State Farm Mutual Auto Insurance Co. v. Lee
In State Farm Mutual Auto Insurance Co. v. Lee, 199 Ariz. 52, 13 P.3d 1169 (2000), the Arizona Supreme Court outlined the test for determining whether an insurer has impliedly waived the attorney-client privilege in a bad faith tort action.
Lee involved a class action lawsuit brought by automobile insurance policyholders against their insurer alleging the insurer had acted in bad faith in denying their underinsured and uninsured motorist claims. 199 Ariz. at 54, P 1, 13 P.3d at 1171.
The insurer admitted it had sought and received advice of counsel about whether to pay or reject the policyholders' claims, but refused to produce its correspondence with counsel, arguing the attorney-client privilege shielded it from discovery. Id. at 55, P 5, 13 P.3d at 1172.
Because the insurer avowed it would not rely on an express advice-of-counsel defense but rather would defend on the basis that its decision to deny the claims was objectively and subjectively reasonable given its claims managers' evaluation of the law, the insurer asserted it had not waived the attorney-client privilege. Id. at 57-58, PP 13-15, 13 P.3d at 1174-75.
The policyholders disagreed, arguing the insurer had impliedly waived the privilege by interjecting into the case the subjective good faith beliefs and mental state of its agents, which were based at least in part on what they had learned from counsel. See id. at 55, 57, PP 5 & 14, 13 P.3d at 1172, 1174.
In State Farm Mut. Auto. Ins. Co. v. Lee, the Arizona Supreme Court explained that to waive the privilege, a party must do more than simply confer with counsel and take action incorporating counsel's advice. Id. at 66,38, 13 P.3d at 1183.
Waiver is implied when, after receiving advice from an attorney, a party makes an affirmative assertion that it was acting in good faith because it relied on counsel's advice to inform its own evaluation and interpretation of the law. Id.
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:
We assume client and counsel will confer in every case, trading information for advice.
This does not waive the privilege.
We assume most if not all actions taken will be based on counsel's advice. This does not waive the privilege. Based on counsel's advice, the client will always have subjective evaluations of its claims and defenses.
This does not waive the privilege. All of this occurred in the present case, and none of it, separately or together, created an implied waiver. Lee, 199 Ariz. at 66,38, 13 P.3d at 1183.
In Lee, State Farm waived the attorney-client privilege because its defense was based on its "investigation and evaluation" of the law, which inevitably depended on and necessarily included the advice it received from its lawyers. Id.
The coverage issue in Lee turned on State Farm's interpretation of recently-decided case law.
In such a situation, "the party's knowledge about the law is vital, and the advice of counsel is highly relevant to the legal significance of the client's conduct." Id. at 62,28, 13 P.3d at 1179.
State Farm's actions were therefore "inextricably intertwined" with the advice it received from counsel. Id. at 60,23, 13 P.3d at 1177