Lead Opinion
OPINION
¶ 1 This is a bad faith action in which a class of policyholders of State Farm Mutual Automobile Insurance Company sought discovery of files and other documents relating to State Farm’s rejection of their underinsured and uninsured motorist claims. State Farm resisted discovery, arguing the documents were protected by the attorney-client privilege. We granted review to consider the applicable standard for determining whether the privilege has been waived in cases in which the mental state of a litigant is at issue. We must also decide whether the court of appeals used the correct legal test for determining the existence of an implied waiver of the attorney-client privilege and, if so, whether the test was properly applied to the facts of this case.
FACTS AND PROCEDURAL BACKGROUND
¶ 2 In 1995, a class representing approximately 1,000 State Farm insureds (Plaintiffs) was formed to contest State Farm’s denial of certain stacking claims. Between 1988 and 1995, State Farm took the position that insureds who had more than one State Farm policy covering their several cars could not apply the uninsured (UM) and underinsured (UIM) motorist coverages of those multiple policies to a single loss. For example: an insured owned two cars, each of which was covered by a separate State Farm policy. While driving car A, the insured was seriously injured in an accident. Because the other driver’s insurance was not sufficient to compensate the insured for all of his damages, the insured sought additional compensation from the UIM coverage of the policies covering both car A, which was in the accident, and car B.
¶3 State Farm denied requests to stack UIM coverages in this manner based on an anti-stacking provision in its policy form. Plaintiffs allege that State Farm acted unreasonably because its anti-stacking language did not comply with A.R.S. § 20-259.01(H) (Supp.1999) (then numbered § 20-259.01(F)), which allowed automobile liability insurers to
¶ 4 In Lindsey, we held that State Farm’s anti-stacking language was ineffective because it was not sufficiently clear to put policy owners on notice that A.R.S. § 20-259.01(H) was being invoked and that they therefore had a choice of which policy and which limits to apply.
¶5 During discovery, State Farm produced numerous documents from claims files in other cases and conceded it had sought and received advice of counsel about whether to pay or reject Plaintiffs’ claims. State Farm denied it intended to show good faith by advancing a defense of reliance on advice of counsel and claimed correspondence with counsel relating to denial of stacking claims was protected by the attorney-client privilege. The documents in question evidently fill five privilege logs, covering communications with fifteen law firms. Plaintiffs filed a motion to compel discovery and for an in-camera review of the contested documents. They did not agree with State Farm’s characterization of its position, arguing that State Farm injected the subjective good faith beliefs and mental state of its claims people as an issue in the case, thus implicitly waiving the privilege.
¶ 6 After a hearing, the trial judge granted Plaintiffs’ motion to compel production of the contested documents. Evidently agreeing with Plaintiffs’ characterization, the judge stated:
Plaintiff next argues that the attorney-client privilege has been impliedly waived by Defendants based upon a corporate knowledge/advice of counsel defense. If a defendant sets forth a defense that it is not liable because it based its decision on the advice of counsel then it has impliedly waived the attorney-client privilege by placing the advice of counsel at issue. Defendants in this case claim that it has not expressly raised the defense of advice of counsel.
In this case, Defendants have claimed that its managers held a good faith belief in their interpretation that stacking was not permitted under its insurance policies. While not expressly setting forth the advice of counsel defense, the facts in this case demonstrate that the Defendants’ po*56 sition on stacking was made after having its counsel review the applicable statutes and developing cases and advise the corporate decision makers. Thus, the advice of counsel was a part of the basis for Defendants' position that was taken. The advice of counsel defense is impliedly one of the bas[e]s for the defense Defendants maintain in this action. Defendants have, therefore, impliedly waived the attorney-client privilege.
Minute Entry, Jan. 19,1999, at 4 (emphasis added).
¶ 7 The judge’s minute entry, read in light of counsel’s previous briefing, shows that he accepted State Farm’s avowal that it would not advance an express reliance on advice-of-counsel defense. He concluded further that State Farm would not be relying on the objective reasonableness of the decision to deny stacking. Instead, State Farm was defending Plaintiffs’ claim by asserting that its-claims managers held a subjective good-faith belief that their decision to deny stacking was reasonable under what they knew about the state of the law as it then existed. See, e.g., State Farm’s avowal that it would defend in part “on what its decisionmakers knew, thought and did.” See Petition for Review, Appendix 5, at 1. The judge evidently believed that what State Farm knew included advice of counsel because that “was a part of the basis for” the defense. He therefore concluded that State Farm impliedly waived the privilege when it put at issue the subjective legal knowledge of its managers after they sought and received legal advice. As will be explained, we find no abuse of discretion in those findings.
¶ 8 State Farm filed a special action in the court of appeals contesting the trial judge’s finding of waiver. The court of appeals held that the “judge misapplied the law” in finding a waiver because “the record shows” State Farm’s “defense is that it reasonably believed the policies complied with the [anti-stacking] statute and that this belief was based on the pertinent case law that existed before ... Lindsey." State Farm Mut. Auto. Ins. Co. v. Lee,
¶ 9 The court of appeals analyzed whether a finding of waiver was nonetheless warranted based on Arizona’s adherence to the “fairness approach” in deciding waiver. Id. at 353-58 ¶¶ 21-36,
¶ 10 The court of appeals then decided that the so-called Hearn test, as articulated in Hearn v. Rhay,
(1) assertion of the privilege was a result of some affirmative act, such as filing suit [or raising an affirmative defense], by the asserting party; (2) through this affirmative act, the asserting party put the protected' information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.
¶ 11 The court of appeals found that prongs one and two were not satisfied because State Farm made no affirmative act
DISCUSSION
¶ 12 In discovery matters, including rulings on assertion of the privilege, the trial judge has broad discretion that we review only for abuse. See Brown v. Superior Court,
A. State Farm’s contention
¶ 13 An important preliminary question, and thus our first concern, is to determine State Farm’s position in defending this case — a question on which there has been considerable disagreement between counsel, the trial judge, and the court of appeals. It is also a matter on which there was and is considerable disagreement in the briefs and in oral argument before this court. After reviewing the record, we think that the best characterization of State Farm’s defense is that given by State Farm itself:
State Farm made clear both here and below that its defense has both objective and subjective components because the defense necessarily mirrors plaintiffs’ claims, which themselves have both objective and subjective components. Once again, State Farm asserts that its conduct was objectively reasonable and subjectively reasonable and in good faith because of what its policies, the statute and the case law actually said (not what State Farm’s lawyers said they said), and because of what its personnel actually knew and did (not what State Farm’s lawyers told them to do).
State Farm’s Response to Plaintiffs’ Motion for Reconsideration (in the Court of Appeals), at 3 (emphasis added). State Farm’s position in this court is essentially the same. Its defense will include “what its personnel actually knew and did” but “not because of what its lawyers advised.” Response to Petition for Review, at 5.
¶ 14 State Farm had its agents evaluate the law — policy provisions, statutes, and cases. As part of that evaluation, the agents were informed by counsel. On the basis of this evaluation, including, we must suppose, the information gained from counsel, State Farm’s agents denied the claims in good faith based on their view of the law, not because of what its lawyers advised. We note, of course, that State Farm does not claim— perhaps, in honesty, could not — that the lawyers’ advice formed no part of the evaluation. State Farm also does not claim that the information provided by the lawyers was not included in the evaluation process but only that it did not do what it did because of what its lawyers advised. Given these avowals, we believe the trial judge was well within his discretion in concluding that advice of counsel was a part of the basis for State Farm’s defense. What State Farm knew about the law obviously included what it learned from its lawyers.
¶ 15 The question before us is whether, having alleged that its actions were objectively and subjectively reasonable and in good faith based on its evaluation of the law — an evaluation that included advice of counsel, State Farm may then raise the privilege as a bar to prevent discovery of the information in the possession of its employees and managers when they made the subjective determination and concluded that the
¶ 16 Thus, we agree with the court of appeals that before a waiver can be implied, a Hearn-like requirement of an affirmative act of putting the privileged materials at issue is necessary. See Lee,
¶ 17 As will be seen from our eases, there is no question that express reliance on an advice-of-counsel defense would constitute an implied waiver under almost any test. See also 1 John W. Strong, McCormick on Evidence § 93, at 373 (5th ed.1999). The question here is whether and when an assertion short of an express advice-of-counsel defense waives the privilege. Hearn, of course, found a waiver of privilege, despite the government’s disavowal of reliance on an advice-of-counsel defense, because the government had affirmatively claimed a qualified immunity, thus putting in issue the question of “disregard of settled, undisputable law.”
B. The Arizona cases
¶ 18 In previous opinions, our courts have found reliance on a privilege unfair when used as both a sword and a shield. In Ulibarri, for instance, a patient sued her psychiatrist for medical malpractice.
[I]t is only fair that [the psychiatrist] be allowed to ask the attorney whether those alleged communications occurred.
“[The patient] is not permitted to thrust his lack of knowledge into the litigation as*59 a foundation or condition necessary to sustain his claim against [the psychiatrist] while simultaneously retaining the lawyer-client privilege to frustrate proof of knowledge negating the very foundation or condition necessary to prevail on the claim asserted against [the psychiatrist]. Such tactic would repudiate the sword-shield maxim...
¶ 19 In Elia v. Pifer, our court of appeals applied the Hearn test and found a waiver in a legal malpractice action in which a plaintiff claimed privilege for the communications between himself and the attorneys he hired after the defendant’s alleged malpractice occurred.
¶ 20 This, the court said “was consistent with Arizona law.” Id. at 82 ¶ 40,
¶ 21 Similar language was used when a criminal defendant claimed he had not been given information essential for an informed decision on his plea agreement. See State v. Cuffle,
C. Disavowal of express reliance on advice of counsel while defending on basis of legal knowledge or lack thereof
¶22 The court of appeals in the present case correctly noted that State Farm was not relying on counsel’s advice to establish that its conduct was reasonable and in good faith. If State Farm were merely asking its expert witness to evaluate the reasonableness of its conduct under the statutes, the case law, and the policy language, State Farm would not have put counsel’s advice to the claims managers at issue; nor would Plaintiffs need to know what the claims managers actually believed about the legality of stacking to prove that State Farm’s position was not objectively reasonable.
¶ 23 But as our cases have shown, a litigant’s affirmative disavowal of express reliance on the privileged communication is not enough to prevent a finding of waiver. When a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question. Thus, the advice received from counsel as part of its investigation and evaluation is not only relevant but, on an issue such as this, inextricably intertwined with the court’s truth-seeking functions. A litigant cannot assert a defense based on the contention that it acted reasonably because of what it did to educate itself about the law, when its investigation of and knowledge about the law included information it obtained from its lawyer, and then use the privilege to preclude the other party from ascertaining what it actually learned and knew. Justice Martone put it well in describing an implied waiver of the marital privilege:
Where, as here, (1) a litigant asserts a claim in which she affirmatively puts protected information at issue, (2) such information is intended to defeat a statutory defense ..., and (3) the litigant asserts the marital privilege to deny the opposing party access to evidence vital to defeating the claim, then the party asserting the privilege has waived it.
Ulibarri’s allegations of memory loss placed her memory at issue and were intended, at least in part, to defeat the statute of limitations defense. She then asserted the marital privilege as to communications with her husband, thus denying [defendant] vital rebuttal evidence. In my view, we should not allow a litigant “to use as a sword the protection which*61 the Legislature awarded them as a shield.”
Hancock,
A party cannot force an insurer to waive the protections of the attorney-client privilege merely by bringing a bad faith claim. Where, however, an insurer makes factual assertions in defense of a claim which incorporate, expressly or implicitly, the advice and judgment of its counsel, it cannot deny an opposing party “an opportunity to uncover the foundation for those assertions in order to contradict them.”
Our ruling does not create a rule of per se waiver of the attorney-client privilege in insurance bad faith cases. But where, as here, an insurer makes factual representations which implicitly rely upon legal advice as justification for non-payment of claims, the insurer cannot shield itself from disclosure of the complete advice of counsel relevant to the handling of the claim.
Tackett v. State Farm Fire & Cas. Ins. Co.,
¶ 24 The court of appeals refused to follow Tackett because it believed the case “placed far too low a burden” on assertion of the privilege. Lee,
¶ 25 Tackett involved a bad faith claim based on the carrier’s delay in evaluation and its assertion that it handled the claim in a routine manner.
A privileged person would seldom be found to waive, if his intention not to abandon could alone control the situation. There is always also the objective consideration that when his conduct touches a certain point of disclosure, fairness requires that his privilege shall cease whether he intended that result or not.
8 Wigmore, supra § 2327, at 636.
¶ 26 But where is the certain point at which fairness requires that assertion of the
Putting a privileged communication into issue. At least three approaches to the waiver [issue exist]: The first approach radically holds that, whenever a party seeks judicial relief, the party impliedly waives the privilege. A second approach would attempt to balance the need for disclosure against the need for protecting the confidentiality of the client’s communications on the facts of the individual case, [citing Elia] The third approach avoids the extremes of an over-inclusive automatic-waiver rule or an indeterminate, ad hoc balancing approach. Instead, it focuses on whether the client asserting the privilege has interjected the issue into the litigation and whether the claim of privilege, if upheld, would deny the inquiring party access to proof needed fairly to resist the client’s own evidence on that very issue, [citing Hearn ]
Restatement (Third) of Law Governing Lawyers § 80 (Reporter’s Note, cmt. b) (other citations omitted). Under the first two views, the privilege might be waived whenever a client’s mental state was in issue. This, according to McCormick, is “dubious” absent “acceptance of the Benthamite principle that the privilege ought to be overthrown to facilitate the search for truth.” 1 McCormick, supra § 93, at 373. We do not accept that' principle, though some of the language of our cases would seem to do so, and instead adopt a more narrow view.
¶ 27 The text of the rule reads as follows, so far as relevant to the present ease:
The attorney-client privilege is waived for any relevant communication if the client asserts as to a material issue in a proceeding that:
(a) the client acted upon the advice of a lawyer or that the advice was otherwise relevant to the legal significance of the client’s conduct....
Restatement § 80(1) (emphasis added).
¶28 We believe the third approach described in the Reporter’s Note, as explained in comment b, is not only the best but is at least as restrictive, and perhaps more, as the one we have followed in Arizona. We therefore apply Restatement § 80 here. In doing so, we reject the idea that the mere filing of a bad faith action, the denial of bad faith, or the affirmative claim of good faith may be found to constitute an implied waiver of the privilege. The party that would assert the privilege has not waived unless it has asserted some claim or defense, such as the reasonableness of its evaluation of the law, which necessarily includes the information received from counsel. In that situation, the party claiming the privilege has interjected the issue of advice of counsel into the litigation to the extent that recognition of the privilege would deny the opposing party access to proof without which it would be impossible for the factfinder to fairly determine the very issue raised by that party. We believe such a point is reached when, as in the present case, the party asserting the privilege claims its conduct was proper and permitted by law and based in whole or in part on its evaluation of the state of the law. In that situation, the party’s knowledge about the law is vital, and the advice of counsel is highly relevant to the legal significance of the client’s conduct. Add to that the fact that the truth cannot be found absent exploration of that issue, and the conditions of Restatement § 80 are met.
¶29 This approach accords with the Arizona authority reviewed above — though it
¶ 30 Justice Martone’s dissent reaches the opposite conclusion, arguing that there was no implied waiver of the privilege because Plaintiffs, not State Farm, raised the subjective good faith of State Farm’s claims people. In making that argument, the Martone dissent overlooks the basis of our decision. It is true that Plaintiffs raised the subjective bad faith of State Farm’s employees, but it is not State Farm’s denial of that allegation that waives the privilege. Nor does State Farm’s affirmative assertion of good faith waive the privilege. It is, rather, State Farm’s affirmative assertion that its actions were reasonable because of its evaluation of the law, based on its interpretation of the policies, statutes, and case law, and because of what its personnel actually knew and did.
¶ 31 But what its personnel did, presumably among other things, was to consult
¶ 32 The Martone dissent argues that State Farm has not said the lawyers’ advice was relevant to the legal significance of its conduct. Dissent at ¶ 48. True, but such an assertion is the functional equivalent of an express advice-of-counsel defense. Most sophisticated litigants will know better than to dig that hole for themselves. We do not read the Restatement to require such a magical admission, nor to require that the court accept as dispositive the client’s assertion that it did not rely on the advice it received. Dissent at ¶ 51. If it asserted that it had relied, of course, that would, again, be equivalent to an express advice-of-counsel defense.
¶ 33 There is, of course, room for disagreement on this subject, and there is plenty of disagreement.
¶ 34 By asserting the subjective evaluation and understanding of its personnel about the state of the law on stacking, State Farm has affirmatively injected the legal knowledge of its claims managers into the litigation and put the extent, and thus the sources, of this legal knowledge at issue. State Farm’s claims managers cannot testify that they investigated the state of the law and concluded and believed they were acting within the law but deny Plaintiffs the ability to explore the basis for this belief and to determine whether it “might have known its actions did not conform to the law.” Cox,
¶ 35 State Farm argues, however, that it only raised the subjective beliefs of its claims people because Plaintiffs alleged State Farm not only misinterpreted the law but knew it was doing so. Thus, State Farm says, it was Plaintiffs who injected the issue of subjective belief. It is, of course, difficult for State Farm to meet Plaintiffs’ allegation without affirmatively alleging that it investigated and evaluated the law, but it could do so simply by denying that it knew it was acting unlawfully and relying on a defense of objective reasonableness. See Bilzerian,
¶36 Given State Farm’s defense that it acted reasonably in investigating and evaluating the law, and even assuming the privilege applies, it would not protect the fact that the claims managers consulted counsel on the stacking issue. See Ulibarri,
¶ 37 Thus, we can agree with both dissents that it might have been better strategy for Plaintiffs to let State Farm assert its privilege or for State Farm to either waive its privilege or not assert its claim of justifiable conduct based on its subjective evaluation of the law. See Martone dissent at ¶ 48, McGregor dissent at ¶ 57. But we decide the case as presented. State Farm advances the argument that its conduct was reasonable and in good faith because of its investigation of the law and the resultant subjective belief of its claims people. That investigation and knowledge included the opinions it received from its lawyers. Under well established Arizona precedent, it cannot, on the one hand, claim that what it discovered and what it knew following that legal investigation led it to a reasonable, good-faith conclusion that it could and should deny the claims of its insured and, on the other hand, prevent the court and jury from learning what it discovered and what it knew.
¶38 To the same effect, Justice McGregor’s dissent postulates several hypothetical cases in which she fears that as a result of this opinion, the privilege will be waived because the litigant will have consulted with counsel. See McGregor dissent at ¶ 55. But nothing in this opinion could or should produce such a result. We assume client and counsel will confer in every case, trading information for advice. This does not waive the privilege. We assume most if not all actions taken will be based on counsel’s advice. This does> not waive the privilege. Based on counsel’s advice, the client will always have subjective evaluations of its claims and defenses. This does not waive the privilege. All of this occurred in the present case, and none of it, separately or together, created an implied waiver. But the present case has one more factor — State Farm claims its actions were the result of its reasonable and good-faith belief that its conduct was permitted by law and its subjective belief based on its claims agents’ investigation into and evaluation of the law. It turns out that the investigation and evaluation included information and advice received from a number of lawyers. It is the last element, combined with the others, that impliedly waives the privilege. State Farm claims that its actions were prompted by what its employees knew and believed, not by what its lawyers told them. But a litigant cannot with one hand wield the sword — asserting as a defense that, as the law requires, it made a reasonable investigation into the state of the law and in good faith drew conclusions from that investigation — and with the other hand raise the shield — using the privilege to keep the jury from finding Out what its employees actually did, learned in, and gained from that investigation.
¶ 39 As we said in Ulibarri and noted in ¶ 18 above:
*67 [The plaintiff] is not permitted to thrust his ... knowledge into the litigation as a foundation ... to sustain his claim ... while simultaneously retaining the lawyer-client privilege to frustrate proof ... negating ... the claim asserted. Such [a] tactic would repudiate the sword-shield maxim.
CONCLUSION
¶ 40 We believe the trial judge’s characterization of State Farm’s position was reasonably correct under Arizona law. We must therefore defer to his finding that State Farm implicitly asserted the advice of counsel as a defense when it made its claim of good-faith conduct turn on its legal research and the resulting subjective legal knowledge of its claims managers at issue in the case and when that knowledge necessarily included the advice of counsel as part of the decision-making process. Therefore, the court of appeals’ opinion is vacated, and the trial judge’s order granting Plaintiffs’ motion to compel is approved. The superior court may proceed with the case in a manner not inconsistent with this opinion. Of course, the propriety of the claim of privilege and its recognition or rejection as to any particular is not a static matter and may be considered or reconsidered by the trial judge as the ease develops.
Notes
. We also accepted for review the question of whether the court of appeals erred in upholding State Farm’s objection to Plaintiffs’ request to supplement the record with excerpts from depositions taken after the special action was filed with the court of appeals. The issue is moot because, with one exception, we do not consider any of these documents in our resolution of the case. The exception is the deposition of State Farm’s claims superintendent, Gillespie. That deposition is referred to, and in part quoted, by State Farm in its filings in this court. See Response to Petition for Review, at 5-6 n. 1.
. State Farm relies on three Arizona cases to show that Arizona law on stacking was unsettled and its position on stacking therefore reasonable. See Giannini v. State Farm Mut. Auto. Ins. Co.,
. We bear in mind throughout this opinion that the litigation before us is between an insurer and its insureds. State Farm’s duties and obligations in this regard are somewhat more stringent than in disputes with third parties. In Zilisch, we said that an insurer may properly challenge fairly debatable claims, but it must also exercise reasonable care and good faith. An insurer dealing with a first-party claim must “play fairly with its insured,” give equal consideration in handling the claim, and do so in fairness and honesty.
. A waiver is to be predicated not only when the conduct indicates a plain intention to abandon the privilege, but also when the conduct (though
. The unfairness not just to the party opposing assertion of the privilege but to the entire system and its attempt to find the facts is, we think, well illustrated by reference to the deposition of Tucson Claims Superintendent Gillespie. See supra note 1. Review of that deposition indicates that Gillespie had little or no legal knowledge except for that supplied by State Farm’s counsel. For example, when asked what legal training State Farm gave him to qualify him to make the evaluation in question, the following colloquy between Plaintiffs' attorney and Gillespie took place:
Q: Tell me how they taught you about the Arizona law.
A: Specifics, I just don’t recall.
* * *
Q: ... you don’t remember anything at all?
A: No.
Deposition of Dwight Gillespie, July 13, 1999, at 54-55. More specifically on the stacking issue:
*63 Q: Other than the advice they [State Farm’s counsel] may have given you, can you point me to a single source of information that I can look through to find out what other legal information was provided to you or would have been available to you as Claims Superintendent?
A: No.
Q: Do you have any recollection or understanding as to whether the law of stacking [UM] or [UIM] coverage was clear or unsettled [in 1990]?
A: Offhand, I don’t.
Id. at 56, 239-40 (objections omitted). Indeed, Gillespie could remember nothing about the demand or claims, other than seeing "a book or magazine” that he could not identify. Id. at 75. Nor did he have copies. Id. at 76. Nor could he explain the case law or the statutes, nor give any reason or recollection other than what the lawyers might have said. Id. at 290-91.
. Bilzerian contains other explicit language to the same effect. See
Whether fairness requires disclosure has been decided by the courts on a case-by-case basis, and depends primarily on the specific context in which the privilege is asserted. .Thus, in Bilzerian, we held that a defendant who intended to testify as to his "good faith” reliance on legal advice could not prevent the government from cross-examining him on advice received from counsel. Because the defendant raised the advice-of-counsel defense, and sought to rely on privileged information in the judicial setting, the court found that if defendant so testified a broad waiver would be appropriate.
In re Grand lury Proceedings,
Of course, we have no transcript of the record in Bilzerian, but nothing in the opinion indicates that the defendant was to testify that he relied on legal advice or that he raised the advice-of-counsel defense. Quite to the contrary, the opinion indicates that the defendant intended to testify only to his good faith belief that his actions were legal. The portion of the opinion that concludes a discussion of the privilege issue ends with the following words, which comport almost exactly with our holding in the present case:
The trial court’s ruling left defendant free to testify without getting into his state of mind, but correctly held that if he asserted his good faith, the jury would be entitled to know the basis of his understanding that his actions were legal.
Bilzerian,
. We have also considered the view of amici. See in particular the briefs of Geoffrey C. Hazard, Jr. and the American Corporate Counsel Association (ACCA). Professor Hazard, a distinguished authority, argues that while the “put in issue” exception to the privilege is recognized, it should be limited to situations in which the claimant relies on advice of counsel to the extent of claiming that what he did "may be illegal but my lawyer told me it was OK.” Hazard brief, at 3. Thus, Professor Hazard rejects the “balancing test” of Heam, concluding there is "really no room” for such a test with respect to an evidentiary privilege so long as the party claiming the privilege did not attempt to use the attorney's advice to escape liability. Id., at 5-6. But Arizona long ago rejected that view, considered and used the fairness element contained in Wigmore's approach, adopted the balancing test of Heam, and, as we have seen, applied it in a number of cases.
The ACCA argues that the privilege is not waived simply because a litigant has consulted counsel or denied the allegations made by its adversary. This is not enough “to place privileged communications 'at issue’ and thereby waive the privilege.” ACCA brief, at 5. Nor is the mere fact of relevance sufficient to place the communications at issue. Id. But we agree with these contentions. So did Plaintiffs, who argue instead that "a privilege holder does waive the privilege by narrowing a general denial of the allegations of the plaintiff's complaint to a specific factual assertion that implicates privileged communications where the opposing party is also denied an opportunity to effectively rebut and/or explore the basis of the ... assertion.” Plaintiff's Response to ACCA brief, at 2 (emphasis added). As we have seen, this is the Arizona law on the subject. The specific factual assertion in the present case is State Farm’s claim that it acted reasonably and in good faith because its personnel made an evaluation of the law as it pertained to the policy language, Arizona cases, and statutes, and reached the subjective, good-faith conclusion that the law permitted denial of the stacking claims. Thus, the hypotheticals presented in ACCA’s brief do not accurately reflect the narrow holding of this opinion. For example, ACCA presents the following hypotheticals: "[Bjefore placing its new product on the market, a manufacturer consults with corporate counsel about the level of detail required for its product warnings. An injured consumer sues ... [and the] corporation defends on the theory that its warnings were reasonable.” ACCA brief, at 6. Nothing in this opinion would justify finding a waiver of the attorney-client privilege. Similarly, there is no waiver in the following example: “A corporation does not hire a job applicant. The applicant sues, alleging ... age discrimination. The corporation denies ... the allegation that it acted out of a discriminatory intent [and] Plaintiff now argues ... [waiver of] the privilege concerning all discussions with corporate counsel on employment policies.” Id. These and the other hypotheticals posed do not involve the assertion by the privilege holder of a specific factual claim that involves good-faith conduct based on subjective evaluation of the law. It is not enough that plaintiff brings the privilege holder's mental state in issue. The waiver exists only when the privilege holder raises and defends on the theory that its mental state was based on its evaluation of the law and the facts show that evaluation included and was informed by advice from legal counsel.
For the same reasons, we disagree with Justice McGregor's argument that "any plaintiff [or other litigant] who advances a subjective claim seemingly will waive the privilege if, before asserting his claim, he consults with his lawyer and uses the knowledge obtained to reasonably evalu
. This, of course, does not mean the privilege was waived as to communications between State Farm and its counsel on other subjects pertaining to the stacking claims. There may have bpen communications regarding whether an opposing motorist was uninsured or underinsured, evaluations of damages and liability defenses, and the like. Plaintiffs are not entitled to a fishing expedition through all of counsel’s communications on each of the stacking claims but only to discovery of those communications pertaining to the permissibility or deniability of stacking under the policy language, the case law, and the statutes as they existed at the time the claims were presented: the information, in other words, that was part of what State Farm knew in reaching its evaluation of the law. The trial judge took great care to prevent a fishing expedition and to narrow discovery by permitting State Farm to continue to withhold portions of its flies, to amend its logs to explain the reasons for withholding communications, and to appoint a master to resolve any further dispute as to documents not produced by State Farm pursuant to the trial judge's order. See Minute Entry of January 19, 1999.
. United. California Bank is a civil case. Cf. State v. Holsinger,
Dissenting Opinion
dissenting.
¶41 I agree with the majority that the Restatement (Third) The Law Governing Lawyers § 80 (2000) and Hearn v. Rhay,
¶42 I first examine Hearn and the Restatement more closely to see that this is so. I then apply Hearn and the Restatement to a bad faith tort case. It then becomes apparent that the majority has ignored the critical elements of both Hearn and the Restatement.
¶ 43 In Hearn, the plaintiff brought claims of violation of due process and cruel and unusual punishment, neither of which implicated the defendants’ attorney-client privilege. The defendants then asserted an affirmative defense of immunity from suit, which was valid only if they were acting in good faith. See Hearn,
¶44 The Restatement requires the same two elements. It provides as follows:
§ 80. Putting Assistance or a Communication in Issue
(1) The attorney-client privilege is waived for any relevant communication if the client asserts as to a material issue in a proceeding that:
(a) the client acted upon the advice of a lawyer or that the advice was otherwise relevant to the legal significance of the client’s conduct.
Restatement § 80 (emphasis added). Note that it is not enough “that the advice was otherwise relevant to the legal significance of the client’s conduct.” Instead, the client must assert that the advice was otherwise relevant to the legal significance of the client’s conduct. While the majority adopts the Restatement, it completely ignores the Restatement’s requirement that the client must assert that the advice was relevant. Contrary to the majority’s contention, State Farm has made no such assertion in this
¶ 45 The majority relies upon a series of cases to illustrate the injection of an issue into a case. Ante ¶¶ 18 through 21. Yet ail of the cases cited involve a claim or defense raised by the privilege holder who then attempted to use the attorney-client privilege as a shield.
¶ 46 The majority says that “[i]f State Farm had merely denied bad faith and defended on an objective basis, without advancing its agents’ subjective understanding of the law, we would have a different ease.” Ante ¶ 8. But a bad faith defendant cannot do this. Every bad faith claim requires proof of both objective and subjective unreasonableness on the part of the insurer. Noble v. National Am. Life Ins. Co.,
¶ 47 The majority errs in asserting that State Farm waived the privilege by putting its decision-makers’ subjective understanding of the law into issue. By claiming that State Farm developed an interpretation of the law that was in bad faith, plaintiffs injected the reasonableness of State Farm’s subjective interpretation of the law into the case. Under the majority view, a plaintiff may abrogate the defendant’s attorney-client privilege simply by raising a bad faith claim on any matter regarding an interpretation of the law.
¶ 48 Now it may well be that an insurer would be willing to make a coverage decision without relying on the advice of its lawyers. But the prudent insurer will consult a lawyer and under today’s decision that advice always will be admissible in an action against it claiming bad faith, despite the majority’s protestations to the contrary.
¶ 49 This would be a different case if State Farm raised an affirmative defense such as, to the use the words of the Restatement, asserting that it “acted upon the advice of a lawyer,” or asserting “that the advice was otherwise relevant to the legal significance of [its] conduct.” Restatement § 80. But State Farm has not asserted that it acted upon the advice of its lawyer. And State Farm has not asserted that that advice was otherwise relevant to the legal significance of its decision. All it did was put the plaintiff to its burden of proving both objective and subjective unreasonableness.
¶ 51 Under the Restatement, which the majority says it follows, State Farm has a choice in defending this matter. Yet under the majority’s approach, it has no choice. Once it denies an essential allegation of the claim (subjective reasonableness of its resolution of the coverage question), it waives its privilege. This is wrong. The Restatement approach advances two important policy objectives. It advances the policy behind the attorney-client privilege and it allows for a fair result. Properly applied, the Restatement and Hearn would give State Farm the difficult choice of either defending the subjective element of the bad faith claim without evidence of legal advice or waiving the privilege.
¶ 52 The majority holds that “waiver exists only when the privilege holder raises and defends on the theory that its mental state was based on its evaluation of the law and the facts show that evaluation included and was informed by advice from legal counsel.” Ante ¶ 33 n. 7. But State Farm expressly disavowed in this case that its “evaluation included and was informed by advice from legal counsel.” The majority is unfaithful to both Hearn and the Restatement, and exposes every bad faith defendant to a claim of waiver of the attorney-client privilege whenever that defendant has consulted a lawyer, even though subjective unreasonableness is injected by the plaintiffs complaint and not the defendant’s defense.
¶ 53 I therefore respectfully dissent.
Dissenting Opinion
dissenting.
¶54 I agree with Justice Martone’s dissent. I write separately to emphasize the degree to which today’s opinion undermines the attorney-client privilege. Although the majority attempts to limit the scope of its holding, at best the opinion introduces intolerable uncertainty into the question whether attorneys and their clients can regard communications as privileged.
¶ 55 The impact on privileged communications derives from the majority’s broad description of the conditions under which a litigant waives the attorney-client privilege. As the majority explains, “[I]n cases such as this in which the litigant claiming the privilege relies on and advances as a claim or defense a subjective and allegedly reasonable evaluation of the law — but an evaluation that necessarily incorporates what the litigant learned from its lawyer — the communication is discoverable and admissible.” Supra ¶ 15. Or, put another way, “When a litigant seeks to establish its mental state by asserting that it acted after investigating the law and reaching a well-founded belief that the law permitted the action it took, then the extent of its investigation and the basis for its subjective evaluation are called into question.” Supra ¶23. If that is the test for waiver of this important privilege, I cannot agree that no waiver occurs in the examples set out in footnote 7 of the majority opinion. In both, the defendant, in denying the plaintiffs allegations, necessarily relies upon its knowledge that includes advice from its lawyer.
¶ 56 But today’s holding, which applies not only to plaintiffs’ bad faith claim, but also to the counts alleging fraud, supra ¶ 3, will sweep even more broadly. If a defendant can waive the privilege simply by relying upon knowledge gained, in part, through advice of counsel to deny a plaintiffs allegations, any plaintiff advancing a subjective claim will run the risk of waiving the privilege simply by filing an action. A plaintiff who advances a subjective claim seemingly will waive the privilege if, before asserting his claim, he consults with his lawyer and uses the knowledge obtained to reasonably evaluate his claim. Because many, perhaps most, potential litigants do not know the
¶ 57 The majority suggests, but does not say, that its holding' depends upon the fact that this litigation involves a first-party insurance claim. Supra note 3. Perhaps an argument can be made that an insurer cannot expect communications with its attorneys to remain privileged when it considers an issue on which it must give the interests of another party, its insured, consideration equal to that it gives its own interest. See, e.g., Zilisch v. State Farm Mut. Auto. Ins. Co.,
¶ 58 Today we make the scope of the attorney-client privilege uncertain, at best, and abrogate the privilege in many instances, at worst. We do so without any real need to take such a drastic step. As both the majority, supra ¶¶ 35, 36, and Justice Martone, supra ¶ 48, point out, State Farm faced a difficult task in responding to plaintiffs’ bad faith claim without asserting it relied upon advice of counsel. Had this litigation continued its natural course, State Farm might have chosen to waive its privilege rather than face the difficulty raised by defending without reference to legal advice. But the decision of which defense to advance was for State Farm, which was justified in assuming that unless and until it put its reliance on counsel at issue, its earlier communications with counsel would remain privileged.
¶ 59 To permit plaintiffs to discover communications that they quite probably do not need to establish their claim, we have placed in jeopardy countless attorney-client communications, which litigants rightly anticipated would be confidential. We also have introduced needless uncertainty into the attorney-client relationship, and have discouraged persons from seeking needed legal advice, which they cannot assume will remain confidential. Because I believe the result of today’s opinion will be to cause extensive, unjustified waiver of the attorney-client privilege, I respectfully dissent.