Everest Indemnity Insurance Company v. The Honorable John Rea – 1/15/2015

January 16, 2015

Arizona Court of Appeals Division One holds that an insurer does not waive the attorney-client privilege by asserting the defense of subjective good faith in a bad faith case unless it asserts that it depended on the advice of counsel in forming its subjective beliefs.

Everest filed this special action seeking relief from a trial court order ordering it to produce allegedly privileged documents.  The underlying case is a bad faith case brought by Rudolfo Brothers Plastering and Western Agricultural Insurance Company, who argue that Everest acted in bad faith by entering into a settlement agreement “that exhausted the liability coverage of an Owner Controlled Insurance Program (OCIP) policy” to their detriment.  Everest’s defense is that its decision to settle “was made in good faith based on its subjective beliefs concerning the relative merits of the various available courses of action.”  Everest acknowledges that it “communicated with counsel during the process of making that decision.” 

Rudolfo argued that based on Mendoza v. McDonald’s Corporation, 222 Ariz. 139, 154 (App. 2009), Everest had waived the attorney-client privilege because it chose to defend itself “based on the subjective reasonableness of its actions after consulting with counsel[.]”  The Court of Appeals disagreed, finding that Rudolfo’s argument both overstated Mendoza and was inconsistent with State Farm Mutual Automobile Insurance Company v. Lee, 199 Ariz. 52, 62 (2000).  The Court noted that Lee “expressly held that the assertion of a subjective good faith defense coupled with consultation with counsel did not, without more, waive the attorney-client privilege[.]”  Rather, the Court continued, the privilege “is impliedly waived only when the litigant asserts a claim or defense that is dependent upon the advice or consultation of counsel[.]”  To impliedly waive the attorney-client privilege based on Lee, the Court noted, “a party must make an affirmative claim that its conduct was based on its understanding of the advice of counsel[.]”  The Court found that “it is not sufficient that the party consult with counsel and receive advice.” 

The Court noted that no showing had been made that Everest was in doubt as to any legal issue and that Everest had not asserted—expressly or impliedly—that its decision to settle the case was “the product of legal advice.”  The Court also distinguished Mendoza because the defendant’s employer there asserted that it relied on the advice of counsel in handling a worker’s compensation claim, thereby expressly admitting that its decisions were based on the advice of counsel. 

The Court held that Everest’s actions fell short of what was required by the Lee and Mendoza courts to find a waiver.  Although the Court noted that Everest contended it “acted with a subjective belief in the good-faith nature of its actions,” and “also admit[ted] that it consulted counsel before making the decision to enter into the settlement agreement,” the Court concluded that “these facts alone are not enough to suggest that Everest’s subjective belief in the legality of its actions necessarily included or depended on the advice received from counsel.”  The Court reasoned that Everest had “not yet placed the advice it received from counsel at issue,” noting that Everest had not asserted that it depended on the advice of counsel informing its subjective beliefs and that Everest had not shared “the advice of its counsel with its own expert.”  Accordingly, the Court vacated the portion of the trial court’s order considering whether Everest had impliedly waived its attorney-client privilege. 

Judge Orozco dissented and would have declined special action jurisdiction.  Although she agreed with the majority’s recitation of the relevant law, she disagreed with its application of the law to the facts of the case.  Judge Orozco took issue with the conclusion that Everest had not put the advice of its counsel at issue because Everest consulted counsel during the settlement negotiations and was represented by its counsel during the negotiations.  She reasoned that “[c]ounsel’s participation, along with Everest’s assertion of subjective good faith, is an affirmative interjection of counsel’s role in formulating and acting upon Everest’s subjective good faith in this litigation.”  Judge Orozco noted that “Lee does not require an affirmative interjection in the sense that an implied waiver occurs only when a party explicitly states that it relied on counsel.”  She found that although “Everest has not yet explicitly stated that it relied on counsel in acting with subjective good faith,” its actions were “‘inextricably intertwined’ with the advice it received from counsel.” 

Judge Gemmill authored the majority opinion, joined by Judge Swann.  Judge Orozco filed a dissenting opinion