The Battle to Define the Scope of Attorney-Client Privilege in the Context of Insurance Company Bad Faith: A Judicial War Zone

[Excerpt] The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law. \u27 The privilege is [d]eeply rooted in public policy, and plays a \u27vital role\u27 in the administration of justice. As such, the privilege is traditionally deemed worthy of maximum legal protection \u27 and it remains one of the most carefully guarded privileges and is not readily to be whittled down. The privilege has come under assault in the insurance bad faith context in recent decades resulting in a whittling down of the privilege for insurance companies as a target party. Over the past couple of decades, various courts have rendered significant decisions regarding implied waiver of the privilege in the insurance bad faith context. These courts have seemingly set a minimal threshold for waiver that is the functional equivalent of a per se waiver rule, a rule which is inconsistent with the strength of the protection normally provided the attorney-client privilege in other contexts involving non-target parties. In contrast, Arizona, one of the jurisdictions which previously appeared to create such a per se rule, may be, with recent intermediate court decisions, redefining the battle for the scope of the attorney-client privilege in the insurance bad faith context. The Arizona decisions on this issue serve as a case study regarding the analytic gymnastics courts have engaged in to create implied waiver in the insurance bad faith context. However, these decisions may also set the stage for the judicial combatants. Will the battle result in a return to the more conservative protections of the privilege provided in other contexts or will it end with a broad per se implied waiver in the insurance context? In Part I of this article, the attorney-client privilege is discussed generally, as well as specifically, in the context of insurer bad faith. In Part I.A, a general overview of the attorney-client privilege is presented. In Part I.B, express and implied waiver of the attorney-client privilege are discussed. The courts have disagreed on the general contours of the test to be applied in determining whether an implied waiver of the attorney-client privilege has occurred, and what should be the precise formulation for that determination. The courts have also disagreed as to when a client may be deemed to have injected privileged attorney-client communications into a case, causing an implied waiver. There are three general approaches to determine whether a litigant has impliedly waived the attorney-client privilege. Each of these approaches is discussed. In Part I.C, the article discusses general principles regarding insurance bad faith and how the direct assertion of the advice-of counsel defense results in waiver of the attorney-client privilege in that context. The nature and scope of the advice-of-counsel defense is explored. In Part II, the battle over the changing boundaries of waiver by implication is examined by comparing the case authority supporting expansion versus the development of three published decisions from the courts of Arizona. The discussion starts in Part IIA, where the expansion of waiver by implication is discussed. Part II.B examines a decision from the Arizona Supreme Court which followed the trend of substantial expansion of the waiver-by-implication rule and then examines two subsequent decisions from the Arizona Court of Appeals which have applied the Arizona Supreme Court precedent to reach two very different and arguably contradictory results. The first of these appellate decisions arguably takes the expansion of implied waiver to the next level-a per se rule triggering automatic waiver as a result of defending a bad faith case on a subjective belief of acting in good faith. The second appellate decision, however, takes a step back from the ledge and seeks to limit the prior ruling to its facts rather than creating a per se rule in those circumstances. Part II.C seeks to synthesize and define the battle in Arizona over the scope of implied waiver, discussing the chilling effect continued expansion of implied waiver can have upon the advice that insurance companies seek from counsel and how the recent decision from Arizona may serve as a warm front to thaw the chill that has been in the air for the last two decades