Washington Federal Court Analyzes Cedell Decision

A federal district court judge in Washington recently issued an opinion in MKB Constructors v American Zurich Ins. Co., 2014 WL 2526901 (W.D. Wash. May 27, 2014), addressing an insurance company’s ability to assert the attorney-client privilege and work product doctrine in the context of insurance coverage litigation.  The court determined that it was not bound by the procedural requirements of Washington law in determining whether the insurance company was entitled to protection under the attorney-client privilege, and that federal law applied to determinations of whether the work product doctrine applied.  Ultimately, the court determined that the insurance company should not be compelled to provide the disputed communications, but ordered it to provide a revised privilege log to better describe the documents being withheld.

The case concerned an insured that filed suit against the insurance company for breach of an insurance contract.  Sometime later, the insured amended its complaint to include claims for insurance bad faith, and violations of the Insurance Fair Conduct (IFCA) and Consumer Protection Act (CPA).  The insured served a series of discovery requests, and the insurance company responded by providing responsive documents and a privilege log.  After the insured amended its complaint to include the extra-contractual insurance claims, it re-served the discovery requests to address those claims.  It also directed the insurance company’s attention to the Washington Supreme Court’s decision in Cedell v Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P.3d 239 (2013), asserting that the insurance company’s redactions pursuant to the attorney-client privilege and work product doctrine were no longer appropriate.  The insurance company responded by providing no additional documents and did not provide a revised privilege log.

After the parties conferred regarding the discovery dispute, the insured filed a motion to compel.  Shortly before its response was due, the insurance company produced a number of responsive documents and a supplemental privilege log.  Following that production, the remaining issues for the court were (1) certain redactions based on the attorney-client privilege and work product doctrine, and (2) the sufficiency of the insurance company’s privilege log.  Specifically, the insured was seeking production of certain documents relating to the insurance company’s subrogation and coverage attorneys.

The court began its analysis of the issue by surveying Washington law on the attorney-client privilege and work product doctrine and, particularly, the Cedell decision.  The court first determined that, although it was bound to apply Washington substantive law to an insurance company claim of attorney-client privilege, under the Erie doctrine, it was not bound by the Cedell court’s procedure of conducting in camera inspections.  Further, the court determined that analysis of the work product doctrine was subject to federal law—not Cedell.

With those standards in mind, the court found that the insurance company satisfied its burden under Fed. R. Civ. P. 26(b)(3) to establish work product protection for communications with subrogation counsel.  It determined that the very nature of subrogation contemplates litigation, thus invoking the work product doctrine.  The court rejected the insured’s arguments that Cedell should apply and that it had a substantial need for the documents that justified production.

The court also found that the insurance company satisfied its burden under Cedell to protect summaries of correspondence contained in the claim notes between the adjuster and coverage counsel.  Based upon the available information, the court found that coverage counsel provided legal advice and was not engaged in any quasi-fiduciary activities—such as investigating or adjusting the claim.  The court specifically pointed to the fact that coverage counsel did not conduct any examinations under oath or perform any other investigative functions.  The insured’s argument that the insurance company’s assertion of the privilege amounted to civil fraud was likewise rejected by the court.

The court did, however, require the insurance company to produce a revised privilege log.  It found that the insurance company’s privilege log was inadequate because several entries indicated the document was being withheld on the basis of the attorney-client privilege or work product doctrine, but did not identify the attorney involved in the communication.  The court also determined that the insurance company’s supplemental privilege log failed in several instances to adequately satisfy the Cedell requirements that it establish the attorney was not involved in claims handling functions or to permit the insured to adequately to assess the claim of privilege.  The insurance company was ordered to revise its privilege log accordingly and, if any disputes remained, the court indicated it would reconsider the insured’s motion to compel.

The attorneys of Maloney Lauersdorf Reiner regularly litigate insurance coverage issues in Washington and are knowledgeable with the discovery issues addressed in the Cedell case.  Please contact us with any questions about this case, or any other matter you see addressed in our Insurance Coverage Blog.

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