Merlin Law Group is closely monitoring a case pending before the South Carolina Supreme Court to see how it answers the question: “Does South Carolina law support application of the ‘at issue’ exception to the attorney-client privilege such that a party may waive the privilege by denying liability in its answer?”

Time and time again, insurers object to handing over their claims file by stating the claims file is protected by attorney-client privilege, and if anything is produced, in my experience it is heavily redacted.

That may soon change in South Carolina.

In a case brought against Mt. Hawley Insurance Company by ContraVest Construction Company for bad faith by failing to defend and indemnify ContraVest, Mt. Hawley objected to producing the claims file, claiming it violated attorney-client privilege. Specifically, ContraVest was requesting production of Mt. Hawley’s file on ContraVest’s claim for excess coverage and the files relating to all ContraVest claims under its excess liability policies.

The US District Court for the District of South Carolina granted ContraVest’s motions to compel the requested discovery for in camera inspection. The court, analyzing City of Myrtle Beach v. United Nat. Ins. Co., No. 4:08-1183-TLW-SVH (D.S.C. Aug. 27, 2010), relied on the premise that “there was no per se waiver of the attorney-client privilege simply by a plaintiff making allegations of bad faith. However, if a defendant voluntarily injected an issue in the case, whether legal or factual, the insurer voluntarily waived, explicitly or impliedly, the attorney-client privilege.” In layman’s terms: Because Mt. Hawley denied bad faith in its answer, Mt. Hawley waived attorney-client privilege regarding the attorney-client communications in the claims file.

Mt. Hawley sought a writ of mandamus from the U.S. Fourth Circuit Court of Appeals to vacate the district court’s granting the motion to compel, challenging the holding that the files were not protected by attorney-client privilege by denying liability for bad-faith failure to defend or indemnify.

The Fourth Circuit states in its decision that if South Carolina law doesn’t support the ‘at issue’ exception as applied in City of Myrtle Beach, the district court’s granting the motions to compel was erroneous. As the Fourth Circuit could not find South Carolina authority that definitively answers the question, it certified the question to the Supreme Court of South Carolina:

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

We will keep you updated. The case is In re Mt. Hawley Ins. Co., No. 18-1401 (4th Cir. June 28, 2018).