The South Carolina Supreme Court Addresses Waiver of Attorney-Client Privilege in Bad Faith Actions

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Nearly one year ago, in this space, we addressed the issue of whether South Carolina’s attorney-client privilege was facing its ultimate demise, in the context of insurance bad faith litigation.^[1] At that time, based upon an opinion of the United States District Court for the District of South Carolina, there loomed the prospect that an insurer’s attempt to defend itself in a bad faith action, by simply denying liability, may constitute a waiver of its attorney-client privilege. The attorney-client privilege, long recognized in South Carolina and long a cornerstone of our judicial system, allows one confidence that his or her disclosures to counsel will be protected, thus facilitating effective representation. The attorney-client privilege is significant public policy, yet, it is not absolute; there is a competing interest in the proper administration of justice against which the privilege must be balanced. As a result of that district court opinion almost a year ago, our Supreme Court undertook an analysis of this delicate, yet requisite balance and the survival of the privilege in the context of bad faith litigation in In re: Mt. Hawley Insurance Company, 2019 WL 2441119 (June 12, 2019).

Mt. Hawley issued an excess commercial liability policy to ContraVest Construction Company. When sued for construction defects, ContraVest’s request to Mt. Hawley for defense and indemnification was denied. ContraVest settled the underlying action and brought a bad faith action against Mt. Hawley in state court. The case was removed to district court pursuant to diversity jurisdiction. In the course of discovery, ContraVest sought production of Mt. Hawley’s files on ContraVest’s claim at issue as well as the files relating to all of ContraVest’s claims under its excess liability policies. Mt. Hawley produced the requested files in redacted form, taking the position the files contained attorney-client privileged material. ContraVest filed motions to compel, asserting Mt. Hawley waived the attorney-client privilege. Upon recommendation of the magistrate judge, the district court granted the motions to compel and ordered Mt. Hawley to produce the files for in camera inspection. Upon denial of Mt. Hawley’s motion for reconsideration, it sought a writ of mandamus from the Fourth Circuit, vacating the district court’s order. The Fourth Circuit certified the following question to the Supreme Court:

                                                Does South Carolina law support
                                                support application of the “at issue”
                                                exception to attorney-client privilege
                                                such that a party may waive the
                                                privilege by denying liability in its
                                                answer?

The Supreme Court answered the certified question, obviously narrow in scope, indicating a denial of liability or assertion of good faith in an answer, alone, does not place the privileged communications ‘at issue’ so to constitute a waiver of the privilege. The court provided two substantial holdings, addressed below. 

Our Supreme Court has not previously been charged with reconciling attorney-client privilege and insurance bad faith law. Thus, it approached the task by engaging in thoughtful examination of various approaches to the issue at bar. In so doing, it rejected the approach previously applied by our district court. Relying on what it believed our Supreme Court would adopt, the district court previously held that while a plaintiff’s allegations of bad faith alone do not constitute a waiver of the insurer’s privilege, if an insurer voluntarily injected a factual or legal issue into the case, it constituted the insurer’s voluntary waiver of privilege. The “voluntary inject[ing]” was not limited to affirmatively asserting reliance on advice of counsel.^[2] In the case at bar, however, the Supreme Court adopted a more tempered position, finding a client does not waive the privilege by merely initiating or defending an action. Rather, the court held the party asserting the privilege bears the initial burden of establishing that the communications in question are privileged. If that burden is met, the party challenging the privilege must demonstrate the communications are subject to an exception or waiver, thereby making them discoverable.

Furthering the more moderate approach, the court also held that whether there has been an effective waiver must be determined on a case-by-case examination of the facts. If an insurer defends a bad faith action on the basis of its subjective understanding of the law, as informed by counsel, rather than defending solely on an objective reading of the disputed policy exclusions, the privilege is at risk. Our court took an additional step toward preserving the sanctity of the privilege, however, by promulgating an additional requirement; the party seeking waiver must also make a prima facie showing of bad faith.

The court’s careful examination of the assessment of privilege and its waiver in earlier cases, based upon the district court’s reasoning, and its examination of the manner in which other jurisdictions approach the issue, worked to prevent the waiver of privilege based upon an insurer’s reasonable efforts to defend a bad faith action. The approach the court delivered is consistent with South Carolina’s strict construction of the attorney-client privilege and its requirement that any waiver of the privilege must be distinct and unequivocal and may not be implied from doubtful acts.

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Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.