In re: Mt. Hawley Insurance Company, Petitioner, In Which Contravest, Inc., Contravest Construction Company and Plantation Point Horizontal Property Regime Owners Association, Inc., as assignees, are Respondents. Appellate Case No. 2018-001170
April 17, 2019
CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR THE
Mitchell Brown, William C. Wood Jr., and Blake T. Williams,
all of Nelson Mullins Riley & Scarborough, LLP, of
Columbia; and Andrew K. Epting Jr., of Andrew K. Epting Jr.,
LLC, of Charleston, all for Petitioner.
A. Kirchner, Michael A. Timbes and Thomas J. Rode, all of
Thurmond Kirchner & Timbes, P.A., of Charleston, for
T. Culbreath and Janice Holmes, both of Gallivan, White,
& Boyd, PA, of Columbia, for amici curiae The American
Property Casualty Insurance Association and The South
Carolina Insurance Association.
G. Utsey III, of Peters, Murdaugh, Parker, Eltzroth &
Detrick, P.A., of Charleston, and J. Ashley Twombley, of
Twenge & Twombley Law Firm, of Beaufort, for amicus
curiae the South Carolina Association for Justice.
presented with a certified question from the United States
Court of Appeals for the Fourth Circuit. The underlying case
is an insurance bad faith action against an insurance company
for its failure to defend its insured in a construction
defect action. The insured settled the construction defect
action and brought a bad faith tort action. When the insurer
asserted it acted in good faith in denying coverage, the
insured sought to discover the reasons why the insurer denied
coverage. According to the insurer, the discovery requests
included communications protected by the attorney-client
relationship. The federal district court reviewed the
parties' respective positions, determined the insured had
established a prima facie case of bad faith, and ordered the
questioned documents to be submitted to the court for an
in camera inspection. The insurer then sought a writ
of mandamus from the Fourth Circuit to vacate the district
court's order regarding the discovery dispute. In turn,
the Fourth Circuit certified the following question to this
Does South Carolina law support application of the "at
issue" exception to attorney-client privilege such that
a party may waive the privilege by denying liability in its
parties, especially the insured, assert the certified
question does not accurately represent the correct posture of
the case. In fact, the insured concedes the narrow question
presented requires an answer in the negative. We agree, for
we find little authority for the untenable proposition that
the mere denial of liability in a pleading constitutes a
waiver of the attorney-client privilege. For the reasons set
forth below, we elect to analyze the issue narrowly in the
limited context of a bad faith action against an insurer. We
are constrained to answer the certified question as follows:
"No, denying liability and/or asserting good faith in
the answer does not, standing alone, place the privileged
communications 'at issue' in the
Certification Order, the Fourth Circuit summarized the
relevant facts as follows:
Mount Hawley [Insurance Company ("Mount Hawley")]
provided ContraVest Construction Company
("Contravest") with excess commercial liability
insurance from July 21, 2003, to July 21, 2007. During that
period, Contravest constructed the Plantation Point
development in Beaufort County, South Carolina. In 2011 the
Plantation Point Horizontal Property Regime Owners
Association ("the Owners Association") sued
Contravest for alleged defective construction of Plantation
Point. Mount Hawley refused Contravest's demands to
defend or indemnify Contravest in the suit, as Contravest
contended was required by its insurance policies, and
Contravest ultimately settled the case.
Contravest and the Owners Association subsequently sued Mount
Hawley in South Carolina court, alleging bad faith failure to
defend or indemnify, breach of contract, and unjust
enrichment. Mount Hawley removed the case to the United
States District Court for the District of South Carolina
pursuant to 28 U.S.C. § 1441 (2012), and federal subject
matter jurisdiction exists under 28 U.S.C. § 1332 (2012)
based upon complete diversity of citizenship between the
parties and damages alleged to be greater than $75, 000.
During discovery, the plaintiffs sought production of, first,
Mount Hawley's file on Contravest's claim for excess
coverage relating to the Plantation Point suit, and later,
Mount Hawley's files relating to all of Contravest's
claims under its excess liability policies. See Fed.
R. Civ. P. 26(b)(1), 34(a)(1)(A). Mount Hawley contended that
these files contained material protected by the
attorney-client privilege, and produced files in redacted
form with accompanying privilege logs. See Fed. R.
Civ. P. 26(b)(5)(A). The plaintiffs filed multiple motions to
compel, arguing that Mount Hawley waived the attorney-client
privilege as to these files. See Fed. R. Civ. P.
37(a)(3)(B)(iv). The district court adopted the
recommendation of the magistrate judge, granted the motions
to compel, and ordered Mount Hawley to produce the files for
in camera inspection. ContraVest Inc. v. Mt. Hawley Ins.
Co., 273 F.Supp.3d 607, 622-23 (D.S.C. 2017). The
district court subsequently denied Mount Hawley's motion
for reconsideration [in which it asked the district court to
certify four questions of law to the Supreme Court of South
Carolina]. Mount Hawley then sought a writ of mandamus from
[the Fourth Circuit] to vacate the district court's order
granting the motions to compel.
In its petition for a writ of mandamus, Mount Hawley
challenges the district court's holding that the relevant
files were not protected by the attorney-client privilege
because Mount Hawley put them "at issue" in the
case by denying liability for bad faith failure to defend or
indemnify. Because this is a diversity action involving
claims for which South Carolina law provides the rule of
decision, South Carolina's law of attorney-client
privilege applies. See Ashcraft v. Conoco, Inc., 218
F.3d 282, 285 n.5 (4th Cir. 2000); Fed.R.Evid. 501. In South
Carolina the attorney-client privilege is defined as follows:
(1) Where legal advice of any kind is sought (2) from a
professional legal adviser in his capacity as such, (3) the
communications relating to that purpose (4) made in
confidence (5) by the client, (6) are at his instance
permanently protected (7) from disclosure by himself or by
the legal adviser, (8) except the protection be waived.
Tobaccoville USA, Inc. v. McMaster, 387 S.C. 287,
293, 692 S.E.2d 526, 530 (2010). "In general, the burden
of establishing the privilege rests upon the party asserting
it." Wilson v. Preston, 378 S.C. 348, 359, 662
S.E.2d 580, 585 (2008).
In finding that the relevant files were not protected by
South Carolina's attorney-client privilege, the district
court relied on City of Myrtle Beach v. United Nat[ional]
Ins[urance] Co., No. 4:08-1183-TLW-SVH, 2010 WL 3420044
(D.S.C. Aug. 27, 2010) (unpublished). City of Myrtle
Beach also involved a bad faith insurance suit under
South Carolina law in which the insured sought to compel the
insurer to produce the relevant claim files, and the insurer
argued that the files contained material protected by the
attorney-client privilege. Id. at *1-2. The district
court adopted the approach articulated in Hearn v.
Rhay, 68 F.R.D. 574 (E.D. Wash. 1975), as
"consistent with established South Carolina law."
Id. at *5. Applying Hearn, the district
court found that
there is no per se waiver of the attorney client privilege
simply by a plaintiff making allegations of bad faith.
However, if a defendant voluntarily injects an issue in the
case, whether legal or factual, the insurer voluntarily
waives, explicitly or impliedly, the attorney-client
privilege. Thus, "voluntarily injecting" the issue
is not limited to asserting the advice of counsel as an
affirmative defense. A party's assertion of a new
position of law or fact may be the basis of waiver.
Id. (citation omitted).
Applying this definition of waiver, the court in City of
Myrtle Beach found that "for the purposes of the
motion to compel, the insured has presented a prima facie
case of bad faith," and the insurer failed to meet its
burden of establishing the absence of waiver of the attorney
client privilege on account of the defenses asserted in its
answer, including that the insurer acted reasonably and in
good faith. Id. at *7. The court noted that
"while this ruling amounts to a virtual per se waiver of
the privilege in this case, this result is based on the facts
and issues presented by the insurer in its Answer and its
failure to meet its burden as to the applicability of the
privilege with this in mind." Id.
In the present case, the district court rejected Mount
Hawley's argument that City of Myrtle Beach was
inconsistent with South Carolina law in light of the fact
that one member of the Supreme Court of South Carolina
criticized the Hearn decision in a separate opinion
concurring in part and dissenting in part. See Davis v.
Parkview Apartments, 409 S.C. 266, 291-96, 762 S.E.2d
535, 549-51 (2014) (Pleicones, J, concurring in part and
dissenting in part). The district court found "that the
numerous decisions that have applied City of Myrtle
Beach in this district provide stronger evidence than
the separate opinion in Davis that the Supreme Court of South
Carolina would adopt such an approach."
ContraVest, 273 F.Supp.3d at 616. The district court
also concluded that this approach strikes the best balance
between "the important policy goals of the
attorney-client privilege against the substantive interests
underlying an insured bad faith claim." Id.
Following the approach articulated in City of Myrtle
Beach, the district court concluded that because the
plaintiffs had established a prima facie case of bad faith
failure to insure, and Mount Hawley in its answer denied bad
faith liability, Mount Hawley waived the attorney-client
privilege with respect to the attorney-client communications
in the claim files, to the extent such communications are
relevant under [Rule 26 of the Federal Rules of Civil
Procedure]. Id. at 611-23. The court thus ordered Mount
Hawley to produce the files for an in camera review.
Id. at 623.
of Certification at 2-6 (footnotes omitted) (internal