Arizona Appellate Court Refuses To Vitiate the Attorney-Client Privilege When Insurer Does Not Advance Defense Based on Advice of Counsel

In Everest Indemnity Insurance Co. v. Rea, 2015 Ariz. App. LEXIS 9 (Ariz. Ct. App. Jan. 15, 2015), an Arizona appellate court held that Everest Indemnity Insurance Company (“Everest”) had not waived its attorney-client privilege by admitting that it had settled a case in good faith after consulting with counsel. As background, Rudolfo Brothers Plastering and Western Agriculture Insurance Company (collectively “Rudolfo”) alleged that Everest committed bad faith by entering into a settlement agreement that exhausted the liability coverage of an Owner Controlled Insurance Program.

For purposes of the instant motion, Everest admitted that it had communicated with counsel during the process of making its settlement decision. Yet, Everest did not assert for purposes of any of its defenses to bad faith that it had depended on counsel’s advice when entering into the settlement. The appellate court thus agreed with Everest’s reliance on the attorney-client privilege. The appellate court explained that a waiver of the privilege occurs where the insurer makes an affirmative claim that its conduct was based on its understanding of the advice of counsel—it is not enough that the insurer merely consulted with counsel and received advice. The court reasoned that to rule differently would incentivize parties to exclude attorneys from commercial negotiations.

This opinion clearly strengthens the attorney-client privilege, especially when consultations with counsel are merely ancillary to the insurer’s defense to bad faith. The causal nexus between the advice of counsel and the insurer’s decision to act is therefore paramount.