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Industrial Systems & Fabrication, Inc. v. Western National Assurance Co.

United States District Court, E.D. Washington

October 30, 2014

INDUSTRIAL SYSTEMS & FABRICATION, INC., a Washington corporation, Plaintiff,
WESTERN NATIONAL ASSURANCE COMPANY, a Minnesota company, Defendant.



Before the Court are several motions related to discovery: Plaintiff's Motion to Compel, ECF No. 47; Defendant's Motion to Compel Written and Deposition Testimony, ECF No. 49; Plaintiff's Motion for Protective Order, ECF No. 64; and Defendant's Motion to Expedite and for Leave to File Supplemental Memorandum, ECF No. 69.

The Court held a telephonic hearing on these motions on October 24, 2014. Adam Chambers represented Plaintiff. Dana Ferestien and Bridget Schuster appeared on behalf of Defendant. The Court has considered all of the relevant filings and the parties' oral arguments. The Court is fully informed. This Order memorializes and supplements the Court's oral rulings.

The background of this action is discussed in the Court's Order Denying Motion to Quash, ECF No. 46, and will not be repeated here. The Court considers each motion in turn.

1. Plaintiff's Motion to Compel

Plaintiff moves for an order compelling Defendant, Plaintiff's insurer, to provide discovery documents that Defendant claims are protected by the attorneyclient privilege. ECF No. 47. Defendant submitted a privilege log, claiming that multiple documents are subject to the attorney-client privilege or other protections. ECF No. 54-1. The parties dispute whether the attorney-client privilege applies in light of a recent decision of the Washington State Supreme Court, Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686, 697 (2013).

In Cedell, the court attempted to balance the tension between the attorneyclient privilege and an insured's need for adequate discovery from an insurer in order to pursue an insurance bad faith claim. 176 Wn.2d at 698. Recognizing that an insured must have access to an insurer's file to discover facts in support of a bad faith claim, the court found that permitting "a blanket privilege in insurance bad faith claims because of the participation of lawyers hired or employed by insurers would unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices." Id. at 696-97. Therefore, the court adopted "the 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." Id. at 698-99.

An insurer may rebut this presumption, however, "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 under the law." Id. at 699. If the insurer meets this showing, "[it] is entitled to an in camera review of the claims file, and to the redaction of communications from counsel that reflected the mental impressions of the attorney to the insurance company, unless those mental impressions are directly at issue in its quasi-fiduciary responsibilities to its insured." Id.

If an insurer successfully shows that the attorney-client privilege applies, Cedell holds that the insured nevertheless may be entitled to allegedly protected documents under the civil-fraud exception. The Cedell court outlined the following procedure for determining whether the civil-fraud exception applies:

First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials. Second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorneyclient privilege shall be deemed to be waived.

Id. at 700.

Cedell is applied somewhat differently in federal court than in state court, as the parties agree. See ECF Nos. 53 at 4-5; 57 at 3 n.2. "Under the Erie doctrine, a federal court sitting in diversity generally applies the substantive law of the forum state, but federal procedural law." MKB Constructors v. Am. Zurich Ins. Co., C-13-0611-JLR, 2014 WL 2526901, at *5 (W.D. Wash. May 27, 2014) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79 (1939)). Accordingly, while the scope of the attorney-client privilege, as described in Cedell, is a matter of substantive law that applies in this Court, Cedell 's detailed process of in camera review is a matter of procedural law. Id. at *6-7. Pursuant to federal law, the Court exercises its discretion in determining whether to conduct in camera review. Id. at *7; see also Carolina Cas. Ins. Co. v. Omeros Corp., C-12-287-RAJ, 2013 WL 1561963, at *3 (W.D. Wash. Apr. 12, 2013) ("exercise[ing] its authority to order an in camera review" without suggesting that the process is mandatory in federal court).

Another difference regarding the application of Cedell in federal court, and again due to the Erie doctrine, is that while the attorney-client privilege is a substantive legal issue, the work product doctrine is a matter of procedural rule. MKB Constructors, 2014 WL 2526901, at *8; see also Fed.R.Civ.P. 26(b)(3). Therefore, Cedell 's work product analysis does not apply here.

Parsing only the attorney-client privilege law from Cedell is complicated by the fact that Cedell at times does not differentiate between that privilege and the separate work product doctrine. See MKB Constructors, WL 2526901, at *4 n.3 (noting that Cedell "often conflates the two in its analysis or uses the terms nearly interchangeably"); Philadelphia Indem. Ins. Co. ...

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