
way to separate Farmers1 impressions or opinions from its
attorneys1 impressions. There was no way to critique whether
Farmers acted reasonably without considering the advice it relied
upon from its attorneys. It is for these reasons that the Ninth
Circuit Court of Appeals in a similar case has held that work
product may be discovered in insurance bad faith claims. In
.
Holmgren v. State Farm Mutual Automobile Insurance Company (9th cir 1992) , 976
F.2d 573, State Farm was sued pursuant to 5 33-18-201(2), (4), (6),
and (13), MCA, of Montana's Unfair Trade Practices Act. Judgment
was entered for the plaintiff. On appeal, State Farm argued that
the district court erred when it ordered the company to produce,
and then admitted as evidence, handwritten memoranda drafted during
the litigation of the underlying personal injury claim. The
memoranda contained notes written by State Farm's adjuster fixing
a range of values for plaintiff's claim which were far above any
amount offered by State Farm. State Farm argued that the notes
constituted opinion work product which was protected under Rule
26(b)(3), Fed.R.Civ.P. Our corresponding rule is identical. The
Ninth Circuit disagreed. In affirming the district court, it held
that:
We agree with the several courts and commentators
that have concluded that opinion work product may be
discovered and admitted when mental impressions are at
ksue in a case and the need for the material is
compelling. See, e.g., Bio-Rad Labs., Znc. v Pharmacia, Znc., 130
.
F.R.D. 116, 122 (N.D.Ca1. 1990) ; Reavis[v. Metropolitanfioperty
& Liability Ins. Co.], 117 F.R.D. [160,] 164 [S.D.Cal. 19871 ;
. .
Handgards, Znc. v. Johnson & Johnson, 4 13 F supp 926, 93 2-3 3
(N.D.Ca1. 1976); Bird v Penn Cent. Co., 61 F.R.D. 43, 47
.
(E.D.Pa. 1973); 4 J. Moore, Federal Practice 9 26.64
[3.-21, at 26-385 & n.8 (2d ed. 1991); J. Anderson et
al., The Work Product Doctrine, 68 Cornell L.Rev. 760,
831-37 (1983). But see 8 C. Wright & A. Miller, Federal
Practice and Procedure: Civil 5 2022, at 188 n.97, 193,
s 2026, at 229-32 (1970).
Both elements are met here. In a bad faith
insurance claim settlement case, the "strategy, mental
impressions and opinion of the [insurer's] agents
concerning the handling of the claim are directly at
issue." Reavk, 117 F.R.D. at 164. Further, Holmgren's
need for the exhibits was compelling. Montana permits
insureds and third party claimants to proceed under
5 33-18-201 against an insurer for bad faith in the
settlement process. See Mont. Code Ann. 5 33-18-242
(1979) (applicable to claims arising after July 1, 1987);
Klaudtv. Flink, 202 Mont. 247, 658 P.2d 1065, 1067 (1983),
.
overruled on other grounds, Fode v. Farmers Ins. Exch. , 221 Mont 282,
719 P.2d 414 (1986). Unless the information is available
elsewhere, a plaintiff may be able to establish a
compelling need for evidence in the insurer's claim file
regarding the insurer's opinion of the viability and
value of the claim. We review the question on a
case-by-case basis.
In Handgards, "the lawyers who managed and supervised
the former litigation for the defendants [were] being
called as witnesses to express their opinions as to the
merits of the prior suits.I1 Handgards, 413 F.Supp. at
931. This comment, and others like it in "at issuevg
cases, is a practical acknowledgment of the fact that, in
bad faith settlement cases, insurers may call their
adjusters to testify to their opinions as to the lack of
viability of the underlying claim. When an insurer
chooses to remain mute on the subject, the plaintiff is
not foreclosed from developing the same evidence.
The Holrngren decision refers to mental impressions and opinions
of the insurer's agents. In that case, the agents were adjusters.
In this case, the agents were adjusters and attorneys. Farmers
attorneys were involved in the investigation and evaluation of this
case long before there was any lawsuit filed by Palmer. Their
opinions, advice, and mental impressions cannot be separated from
those of Farmersf adjusters in the evaluation of the reasons for
denying plaintiff's claim.
The majority adopts Farmers' position that even if work
product protection did not apply under these circumstances, the
communications from Farmersf attorneys, which were included in
Farmers' claims file, were protected by attorney-client privilege.
However, Farmers waived any claim to attorney-client privilege when
it advised Palmer, through Gregoire, that its attorneys would be
called as witnesses in the bad faith case.
In discussing exceptions to the work product doctrine, the
Ninth Circuit, in Holmgren, relied on Handgards, Inc. v Johnson & Johnson
.
(N.D.Ca1. 1976), 413 F. Supp. 926. In addition to discussing the
work product doctrine, that decision also dealt with a claim of
attorney-client privilege under circumstances similar to those in
this case. In Handgards, the defendant was accused of filing patent
infringement suits against the plaintiff in bad faith as part of a
conspiracy to restrain trade and monopolize the disposable plastic
glove industry. The plaintiff learned that the defendant intended
to call the lawyers who had handled the prior complaints as
witnesses on its behalf. The plaintiff, therefore, sought
discovery of any documents generated by these attorneys which would
indicate their purpose for filing the suits. The defendant
objected, based upon a claim of attorney-client privilege. The
district court held that by listing the attorneys as witnesses, the
defendant had injected the advice of counsel as a defense, and
thereby, waived the attorney-client privilege. It reasoned as
follows:
By putting their lawyers on the witness stand in
order to demonstrate that the prior lawsuits were pursued
on the basis of competent legal advice and were,
therefore, brought in good faith, defendants will waive
the attorney-client privilege as to communications
relating to the issue of the good-faith prosecution of
the patent actions. Garjinkle v. Arcata National Cop., [ 64 F R D...
688 (S.D.N.Y. 1974)l
(McNaughton rev. 1961).
..
.; 8 Wigmore, Evidence § 2327
Handgards, 413 F. Supp. at 929.
That district court also discussed defendant's objection to
production of these materials on work product grounds. It held
that:
The principal issue in the case at bar is the good
faith of the defendants in instituting and maintaining
the prior patent litigation against plaintiff.
Plaintiff's success in the instant action depends on a
showing that defendants pursued the prior suits knowing
they would be unsuccessful on the merits. Since the
lawyers who managed and supervised the former litigation
for the defendants are being called as witnesses to
express their opinions as to the merits of the prior
suits and the validity of the underlying patents,
plaintiff has a particularized and compelling need for
the production of the relevant work product of these
attorneys. Without discovery of the work product,
plaintiff will be unable to ascertain the basis and facts
upon which the opinions of these witnesses are based.
This will undoubtedly impair plaintiff's ability for
effective cross-examination on a crucial issue.
Handgards, 413 F. supp. at 931.
Similarly , in Leybold-Heraeus Technologies, Inc. v. Midwest Instrument Company
(E.D.WiS. 1987) , 118 F.R.D. 609, the district court held that by
'
calling their attorneys as witnesses the plaintiff waived the
attorney-client privilege. In that case, both attorneys were
listed for the purpose of testifying that the actions against the
defendant had been commenced in good faith. However, the plaintiff
sought to protect certain documents generated by those same
attorneys based on the attorney-client privilege. The district
court rejected that argument and held that:
Upon naming two of their attorneys as witnesses, LHT
and LHG assumed the risk that their claim of
attorney-client communication and/or attorney work
product would be abrogated. It is difficult for this
Court to anticipate the parameters of the testimony of
these two (2) attorneys, but certainly Minco would be
disadvantaged in cross-examining them, if it does not
have available the basis for their testimony.
Accordingly, this Court is of the view that many of the
documents which Attorneys Hemmingway and Zapfe
participated in, either as a recipient of communication
or the communicator as to prior art or as to the good
faith belief in the validity of the patents in question
and the good faith in maintaining the lawsuits of both
the present litigation and the Leco case, should be made
available for discovery to Minco.
This Court agrees with Minco's assertion that
LHT-LHG cannot selectively disclose portions of
privileged communications or give testimony favorable to
themselves, without concomitant disclosure of other
unfavorable portions of the privileged communications
relating to the same subject. See Handgards, Inc. v. Johnson &
Johnson, 413 F.Supp. at 929; Teachers Im., Etc. v. Shamrock
BroadcastingCo., 521 F-Supp. 638, 641 (S.D.N.Y. 1981); First
. .
Federal Savings & Loan v. Oppenheim, Appel, Dixon & Co. , 1.10 F R. D
557, 567 (S.D.N.Y. 1986); Duplun Cop. v. DeeringMilliken, Inc.,
397 F.Supp. at 1161.
Leybold-Heraeus Tech., 118 F. R. D. at 614.
Therefore, when the only remaining issue was whether or not
Farmers had acted reasonably based on the information that was
within its knowledge, and when, furthermore, Farmers notified
plaintiff that its attorneys would be called as witnesses to
establish that it acted reasonably, attorney-client privilege with
regard tothose attorneys* communications to Farmers was waived and
a specific exception to the work product doctrine was established.
The propriety of the District Court's order compelling
disclosure of Farmers' claims file was further established by later
developments. On September 13, 1989, plaintiff tookthe deposition
of Bud Rausch, defendant's branch claims supervisor who was in
charge of reviewing plaintiff's claim. He was obviously a critical
witness with regard to the issue of whether or not defendant had a
reasonable basis for denying Palmer's claim. Rausch testified that
the selective manner in which Farmers documented statements from
witnesses was based on advice of counsel. He stated that their
decision to retain a reconstruction expert, butthen not call that
expert at trial, was based on advice of counsel. He even stated
that Farmers' claims office had originally decided to pay
plaintiff's claim but then changed its mind, based on a
conversation with Marvin Smith who based his recommendation on the
investigation being conducted by the law firm*s investigator.
Rausch gave the following unequivocal testimony which
established that the only way Farmers could defend against
plaintiff's claim was based on advice of counsel:
Q. Okay. And you have already told us, and I will ask
you again, in case you want to change your mind
about this, in your initial conclusion to decline
the case, in February 1986, you relied on not only
the investigation, but the opinions and advice of
the law firm Smith, Baillie, and Walsh?
A. That is true.
Q. And you continued to rely on their work on the
trial and interviewing of the witnesses and their
opinions during the trial about trial strategy?
A. They were the only firm they had employed at the
time. We almost had to.
Q. Well, you did rely on it, whether you had to or not?
A. That's correct.
The majority opinion attempts to excuse Rausch's testimony
based on the contrived argument that since Farmers had not pled
"advice of counsel1'as an affirmative defense, it was not a basis
for waiving the attorney-client privilege. However, the important
fact is that the claims person employed by Farmers who was
principally responsible for denying plaintiff's claim testified
that he did so based on the advice of his attorneys. There was no
way for plaintiff to determine whether he did so reasonably without
knowing the substance of that advice. The only way to know the
substance of that advice was to produce the claims file, including
the correspondence which included the advice. The majority's
distinction between Rausch's testimony and an affirmative defense
is a distinction without a difference.
If there was any question about the purpose for which Farmers1
attorneys would be called as witnesses, that question was finally
resolved when Farmers was compelled by order of the District Court
to answer plaintiff's written interrogatories. The interrogatories
had been submitted by plaintiff prior to the underlying contract
case, but had never been answered by Farmers. Finally, on July 9,
1990, pursuant to the District Court's order dated June 18, 1990,
Farmers provided the following answer to Interrogatory No. 1 of
plaintiff's third set of written interrogatories:
Subject to the foregoing objections and without waiving
the same, defendant states that Marvin Smith, James
Walsh, and Bill Gregoire do have relevant knowledge
concerning their actions in preparing the defense of
defendant to plaintiff's underlying lawsuit for uninsured
motorist benefits and regarding what happened at the
trial of that case. Any of them may be called as
witnesses for the defendant as to those essentially
factual matters. If called as witnesses, those
individuals will not be examined regarding their
confidential privileged communications to defendant
regarding that underlying suit, or the instant bad faith
action.
The defendant also listed Billings attorney Steve Harman as an
expert, and in response to plaintiff's Interrogatory No. 6 stated
that:
Steve Harman is also expected to testify concerning the
defense efforts by the lawyers for Farmers Insurance
Exchange in defending and trying the underlying case and
whether those efforts were reasonable under the
circumstances of that case.
It is clear from these answers, that defendant intended to
call its attorneys as witnesses and that they intended to testify
regarding their conduct in handling the case. Their conduct in
handling the case is inseparable, as a factual matter, from the
conduct which gave rise to defendant's denial of plaintiff's claim.
It is equally clear that Farmers intended to call an expert to
testify regarding the reasonableness of its attorneys' conduct,
while at the same time denying plaintiff any access to the
contemporaneous records kept regarding those attorneys' conduct.
The majority opinion dismisses these answers to the
interrogatories, without fully quoting from them, by pointing out
Farmers' self-serving statement that the witnesses would not be
called for the purpose of disclosing confidential privileged
information. In essence, the majority has held that Farmers and
its attorneys can arbitrarily decide which of their communications
are privileged and which are not, and testify to those matters
which are favorable to Farmers* defense while precluding plaintiff
from discovering any matters which might be unfavorable to Farmers'
defense. Such a denial of meaningful cross-examination offends any
notion of due process with which I am familiar.
Some mention should also be made of the manner in which
Farmers actually defended itself at the time of trial. Plaintiff's
case was relatively brief. He called Bud Rausch, his treating
physician, his mother, and Lee Wise, an expert regarding the issue
of bad faith. Farmers' defense, however, consisted completely of
testimony from its former lawyers and their investigator, as well
as an expert consultant who based his testimony on a review of
Farmers' claims file, including the reports issued to Farmers by
its attorneys.
Vassar testified about the investigation he conducted; the
witnesses he contacted; the substance of what he was told by those
witnesses: and the difficulties he encountered when dealing with
the investigating highway patrolman.
Walsh testified that he assisted Gregoixe as one of the
defense attorneys representing Farmers in the underlying trial. He
gave extensive testimony about the expert witness that Farmers had
consulted and what that expert's conclusions were, even though the
witness had not been called in the underlying trial. He gave his
opinion about why they were able to defend during the trial without
calling an expert witness, and evaluated the testimony of Farmers'
principal factual witness in the underlying trial.
Gregoire, who also represented Farmers in the underlying
trial, testified extensively about tactical decisions and his
evaluation of witness testimony in the underlying case. He
testified about his interviews with witnesses; his investigation;
and his personal evaluation of the merits of plaintiff's underlying
claim. He explained how his firm arrived at the evaluation which
led to the denial of plaintiff's claim. He explained their mental
processes as they gathered sometimes contradictory information from
various witnesses, and told why some witnesses had greater
credibility, in his mind, than others. He was allowed to give his
personal evaluation of various experts who testified in the
underlying case, and repeatedly read from testimony in that case
and then gave his analysis of the testimony. He conceded that
Farmers spent $100,000 to defend plaintiff's underlying claim for
$50,000, and explained at length why it was reasonable to spend
twice as much as plaintiff was claiming in an effort to defeat him.
Frank Weedman was a retired claims representative for State
Farm Auto Insurance Company who was called by Farmers as an expert
to give his opinion that Farmers had acted reasonably. He
testified that he had been retained by George Dalthorp, Farmers'
attorney in Billings, to testify on numerous previous occasions.
He acknowledged that in forming his opinion it was necessary for
him to review Farmers' claims file, including correspondence from
Farmers' law firm to the claims department. If it was necessary
for Weedman to consult the file, how could it be any less necessary
for plaintiff's attorneys to have the same information?
It is clear from the November 15, 1988, correspondence,
defendant's answers to interrogatories, Rausch's deposition, and
the testimony that was actually given at trial, that defendant's
attorneys were always intended to be the principal factor in
Farmers' defense. Yet Farmers would have foisted that testimony on
the court and jury without any meaningful opportunity for plaintiff
to cross-examine these witnesses. The majority, by this opinion,
has approved of that trial tactic.
In doing so, the majority opinion also suggests that the
District Court turned over the Smith law firm's litigation files on
a wholesale basis without any justification for doing so. Nothing
could be further from the truth. The District Court's original
order compelling production of Farmers' files compelled production
of only those files generated prior to the time that plaintiff's
bad faith complaint was pursued. It did not include any of the
Smith Firm's litigation files. However, after Walsh was called to
testify on behalf of defendant, plaintiff's attorney requested the
court to order production of those witness files referred to during
Walsh's testimony. Plaintiff argued that Walsh waived any
privilege pertaining to those files as a result of his testimony.
Defense counsel conceded that there was a waiver of any privilege
concerning defendant's expert witness file, but disagreed that
there was a waiver with regard to any other witness. After
listening to arguments, the ~istrict Court agreed that the
privilege had not been waived with regard to the Smith Firm's
entire file. The following conversation took place:
THE COURT: That's where the difficulty comes in is where
do you draw the parameters on what's happened? And I
would just suggest that Mr. Walsh collect his files and
show it to counsel, and if there has to be an in camera
inspection, we'll do that.
MR. CONKLIN: Collect what files, your honor?
THE COURT: The files relative to his testimony. It is
a rather broad testimony, as Mr. Risjord has pointed out.
Speed, the truck being on the right side of the road. I
mean, you're getting right into the guts of the case.
THE COURT: I am going to request that -- and I don't
know how your files how, but would you collect those
files and show them to Mr. Nybo and Mr. Conklin sometime
this afternoon, and then we will have to sort through
this.
THE COURT: Produce it to your counsel for Farmers
Insurance Exchange, Mr. Nybo and Mr. Conklin. In that
way we can sort through it, okay? That's the only way
that I --
and then we can go from there. You are going
to produce -- you are going to go through the file and
produce to counsel for the plaintiff those matters that
you have no question about that have been waived. And I
take it then the matters that you have a question about
-- you are going to reserve that for an in camera
inspection.
As the actual transcript shows, the District Court was very
circumspect and cautious about ordering the production of
attorneys' files, while at the same time recognizing that it would
be inherently unfair to allow Farmers' attorney to testify about
his mental impressions while protecting the actual record of those
impressions from discovery by plaintiff. The District Judge stated
that when Walsh took the stand:
That placed the advice of counsel squarely at issue in
these proceedings. To rule any other way, it is this
Court's opinion, would create a very obvious unfairness
in this case. There would be no way for counsel for the
plaintiff to adequately cross-examine Mr. Walsh in terms
of his testimony that took place yesterday.
Most importantly, the court stated that:
The court's ruling is not to be interpreted as a general
broad ruling. The ruling is, of necessity, limited to
only the testimony that was transcribed yesterday
concerning Mr. Walsh's testimony. In other words,
counsel is only allowed to get into those areas that were
testified to by Mr. Walsh, and I am limiting this ruling
narrowly to that testimony. The entire file is not open.
It is only open in regard to the matters that were
testified to.
The District Court then ordered that Walsh's testimony be
transcribed. The following day the District Judge went through
that testimony line-by-line with counsel for both parties so that
a determination could be made as to the exact extent of the waiver.
As a result of that line-by-line examination, he ordered that all
information regarding the expert witnesses that Walsh worked with
be produced; he ordered production of information from witnesses
that Walsh talked to about plaintiff's speed; he ordered that files
which had to do with witnesses Atcheson and Diacon be produced; and
he ordered that Vassar8snotes be produced since he had testified.
Finally, the District Judge made it clear that if there was
something the parties could not agree on, they could contact the
court for an in camera inspection because the court, at that time,
did not know what was in the Smith firm's files. After that
hearing, the court recessed for the production of the records
indicated. After that recess, defendant's attorneys pointed out
that there were 32 subfiles in the Smith Firm's litigation records
and that some of them had been produced and others were not
produced. However, no further request was made by attorneys for
defendant for an in camera review of any disputed files.
The impression created in the majority opinion that wholesale
production of the Smith Firm's file was ordered, without any
in camera review, is a total distortion of the procedure followed
by the District Court.
At every step of the proceedings in this case, the District
Court ordered the minimal amount of disclosure that could be
permitted without denying plaintiff a meaningful opportunity to
develop the issue with which the case was concerned, and
cross-examine the witnesses that defendant intended to call. The
District Court's orders were a model of restraint and should serve
as an example for future bad faith litigation, rather than be the
majority s excuse for reversing another major verdict against
another insurance company found to have abused its insured.
either is it correct to conclude that defendant has satisfied
the burden imposed by 5 25-11-102, MCA, for reversal of the
District Court judgment. Even if the majority concluded that the
original communications which were the subject of the District
Court's order for production were privileged and should not have
been produced, there was nothing contained in those records which
were prejudicial to defendant. Almost all of the information in
the correspondence from the attorneys to Farmers was a factual
explanation or legal analysis of why Fanners was justified in
denying plaintiff I s claim. If the majority had reviewed these
records, it would be clear to them that production of the records
was not prejudicial to defendant. In fact, the majority of the
information included in those reports was relied upon by Farmers in
defense of the bad faith case.
Finally, I dissent from that part of the majority opinion
which holds that an insurer's decision to appeal the verdict in an
underlying case is not admissible as evidence of bad faith. The
insurer has a continuing obligation to pay a claim when liability
is reasonably clear, and the fact that it may have a technical
basis for retrying a case does not establish as a matter of law
that there is a reasonable issue about liability. The more
reasonable approach to this issue is that adapted by Montana's
Federal District Court in K r s v. Aetna Life and Casually Company (D.Mont
yh .
1986), 624 F. Supp. 1130. In that case, Aetna moved the Federal
District Court to strike that part of plaintiff's complaint which
alleged that Aetna acted in bad faith and solely for the purpose of
delay in appealing the underlying personal injury verdict to the
Supreme Court of Montana. In denying that motion, the court held
that:
Evidence that an appeal was taken in bad faith is neither
inconsistent with the general tort principles expressed
by the Montana Supreme Court, nor is it inconsistent with
the legislative intent expressed in g 33-18-201(6), MCA,
The statute speaks generally in terms of flclaims, but
does not indicate that llclaim@l to be given anything
is
but its ordinary meaning, which includes "cause of
action.
Aetnats jurisdictional argument f a i l s for the same
reasons. section 33-18-201 would be stripped of its
effectiveness if it did not allow the court to consider
all stages of the negotiation and litigation process.
Appeal is but one part of that process. Rule 32,
M.R.App.P., does not alter this conclusion; it merely
gives the Montana Supreme Court authority to award
Itpropergfdamages if it "is satisfied from the record and
the presentation of the appeal1#that the appeal was taken
for purposes of delay only. This rule does not deprive
a trial court, state or federal, of jurisdiction to
consider the motive behind a decision to appeal as one
factor in a claim f o r bad faith against an insurance
company. At the appellate level, the decision that an
appeal is frivolous is based purely on the trial record
and on the appellate briefs and arguments. In a bad
faith action, it becomes a question f o r the jury, t o be
considered in view of all the plaintiff's evidence of the
insurer's conduct in negotiations from start to finish.
Of course, if there is sufficient evidence to show a
good-faith basis for the appeal as a matter of law, an
appropriate motion for directed verdict may be
entertained. See, St. Paul Fire & Marine Ins. Co. v Curnkhzy, [204]
.
Mont. [350], 665 P.2d 223 (1983).
Similarly, Aetna's position that plaintiffls claims
constitute a 88chillingeffect8* AetnaWsright of access
on
to the courts is without merit. Parties to a state suit
in Montana are free to appeal an adverse decision to the
state supreme court: review is not discretionary. In
this case, the subject matter of AetnaVs appeal was the
underlying malpractice action, and the issue concerned
the proper standard of causation. The subject matter of
the instant action is the conduct of Aetna throughout the
pendency of plaintiff's malpractice claim--prior to,
during, and after trial. The issue of Aetna8s bad faith
in claims settlement practices is a jury question, and
the jury should consider all the facts of the case in
reaching its verdict. Montana has enacted a broad
legislative scheme for the regulation of insurance
companies in accordance with federal law and with the
Montana Constitution.
Kyriss, 624 F. Supp. at 1133.
Likewise, in this case, Farmers has a duty pursuant to
5 33-18-201, MCA, to effect prompt settlement of claims where
liability is reasonably clear. That obligation did not end when
plaintiff's complaint was filed. It continued through the pendency
of that claim and following judgment by the District Court.
Insurance companies have tremendous resources with which to
use litigation and appeals to drain their insureds financially and
leverage settlements which are otherwise unreasonable based upon
the facts of the claim. Whether or not Farmers did that in this
case was a factual issue for the jury to decide. Furthermore, that
issue was resolved by the jury in this case based on facts which
were not evident to the Supreme Court from the record on appeal
from the underlying trial. Therefore, any sanction that this Court
could have imposed based on the record in that appeal was not
adequate to deter an appeal taken solely for the purpose of
unreasonably delaying payment of plaintiff's claim.
This decision is a serious blow to those who believe in the
statutory obligation that insurance companies have to treat their
insureds in a reasonable manner. It is an even more serious blow
to those who believe that when one party calls a witness, our rules
of discovery were intended to provide the other party with a
reasonable opportunity to cross-examine that witness by discovering
the factual bases for that witness's opinions and conclusions.
The practical effect of this decision is that insurers can
delegate their statutory obligation to investigate claims to a law
firm, they can deny those claims based on the advice of that law
firm, and then, when the company is accused of violating Montana
law by denying the claim unreasonably, the insurer can defend on
the basis that it relied on the firm's investigation and advice,
while the plaintiff is denied an opportunity to discover the
substance of that advice or what the investigation disclosed.
As sure as night follows day, this opinon will spawn a series
of "Palmer" seminars around the State where claims adjusters for
insurance companies are taught how to mistreat their insureds with
impunity by running the records of their mistreatment through law
firms which will be glad to assist with their investigation for a
fee.
The majority opinion represents a classic example of the legal
profession taking care of its own at the expense of everyone else.
Hopefully, with the passage of time, this decision will become a
relic of an unenlightened period in this Court's history when the
rights of individuals were less important than the rights of
insurance companies and those law firms that represented them.
H o w e v e r , that will not be much conso3ation t o the ~ i s t r i c t
Court or jurors who gave so generously of their time to do the
right thing in this case. And, it will not do much good for David
Palmer who, at least briefly, thought the law was bigger than his
insurance company.
For these reasons, I dissent from the majority opinion.
Justice William E, Hunt, Sr., joins in the foregoing dissent.