In MKB Constructors v. Am. Zurich Ins. Co., No. C13-0611, 2014 U.S. Dist. LEXIS 78883 (W.D. Wash. May 27, 2014), the District Court followed federal law, rather than Washington state court precedent, to find the insurance company had established that work product protection applied to documents prepared by subrogation counsel. With respect to the attorney-client privilege, the court applied precedent from the Washington Supreme Court to conclude that the attorneys were not engaged in investigative activities, so their communications with the insurers were not discoverable.

MKB Constructors arose out of MKB’s work on a new school building. MKB’s contract to construct a building pad and driveway on which the school would be built was terminated after MKB discovered that the ground beneath the building pad had settled significantly and the planned volume of fill set forth in the contract would fail to reach the necessary grade. MKB sought coverage under its first-party property insurance, but the insurer denied the claim.

MKB brought a motion to compel the production of documents that the insurer withheld or redacted on the basis of the attorney-client privilege and work product doctrine. The insured was specifically seeking production of documents prepared by the insurance company’s subrogation counsel, as well as the insurer’s communications with its coverage attorneys.

The District Court cited to the applicable Federal Rule governing disclosure of otherwise-protected work product, Fed. R. Civ. P. 26(b)(3)(A)(ii), and also noted that, in the Ninth Circuit, an insured may be able to obtain opinion work product where claims of bad faith are involved, but that determination is made on a “case-by-case basis.” MKB Constructors, 2014 U.S. Dist. LEXIS 78883, at *9. For non-opinion work product, however, the insured must show that the mental impressions in that work product “are at issue and their need for the material is compelling.” Id. (quoting Holmgren v. State Farm Mut. Auto. Ins. Co., 976 F.2d 573, 577 (9th Cir. 1992)) (emphasis in Holmgren).

The District Court also discussed a 2013 Washington Supreme Court decision, Cedell v. Farmers Insurance Co. of Washington, 176 Wn.2d 686, 295 P.3d 239 (Wash. 2013), in which the court significantly altered the attorney-client privilege in the context of first-party bad faith claims. In that case, the Washington Supreme Court created a “presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant.” Cedell, 295 P.3d at 246. An insurer may overcome that presumption by showing its attorney “was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists.” Id. An insurer may make this showing through in camera review of the documents in question.

However, the District Court in MKB Constructors explained that, a federal court sitting in diversity, it must apply federal procedural law. MKB Constructors, 2014 U.S. Dist. LEXIS 78883, at *16 (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79, 48 S. Ct. 817, 82 L. Ed. 1188 (1939)). Thus, although the Cedell pronouncements regarding attorney-client privileged communications apply, the Cedell requirements regarding in camera review do not. Id. at *18, *23. Further, federal law governs the applicability of the work product doctrine. Id. at *25; see also Johnson v. Allstate Prop. & Cas. Ins. Co., No. C14-5064, 2014 U.S. Dist. LEXIS 121342 (W.D. Wash. Aug. 29, 2014) (citing to MKB Constructors and reaching the same conclusions regarding the applicability of Cedell); Anderson v. Country Mut. Ins. Co., No. C14-0048, 2014 U.S. Dist. LEXIS 118400 (W.D. Wash. Aug. 25, 2014) (same).

Therefore, in assessing the work product doctrine, the court considered Fed. R. Civ. P. 26(b)(3) and applicable federal case law. It found the insurer met its burden under federal law to show that the communications with its subrogation counsel should be withheld because subrogation activity anticipates litigation “through its very purpose,” and MKB did not make a showing of either a “substantial” or “compelling” need for those documents. MKB Constructors, 2014 U.S. Dist. LEXIS 78883, at *28-29.

The insurer also met its burden to show the attorney-client privilege applied to documents created by the claim adjuster about a conference call with coverage counsel. There was no indication coverage counsel had engaged in any investigative functions, such as taking witness examinations under oath. Thus, the court found the insurer successfully overcame Cedell’s presumption of discoverability by establishing that the attorney was not involved in the claim adjusting process. Id. at 29-31. The court also explained that a claim of bad faith alone does not overcome the privilege, as the insured must also make a showing that the insurer engaged in “an act of bad faith tantamount to civil fraud,” but MKB had not made such a showing. Id. at 31-32 (citing Cedell, 295 P.3d at 246-47).

Tressler Comments

MKB Constructors offers significant clarification of the Washington Supreme Court’s precedent in Cedell. Although Cedell seemed to create a bright-line rule regarding the discoverability of adjustment-related documents, despite the involvement of counsel, MKB Constructors limits the application — particularly in the context of federal cases. This decision may lead to venue-related disputes in Washington, as insurers will seek to remove cases to federal court to avoid the overreaching discovery presumptively available in Washington state court, whereas insureds will seek to proceed in state court. However, even in state court, it seems Cedell does not completely dissolve protections for adjustment-related communications between insurers and their coverage counsel, as long as it can be shown that the attorney was engaged in offering legal opinions and advice, rather than claim adjustment.