The Tenth Circuit in Seneca Insurance Co. v. Western Claims, Inc., 2014 U.S. App. LEXIS 24172 (10th Cir. Dec. 22, 2014), affirmed a district court’s decision to allow the discovery and admission into evidence of correspondence between Seneca Insurance Company (Seneca) and its counsel regarding the underlying hail damage claim and litigation. The Tenth Circuit agreed with the district court’s finding that Seneca put the advice of the attorneys at issue, thereby waiving the attorney-client privilege.
The underlying dispute stemmed from Western Claims, Inc.’s (Western Claims) inspection of Seneca’s insured’s, Route 66 Trader Market (Route 66), buildings following hail damage. A claims adjuster for Western Claims estimated that the damage to Route 66 amounted to slightly more than $1,000, which Seneca promptly paid. However, about eight months later, Route 66 asked Seneca to reopen the hail damage claim since an estimate from its roofing contractor indicated that damage to its roof, which was also caused by the hail, totaled approximately $759,000. Seneca refused to pay and Route 66 filed suit against Seneca for breach of insurance contract, bad faith, and fraud, seeking extra-contractual and punitive damages. Ultimately, on advice of its counsel, Seneca settled with Route 66 for $1 million. Thereafter, Seneca filed suit against Western Claims and its adjuster asserting implied equitable indemnity and negligence theories. During discovery, Seneca disclosed a claim note that indicated it had settled the Route 66 case on advice of its counsel. Western Claims moved to compel other documents prepared by Seneca’s coverage counsel, which Seneca relied upon in settling the underlying claim. Over Seneca’s objections, the district court granted the motion. At trial, the district court allowed the correspondence to be admitted for the purposes of establishing Seneca’s reasons for settling the Route 66 litigation. Seneca appealed the district court’s rulings.
Seneca averred that it did not waive its attorney-client privilege or the work-product protection in relation to the correspondence with its coverage counsel. The Tenth Circuit analyzed the question of “at-issue” waiver under the Hearn test since both parties agreed that Oklahoma courts would follow that approach. The Tenth Circuit concluded that the Hearn test was satisfied. Notably, addressing the “vital” prong of the test, Seneca claimed that other individuals, namely Seneca’s officers, had vital information regarding the reasonableness of the Route 66 settlement. The Court disagreed, declaring that the Seneca officers did not rely on their own reasons in settling the case; rather they relied on the reasons proffered by their attorneys. Further, the Court maintained that allowing Seneca to shelter vital evidence regarding the reasonableness of the Route 66 settlement would violate the well-established principle that “attorney-client communications cannot be used both as a sword and a shield.”
This decision highlights the perils of failing to safeguard an insurer’s documents protected by the attorney-client privilege, as well as the challenges insurers face in bad faith litigation in preventing disclosure of their claim files.