Andrews v. Ridco & Twin City Fire Ins. Co.

#26891-rev & rem-LSW
2015 S.D. 24IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
TIMOTHY ANDREWS, Plaintiff and Appellee,
v.
RIDCO, INC., Defendant,
and
TWIN CITY FIRE INSURANCE CO. Defendant and Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
****
THE HONORABLE WALLY EKLUND
Judge
****
MARK A. KOEHN
Rapid City, South Dakota
and
GARY JENSEN of
Beardsley, Jensen, & Von Wald, PLLC
Rapid City, South Dakota
and
SCOTT ARMSTRONG
Rapid City, South Dakota Attorneys for plaintiff
and appellee.
****
ARGUED ON
NOVEMBER 18, 2014
OPINION FILED 04/29/15
FRANCIS J. MALONEY III of
Maloney Lauersdorf Reiner, PC
Portland, Oregon
and
JASON M. SMILEY of
Gunderson, Palmer, Nelson & Ashmore, LLP
Rapid City, South Dakota Attorneys for defendant
and appellant.
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WILBUR, Justice
[¶1.] Timothy Andrews sued Twin City Fire Insurance Company (Twin City)
and Ridco, Inc. a/k/a Riddle’s (Ridco) for the alleged bad faith handling of his
workers’ compensation claim. During the discovery stage of the bad faith claim,
Andrews filed a motion to compel Twin City to produce wholly unredacted claim
files, personnel files, and privilege logs. The circuit court concluded that Twin City
impliedly waived the attorney-client privilege and ordered Twin City to produce all
of the disputed documents in unredacted form. Twin City filed a petition for
intermediate appeal. We reverse and remand.
Background
[¶2.] Andrews suffered a compensable, work-related injury to his neck and
back on March 4, 2005, while employed by Ridco as a gold polisher. Twin City
insured Ridco for purposes of workers’ compensation during all times relevant to
Andrews’s claims. Twin City timely paid, in the proper amounts, Andrews’s
temporary disability benefits from his date of injury through May 12, 2005. 1 On
April 11, 2007, Andrews filed an action before the South Dakota Department of
Labor seeking additional workers’ compensation benefits. The administrative law
judge ruled in favor of Andrews and determined that Andrews’s 2005 work-related
1. Twin City terminated Andrews’s temporary disability benefits beginning on
May 17, 2005, based on the stated grounds that Andrews was not authorized
by a doctor to receive chiropractic care. Twin City hired an occupational
physician to conduct an independent medical examination. Based on the
results of the examination, Twin City discontinued payment for Andrews’s
continued medical treatment on April 11, 2006.
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injury was a major contributing factor to his neck pain and continued need for
treatment.
[¶3.] On July 27, 2010, Andrews filed the present lawsuit against Twin City
and Ridco alleging bad faith handling of his workers’ compensation claim. Andrews
asserted (1) common law bad faith; (2) aiding and abetting or civil conspiracy to
commit fraud or statutory deceit and to deny first party insurance benefits in bad
faith; (3) fraud or statutory deceit; and (4) retaliatory discharge. This action was
based on the theory that Twin City systematically handled workers’ compensation
claims, including Andrews’s claim, in bad faith under a claim handling program
known as the “Large Loss Initiative” (the Initiative)—also referred to as the
“Million Dollar List.” Twin City’s parent company, the Hartford Financial Services,
Inc. (the Hartford), created the Initiative in October of 1998. The purpose of the
program was to give greater attention to claims that had reserves in excess of
$1,000,000. Over the course of the program, the Hartford identified 247 “large loss
initiative” claims. Twin City provided e-mails from the Hartford indicating that the
Initiative was discontinued in 2000. Andrews pointed out, however, that the
Hartford mentioned the possibility of conducting a similar review of claims with a
$500,000 reserve in an e-mail dated March 6, 2001.
[¶4.] Although Andrews’s claim file was never reserved for more than
$322,688—falling short of both the $1,000,000 and the $500,000 thresholds—
Andrews continued to argue that there was a connection between the Initiative and
his claim file. Andrews based this assertion on the allegation that Twin City’s
claim-handling practices were similar to the practices employed under the
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Initiative. Andrews noted that “some of the very same Hartford claim department
personnel involved in handling and supervising [the Initiative] program claims were
also involved in [Twin City’s] handling of Timothy Andrews’[s] claim[.]”
[¶5.] Andrews sought discovery of a number of documents from Twin City.
On May 23, 2012, Andrews served Twin City with requests for production, which
included the following two requested sets of documents at issue on this appeal:
(1) the Andrews claim file 2 and (2) 247 workers’ compensation claim files
administered under the Initiative. 3 Twin City objected to both of these requests on
the basis that certain documents were protected by the attorney-client privilege.
Initially, Twin City refused to provide Andrews with any requested material
containing attorney-client privileged information.
[¶6.] On November 26, 2012, Andrews filed a motion to compel Twin City to
produce all of the documents responsive to his requests. Twin City opposed the
2. “Claim file,” as used in this opinion, refers to all materials maintained by
Twin City for a particular workers’ compensation claim. The use of the term
“claim file notes,” or “activity log,” refers to the contemporaneous diary of
activity conducted with respect to a claim.
3. Andrews’s request for production pertaining to the other workers’
compensation claims stated:
Request No. 46: Please produce any and all documents relating
to ‘large loss initiative’ program files which stem or stemmed
from workers’ compensation policies issued by Twin City Fire
Insurance Company, whether such files were included in the 247
‘million dollar’ claims included in the initial stage of this
program or the unknown number of ‘$500,000’ or smaller claims
included in the later stages of this program. The time-frame
covered by this request is from the October 1998 hiring date of
Mark Deluse (and the subsequent creation of the ‘million dollar
list’ or ‘large loss initiative’ program) to the present date.
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motion and moved for a protective order. The court entered an order on February
11, 2013, requiring Twin City to submit the Andrews claim file notes to the court for
an in camera review. The court stated that it would conduct the in camera review
before making a “final determination as to whether some or all such documents are
subject to discovery.” The order further required Twin City to produce for Andrews
the claim file notes for the 247 “large loss initiative” claim files. In accordance with
the order, Twin City produced 199 of the 247 “large loss initiative” claim file notes
(199 “other” claim file notes), which were all the claim file notes that existed at the
time of Andrews’s request. Twin City redacted the attorney-client privileged
communications contained in these claim file notes.
[¶7.] The circuit court conducted a status hearing on May 28, 2013, to
address the attorney-client privilege as it applied to both the Andrews and the 199
“other” claim files. The court stated that “if [the redacted material is] a
communication from an attorney to the claims people or if it’s a communication
from claims people to the attorney seeking legal advice, it should not be produced.
But otherwise, everything is subject to production from what I saw.”
[¶8.] On June 7, 2013, the circuit court entered a second order confirming its
statements during the status hearing, stating in pertinent part:
The court: Here, it has not been alleged that Heglin
“completely” delegated her claim handling decisions to outside
counsel. Nevertheless, the Supreme Court’s reasoning in both
[Dakota, Minnesota & Eastern Railroad Corp.] and Bertelsen is
applicable. To the extent that Nicole Heglin embedded attorney-
client communications going to the factual grounds (i.e., the
reasonable basis or lack thereof) of her benefits decisions in the
claim file’s central document (i.e., the activity log), the statutory
purpose of which document is to provide a record of the insurer’s
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claim-handling decisions, she “inject[ed] the attorney’s advice
into the case.”
The court ordered Twin City to apply this standard when reviewing its redactions to
the Andrews claim file notes and the 199 “other” claim file notes. The court further
ordered that all of these documents be produced no later than June 21, 2013. 4 Twin
City reviewed each of the previous redactions and unredacted most, but not all, of
the previously redacted attorney-client communications in the Andrews claim file
notes and submitted the notes to Andrews and the court.
[¶9.] On October 22, 2013, Andrews filed a motion to compel Twin City to
produce wholly unredacted claim file notes for the Andrews claim file and the 199
“other” claim files. Andrews argued that he was entitled to production of the
unredacted attorney-client communications based on the following reasons:
(i) the facts of the proceeding; (ii) SDCL 58-3-7.4 regarding the
legally mandated contents of the insurer’s claim file; (iii)
previously briefed generally applicable law pertaining to the
status of attorney-client communications included in otherwise
discoverable material in bad faith actions, particularly where
the insurer defendant is (as here) implicitly relying on an ‘advice
of counsel’ defense, (iv) [the circuit court’s] February 11, 2013,
discovery order, and (v) [the court’s] June 7, 2013, order
specifically addressing the status of attorney-client
communications in the activity logs at issue.
Additionally, Andrews compared the Andrews claim file notes to three pages of
heavily redacted claim file notes from Jackie Hammonds’s claim file—one of the 199
4. On July 24, 2013, Andrews moved for sanctions against Twin City under
SDCL 15-6-37. Andrews argued that Twin City failed to timely produce the
materials in accordance with the June 7, 2013 order. The circuit court denied
Andrews’s motion for sanctions.
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“other” claim files. 5 The redactions to the Hammonds claim file notes, Andrews
contended, left the reader “with absolutely no idea of what decisions were made
during that time period or of the grounds for those decisions.” In comparison,
Andrews argued that the extent of the redactions to the Andrews claim file notes is
“conclusive as to the failure of these two logs at least to comply with the
requirements of SDCL 58-3-7.4.” Twin City responded that the attorney-client
communications that were redacted constituted protected legal communications
occurring after Andrews initiated the administrative proceeding against Twin City
and, therefore, the communications were not a delegation of Twin City’s claims
handling responsibility.
[¶10.] Twin City filed for a protective order “limiting the scope of discovery to
materials and information related to the Andrews claim, the sole subject matter of
this case.” Twin City argued that “[t]he additional discovery requested by
[Andrews] is not likely to lead to the discovery of admissible evidence because there
is no connection between these ‘other claim’ files and [Andrews’s] claim or alleged
damages.” The circuit court conducted a hearing on November 5, 2013, regarding
Andrews’s motion to compel and on Twin City’s motion for a protective order. Twin
City offered to provide the Andrews claim file notes for an in camera inspection,
5. The Hammonds claim file was the subject of the 2007 decision Hammonds v.
Hartford Fire Insurance Co., 501 F.3d 991 (8th Cir. 2007). In that case,
Hammonds argued that the Initiative was the impetus for the alleged bad
faith handling of her workers’ compensation claim. The United States
District Court for the District of South Dakota found that the Initiative did
not constitute bad faith and thereby granted summary judgment in favor of
the Hartford. The Eighth Circuit Court of Appeals affirmed.
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stating as follows: “If the [c]ourt would like us to produce . . . samples, it’s a lot of
materials, but we would be happy to produce it again for an in camera review.
That’s as to the Andrews[] claim file, Your Honor. There’s not been any showing of
waiver.” The circuit court rejected the offer for an in camera inspection.
[¶11.] The circuit court concluded that Twin City impliedly relied on the
advice of counsel in handling Andrews’s bad faith claim and the 199 “other” claims,
and therefore waived the entire attorney-client privilege:
Twin City: Is there a specific thing that the [c]ourt finds was a
constitute [sic] of the waiver [of the entire attorney-client
privilege]?
The court: Well, I believe it is implied.
Twin City: And would it be implied for the Andrews[] claims
and the other 199 claims?
The court: Yes. We’ll be in recess.
On November 14, 2013, the court filed an order denying Twin City’s motion for a
protective order. The court further ordered that Twin City “produce within 30 days
completely unredacted copies of the claim file notes it has previously been ordered
to produce in the present proceeding.”
[¶12.] Twin City filed a motion for reconsideration and requested that the
court allow it to file the disputed materials under seal for purposes of this appeal.
Twin City also offered to provide the court with the 199 “other” claim file notes and
a privilege log in order to conduct an in camera review. On December 3, 2013, the
circuit court conducted a hearing on the motion. The court concluded that it would
adhere to the earlier November 14 order, stating as follows:
The court: I’m going to adhere to my earlier ruling on this.
Quite frankly, I think without a privilege log on [the 199 “other”
claims], I don’t think there’s anything that the Supreme Court is
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going to come forward. They don’t know what I’ve not allowed
. . . I think that the process was not followed in this matter from
the outset, and my ruling stands. . . .
In an order dated that same day, the court denied Twin City’s motion to file the
disputed materials under seal and ordered that Twin City produce unredacted
copies of the Andrews claim file notes and the 199 “other” claim file notes.
[¶13.] Twin City raises the following issues for our review:
1. Whether the circuit court erred in holding that, based on
this record, Twin City impliedly waived the attorney-
client privilege for the Andrews and the 199 “other” claim
file notes.
2. Whether the circuit court erred in holding that Twin City
impliedly waived the attorney-client privilege without
conducting an in camera inspection of the claim file notes
for the Andrews and the 199 “other” claim files.
3. Whether the circuit court must analyze waiver of the
attorney-client privilege under the respective state law
where each of the 199 “other” claims arose.
Standard of Review
[¶14.] Normally, we review “a circuit court’s discovery orders under an abuse
of discretion standard.” Dakota, Minn. & E. R.R. Corp. v. Acuity (DM & E), 2009
S.D. 69, ¶ 47, 771 N.W.2d 623, 636. “An abuse of discretion ‘is a fundamental error
of judgment, a choice outside the range of permissible choices, a decision, which, on
full consideration, is arbitrary or unreasonable.’” In re Jarman, 2015 S.D. 8, ¶ 19,
860 N.W.2d 1, 9 (quoting Thurman v. CUNA Mut. Ins. Soc’y, 2013 S.D. 63, ¶ 11, 836
N.W.2d 611, 616). However, “[w]hen we are asked to determine whether the circuit
court’s order violated a statutory privilege,” see SDCL 19-13-3 (Rule 502(b)), “it
raises a question of statutory interpretation requiring de novo review.” DM & E,
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2009 S.D. 69, ¶ 47, 771 N.W.2d at 636 (quoting Maynard v. Heeren, 1997 S.D. 60,
¶ 5, 563 N.W.2d 830, 833).
Analysis
[¶15.] 1. Whether the circuit court erred in holding that, based on
this record, Twin City impliedly waived the attorney-
client privilege for the Andrews and the 199 “other” claim
file notes.
[¶16.] The circuit court concluded that Twin City impliedly waived the
attorney-client privilege for the Andrews claim file notes and the 199 “other” claim
file notes. The court appeared to have relied on two theories to support its
conclusion of implied waiver: (1) Twin City impliedly injected the advice of counsel
into the bad faith litigation and (2) Twin City completely delegated its claim
handling function to outside counsel. The court did not enter any evidentiary
findings in support of its implied waiver conclusions as to the Andrews claim file
notes and the 199 “other” claim file notes, nor did the court allow Twin City to
submit the 199 “other” claim file notes under seal. Accordingly, our review of this
issue is limited to the incomplete record before us on appeal.
Advice of counsel
[¶17.] Twin City argues that the circuit court erred when it applied a blanket
waiver of the attorney-client privilege to the Andrews claim files notes and the 199
“other” claim file notes without first determining whether Twin City had
affirmatively injected its reliance on the advice of counsel into the bad faith
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litigation. 6 Twin City requests that this Court remand the case with instructions to
enter specific and detailed findings regarding whether Twin City affirmatively
injected its reliance upon the advice of counsel into the bad faith litigation such as
would constitute an implied waiver under Bertelsen v. Allstate Insurance Co., 2011
S.D. 13, ¶¶ 50-53, 796 N.W.2d 685, 702-03.
[¶18.] The attorney-client privilege is described in SDCL 19-13-3 (Rule
502(b)). 7 The client is the holder of the attorney-client privilege. State v. Catch the
6. Andrews argues that this Court does not have jurisdiction to hear this
intermediate appeal. Andrews points out that SDCL 15-26A-3(6) and SDCL
15-26-6 permit appeal of an intermediate order at the discretion of this Court
if the appeal is filed within “thirty days after the . . . order shall be signed,
attested, filed and written notice of entry thereof shall have been given to the
adverse party.” Andrews contends that the November and December circuit
court orders from which Twin City appeals establish no new substantive
obligations; rather, the substantive obligations arise from the earlier
February and June orders. Thus, according to Andrews, Twin City failed to
appeal within 30 days of the June order. Andrews’s argument
mischaracterizes the November and December orders. The November and
December orders compelled Twin City, for the first time, to produce wholly
unredacted claim file notes. Andrews concedes in his briefs to this Court that
this new obligation is properly before this Court: “There is no doubt that this
new obligation is properly before this Court on intermediate appeal.”
Because the subject of this appeal is the circuit court’s ruling regarding
waiver of the attorney-client privilege, we reject Andrews’s argument.
7. SDCL 19-13-3 (Rule 502(b)) provides:
A client has a privilege to refuse to disclose and to prevent any
other person from disclosing confidential communications made
for the purpose of facilitating the rendition of professional legal
services to the client:
(1) Between himself or his representative and his
lawyer or his lawyer’s representative;
(2) Between his lawyer and the lawyer’s representative;
(3) By him or his representative or his lawyer or a
(continued . . .)
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Bear, 352 N.W.2d 640, 645 (S.D. 1984). As such, the attorney-client privilege “may
only be waived by the client, or through [the client’s] attorney.” DM & E, 2009 S.D.
69, ¶ 51, 771 N.W.2d at 637. The burden of establishing a waiver of the attorney-
client privilege rests with the party asserting the claim of waiver—in this case,
Andrews. Id. In order to invoke a waiver of the privilege, “the record must
‘demonstrate that the client impliedly or explicitly consented to his attorney
waiving the attorney-client privilege on his behalf.’” Id. (quoting State v.
Rickabaugh, 361 N.W.2d 623, 625 (S.D. 1985)).
[¶19.] One of the well-established exceptions to the attorney-client privilege
is the “advice of counsel” exception. Kaarup v. St. Paul Fire & Marine Ins. Co., 436
N.W.2d 17, 21 (S.D. 1989). When a party expressly relies on “the advice of counsel
as an essential element of his defense, that party cannot refuse to disclose such
advice.” Id. However, “most sophisticated litigants will know better than to dig
that hole for themselves.” Bertelsen, 2011 S.D. 13, ¶ 50, 796 N.W.2d at 702 (quoting
State Farm Mut. Auto Ins. Co. v. Lee, 13 P.3d 1169, 1181 (Ariz. 2000)). Certainly,
“[a] privileged person would seldom be found to waive, if his intention not to
abandon could alone control the situation.” 8 John H. Wigmore, Evidence in Trials
________________________________________
(. . . continued)
representative of the lawyer to a lawyer or a
representative of a lawyer representing another party
in a pending action and concerning a matter of
common interest therein;
(4) Between representatives of the client or between
the client and a representative of the client; or
(5) Among lawyers and their representatives representing
the same client.
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at Common Law § 2327, at 636 (J. McNaughton rev. ed. 1961). In this case, the
record is clear that, at this point in the bad faith litigation, Twin City has not
expressly relied on the advice of counsel as an essential element of its defense.
[¶20.] Nonetheless, “[a]n insurer need not expressly rely upon the advice of
counsel to waive the attorney-client privilege.” Bertelsen, 2011 S.D. 13, ¶ 50, 796
N.W.2d at 702. An insurer may impliedly waive the attorney-client privilege “by
injecting privileged communications into a case.” Id. When “an insurer makes
factual assertions in defense of a claim which incorporate, expressly or implicitly,
the advice and judgment of its counsel, it cannot deny an opposing party ‘an
opportunity to uncover the foundation for those assertions in order to contradict
them.’” Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 259 (Del. 1995).
“A waiver is to be predicated not only when the conduct indicates a plain intention
to abandon the privilege, but also when the conduct (though not evincing that
intention) places the claimant in such a position, with reference to the evidence,
that it would be unfair and inconsistent to permit the retention of the privilege.”
Wigmore, supra ¶ 21, § 2388 at 855. See also Cerney v. Paxton & Gallagher Co., 119
N.W. 14, 16 (Neb. 1908) (“Any other rule would enable the client to use as a sword
the protection which is awarded him as a shield.”), overruled on other grounds,
Caster v. Moeller, 126 N.W.2d 485 (Neb. 1964).
[¶21.] In Bertelsen, we adopted and supplemented the implied waiver test
from Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975). Bertelsen, 2011 S.D. 13,
¶¶ 50-53, 796 N.W.2d at 702-03. The Hearn test provides three criteria for a court
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to consider in determining whether a party impliedly waived the attorney-client
privilege:
(1) assertion of the privilege was a result of some affirmative act,
such as filing suit [or raising an affirmative defense], by the
asserting party; (2) through this affirmative act, the asserting
party put the protected information at issue by making it
relevant to the case; and (3) application of the privilege would
have denied the opposing party access to information vital to his
defense.
Id. ¶ 50, 796 N.W.2d at 702 (alteration in original) (quoting Hearn, 68 F.R.D. at
581). “We supplemented[ed] the Hearn test to emphasize further the importance of
protecting the attorney-client privilege.” Id. ¶ 53, 796 N.W.2d at 703.
First, the analysis of this issue should begin with a presumption
in favor of preserving the privilege. Second, a client only waives
the privilege by expressly or impliedly injecting his attorney’s
advice into the case. A denial of bad faith or an assertion of good
faith alone is not an implied waiver of the privilege. “Rather,
the issue is whether [the insurer], in attempting to demonstrate
that it acted in good faith, actually injected its reliance upon
such advice into the litigation.” The key factor is reliance of the
client upon the advice of his attorney. Finally, a client only
waives the privilege to the extent necessary to reveal the advice
of counsel he placed at issue.
Id. (citations omitted). See also Harter v. University of Indianapolis, 5 F. Supp. 2d
657, 664 (S.D. Ind. 1998) (stating that “when a client files a lawsuit [or raises an
affirmative defense] in which his or her state of mind (such as good faith or intent)
may be relevant, the client does not implicitly waive the attorney-client privilege as
to all relevant communications unless the client relies specifically on advice of
counsel to support a claim or defense”).
[¶22.] Here, Andrews argues that Twin City injected its reliance upon the
advice of counsel into the bad faith litigation by embedding attorney-client
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privileged communications in the Andrews claim file notes and then redacting the
communications. This practice of “embedding and redacting,” Andrews contends,
has compromised his “ability to determine [Twin City’s] claim handling decisions
and the grounds thereof.” 8 Andrews alleges that this practice constitutes an
implied waiver of the attorney-client privilege because it is inconsistent with the
needs of a plaintiff who asserts a claim of bad faith.
[¶23.] This theory of implied waiver asserted by Andrews misconstrues the
Bertelsen test. Regardless of whether Twin City “embedded and redacted” attorney-
client communications into the claim files notes as Andrews suggests, this practice
does not demonstrate that Twin City injected its reliance on the advice of counsel
into the bad faith litigation. Under Bertelsen, Andrews must demonstrate that
Twin City asserted the attorney-client privilege as a result of an affirmative act,
such as raising an affirmative defense, and then that Twin City specifically relied
on the advice of counsel to support its argument that it acted in good faith. 2011
S.D. 13, ¶ 53, 796 N.W.2d at 703. There has been no such showing in this case.
[¶24.] At this point in the litigation, Twin City has merely alleged that it did
not act in bad faith. See Bertelsen, 2011 S.D. 13, ¶ 53, 796 N.W.2d at 703 (stating
8. In making this argument, Andrews focuses on SDCL 58-3-7.4. This statute
requires an insurer to maintain a complete claim file. Andrews argues that
Twin City’s practice of “embedding and redacting” is inconsistent with the
requirements of SDCL 58-3-7.4. However, Andrews does not present any
authority that states that an insurer is precluded from including attorney-
client privileged information in the claim file. Additionally, Andrews does
not provide any authority that suggests that this statute may be used to
waive the attorney-client privilege if attorney-client privileged
communications are included in the claim file.
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that “[a] denial of bad faith or an assertion of good faith alone is not an implied
waiver of the privilege”). Twin City has not placed at issue its subjective good-faith
reliance on the advice of counsel such as would invoke an implied waiver of the
Andrews and the 199 “other” claim file notes. See id.; Allstate Ins. Co. v. Clancy,
936 N.E.2d 272, 278 (Ind. Ct. App. 2010), vacated, Allstate Ins. Co. v. Clancy, 950
N.E.2d 1201 (“[A]n insurer that states that it was not acting in bad faith because it
acted in accordance with the applicable law neither expressly, nor impliedly, raises
the defense of advice [of] counsel. In such an instance, it is not the subjective good-
faith reliance on the advice of counsel that constitutes the defense, but the objective
compliance with applicable law.”).
[¶25.] Accordingly, the record does not support the circuit court’s conclusion
that Twin City impliedly waived the attorney-client privilege to the Andrews claim
file notes and the 199 “other” claim file notes. The circuit court did not enter any
findings as to whether Twin City injected, by an affirmative act, privileged
communications into the litigation and thereby made the privileged information
relevant to the bad faith litigation by specifically relying on the advice of counsel in
support of its argument that it acted in good faith. See Bertelsen, 2011 S.D. 13,
¶ 53, 796 N.W.2d at 703. The circuit court’s failure to determine whether Twin City
interjected, by an affirmative act, privileged communications into the bad faith
litigation constitutes reversible error.
[¶26.] Furthermore, the attorney-client privilege is waived only “to the extent
necessary to reveal the advice of counsel [Twin City] placed at issue.” Bertelsen,
2011 S.D. 13, ¶ 53, 796 N.W.2d at 703. See also People v. Madera, 112 P.3d 688,
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691 (Colo. 2005) (rejecting the finding that the defendant impliedly waived the
entire attorney-client privilege on the basis that “‘the court must impose a waiver
no broader than needed to ensure the fairness of the proceedings before it’”)
(quoting Bittaker v. Woodford, 331 F.3d 715, 720 (9th Cir. 2003)). Thus, it is
possible that the circuit court also erred by concluding that Twin City waived the
privilege in its entirety. But, without any findings to support its blanket waiver
conclusion, we are unable to determine if a blanket waiver is necessary.
Complete delegation of claims handling function
[¶27.] The record reflects that the circuit court also relied on DM & E to
support its conclusion that Twin City impliedly waived the attorney-client privilege.
In DM & E, this Court held “that where an insurer unequivocally delegates its
initial claims function and relies exclusively upon outside counsel to conduct the
investigation and determination of coverage, the attorney-client privilege does not
protect such communications.” 2009 S.D. 69, ¶ 56, 771 N.W.2d at 638. Andrews
contends that Twin City “completely delegated” its claim handling duties to outside
counsel, and therefore the redacted communications were not protected by the
attorney-client privilege because the attorneys were acting as claims adjusters in
the underlying workers’ compensation claim. See id.[¶28.] An unequivocal delegation of the claims handling function is not an
implied waiver of the attorney-client privilege; rather, it places the material
“outside the scope of the asserted privileges.” Id. ¶ 55 (quoting Mission Nat’l Ins.
Co. v. Lilly, 112 F.R.D. 160, 163 (D. Minn. 1986)). Thus, the circuit court had no
basis to rely on DM & E to support its conclusion that Twin City impliedly waived
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the attorney-client privilege. Moreover, even if we were to address the merits of
this argument, we are unable to discern based on the limited record before us
whether Twin City delegated its claim handling function in the underlying workers’
compensation action, and relied exclusively upon outside counsel. 9
[¶29.] 2. Whether the circuit court erred in holding that Twin City
impliedly waived the attorney-client privilege without
conducting an in camera inspection of the claim file
notes for the Andrews and the 199 “other” claim files.
[¶30.] The next issue is whether the circuit court was required to conduct an
in camera review of the Andrews claim file notes and the 199 “other” claim file
notes to determine whether Twin City either impliedly waived the attorney-client
privilege, see Bertelsen, 2011 S.D. 13, ¶¶ 50-53, 796 N.W.2d at 702-03, or whether
9. Andrews argues that Bertelsen and DM & E support the contention “that any
proper test of a party’s assertion of attorney client privilege must look to the
evidentiary effect the successful assertion of such claim would have on the
opposing party’s ability to make its case.” According to Andrews, the
“operative question is not the defendant insurer’s intent, or the extent of its
delegation, but rather the effect its assertion of privilege has on the
transparency of the claim-handling process[.]” The results-driven test that
Andrews proposes is plainly inconsistent with this Court’s precedent, as well
as South Dakota statutory law, on the attorney-client privilege. The
attorney-client privilege principally protects the holder of the privilege. See
Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 682, 66 L. Ed.
2d 584 (1981) (stating that the purpose of the attorney-client privilege “is to
encourage full and frank communication between attorneys and their
clients”); State Highway Comm’n v. Earl, 82 S.D. 139, 147, 143 N.W.2d 88, 92
(1966) (“The purpose behind our attorney-client privilege is to encourage a
client to freely communicate with his attorney without fear of disclosure.”).
This proposed test would shift the focus from the interests of the client in
enforcing the privilege to the detrimental effect that exercising the privilege
has on the adverse party. As we explicitly stated in Bertelsen, “the analysis
of this issue should begin with a presumption in favor of preserving the
privilege.” 2011 S.D. 13, ¶ 53, 796 N.W.2d at 703. Accordingly, we reject
Andrews’s proposed test.
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the communications were outside the scope of the asserted privilege. See DM & E,
2009 S.D. 69, ¶¶ 55-56, 771 N.W.2d at 638. Twin City argues that the circuit court
should have conducted an in camera review of the disputed documents before
making a determination as to implied waiver. We agree.
[¶31.] We have held that “the preferred procedure for handling privilege
issues is to allow for an in camera review of the documents[.]” DM & E, 2009 S.D.
69, ¶ 49, 771 N.W.2d at 637. The “party asserting privilege must make a showing
to justify withholding materials if that is challenged.” Id. ¶ 48, 771 N.W.2d at 636(quoting 8 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure
§ 2016.1 (2009)). “The question whether the materials are privileged is for the
court, not the party, to decide, and the court has a right to insist on being presented
with sufficient information to make that decision.” Id. (quoting 8 Charles A. Wright
& Arthur R. Miller, Federal Practice and Procedure § 2016.1 (2009)). “The most
feasible way for an insurer to satisfy [the burden of establishing that materials
sought to be excluded from discovery on the basis of privilege] is to obtain judicial
review of the materials in camera.” Unklesbay v. Fenwick, 855 N.E.2d 516, 522
(Ohio Ct. App. 2006).
[¶32.] In this case, there are two sets of documents at issue: the Andrews
claim file notes and the 199 “other” claim file notes. In the February 11, 2013 order,
the circuit court instructed Twin City to produce the Andrews claim file notes for
the court for an in camera review. 10 Twin City complied and submitted the
10. The February 11, 2013 court order provided:
(continued . . .)
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Andrews claim file notes to the court for an in camera review. The circuit court
then issued an order on June 7, 2013, requiring Twin City to conform its redactions
to the analysis set forth in the order. Twin City produced a privilege log for the
Andrews claim file notes on July 31, 2013, pursuant to SDCL 15-6-26(b)(5). The
privilege log consisted of an unredacted copy of the claim file notes with the
redacted communications highlighted in yellow. 11 Then, during the November 5,
2013 hearing, Twin City again offered to provide the Andrews claim file notes to the
________________________________________
(. . . continued)
Accordingly, [Twin City] shall produce to Plaintiff, within 30
days of the date of this order, those non-privileged documents
falling within the scope of Requests Nos. 1, 2, 5, and 53 [i.e., the
Andrews claim file]. It shall provide to the [c]ourt, within the
same time frame, for in camera review the documents regarding
which it continues to assert privilege. The [c]ourt will then
make a final determination as to whether some or all such
documents are subject to discovery.
11. Andrews argues that Twin City’s privilege log did not meet the statutory
requirements provided in SDCL 15-6-26(b)(5):
When a party withholds information otherwise discoverable
under these rules by claiming that it is privileged or subject to
protection as trial preparation material, the party shall make
the claim expressly and shall describe the nature of the
documents, communications, or things not produced in a manner
that, without revealing information itself privileged or
protected, will enable other parties to assess the applicability of
the privilege or protection.
We note that the privilege log submitted by Twin City complied with SDCL
15-6-26(b)(5). The highlighted communications allowed the circuit court to
“assess the applicability of the privilege or protection.” See id. The court
accepted this privilege log without objection.
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court for an in camera inspection. 12 There is no indication in the record that the
circuit court conducted an in camera review of the Andrews claim file notes once
Twin City had complied with the June 7, 2013 order and unredacted more of the
attorney-client communications. Nor did the circuit court make any findings about
the propriety of each redaction made by Twin City in the Andrews claim file notes.
[¶33.] Regarding the 199 “other” claim file notes, Twin City provided the
circuit court with copies of those documents pursuant to the February 11, 2013
order. The first time Twin City offered to provide the court with unredacted copies
of the 199 “other” claim file notes for an in camera review was in its brief on the
motion for reconsideration after the November 5, 2013 hearing. 13 Twin City did not
offer to provide the court with the 199 “other” claim file notes for an in camera
review during or before the November 5, 2013 hearing. 14 At the December 3, 2013
12. During the November 5, 2013 hearing, Twin City stated as follows:
Twin City: There is nothing more to produce on this. Anything
else that is compelled to be produced, Your Honor, is clearly
attorney-client privilege. If the [c]ourt would like us to produce,
you know, samples, it’s a lot of materials, but we would be happy
to produce it again for in camera review. That’s as to the
Andrews[] claim file, Your Honor. There’s not been any showing
of waiver.
13. Twin City stated as follows in its brief on the motion for reconsideration:
Twin City asks this [c]ourt to allow it to submit for an in camera
review all of the materials at issue, and requests this [c]ourt to
make specific findings as to each claim file relating to the
attorney-client communications at issue.
14. During the November 5, 2013 hearing, Twin City stated:
Twin City: The other 199 claim files are a completely different
issue. There is—as far as I know, plaintiff has not even made an
attempt to argue that there’s been some sort of waiver of the
(continued . . .)
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hearing, Twin City again offered to provide the 199 “other” claim file notes to the
court for an in camera review. The court rejected Twin City’s offer and stated that
“without a privilege log on this, I don’t think there’s anything that the Supreme
Court is going to come forward. . . . I think that the process was not followed in this
matter from the outset, and my ruling stands.”
[¶34.] Andrews argues that this Court has not held that there is a procedural
requirement for a circuit court to conduct an in camera review before ruling on a
party’s assertion of the attorney-client privilege, but, rather, this Court has merely
said that an in camera review is the preferred method. See DM & E, 2009 S.D. 69,
¶ 49, 771 N.W.2d at 637; Arnoldy v. Mahoney, 2010 S.D. 89, ¶ 33, 791 N.W.2d 645,
657. Thus, according to Andrews, the circuit court was not required to conduct an
in camera review of the disputed documents. We disagree. The circuit court could
not resolve the issue of implied waiver and complete delegation in this case without
first conducting an in camera review of the disputed documents. Moreover, the
circuit court indicated that it would conduct an in camera review of the Andrews
claim file notes. However, even though Twin City complied and provided the court
with the Andrews claim file notes, the court failed to make any findings to support
its conclusions. Twin City subsequently offered to provide the court with copies of
________________________________________
(. . . continued)
attorney-client privilege in the other claim files. Many of
those—some of those went into litigation, some of those have
redactions, other don’t, but there certainly cannot be said to
have been a waiver in any of those, and certainly the plaintiff
has not met his burden of proof in showing there has been a
waiver.
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the 199 “other” claim file notes for in camera review, which offer the court refused.
While we do not hold that there is a procedural requirement to conduct an in
camera review before ruling on a party’s assertion of the attorney-client privilege,
the present facts establish that Twin City satisfied its burden of triggering the
circuit court’s obligation to conduct an in camera review of the disputed
documents. 15 See DM & E, 2009 S.D. 69, ¶ 48, 771 N.W.2d at 636 (holding that the
“party asserting privilege must make a showing to justify withholding materials if
that is challenged”). See also Unklesbay, 855 N.E.2d at 522 (stating that “[t]he most
feasible way for an insurer to satisfy this burden is to obtain judicial review of the
materials in camera”).
[¶35.] Upon review of the record, we conclude that the circuit court abused its
discretion in failing to conduct an in camera review of the Andrews claim file notes
and the 199 “other” claim file notes. Based on the facts of this case, an in camera
review is necessary to determine whether Twin City completely delegated its claim
handling function or impliedly waived its attorney-client privilege by injecting its
reliance upon advice of counsel into the bad faith litigation by an affirmative act.
15. Andrews argues that Twin City did not timely offer the 199 “other” claim file
notes to the circuit court for an in camera review. Andrews points out that
Twin City did not offer to provide those claim file notes until after the
November 5, 2013 hearing on the motion to compel. Andrews argues that
once the court ruled against Twin City on the motion to compel, the court was
under no obligation to permit Twin City to then offer the 199 “other” claim
file notes for an in camera review. We disagree. The record establishes that
Twin City timely offered to provide the 199 “other” claim file notes to the
court for an in camera review in its motion for reconsideration and during the
December 3, 2013 hearing on the motion for reconsideration.
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See DM & E, 2009 S.D. 69, ¶ 56, 771 N.W.2d at 638; Bertelsen, 2011 S.D. 13, ¶ 53,
796 N.W.2d at 703.
[¶36.] An in camera review is necessary in this case to determine whether
Twin City “unequivocally delegate[d] its initial claims function and relie[d]
exclusively upon outside counsel to conduct the investigation and determination of
coverage[.]” DM & E, 2009 S.D. 69, ¶ 56, 771 N.W.2d at 638. The propriety of any
determination of complete delegation rests on the nature and content of the
communications. “To the extent that [Twin City] acted as claims adjusters, then,
their work-product, communications to client, and impressions about the facts will
be treated herein as the ordinary business of plaintiff, outside the scope of the
asserted privileges.” Id. ¶ 55 (quoting Lilly, 112 F.R.D. at 163). Thus, in order to
determine whether Twin City completely delegated its claim handling function to
outside counsel, the circuit court must conduct an in camera review of and make
findings regarding the claim file notes at issue.
[¶37.] Likewise, the circuit court should have conducted an in camera review
of the claim file notes before concluding that Twin City impliedly waived the
attorney-client privilege by relying on the advice of counsel. See Bertelsen, 2011
S.D. 13, ¶ 53, 796 N.W.2d at 703. The attorney-client privilege is waived only to the
“extent necessary to reveal the advice of counsel [Twin City] placed at issue.” Id.
The circuit court erred when it applied a blanket waiver of the attorney-client
privilege without determining the extent, if any, of the implied waiver. An in
camera review of the Andrews claim file notes and the 199 “other” claim file notes
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would have enabled the circuit court to articulate findings and make that
determination.
[¶38.] 3. Whether the circuit court must analyze waiver of the
attorney-client privilege under the respective state law
where each of the 199 “other” claim files arose.
[¶39.] Twin City contends that the proper legal analysis of whether it waived
the attorney-client privilege with respect to the 199 “other” claim file notes is that
the claim files should be analyzed pursuant to the state law governing each file.
Twin City points out that most of the 199 “other” claim file notes originated in other
jurisdictions and have no connection with South Dakota. Andrews responds that
“the threshold problem with [Twin City’s] proposed requirement is not the practical
difficulty of conducting such an analysis . . . but rather the fundamental
incoherence of the proposal.”
[¶40.] In Chambers v. Dakotah Charter, Inc., we adopted “the most
significant relationship approach to govern multi-state tort conflicts.” 488 N.W.2d
63, 67 (S.D. 1992) (adopting Restatement (Second) of Conflict of Laws §§ 6, 145
(1971)). In determining the choice of law regarding an assertion of a privilege, the
Restatement provides as follows:
(1) Evidence that is not privileged under the local law of the
state which has the most significant relationship with the
communication will be admitted, even though it would be
privileged under the local law of the forum, unless the admission
of such evidence would be contrary to the strong public policy of
the forum.
(2) Evidence that is privileged under the local law of the state
which has the most significant relationship with the
communication but which is not privileged under the local law of
the forum will be admitted unless there is some special reason
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why the forum policy favoring admission should not be given
effect.
Restatement (Second) of Conflict of Laws § 139 (1971) (emphasis added). 16 For
privileged information, “[t]he state which has the most significant relationship with
a communication will usually be the state where the communication took place[.]”
Restatement (Second) of Conflict of Laws § 139 cmt. e (1971).
[¶41.] To the extent that the 199 “other” claim file notes have no connection
to South Dakota other than the circuit court compelling their production, the “most
significant relationship” test is the appropriate analysis for evaluating whether the
attorney-client privilege is waived for each claim file. The state with the “most
significant relationship” to each claim file is generally the state where the
communications took place. Once the circuit court has applied the “significant
relationship” test and selected the state that satisfies the test, the court must apply
the law of that state to determine whether the attorney-client privilege is waived.
Accordingly, the circuit court on remand shall apply the “most significant
relationship” test to some or all of the 199 “other” claim files as appropriate, if the
court finds that any of the 199 “other” claim files are relevant to the bad faith
16. In determining whether a “special reason” exists, the following factors are to
be considered:
(1) The number and nature of the contacts that the state of the
forum has with the parties and with the transaction involved,
(2) the relative materiality of the evidence that is sought to be
excluded, (3) the kind of privilege involved and (4) fairness to
the parties.
Restatement (Second) of Conflict of Laws § 139 cmt. d (1971).
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litigation, in order to determine the appropriate law to be utilized to evaluate
whether the attorney-client privilege is waived.
CONCLUSION
[¶42.] We reverse and remand for findings as to whether Twin City injected,
by an affirmative act, its reliance upon the advice of counsel into the bad faith
litigation thereby making the disputed communications relevant to the case such
that would constitute an implied waiver of the attorney-client privilege. See
Bertelsen, 2011 S.D. 13, ¶ 53, 796 N.W.2d at 703. If the circuit court finds that
Twin City impliedly waived the attorney-client privilege by injecting the advice of
counsel into the bad faith litigation, then the court must conduct an in camera
review to determine and make findings as to the extent that the attorney-client
communications should be revealed. See id. (holding that “a client only waives the
privilege to the extent necessary to reveal the advice of counsel he placed at issue”).
Regarding the claim of complete delegation, the circuit court must conduct an in
camera review of the disputed documents to determine and make findings as to
whether Twin City unequivocally delegated its initial claims function and relied
exclusively upon outside counsel to conduct the investigation and determination of
coverage. See DM & E, 2009 S.D. 69, ¶¶ 55-56, 771 N.W.2d at 638.
[¶43.] In addition, Twin City shall submit to the circuit court some or all of
the 199 “other” claim files along with a privilege log, if the court determines that
any of those claim files are relevant to this bad faith litigation, for an in camera
review. See id. To the extent that any of the 199 “other” claim files are relevant to
the bad faith litigation, the circuit court must apply the “most significant
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relationship” test to each of the relevant 199 “other” claim files in order to
determine under the law of the appropriate state whether the attorney-client
privilege was waived.
[¶44.] Reversed and remanded with directions for proceedings consistent
with this opinion.
[¶45.] GILBERTSON, Chief Justice, and ZINTER and SEVERSON, Justices,
and KONENKAMP, Retired Justice, concur.
[¶46.] KERN, Justice, not having been a member of the Court at the time this
action was assigned to the Court, did not participate.
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