Argued: November 18, 2014,
As Corrected July 16, 2015.
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.
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.
WILBUR, Justice. GILBERTSON, Chief Justice, and ZINTER and SEVERSON, Justices, and KONENKAMP, Retired Justice, concur. KERN, Justice, not having been a member of the Court at the time this action was assigned to the Court, did not participate.
[¶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.
[¶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. 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 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 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 and (2) 247 workers' compensation claim files administered under the Initiative. 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 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 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. 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 " other" claim files. 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, 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 ...