Palmer v. Farmers Insurance Exchange

NO. 91-523

IN THE SUPREME COURT OF THE STATE OF MONTANA

1993

DAVID ALARIC PALJ4ER, a Protected Person,

by Martha Rose Diacon, his Conservator, -. .

Plaintiff and

-v-

FARMERS INSURANCE EXCHANGE,

Defendant and

APPEAL FROM: District Court of the Eighth Judicial District,

In and for the County of Cascade,

The Honorable Thomas M. McKittrick, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

William Conklin 6r L.D. Mybo (argued), Conklin, N y b o

& Leveque, Great Falls, Montana

For Respondent:

Dennis Patrick (argued), Great Falls,

Conner

Montana; and John C. (argued) , R i s j o r d &

Risjord

James, Overland Park, Kansas

For Amicus :

Randy J, Cox, Boone, Karlberg & Haddon, Missoula,

Montana: Dana L. Christensen, Murphy, Robinson,

Heckathorn & Phillips, Kalispell, Montana; anRobert

F. James (argued), James, Gray & McCafferty, Great

Falls, Montana

Submitted: December 10, 1992

Decided: October 18, 1993

Filed:

Justice R. C. McDonough delivered the Opinion of the Court,

This is an appeal from an order based on a jury verdict and a

judgment of $750,000 in compensatory damages and $750,000 in

punitive damages against Farmers Insurance Exchange (Farmers) for

breach of the covenant of good faith and fair dealing (bad faith).

We reverse and remand for a new trial.

his action arose in conjunction with a claim by Palmer, the

insured, against Farmers, the insurer, for uninsured motorist

benefits. Palmer's claim ensued after a no-vehicle-contact

motorcycle accident on June 10, 1984. Farmers requested that the

court bifurcate the uninsured motorist claim from the bad faith

claim and stay discovery proceedings concerning bad faith until the

uninsured motorist claim w a s resolved. The court granted Farmers'

request on August 21, 1986.

The uninsured motorist claim proceeded to trial in March of

1987. The jury found an uninsured motorist liable for Palmer s

injuries. We affirmed the verdict and judgment on appeal. Palmer

by Diacon v. Farmers Ins. Exch. (1988), 233 Mont. 515, 761 P.2d

401.

The bad faith action was revived in the fall of 1988 and the

case went to trial on March 4, 1991. After the jury verdict, the

trial judge approved the punitive damage award and entered judgment

against Farmers. Farmers filed a motion for either a judgment

notwithstanding the verdict or a new trial. The motion was deemed

denied. This appeal followed.

The pertinent issues on appeal are:

2

1. Whether the District Court erred by denying Farmers'

motion for directed verdict.

2. Whether the District Court erred in admitting evidence

from the underlying trial.

3. Whether Farmers is entitled to a new trial because the

District Court ordered Farmers to produce, and later

allowed into evidence, correspondence between Farmers and

its attorneys who defended the underlying uninsured

motorist lawsuit.

A. Whether the attorney-client privilege applies to

first-party bad faith cases in which the insurer's

attorney did not represent the interests of the insured

in the underlying case.

B. Whether Farmers' claim file contained material

subject to attorney-client privilege.

C. Whether Farmers voluntarily waived its attorney-

client privilege.

D. Whether evidence of privileged communications is

admissible against the holder of the privilege after the

court erroneously compelled its discovery.

E. Whether the admission of privileged materials into

evidence prevented Farmers from having a fair trial, thus

entitling it to a new trial.

4. Whether the District Court erred in ordering the

production of work-product materials and then allowing

the materials into evidence.

A. Whether the District Court erred in ordering Farmers

to produce the work-product materials in its claim files.

B. Whether the District Court erred in determining that

one of Farmersr former defense attorneys waived the

protection of the work-product doctrine by making

testimonial use of certain work-product materials.

5. Whether the District Court erred by admitting evidence of

the litigation tactics of Farmers' attorneys and of

Farmers' decision to appeal.

A. Whether evidence of an insurer's post-filing

conduct, such as litigation strategy and tactics in

defending the underlying suit, is admissible in a bad

faith action based on the insurer's decision to deny

coverage.

B. Whether an insurer's decision to appeal the verdict

in the underlying case is admissible as evidence in a

subsequent bad faith action.

From the inception of the proceedings, Palmer has maintained

that an unidentified tractor and semitrailer (the truck) crossed

the centerline and ran his motorcycle off the road. Farmers denied

the uninsured motorist claim in February of 1986, after a witness

told a Farmersv claims adjuster that the truck was in its own lane.

A few days later Palmer filed suit against Farmers for denying the

claim and for bad faith.

Pursuant to a motion to compel, the court ordered production

of Farmers' entire claim file during discovery on the bad faith

claim. The court also ruled that Farmers was not required to

produce materials dated after October, 26, 1988, the date Palmer

notified Farmers that he intended to proceed with the bad faith

claim. However, the materials dated prior to October 26, 1988

included confidential reports sent to Farmers by the attorneys who

represented it in the uninsured motorist case.

On February 21, 1989, Farmers produced its claim file under

court order. At that point, nothing had transpired in the bad

faith action, except Palmer's motion to compel and a letter from

Farmers' attorney Bill Gregoire to Palmer's attorney. The letter

stated that Farmers would have to obtain new counsel for the bad

faith trial because Farmers would likely call him and Farmers'

other attorneys, Marvin Smith and James Walsh, as witnesses in the

bad faith trial.

Equipped with attorney Gregoire's confidential reports to

Farmers, Palmer deposed several of Farmers' employees who had

worked on the uninsured motorist case. Among the persons that

Palmer questioned using the privileged materials was Bud Rausch,

Farmersf branch claims supervisor. Neither Rausch nor any of the

other deponents had been designated as expert witnesses at the time

of their depositions.

At a deposition on September 13, 1989, Palmer's attorney

cross-examined Rausch extensively on five of the letters Farmers

received from its attorney Gregoire and on events which transpired

during preparation for trial and during trial. Palmer made similar

use of Gregoire's letters to Farmers when he deposed a Farmers'

claims representative on February 16, 1990, and Farmers'

investigator on February 19, 1990.

Farmers identified its prospective expert witnesses on July

18, 1990, in an answer to an interrogatory. Farmers identified

Frank Weedman and Bud Rausch as potential expert witnesses. In

addition, Farmers identified attorneys Smith, Walsh, an,3Gregoire

as potential witnesses in the bad faith trial. The answer also

stated: "If called as witnesses, those individuals will not be

examined regarding their confidential privileged communications to

the defendant regarding that underlying suit or the instant bad

faith action."

Farmers hired Weedman as an expert witness regarding

reasonable insurance industry practice on March 8, 1990, a year

after Farmers produced its claim file for Palmer. Farm'erssent a

copy of the same claim file to Weedman for his review. Shortly

thereafter, Farmers filed a motion for return of privileged

communications.

Nine months later, one week before trial, the District Court

ruled on the motion for return of privileged communications. The

court ruled that neither the attorney-client privilege nor the

work-product doctrine apply in first-party bad faith actions, and

therefore, Palmer was entitled to Farmers1 entire claim file. The

court then ruled that Farmers had waived the privilege because the

experts it intended to call at trial based their opinions on a

review of the entire claim file, including attorney correspondence.

At trial, most of Palmer's case-in-chief involved evidence

concerning the underlying trial and Farmers1 post-filing conduct.

The evidence included the strategy and litigation tactics of

Farmers1 attorneys who defended the underlying case and testimony

from the underlying trial.

In questioning Bud Rausch, the first witness at trial, Palmer

introduced into evidence and read nine of the reports consisting of

confidential communications between Farmers and its former

attorneys. After the reports had been disclosed to the jury,

Farmers called its former attorneys as witnesses to explain their

actions in defending the underlying uninsured motorist case. Near

the end of the trial, Farmers offered the complete claim file into

evidence to rebut Palmer's use of selected portions of the

privileged materials.

Farmers made a motion for a directed verdict at the end of

Palmer's case-in-chief. The court denied the motion. Farmers

renewed the motion at the close of all of the evidence with a

stipulation from Palmer that the earlier motion and arguments were

deemed repeated. The court accepted the form of the motion and

again denied it.

This opinion will refer to additional facts where they are

pertinent to the discussion.

Our review of the District Court's conclusions of law is

plenary; we determine whether the court's conclusions are correct.

We review discretionary acts of the District Court to determine

whether the court abused its discretion. Steer Inc. v. Dept. of

Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

Did the District Court err by denying Farmers' motion for a

directed verdict?

his is a borderline issue, considering the closeness of the

questions of fact in the underlying case. See Palmer bv Diacon,

761 P.2d at 404. But, given the standard for granting a directed

verdict, we conclude that the District Court did not commit

reversible error by denying Farmers1 motion for a directed verdict.

This case arose before the legislature enacted 9 33-18-242,

MCA, which appears to have codified our common law standard of

liability for bad faith in denying insurance coverage. Under

Montana common law, an insurer cannot be held liable for bad faith

in denying a claim if the insurer had a reasonable basis for

contesting the claim or the amount of the claim. Tynes v. Bankers

7

Life Co. (1986), 224 Mont. 350, 364, 730 P.2d 1115, 1124. As we

have stated, "[i]t is generally held that an insurer is entitled to

challenge a claim on the basis of debatable law or facts and will

not be liable for bad faith or punitive damages for denying

coverage if its position is not wholly unreasonable." Safeco Ins.

Co. v. Ellinghouse (1986), 223 Mont. 239, 248, 725 P.2d 217, 223;

see also St. Paul Fire & Marine Ins. Co. v. Cumiskey (1983), 204

Mont. 350, 665 P.2d 223: 5 33-18-242(5), MCA.

Farmers cited Cumiskev to support its position that the court

should have granted its motion for a directed verdict. In

Cumiskev, an insurer filed a declaratory judgment action, asking

the court to interpret the policy and determine the relationships

of the parties and their legal rights. The insured counterclaimed,

alleging that the insurer acted in bad faith by bringing the

declaratory judgment action instead of payingthe claim. Cumiskev,

665 P.2d at 226-27.

The trial court granted a directed verdict in favor of the

insurer. We upheld the court because in a proper case, an insurer

may file a declaratory judgment action to obtain a determination of

the validity, continuance or coverage of the insurance policy, the

extent of liability, or the insurer's duty under the policy.

Cumiskev, 665 P.2d at 227. We held that filing a declaratory

judgment action under appropriate circumstances does not

necessarily constitute bad faith. See Cumiskey, 665 P.2d at 227.

In this case, Farmers contested liability, contending that

Palmer's accident was not caused by another motorist, and

therefore, Palmer's uninsured motorist policy did not cover the

accident. Cumiskev does not require the court to grant a directed

verdict under the facts of this case.

Farmers also contends that the District Court should have

granted its motion for a directed verdict because Farmers had a

reasonable basis to deny coverage. To support its contention,

Farmers argues that statements taken from witnesses before Farmers

denied the claim gave it a reasonable basis for denying the claim.

Witness Atchison told a claims investigator that, contrary to

Palmer's assertion, a truck did not run Palmer's motorcycle off the

road. In a later deposition, Atchison adhered to his story,

stating that from the time he first saw the truck until the

motorcycle went off the road, the truck never left its own lane.

In all of his statements, Atchison never deviated from his

testimony that the truck was in its own lane and did not run Palmer

off the road.

In addition, Farmers obtained statements from some dirt

bikers. They reported seeing a motorcycle speeding down the

highway at full throttle about one-half mile from the accident

scene. It matched the description of Palmer's motorcycle. Shortly

thereafter, they came across Palmer's motorcycle along with Palmer

and his passenger in the ditch. According to the dirt bikers, no

other speeding motorcycles went past them before they came upon the

accident.

Farmers argues that the statements of Atchison and the dirt

bikers gave it a reasonable basis for denying the claim as a matter

of law. Under the law, if Farmers had a reasonable basis upon

which to deny the claim, it cannot be found to have acted in bad

faith. Tvnes, 730 P.2d at 1124. Because Palmer's uninsured

motorist policy would not coverthe accident unless another vehicle

ran Palmer off the road, the witnesses' statements appear at first

glance to provide a reasonable basis for denying the claim.

Palmer, however, counters that it was unreasonable for Farmers

to rely on Atchison's statements because Atchison was an unreliable

witness. Palmer points out that Atchison kept changing details of

his story, such as the exact speed of the motorcycle before it left

the road and whether he saw the motorcycle as it left the road or

merely a cloud of dust. Palmer argues that it was unreasonable for

Farmers to deny coverage based on Atchison's information because

Atchison changed details of his story. The credibility of Atchison

is, therefore, a question of fact in this case.

Palmer supplied another witness who was riding a motorcycle

similar to Palmer's. The witness testified that he and his wife

were speeding on the same road at about the time of the accident.

Palmer argues that this gives another reasonable explanation of the

speeding motorcycle seen by the dirt bikers. However, there is no

evidence that Farmers knew of this witness' statement when it

denied the claim.

In a jury trial, a judge may direct a verdict in favor of the

party entitled thereto when the case presents only questions of

law. Section 25-7-302, MCA. When a defendant moves for a directed

verdict, the court views only the evidence presented by the

plaintiff and views it in the light most favorable to the

plaintiff. Cremer v. Cremer Rodeo Land & Livestock Co. (3979), 181

Mont. 87, 91, 592 P.2d 485, 488. A court may not withdraw a case

from the jury, unless the conclusion requested by the defendant

must follow from the evidence as a matter of law and the plaintiff

cannot recover under any view that could reasonably be drawn from

the evidence. Cremer, 592 P.2d at 488.

The test for determining whether the evidence is legally

sufficient to withdraw a case from the jury is whether reasonable

people could draw different conclusions fromthe evidence. If only

one canclusion is reasonably proper, a directed verdict is

appropriate. Cremer, 592 P.2d at 488.

Here, the court evidently concluded that more than one

conclusion was reasonably proper based on the evidence.

Consequently, it denied Farmersf motion for directed verdict. In

reviewing the courtf denial of Farmersf motions, we apply the

s

common-law standard for holding an insurer liable for bad faith in

denying a claim. Under that standard, an insurer cannot be held

liable if the insurer had a reasonable basis for contesting the

claim. Tvnes, 730 P.2d at 1124.

In this case, there is conflicting evidence concerning the

credibility of the witnesses. It is for the jury to determine the

probative value of the evidence and draw inferences from the

evidence, and then determine whether Farmers had a reasonable basis

for denying the claim.

We hold that Cumiskev does not require the District Court to

grant a directed verdict for Farmers. We further hold that the

court did not commit reversible error by concluding that reasonable

people could draw different conclusions about whether Farmers' had

a reasonable basis for contesting Palmer's claim. Accordingly, the

court did not err in denying Farmers' motion for a directed

verdict.

Did t h e D i s t r i c t Court err i n admitting evidence from the

underlying trial and other irrelevant evidence?

Because we are reversing on other grounds and remanding for a

new trial, we will not rule on the particulars relative to this

issue. However, some comment is necessary because the District

Court admitted into evidence a large quantity of material relating

to the underlying uninsured motorist trial.

Relevant evidence is flevidencehaving any tendency t o make the

existence of any fact that is of consequence to the determination

of the action more probable or less probable than it would be

without the evidence." Rule 401, M.R.Evid. Trial judges have the

discretion to determine the relevancy and admissibility of

evidence, Dahlin v . Holmquist (1988), 235 Mont. 17, 20, 766 P.2d

239, 241. However, the admission of irrelevant evidence is an

abuse of discretion and warrants a new trial if it affects the

substantial rights of a party. Dahlin, 766 P.2d at 241.

Material from the underlying trial tending to show what

Fanners knew or should have known at the time it made the decision

to deny the claim is relevant. In addition, material tending to

12

show whether or not such knowledge supports a reasonable basis for

denying the claim is relevant. See Rule 401, M.R.Evid. However,

evidence from the underlying trial that is not related to Farmersf

basis for denying the claim is not relevant.

The essential issue in this case is whether Farmers had a

reasonable basis for denying the claim. Any evidence that does not

relate to facts of consequence to this issue is not relevant.

111.

Did the District Court erroneously order Farmers to produce, and

later allow into evidence, correspondence between Farmers and its

attorneys who defended the underlying uninsured motorist lawsuit,

thus entitling Farmers to a new trial?

In a request for production of documents on February 26, 1986,

Palmer requested Farmers' "entire file on the accident described in

the Complaint filed herein, including but not limited to any and

all documents relating to plaintiff's claim for uninsured motorist

benefits. " Palmer also requested from Farmers, " [a]ny and all

correspondence between you, your agents and attorneys and

plaintiff, plaintiff's agents and attorneys, concerning plaintiff's

claim for uninsured motorist benefits."

Sometime later, Palmer moved to compel discovery of Farmers'

claim files developed in investigating and defending the uninsured

motorist suit. Farmers produced everything in its files, except

for correspondence between Farmers and its attorneys and materials

dated after October 8, 1985, the date Palmer's attorney threatened

to sue for bad faith if Farmers did not pay Palmer's claim.

Farmers objected to producing exhibits consisting of

confidential attorney-client communications on the grounds that

13

they were protected by attorney-client privilege. Farmers objected

to producing other exhibits on the grounds that they were immune

from discovery under the work-product: rule. The court ordered

Farmers to produce the attorney-client communications.

In an order dated February 16, 1989, the court ruled that

"defendant's assertion of the attorney-client privilege with

respect to those claim file documents which constitute

communications between it and its counsel is overcome by

plaintiff's need for such materials in preparation of its bad faith

case against defendant.'l

On February 21, 1989, pursuant to court order, Farmers

produced all claim file materials dated before October 26, 1988.

Among the materials were several letters from Farmersf defense

attorney Gregoire, including eight letters marked "confidential

reports." Over continuing objections by Farmers, the District

Court allowed into evidence these letters and other correspondence

between Farmers and its attorneys who defended the underlying

uninsured motorist case.

Farmers argues that it did not have a fair trial because the

District Court admitted this; privileged material into evidence.

Farmers points out that the bad faith trial should have centered on

whether the infomation it had when it denied Palmer's claim

constituted a reasonable basis for contesting the claim. Farmers

contends that by admitting privileged materials, the court allowed

Palmer to focus much of the bad faith case on the litigation

tactics defense counsel used in preparing for the underlying trial,

in conducting the trial itself, and in recommending and pursuing

the subsequent appeal. Therefore, Farmers argues, it is entitled

to a new trial. We agree.

The fundamental purpose of the attorney-client privilege is to

enable the attorney to provide the best possible legal advice and

encourage clients to act within the law. The privilege furthers

this purpose by freeing clients from the consequences or the

apprehension of disclosing confidential information, thus

encouraging them to be open and forthright with their attorneys.

State ex rel. United States Fidelity and Guaranty Co. v. Second

Judicial Dist. Ct. (1989), 240 Mont. 5, 10, 783 P.2d 911, 914

(USF&G), (citing Upjohn Co. v. United States (l98l), 449 U.S. 383,

Another important policy behind the attorney-client privilege

is to foster the attorney-client relationship by ensuring that

attorneys are free to give accurate and candid advice without fear

that the advice will later be used against the client. We approve

of the Missouri Supreme Court's recognition of this policy,

articulated as follows:

As long as our society recognizes that advice as to

matters relating to the law should be given by persons

trained in the law--that is, by lawyers--anything that

materially interferes with that relationship must be

restricted or eliminated, and anything that fosters the

success of that relationship must be retained and

strengthened. The relationship and the continued

existence of the giving of legal advice by persons

accurately and effectively trained in the law is of

greater societal value, it is submitted, than the

admissibility of a piece of evidence in a particular

lawsuit. Contrary to the implied assertions of the

evidence authorities, the heavens will not fall if all

relevant and competent evidence cannot be admitted.

State ex rel. Great Am. Ins. Co. v. Smith (Mo. l978), 574 S.W.2d

379, 383 (quoting Sedler & Simeone, Comment, Privileqes in the Law

of Evidence: The Realities of Attornev-Client Confidences, 24 Ohio

St.L.J. 1, 3 (1963)). With these policies in mind, we will apply

the statutes and rules to the particular contentions of the

parties.

A. Does the attorney-client privilege apply to first-party bad

faith cases in which the insurer's attorney did n t represent

o:

the insured's interests in the underlying case?

Palmer contends that all correspondence between Farmers and

its former attorneys is discoverable because the attorney-client

privilege does not apply in first-party bad faith actions such as

this one. We previously held that the attorney-client privilege

applies in the context of third-party bad faith actions, but we

have not determined whether the privilege applies in first-party

bad faith litigation. USF&G, 783 P.2d at 916.

For definitional purposes, a third-party bad faith action is

one in which the plaintiff is a third-party claimant rather than

the insured. In a first-party bad faith action the plaintiff is

the insured. There are different types of first-party bad faith

actions.

Palmer argues that this Court has made a distinction between

third-party and first-party bad faith actions. Palmer argues,

based on federal district court cases, that the attorney-client

privilege does not apply in first-party bad faith cases. See

Bergeson v. National Surety Corp. (D.Mont. 1986), 112 F.R.D. 692:

Baker v. CNA Ins. Co. (D.Mont. 1988), 123 F.R.D. 322. We disagree.

16

One type of first-party bad faith action involves dual

representation by the attorney. Judge William Jameson first

expressed the concept of dual representation as follows: "Under an

insurance contract, however, the insurer initially employs the

attorney to represent the interests of both the insured and the

insurer.I1 Jessen v. O'Daniel (D.Mont. 1962), 210 F.Supp 317, 331-

32; see also Ellinuhouse, 725 P.2d at 226; USF&G, 783 at 913-14.

First-party bad faith cases involving dual representation

often arise after a third-party claimant obtains a judgment in

excess of policy limits and the insured later sues the insurance

company for failure to settle within policy limits. In these

cases, courts have held that the insured is entitled to the entire

claim file prepared forthe underlying lawsuit, because the insurer

created the file primarily on behalf of the insured. E.g., Baker,

123 F.R.D. at 326. The rationale courts use to abrogate the

attorney-client privilege in such cases is that one joint client

(the insurer) cannot assert the privilege against another joint

client (the insured). See, e.g. Baker, 123 F.R.D. at 325-26; see

also 22 A.L.R.2d 659 5 3; 4 A.L.R.4th 765 (annotations concerning

applicability of attorney-client privilege in dual representation

cases).

The present case is a distinct type of first-party action. In

this type of action, the claimant and the insurer are in adverse

positions from the outset of the underlying case. Farmers stepped

into the shoes of the unidentified third party motorist when it

denied Palmer coverage under his uninsured motorist policy. The

attorneys who represented Farmers in the uninsured motorist case

have not represented Palmer, therefore the dual representation

reasoning does not apply in this case.

The nature of the relationship, not the nature of the cause of

action, controls whether communications between attorney and client

can be discovered. USF&G, 783 P.2d at 915. Tbe attorney-client

privilege protects communications in first-party bad faith cases

when the insurer's attorney did not represent the interests of the

insured in the underlying case. That is tbe nature of the

relationship here; therefore, the attorney-client privilege applies

in this case.

B. Did Farmers1 file contain material subject to attorney-client

privilege?

The subject matter and author of each exhibit is critical in

determining whether the attorney-client privilege prevents its

discovery. Absent a voluntary waiver or an exception, the

privilege applies to all communications from the client to the

attorney and to all advice given to the client by the attorney in

the course of the professional relationship. Kuiper v. Dist. Ct.

of the Eighth Judicial Dist. (1981), 193 Mont. 452, 461, 632 P.2d

694, 699; see also 6 26-1-803, MCA.

The portion of Farmers1 file produced under court order

contained "confidential reportstt

concerning the pending litigation

from Farmers' attorney Gregoire to Farmers. The reports

constituted advice from Gregoire to Farmers on many matters

relating to Palmer's claim. In the reports, Gregoire evaluated

witnesses, evaluated the trial, advised Farmers concerning his

investigation and trial preparation, advised Farmers on his

opinions of defense and trial strategy, advised Farmers on the

prospect for a successful defense, and advised Farmers on post-

trial negotiations and on grounds for appeal.

The reports clearly contain advice given to Farmers by its

attorney in the course of the attorney's professional relationship.

The attorney-client privilege protects Farmers from disclosing

those reports and any other correspondence sent in the course of

the professional relationship with its attorneys. See Kui~er,632

P.2d at 699.

The privilege of non-disclosure is not lost merely because the

communications contain relevant nonlegal considerations. Union Oil

Co. of Calif. v. Dist. Ct. (1972), 160 Mont. 229, 236, 503 P.2d

1008, 1012. The protection applies unless the communications fall

within some exception to the privilege or Farmers voluntarily

waived the privilege.

C. Did Farmers voluntarily waive its attorney-client privilege?

Palmer contends that Farmers waived its attorney-client

privilege before the court ordered production of the privileged

correspondence. According to Palmer, Farmers waived the privilege

when Farmers' attorney Gregoire sent a letter dated November 15,

1988, to Palmer's attorney, stating that Farmers would have to

obtain new counsel for the bad faith trial because he and Farmers'

other attorneys, Smith and Walsh, might be called as witnesses in

the trial. Palmer argues that after Gregoire sent the letter,

Palmer was entitled to discover the bases of the testimony and

opinions those attorneys would present to the jury-

This argument has no merit for two reasons. First, the

attorney-client privilege belongs to the client and an attorney

cannot waive it without consent of the client. See 5 26-1-803,

MCA; Rule 503, M.R.Evid. Second, Farmers did not list the

attorneys as witnesses until July 18, 1990, over a year after the

court ordered Farmers to produce the privileged materials. Even

then, Farmers stated that the attorneys would testify to factual

matters, but would not testify regarding confidential privileged

information.

Palmer further contends that Farmers voluntarily waived its

attorney-client privilege several times after Farmers produced the

privileged material under court order. Notably, all of the alleged

waivers occurred after the court compelled discovery and Palmer had

made extensive use of the privileged materials in preparing his

case. Palmer's arguments are inconsequential because Farmers did

not voluntarily release the attorney communications--the court

ordered it to do so. We will, however, address each of Palmerrs

arguments in turn.

Palmer asserts that Farmers did not object to his cross-

examination regarding the contents of the privileged correspondence

at the deposition of Bud Rausch, Farmers' branch claims supervisor.

In so arguing, Palmer overlookedthe following continuing objection

made by Farmersr a t t o r n e y at the beginning of the deposition.

* [ ] order to preserve our objections, I wish to state

'In

a general and continuing objection to any and all

reference to and questioning regarding documents frornthe

claim files of Farmers Insurance Exchange, pertaining to

Mr. Palmer's claims in their several, various versions,

which documents we produced over objection and pursuant

to the court's order compelling production, dated

February 16, 1989. Defendant's objections are that such

documents are immune from discovery under the work-

product protection afforded by Rule 26 (b)3 of the Montana

Rules of Civil Procedure. And also, because a great many

of such documents constitute communications between

defendant and its attornevs and are ~rivileaedunder the

attornev-client privileqe, I have a second obiection.

:

(Emphasis added. )

Farmers thus preserved its objection to Palmerrs use of the

privileged materials, and nothing in Rausch's deposition acted as

a waiver of Farmers' attorney-client privilege.

Palmer next contends that Farmers waived its attorney-client

privilege by relying on advice of counsel in its decision to deny

Palmer's claim. However, mere reliance on an attorney's advice is

not the crucial factor. The attorney-client privilege applies

lgunlessthe insurer directly relies on advice of counsel as a

defense to the bad faith charse." (Emphasis added.) Spectra-

Physics v. Superior Court (Cal.App. 1988), 244 Cal.Rptr. 258, 261;

see also ~ransamerica~ i t l eIns. Co. v . Superior Court (Gal-App.

Upon cross-examination in his deposition and at trial, Bud

Rausch stated that advice of counsel influenced Farmersf decision

to deny Palmer's claim. Although Farmers listened to the advice of

counsel in deciding to deny Palmer's uninsured motorist claim,

Farmers did not directly rely on advice of counsel as a defense to

Palmerrs bad faith claim. Therefore, Palmer's contention that

Farmers waived its privilege by relying on advice of counsel is

lacking in mejrit. See Svectra-Phvsics, 244 Gal-Rptr. at 261.

Palmer next contends that Farmers did not object at trial to

the admission of privileged communications. On the contrary,

during a hearing on the morning of trial, Farmers made a continuing

objection to use of the privileged materials as evidence. The

court granted the request for a continuing objection so that at

trial Farmers1 attorney would not have to get up and object

continually, whenever privileged material was discussed or offered

into evidence. Thereafter, Farmers was not required to state

specific attc~rney-clientprivilege objections to each exhibit.

Palmer next contends that at trial Farmers made an

"unequivocal and thorough waiver of purported attorney-client

privilege.'I During arguments over the relevance of some

communicatiors between Farmers and its attorneys, the discussion

focused on which communications Palmer wanted to examine. Farmers

counsel stated, " t s

I' already been waived. I'

ts already been

produced." Taken in context, this statement is not a waiver,

rather it is a comment that there were no attorney-client

communications left that had not been produced under court order.

Palmer next contends that Farmers made multiple waivers by

naming attorneys as witnesses, by furnishing their communications

to experts who then testified with regard to them, by permitting

their insured to testify to communications without objection, and

by calling their attorneys to the witness stand to testify to the

subjects of the privileged information. Under the circumstances of

this case, these actions do not constitute a waiver of the

attorney-client privilege.

One thing is clear. At the time the District Court abrogated

Farmers' attorney-client privilege and ordered production of

Farmers' claim file and all confidential attorney-client

communications between ~armers and its attorneys Smith, Walsh,

Clarke, and Gregoire, Farmers had done nothing that could be

interpreted as a voluntary relinquishment of its right to claim the

privilege.

As a general rule, "[a] person upon whom these rules confer a

privilege against disclosure waives the privilege if the person .

. . voluntarily discloses or consents to disclosure of any

significant part of the privileged matter." Rule 503, M.R.Evid.

Mere reference to privileged reports is not enough to waive the

attorney-client privilege. To have waived the privilege by

disclosing privileged communications, Farmers would have had to

voluntarily divulge the specific confidential material contained in

the reports. See Union Oil Co. of Calif., 503 P.2d at 1012-13.

Once the court erroneously abrogated Farmers' attorney-client

privilege by compelling discovery of the confidential reports, it

was too late for a voluntary waiver to occur and Farmers' claim of

privilege was not defeated. See Rule 504, M.R.Evid. Farmers,

therefore, did not voluntarily waive the attorney-client privilege

applicable to the communications between Farmers and its attorneys.

D. Is evidence of privileged communications admissible against

the holder of the privilege if the court erroneously compelled

its discovery?

The District Court in this case compelled discovery of all the

materials dated after October 26, 1988, in the claim file,

including materials subject to attorney-client privilege. In so

ruling, the court found that Palmer demonstrated a substantial need

for the materials and would incur undue hardship in obtaining the

substantial equivalent of those privileged materials.

The District Court seems to have confused the attorney-client

privilege with the work-product doctrine. A showing of need cannot

defeat the attorney-client privilege, whereas a showing of need may

overcome the immunity from discovery given to an attorney's work

product. USF&G, 783 P.2d at 915.

As discussed above, the purpose of the attorney-client

privilege is to foster the attorney-client relationship by enabling

attorneys to provide the best advice possible to their clients and

encourage the clients to act within the law. The privilege

furthers this purpose by encouraging clients to give information to

their attorneys without fear that it will later be used against

them.

The privilege also furthers this purpose by allowing attorneys

to give candid advice to clients without fear that later it can be

used against the client. Our statute reflects this policy by

including as privileged communications any advice from the attorney

to the client given within the professional relationship. See 5

26-1-803, MCA.

The Montana Rules of Evidence promote the policies underlying

the attorney-client privilege by providing that "[a] claim of

privilege is not defeated by a disclosure which was compelled

erroneously . ... '1 Rule 504, M.R.Evid. This rule provides a

remedy for the holder of a privilege when a court erroneously

compels discovery of privileged material. "The remedy provided is

that the privilege may be subsequently claimed and the disclosed

subject matter made inadmissible. Rule 504, M.R. Evid. , Commission

Comments.

Rule 504 was intended for this situation, in which the holder

of a privilege was compelled to disclose privileged matters

pursuantto court order. Rule 504, M.R.Evid., Commission Comments.

Evidence of the privileged communications between Fanners and its

attorneys was not admissible against Farmers merely because the

court erroneously compelled its discovery.

E. Did the admission of privileged materials into evidence

prevent Farmers from having a fair trial, thus entitling it to

a new trial?

The District Court misconstrued the law when it ordered

Farmers to produce privileged material and admitted the privileged

material into evidence. An example of the prejudicial effect of

the disclosure of the correspondence between Farmers and their

attorneys, was the attorneysv analysis and recommendations to

Farmers relative to the underlying case being dangerous to Farmers

and the need for the retention of an accident reconstruction

expert. The alleged failure to timely retain such an expert

contraryto the recommendation of their attorneys was a substantial

element in Palmer's proof of Farmerst bad faith in investigating

and settling Palmer's claim. Palmer claimed the retention of such

an expert and his opinion would have refuted any statements relied

on by Fanners that Palmer was speeding. The attorneys' analysis

and recommendations and Farmers' reaction to them was brought out

thoroughly in the direct examination by Palmer's attorney of

Farmers' branch claim supervisor as an adverse witness. Such

correspondence was also noted extensively in Palmer's attorneys'

final argument as evidence of bad faith and failure to timely and

properly investigate the claim. This error also helped Palmer to

focus his case on the trial preparation strategy and litigation

tactics of Farmers' attorneys, rather than on whether Farmers had

a reasonable basis for denying liability. In issue V below, we

further discuss how evidence of Farmers' litigation tactics and

strategy prejudiced Farmers.

The admission of privileged correspondence into evidence

materially affected Farmers1 substantial rights and prevented

Farmers from having a fair trial. See § 25-11-102(1), MCA.

Therefore, we vacate the District Court's order and judgment and

remand for a new trial in which Farmers can reassert its attorney-

client privilege. See Rule 504, M.R.Evid., Commission Comments.

IV.

Did the District Court err in ordering the production of work-

product materials and then allowing the materials into evidence?

On February 16, 1989, the District Court ordered production of

all Farmers1 claim file materials dated after October 26, 1988, the

date of a letter from Palmer's attorney to Farmers' attorney

expressing that Palmer would proceed with the bad faith action.

During the second week of trial, the court ordered Farmers1 former

26

defense counsel to produce the firm's witness files to Palmer's

counsel. Farmers contends that the ~istrict Court erred in

ordering production of these materials on the grounds that some of

the materials were immune from discovery under the work-product

doctrine. We agree.

W e are remanding because of errors involving t h e issue of

attorney-client privilege, but we are also remanding based on this

issue because the admission of certain work-product materials

affected Farmers' substantial rights and prevented it from having

a fair trial. See § 25-11-102 (1), MCA.

A. Did the District Court err by ordering Farmers to produce the

work-product materials in its claim file?

In response to Palmer's motion to compel discovery of Farmers'

claim file, Farmers objected to producing any materials dated after

October 8, 1985. On that date, Palmer's attorney threatened to sue

for bad faith if Farmers denied Palmer's claim. Farmers argues

that, after that date, the unprivileged materials in the file were

prepared in anticipation of litigation, thus were subject to the

work-product doctrine.

The work-product doctrine protects materials prepared in

anticipation of litigation, even though litigation is not in

progress. Rule 26(b) ( 3 ) , M.R.Civ.p. Normally, claim files are

commenced in anticipation of litigation and an investigation must

be geared toward the eventuality of litigation. For that reason,

we have held that work-product protection applies from the time a

claim file is opened. Kui~er,632 P.2d at 701.

In a bad faith case, however, the investigation is not geared

toward ultimate bad faith litigation from the time the insurer

opens a claim file. At that time, the insurer would have no reason

to expect bad faith litigation and investigations are not made with

the expectation of such litigation.

In the present case, Farmers does not seek the protection of

the work-product doctrine for materials prepared between the time

it opened the claim file and October 8, 1985. Therefore, we need

not rule on whether the doctrine applies to materials dated during

that time period.

Materials prepared after Palmer's attorney threatened to sue

for bad faith if Farmers denied Palmer's claim, however, were

prepared with an eye toward eventual bad faith litigation.

Therefore, any materials dated after October 8, 1985, are subject

to the work-product doctrine. Materials in the files dated after

that date, therefore, are discoverable only upon the required

showing discussed below.

In the February 16, 1989 order, the court found: I1[a]fter

considering the arguments of counsel and the court deeming itself

fully advised, the court finds that plaintiff had made a

satisfactory showing that he has substantial need of defendant's

claim file materials for the preparation of plaintiff's bad faith

case against defendant and that plaintiff is unable without undue

hardship to obtain the substantial equivalent of those materials,

thus overcoming defendant's work-product obje~tion.~~

As discussed above, if materials in the files are privileged

because they are confidential attorney-client communications, they

are immune from discovery. However, materials consisting of work

product prepared in anticipation of litigation or in another

related case have a qualified immunity from discovery under the

work-product doctrine. See Rule 26(b)(3), M.R.Civ.l?. The immunity

offered by the doctrine is only a qualified immunity because work

product is discoverable in certain circumstances.

The immunity offered by the work-product doctrine depends on

the type of work product being sought. There are two basic types

of work product. First, there is ordinary work product, which

relates to factual matters. Next, there is opinion work product,

which relates to mental impressions, opinions, conclusions, or

legal theories. See Rule 26(b)(3), M.R.Civ.P.

Ordinary work product is discoverable to the extent that it is

not privileged and is 'relevant to the subject matter involved in

the pending action." Rule 2 6 ( b ) ( l ) , M.R.Civ.P. However, a party

can discover ordinary work product "prepared in anticipation of

litigation or for trial or for another party or by or for that

other party's representative (including the other party's attorney,

consultant, surety, indemnitor, insurer, or, agent) only upon a

showing that the party seeking discovery has substantial need of

the materials in the preparation of the party's case and that the

party is unable without undue hardship to obtain the substantial

equivalent of the materials by other means. Rule 26 (b)(3),

M.R.Civ.P.

"At its core, the work-product doctrine shelters the mental

processes of the attorney, providing a privileged area within which

he can analyze and prepare his client's case." United States v.

Nobles (1975), 422 U.S. 225, 238, 45 L.Ed. 141, 154, 95 S.Ct. 2160,

2170. Because of this purpose, opinion work product is subject to

additional protection by the court.

The Montana Rules of Civil Procedure provide this protection

by stating that in ordering discovery of work product upon the

required showing, "the court shall protect against disclosure of

the mental impressions, conclusions, opinions, or legal theories of

an attorney or other representative of a party concerning the

litigation." Rule 26(b) (3), M.R.Civ.P. This Rule does not

absolutely preclude discovery of opinion work product, rather it

mandates that the court provide greater protection for opinion work

product than for ordinary work product. See Nobles, 422 U S . at

This Court has endorsed the following rationale concerning the

greater protection granted to opinion work product:

It is clear that opinion work product is entitled to

substantially greater protection than ordinary work

product. Therefore, unlike ordinary work product,

opinion work product cannot be discovered upon a showing

of substantial need and an inability to secure the

substantial equivalent of the materials by alternate

means without undue hardship. [See Rule 26(b) (3),

M.R.Civ.P.1 In our view, opinion work product enjoys a

nearly absolute immunity and can be discovered only in

very rare and extraordinary circumstances. See Hickman

v. Tavlor, supra. Our unwillingness to recognize an

absolute immunity for opinion work product stems from the

concern that there may be rare situations, yet

unencountered by this court, where weighty considerations

of public policy and a proper administration of justice

would militate against the nondiscovery of an attorney's

mental impression. [Actually, the special protection

Rule 26(b) (3) gives to opinion work product is broader

and protects the mental impressions of an attorney or

other representative of a party concerning the

litigation.] Absent such compelling showing, the ...

opinion work product should remain immune from discovery.

Kui~er,632 P.2d at 701-02 (citation omitted).

Several courts, including the Ninth Circuit Court of Appeals,

have designated a rare and extraordinary circumstance when opinion

work product is discoverable. We agree with the reasoning of those

courts which have held that opinion work product is discoverable

when the mental impression is directlv at issue in the case and the

need for the material is compelling. See, e.g., Holmgren v. State

Farm Mut. Auto. Ins. Co. (9th Cir. 1992), 976 F.2d 573, 577:

Handgards, Inc. v. Johnson & Johnson (N.D.Ca1. 1976), 413 F.Supp.

926, 932-33.

To clarify the terms we use in this test, by 8*directlyat

issue in the case" we mean that the mental impressions actually are

the issue in the case. To meet the "compelling needs1requirement,

the party seeking discovery must demonstrate that weighty

considerations of public policy and the administration of justice

outweigh the need to protect the mental impressions of the opposing

party's attorneys or its representatives. See Kui~er,632 P.2d at

701-02.

In a bad faith case, such as the present case, where the issue

is whether the insurer had a reasonable basis for denying the

claim, the mental impressions and opinions of the insurer are

directly at issue. The basis for denying such a claim lies only in

the mental impressions of those representatives of the insurer who

31

decided to deny the claim. Consequently, a party may discover the

opinion work product of the representatives whose mental

impressions are directly at issue, but only upon a showing of

compelling need bevond the substantial need/undue hardship test

required by Rule 26(b)(3), M.R.Civ.P., for ordinary work product.

See Holmqren, 976 F.2d at 577.

Here, the District Court ordered production of Farmers' entire

claim file. Farmers' claims agents and a branch claims supervisor

made the decision to deny coverage, so their mental impressions and

opinions are directly at issue in this case; therefore, materials

containing the insurer's mental impressions are discoverable on a

showing of compelling need.

It is difficult to envision a circumstance in which the

compelling need requirement would not be met when the mental

impressions of a ~ a r t vare directly at issue in the case. However,

because of the possibility of a rare and extraordinary circumstance

in which the mental impressions should not be discovered, we

decline to rule that the compelling need requirement is

automatically met in such cases.

The work-product doctrine, however, protects materials

containingthe mental impressions of Farmers' attorneys. The court

ruled that when attorney Walsh took the stand, Farmers placed

advice of counsel squarely at issue in the proceedings. Farmers,

however, did not rely on advice of counsel as a defense to the bad

faith charge. The insurer, not the attorneys, made the ultimate

decision to deny coverage in this case. Therefore, attorney mental

impressions and opinions are not directly at issue, so the

threshold requirement of the test for discoverability of opinion

work product is not met. As a result, materials that contain the

mental impressions and opinions of Farmers1 former attorneys are

immune from discovery under the work-product doctrine, unless a

waiver occurred.

The District Court erred by ordering Farmers to produce all

claim file materials dated after October 26, 1988, on a showing of

substantial need and undue hardship. On remand, it is incumbent on

Farmers to show which materials included in the District Court's

order contain opinion work product. The court then must apply the

law to each exhibit to determine whether it is discoverable. If

part of an exhibit is discoverable, the court must redact the

undiscoverable portions of the materials. See Kui~er,632 P.2d at

B. Did the District Court err in determining that one of Farmers'

former defense attorneys waived the protection of the work-

product doctrine by making testimonial use of certain work-

product materials?

In addition to ordering production of Farmers1 claim files,

the District Court, during the course of the trial, ordered

Farmers1 former attorneys from the law firm of Smith, Walsh,

Clarke, and Gregoire (the Smith firm) to produce several of the

firm's witness files. The court specified certain files on named

witnesses and any files that had anything to do with speed.

Palmer argues that attorney Walsh waived the work-product

immunity by making testimonial use of the materials at trial. On

the other hand, Farmers argues that, except for his testimony

33

regarding expert witness Dr. Shapley, Walsh only generally

mentioned four other witnesses. Therefore, Farmers argues, Walsh

did not waive the protection of the work-product doctrine for

anything but the Shapley file.

In the present case, the court ordered production of the Smith

firm's work-product files without discriminating as to whether the

materials contained therein were ordinary work product or opinion

work product. However, the immunity from discovery given to

opinion work product cannot be waived as easily as the immunity

given to ordinary work product.

The standards for waiver by testimonial use of the work

product differ between opinion and ordinary work product. Waiver

by testimonial use does not apply to opinion work product unless

the witness directly discloses his or her mental impressions. See

In re Martin Marietta Corp. (4th Cir. 1988), 856 F.2d 619, 625.

With ordinary work product, once a witness makes testimonial use of

the files, the witness implicitly waives the protections of the

work-product doctrine with respect to factual matters covered in

the testimony of the witness. Martin Marietta CorD., 856 F.2d at

625; Nobles, 422 U.S. at 239.

In this case, Palmer's attorney challenged witness Rausch to

explain why Farmers hired Dr. Shapley as an accident reconstruction

expert but failed to have him testify in the uninsured motorist

trial. Rausch was not the one who made the decision and could not

address the question, so Farmers called its former attorney James

Walsh to explain why Shapley was not called as a witness.

Walsh testified concerning his dealings with Shapley, the

general nature and calculations he requested Shapley to make, and

Shapleyls conclusions. Walsh testified that he decided there was

no need to call Shapley because his opinions were consistent with

those of Palmer's expert.

Walsh thus directly disclosed his mental impressions

concerning his decision not to call Shapley as a witness. By doing

so he waived the immunity for his mental impressions contained in

the Smith firm's Shapley files.

In addition to discussing Shapley, Walsh referred to the dirt

bikers and their observation of the speed of the motorcycle. He

stated that, based on Shapley's calculations, Farmers knew early on

that speed was not a factor in the accident. Walsh also referred

to the credibility of witness Atchison.

Walsh did not, however, testify to the substance of any of the

work product in his file, nor did he refer to any of the materials

in his firm's work product files. In fact, he stated that he did

not rely on any of the firm's files in testifying, rather he

remembered what happened at trial. He testified on cross-

examination that he was unfamiliar with the content of most of his

firmlswitness files because, for the most part, they were prepared

and used by Gregoire.

Walsh did not disclose his or his partners' mental impressions

concerning those witnesses. In addition, Walsh did not make

testimonial use of the Smith firm's files regarding those

witnesses. Walsh merely referred to facts brought out in the

underlying trial. Therefore, Walsh's testimony did not waive the

work-product doctrine's protection of his mental impressions, nor

did his testimony implicitly waive the protection of factual

matters pertaining to those witnesses.

The Court's order requiring the disclosure of certain work

product materials of the Farmers1 attorneys and especially of

attorney Gregoire and the use of such materials in cross

examination of attorney Walsh placed Farmers in the prejudicial

position of having to explain such private thoughts, impressions,

notes, etc., which were clearly work product.

We conclude that the admission of certain work product into

evidence materially affected Farmers' substantive rights and

prevented Farmers from having a fair trial. See 5 25-11-102(1),

MCA. On these grounds, we vacate the District Court's order and

judgment and remand for a new trial.

Did the District Court err in admitting evidence of the litigation

tactics of Farmers1 attorneys and of its decision to appeal?

Prior to trial and again on the first day of trial, Farmers

made a motion in limine to exclude evidence of the conduct of

Farmers' attorneys in defending the underlying uninsured motorist

case and of Farmers1 decision to appeal the judgment in that case.

The District Court denied the motion and allowed Palmer to

introduce evidence of the litigation strategy and tactics Farmers'

attorneys used in defending the uninsured motorist case and of

Farmers' decision to appeal the judgment in that case.

A. Is evidence of an insurer's post-filing conduct, such as

litigation strategy and tactics in defending the underlying

suit, admissible in a bad faith action?

Farmers contends that after litigation commenced, the parties

assumed adverse positions, and events occurring after that time

could not form the basis of either a common law or a statutory bad

faith claim. Farmers further contends that allowing a jury to

consider evidence of litigation conduct is extremely prejudicial to

an insurer's right to defend against a claim it believes lacks

merit.

Palmer, on the other hand, contends that "conduct during the

trial was highly relevant to establish that both the initial

investigation and denial were incomplete and erroneous and that

Farmersf course of conduct continued by attempting to cover up the

true facts belatedly discovered."

Courts have held, and we agree, that an insurer's duty to deal

fairly and not to withhold payment of valid claims does not end

when an insured files a complaint against the insurer. See, e.g.,

White v. Western Title Ins. Co. (Cal. l985), 710 P.2d 309, 317.

Several courts have considered whether evidence of an insurer's

conduct during litigation of the underlying suit is admissible in

a subsequent bad faith action. After examining the reasoning of

courts that have considered the issue, we conclude that the

continuing duty of good faith does not necessarily render evidence

of an insurer's post-filing conduct admissible. See Palmer v. Ted

Stevens Honda, Inc. (Cal.App. 1987), 238 Cal.Rptr. 363, 366-69;

White, 710 P.2d at 317 (as interpreted by both Nies v. National

Auto. & Casualty Ins. Co. (Cal.App. 1988), 245 Cal.Rptr. 518, 523-

25, and California Physicians' v. Superior Ct. (Cal-App.1992), 12

Cal.Rptr.2d, 95, 99-100). Indeed, courts rarely should allow such

evidence and we have adopted a balancing test for those rare

circumstances.

Public policy favors the exclusion of evidence of an insurer's

post-filing litigation conduct in at least two respects. First,

permitting such evidence is unnecessary because during the initial

action, trial courts can assure that defendants do not act

improperly. Next, and more importantly, the introduction of such

evidence hinders the right to defend and impairs access to the

courts.

The Rules of Civil Procedure control the litigation process

and, in most instances, provide adequate remedies for improper

conduct during the litigation process. Once the parties have

assumed adversarial roles, it is generally for the judge in the

underlying case and not a jury to determine whether a party should

be penalized for bad faith tactics. Ted Stevens Honda, 238

Cal.Rptr. 363, 369, (citing White, 710 P.2d at 325 (Lucas, J.,

concurring and dissenting)).

An attorney in litigation is ethically bound to represent the

client zealously within the framework provided by statutes and the

Rules of Civil Procedure. These procedural rules define clear

boundaries of litigation conduct. If a defense attorney exceeds

the boundaries, the judge can strike the answer and enter judgment

for the plaintiff, enter summary judgment for the plaintiff, or

impose sanctions on the attorney. See White, 710 P.2d at 325,

(Lucas, J., concurring and dissenting). There is no need to

penalize insurers when their attorneys represent them zealously

within the bounds of litigation conduct. To allow a jury to find

that an insurer acted in bad faith by zealously defending itself is

to impose such a penalty.

The most serious policy consideration in allowing evidence of

the insurer's post-filing conduct is that it punishes insurers for

pursuing legitimate lines of defense and obstructs their right to

contest coverage of dubious claims. As discussed below, if

defending a questionable claim were actionable as bad faith, it

would impair the insurer's right to a zealous defense and even its

right of access to the courts.

Allowing evidence of litigation strategies and tactics would

expose the insurer's entire defense in a coverage action to

scrutiny by the jury, unless the insurer won the underlying suit.

The jury then, with the assistance of hindsight, and without the

assistance of insight into litigation techniques, could "second

guess the defendant's rationales for taking a particular course."

White, 710 P.2d at 324 (Lucas, J., concurring and dissenting). In

addition, the jury could consider evidence of the defendant's

litigation strategy and tactics without any showing that the

insurer's conduct was technically improper. Thus, insurers would

be reluctant to contest coverage of questionable claims.

The case at hand exemplifies the warning given by Justice

Lucas in his dissent to White. Justice Lucas warned that

permitting evidence of the post-filing conduct of the insurer's

attorneys would allow juries to impose liability for litigation

tactics which are in and of themselves proper, merely because a

jury may conclude that the strategy and tactics in and of

themselves amounted to bad faith. See white, 710 P.2d at 323-24

n.4 (Lucas, J., concurring and dissenting).

In this case, as in White, the plaintiff did not contend that

insurer's tactics in and of themselves were improper, rather the

implicit claim was that the litigation strategy and tactics

amounted to bad faith. The jury was allowed to consider Farmers1

legitimate defense strategy and proper litigation tactics as

evidence of bad faith, when the relevant inquiry should have been

whether Farmers' had a reasonable basis for denying the claim.

To permit evidence of insurers1 litigation strategies and

tactics is to impede insurers' access to the courts and right to

defend, because it makes them reluctant to contest coverage of

questionable claims. "Free access to the courts is an important

and valuable aspect of an effective system of jurisprudence, and a

party possessing a colorable claim must be allowed to assert it

without fear of suffering a penalty more severe than typically

imposed on defeated parties.I1 White, 710 P.2d at 324 (Lucas, J.,

concurring and dissenting) (quoting Young v. Redman (Cal.App.

1976), 128 Cal.Rptr. 86, 93). Public policy dictates, therefore,

that courts must use extreme caution in deciding to admit such

evidence even if it is relevant to the insurer's initial decision

to deny the underlying claim.

This brings us to another crucial point, the relevance of the

insurer's post-filing conduct. In general, an insurer's litigation

tactics and strategy in defending a claim are not relevant to the

insurer's decision to deny coverage. Indeed, if the insured must

rely on evidence of the insurer's post-filing conduct to prove bad

faith in denial of coverage, questions arise as to the validity of

the insured's initial claim of bad faith. One court has gone so

far as to hold that I1once litigation has commenced, the actions

taken in its defense are not, in our view, probative of whether

defendant in bad faith denied the contractual lawsuit.I1 Ted

Stevens Honda, 238 Cal.Rptr. at 368.

After the onset of litigation, an insurer begins to

concentrate on supporting the decisions that led it to deny the

claim. The insurer relies heavily on its attorneys using common

litigation strategies and tactics to defend against a debatable

claim. Consequently, actions taken after an insured files suit

are at best marginally probative of the insurer's decision to deny

coverage. See Randy Papetti, Note, Insurer's Dutv of Good Faith

in the Context of Liticration, 60 Geo. Wash. L.Rev. 1931, 1972

(1992).

In some instances, however, evidence of the insurer's post-

filing conduct may bear on the reasonableness of the insurer's

decision and its state of mind when it evaluated and denied the

underlying claim, Therefore, we do not impose a blanket

prohibition on such evidence.

We believe the correct approach is to strike a balance between

deterring improper conduct by the insurer and allowing insurers to

defend themselves against spurious claims. Rule 403, M.R.Evid.,

provides for that balance. When the insurer's post-filing conduct

has some relevance, the court must weigh its probative value

against the inherently high prejudicial effect of such evidence,

keeping in mind the insurer's fundamental right to defend itself.

See Rule 403, M.R.Evid. ; White, 710 P.2d at 324 n.5 (Lucas, J.,

concurring and dissenting).

The following comment on the relevance of post-filing conduct

expresses our position on the issue.

When evaluated through the prism of the substantive law,

an insurance company's postfiling conduct, particularly

its litigation conduct, has little relevance to proving

that the insurer's prefiling actions resulted in the

wrongful denial of policy benefits. Litigation, in

almost all cases, does not commence until after the

policyholder's claim has been denied or the insurer has

failed to respond to a policyholder's claim within a

sufficient amount of time. In contrast, the actual tort

occurs, or does not occur, contemporaneously with the

'wrongful denial of ~overage'~--an act that occurs well

before any improper litigation conduct takes place.

Damages likely will be incurred after the wrongful denial

of a claim as a result of the continued deprivation of

policy benefits, but the tort itself occurs when the

contract is breached unreasonably. Thus, courts that

merely inquire into the reasonableness of a defendant

insurer's postfiling conduct itself fail to recognize

that, in most cases, the only possible relevance of such

evidence is to reinforce or expose the unreasonableness

of the original denial of coverage. Improper postfiling

conduct, no matter how unreasonable, is rarely actionable

in and of itself under the rubric of bad faith tort

action. When analyzins the relevance of an insurer's

postfilins conduct. therefore. the urouer inuuirv should

be into the extent to which such conduct casts lisht on

the reasonableness of the oriqinal denial of the

policyholderrs claim.

Insurer's Duty of Good Faith, 60 Geo. wash. L.Rev. at 1969-70.

(Emphasis added.)

After analyzing Farmersf post-filing conduct, we find that the

prejudicial nature far outweighs any relevance of the conduct. The

following examples illustrate how Palmer used evidence with little

or no relevance to prejudice the jury against Farmers.

First, Farmers reimbursed key witness Atchison f o r lost wages

and expenses incurred in traveling to the accident scene to help

him remember, and Farmers' attorneys better understand, the events

on the day of the accident. Palmer's counsel implied to the j u r y

that this conduct constituted a bribe for changing his testimony.

Farmers' attorneys also invited other witnesses to view the

scene. Farmers invited the dirt bikers as well as the deputy

sheriffs and the highway patrol officer who investigated the

accident. The Meagher County Attorney accompanied the officer.

Palmer's attorney implied through his questioning that this so-

called Iffirmingup1'session was somehow unethical or illegal.

The "firming upn session, and questions regarding it, have

little or no probative value. Implications of unethical or illegal

behavior are inherently prejudicial, especially in a bad faith

case. The prejudicial effect of the evidence far outweighs any

possible probative value.

Furthermore, Palmer's attorney, over objection, criticized

witness Rausch for not alerting the jury that witness Atchison had

changed his story about whether the motorcycle had passed behind or

in front of the truck. Through his questioning in the bad faith

trial, Palmer's attorney insinuated that Farmers had an obligation

to alert:the jury in the underlying trial that Atchison had changed

parts of his description of t h e accident.

In addition, Palrnerfsattorneys continually challenged Rausch

to explain and defend the comments and conduct of Famers' counsel

in defending the underlying case. Rausch was unable to explain to

the jury all of the intricacies of the defense attorneys' actions

and strategies carrying out discovery, obtaining witness

statements, taking depositions, preparing for trial, and conducting

trial. Nor was Rausch equipped to explain motions to compel, why

Farmers was reluctant to produce work product for Palmer, and why

Farmers did not call one of its expert witnesses in t h e underlying

trial. Only the attorneys could explain these circumstances.

Last, defense attorney Gregoire was cross-examined extensively

on his role in meeting with Atchison and cross-examining other

witnesses at trial and in depositions. Palmer's attorney suggested

to the jury that Gregoire asked an investigator to I1tail1l a

witness, not to see if she stayed with Palmer's family, but to "get

some dirt on h e r . "

A11 of this evidence was prejudicial because it allowed the

jury to second guess Farmersf attorneys and to consider legitimate

defense strategy and proper litigation tactics as evidence of bad

faith. The evidence does not relate to the reasonableness of the

original denial of the policyholderts claim, and therefore, has

little or no relevance. Thus, the District Court erred by

admitting evidence of Farmersf attorneysf post-filing conduct.

In the bad faith trial, Palmer introduced other post-filing

conduct of Farmerst attorneys. We need not rule on its

admissibility because we are remanding for a new trial. The trial

judge can inquire into the extent to which the conduct casts light

on the reasonableness of Farmersf original denial of Palmer's

uninsured motorist claim. If the conduct is sufficiently related

to Fanners' denial of the claim, the judge can then determine

whether the probative value of the evidence outweighs its

prejudicial effect, keeping in mind Fannerst right to defend its

denial of a questionable claim.

B. Is an insurer's decision to appeal the verdict in the

underlying case admissible as evidence in a subsequent bad

faith action based on the insurerfs decision to deny coverage?

Farmers contends that post-judgment conduct is not admissible

as evidence of bad faith, Specifically, Farmers argues that Ifno

bad faith occurred by virtue of the fact that Farmers appealed the

jury verdict." We agree.

This Court, and not a jury, is in the best position to

determine the merits of appeals to this Court. As discussed above,

sanctions are available for frivolous litigation tactics, including

the filing of a frivolous appeal.

We agree with the following analysis by the California Supreme

Court:

Although there are many contexts in which jury

determinations may be superior to those of trial or

appellate judges, the determination of the frivolousness

of an appeal is not one. And the potential "chilling

effectn on appeals ... would be greatly exacerbated if

every appellant faced the prospect that a jury might

impose additional damages--compensatory and punitive--in

a subsequent action based on its assessment of his or her

motive in prosecuting the appeal.

Coleman v. Gulf Ins. Group (Cal. 1986), 718 P.2d 77, 81. We hold

that the District Court's decision to admit evidence of Farmers'

decision to appeal the jury verdict was erroneous and prejudiced

Farmers.

SUMMARY

The District Court did not err in denying Farmers' motion for

a directed verdict. However, Farmers is entitled to a new trial

for two distinct reasons. First, the court compelled discovery of

materials subject to the attorney-client privilege and then

admitted the materials into evidence. Second, the court compelled

discovery of work product without an adequate showing by the

plaintiff and then admitted the materials into evidence. The

admission of certain undiscoverable work product into evidence

prejudiced Farmers and prevented it from having a fair trial, as

did the admission of material subject to attorney-client privilege.

Farmers is thus entitled to a new trial.

Farmers listed several other issues for our review. However,

we are not considering them because on remand they might arise in

a different context, if at all.

Justices

Justice Terry N. Trieweiler dissenting.

I dissent from the opinion of the majority.

Any group of people who, without a qualm, would take

$1.5 million from a severely brain damaged man who can no longer

care for himself in order to protect the secret maneuverings of a

few lawyers, ought to have a better familiarity with the record

than is demonstrated by the majority's opinion.

After carefully reviewing the record, I conclude that the

majority opinion has distorted the rulings of the District Court;

ignored and wasted hours of conscientious service by the jurors who

served in this case; and unjustly treated the victim whose efforts

to reclaim some modicum of dignity have been dealt a severe

set-back by this decision.

I have no quarrel with attorney-client privilege, nor the work

product doctrine. Under the appropriate circumstances, those

principles provide a necessary shield from exposure of an

attorney's candid communications and mental impressions. However,

this opinion does not limit these worthwhile privileges to their

intended defensive purpose. It allows them to be used as an

offensive spear for the selective benefit of the insurer and its

attorneys. It allows an insurer to selectively use records from

its file which serve its self-interest, while denying its own

policy holder an opportunity to search those same files for

materials which are inconsistent. It allows the attorneys of an

insurer to offer self-serving opinions and mental impressions, but

denies the attorney for a policy holder the opportunity to

effectively cross-examine the insurer's attorney by knowing what

his or her opinions or impressions were at an earlier time when

decisions were made which were adverse to the policy holder's

interest and may have been a violation of our laws.

Neither the attorney-client privilege, nor the work product

doctrine, were intended for such selective application as is

permitted by the majority's opinion.

To fully understand the injustice of this opinion, it is

necessary to understand the actual events which led to the District

Court's decision compelling production of Farmers' records.

However, it is difficult to glean those events from the majority

opinion which, to a large extent, simply sets forth as fact those

arguments made in Farmers' brief. Therefore, what follows is a

more complete statement of the facts relevant to the legal issues

raised on this appeal.

In considering these facts, it should be kept in mind that

exceptions to attorney-client privilege and the work product

doctrine exist where the party invoking the privilege intends to

call his attorney as a witness or defend against a claim that he

acted unreasonably by asserting that he acted in reliance on advice

of counsel. Another exception to the work product doctrine

relating to mental impressions and opinions exists in a bad faith

case, like this one, where the mental impressions and opinions of

the defendant are the primary issue in the case.

David Palmer was severely injured on June 10, 1984, when the

motorcycle that he was operating was forced off the road by a

semi-truck and trailer that have never been identified. He

notified Farmers Insurance Exchange, from whom he had purchased

uninsured motorist coverage, of the incident within a short time

after the accident. However, his policy had an exclusion for

accidents caused without contact between the two vehicles.

Farmers' investigation consisted of an interview with the passenger

on Palmer's motorcycle and a review of the investigating highway

patrolman's report. There were no other witnesses to the accident,

and because of the exclusion, nothing further was done to

investigate the claim until over a year later.

On June 19, 1985, we decided McGlynn v Safeco Insurance Company o

. f

America (1985), 216 Mont. 379, 701 P.2d 735. In that case, we held

that the exclusion relied on by Farmers was void as a matter of

public policy. Following our decision in McClynn, Farmers referred

this case to the law firm of Smith, Walsh, Clark and Gregoire for

further investigation and advice. From that point on, additional

investigation was done by Bruce Vassar, the law firm's

investigator, and was reported to Farmers by members of the firm.

It was the law firm's investigation and reports to Farmers

which led to Farmers' final rejection of Palmer's claim in February

1986. In fact, that rejection was communicated to Palmer's

attorney by Marvin Smith, a member of the law firm. Following the

denial of his claim, Palmer filed a complaint in the District Court

on February 26, 1986, alleging that he was entitled to coverage for

his injuries and that Farmers had acted unreasonably and was guilty

of bad faith when it denied his claim.

In its answer, Farmers denied that it had acted in bad faith

or v i o l a t e d any reasonable settlement p r a c t i c e s . However, by that

time the conduct of Farmers' own employees, and the conduct of its

attorneys and their investigator, were so interrelated that they

could not, for practical purposes, be separated with regard to the

issue of whether or not the claim had been reasonably denied.

On May 8, 1986, the District Court, pursuant to our decision

in Fodev. FannersInsuranceExchange (1986), 221 Mont. 282, 719 P.2d 414,

bifurcated plaintiff's claims and ordered that the underlying claim

for coverage pursuant to the uninsured motorist contract should be

tried first, and that any bad faith should be considered after that

case was resolved by settlement or judgment.

The contract claim went to trial on March 9, 1987, and a jury

rendered its verdict in favor of Palmer on March 13, 1987. Bill

Gregoire and Jim Walsh represented Farmers at that trial.

Following trial, Gregoire advised Farmers that he thought

there were several technical bases for appeal to the Supreme Court,

but also advised the company that even if the case was reversed by

the Supreme Court, a second jury would probably return the same

verdict in favor of Palmer. Farmers chose to proceed with the

appeal anyway, reasoning t h a t if it was successful on appeal, there

would be some benefit to the bad faith claim which was still

pending.

On September 13, 1988, this Court rendered its decision

affirming the judgment of the District Court.

On October 26, 1988, Palmer's attorney advised Farmers1

attorney that he was ready to proceed with the bad faith claim. In

response to that notice, Gregoire, who was still acting as Farmers1

attorney, and who had complete authority to waive any privilege

that his client could claim (see Drimmerv. Appleton (S.D.N.Y. 1986), 628

F. Supp. 1249), wrote the following letter to Palmer's attorney:

Dear Dennis:

As we explained over the telephone, we do not believe

that we can continue to represent Farmers Insurance

Exchange in the action you have filed. There seems to be

little question but that Marvin Smith, Jim Walsh, and

myself will be witnesses in the action that is presently

pending in the District Court. We would assume that you

and Mr. Risjord would likewise be witnesses.

At that point in time, the only remaining issue to be decided

in the bifurcated claim was whether Farmers had acted reasonably or

in bad faith when it denied plaintiff's claim for payment pursuant

to his uninsured motorist policy. The information that Farmers

relied on, and the impressions and opinions of its employees

regarding its obligations to its insured, became the primary issues

that remained in the litigation. Farmers' claims adjusters, its

attorneys, and their investigator acted in concert. There was no

way to separate Farmers1 impressions or opinions from its

attorneys1 impressions. There was no way to critique whether

Farmers acted reasonably without considering the advice it relied

upon from its attorneys. It is for these reasons that the Ninth

Circuit Court of Appeals in a similar case has held that work

product may be discovered in insurance bad faith claims. In

.

Holmgren v. State Farm Mutual Automobile Insurance Company (9th cir 1992) , 976

F.2d 573, State Farm was sued pursuant to 5 33-18-201(2), (4), (6),

and (13), MCA, of Montana's Unfair Trade Practices Act. Judgment

was entered for the plaintiff. On appeal, State Farm argued that

the district court erred when it ordered the company to produce,

and then admitted as evidence, handwritten memoranda drafted during

the litigation of the underlying personal injury claim. The

memoranda contained notes written by State Farm's adjuster fixing

a range of values for plaintiff's claim which were far above any

amount offered by State Farm. State Farm argued that the notes

constituted opinion work product which was protected under Rule

26(b)(3), Fed.R.Civ.P. Our corresponding rule is identical. The

Ninth Circuit disagreed. In affirming the district court, it held

that:

We agree with the several courts and commentators

that have concluded that opinion work product may be

discovered and admitted when mental impressions are at

ksue in a case and the need for the material is

compelling. See, e.g., Bio-Rad Labs., Znc. v Pharmacia, Znc., 130

.

F.R.D. 116, 122 (N.D.Ca1. 1990) ; Reavis[v. Metropolitanfioperty

& Liability Ins. Co.], 117 F.R.D. [160,] 164 [S.D.Cal. 19871 ;

. .

Handgards, Znc. v. Johnson & Johnson, 4 13 F supp 926, 93 2-3 3

(N.D.Ca1. 1976); Bird v Penn Cent. Co., 61 F.R.D. 43, 47

.

(E.D.Pa. 1973); 4 J. Moore, Federal Practice 9 26.64

[3.-21, at 26-385 & n.8 (2d ed. 1991); J. Anderson et

al., The Work Product Doctrine, 68 Cornell L.Rev. 760,

831-37 (1983). But see 8 C. Wright & A. Miller, Federal

Practice and Procedure: Civil 5 2022, at 188 n.97, 193,

s 2026, at 229-32 (1970).

Both elements are met here. In a bad faith

insurance claim settlement case, the "strategy, mental

impressions and opinion of the [insurer's] agents

concerning the handling of the claim are directly at

issue." Reavk, 117 F.R.D. at 164. Further, Holmgren's

need for the exhibits was compelling. Montana permits

insureds and third party claimants to proceed under

5 33-18-201 against an insurer for bad faith in the

settlement process. See Mont. Code Ann. 5 33-18-242

(1979) (applicable to claims arising after July 1, 1987);

Klaudtv. Flink, 202 Mont. 247, 658 P.2d 1065, 1067 (1983),

.

overruled on other grounds, Fode v. Farmers Ins. Exch. , 221 Mont 282,

719 P.2d 414 (1986). Unless the information is available

elsewhere, a plaintiff may be able to establish a

compelling need for evidence in the insurer's claim file

regarding the insurer's opinion of the viability and

value of the claim. We review the question on a

case-by-case basis.

In Handgards, "the lawyers who managed and supervised

the former litigation for the defendants [were] being

called as witnesses to express their opinions as to the

merits of the prior suits.I1 Handgards, 413 F.Supp. at

931. This comment, and others like it in "at issuevg

cases, is a practical acknowledgment of the fact that, in

bad faith settlement cases, insurers may call their

adjusters to testify to their opinions as to the lack of

viability of the underlying claim. When an insurer

chooses to remain mute on the subject, the plaintiff is

not foreclosed from developing the same evidence.

The Holrngren decision refers to mental impressions and opinions

of the insurer's agents. In that case, the agents were adjusters.

In this case, the agents were adjusters and attorneys. Farmers

attorneys were involved in the investigation and evaluation of this

case long before there was any lawsuit filed by Palmer. Their

opinions, advice, and mental impressions cannot be separated from

those of Farmersf adjusters in the evaluation of the reasons for

denying plaintiff's claim.

The majority adopts Farmers' position that even if work

product protection did not apply under these circumstances, the

communications from Farmersf attorneys, which were included in

Farmers' claims file, were protected by attorney-client privilege.

However, Farmers waived any claim to attorney-client privilege when

it advised Palmer, through Gregoire, that its attorneys would be

called as witnesses in the bad faith case.

In discussing exceptions to the work product doctrine, the

Ninth Circuit, in Holmgren, relied on Handgards, Inc. v Johnson & Johnson

.

(N.D.Ca1. 1976), 413 F. Supp. 926. In addition to discussing the

work product doctrine, that decision also dealt with a claim of

attorney-client privilege under circumstances similar to those in

this case. In Handgards, the defendant was accused of filing patent

infringement suits against the plaintiff in bad faith as part of a

conspiracy to restrain trade and monopolize the disposable plastic

glove industry. The plaintiff learned that the defendant intended

to call the lawyers who had handled the prior complaints as

witnesses on its behalf. The plaintiff, therefore, sought

discovery of any documents generated by these attorneys which would

indicate their purpose for filing the suits. The defendant

objected, based upon a claim of attorney-client privilege. The

district court held that by listing the attorneys as witnesses, the

defendant had injected the advice of counsel as a defense, and

thereby, waived the attorney-client privilege. It reasoned as

follows:

By putting their lawyers on the witness stand in

order to demonstrate that the prior lawsuits were pursued

on the basis of competent legal advice and were,

therefore, brought in good faith, defendants will waive

the attorney-client privilege as to communications

relating to the issue of the good-faith prosecution of

the patent actions. Garjinkle v. Arcata National Cop., [ 64 F R D...

688 (S.D.N.Y. 1974)l

(McNaughton rev. 1961).

..

.; 8 Wigmore, Evidence § 2327

Handgards, 413 F. Supp. at 929.

That district court also discussed defendant's objection to

production of these materials on work product grounds. It held

that:

The principal issue in the case at bar is the good

faith of the defendants in instituting and maintaining

the prior patent litigation against plaintiff.

Plaintiff's success in the instant action depends on a

showing that defendants pursued the prior suits knowing

they would be unsuccessful on the merits. Since the

lawyers who managed and supervised the former litigation

for the defendants are being called as witnesses to

express their opinions as to the merits of the prior

suits and the validity of the underlying patents,

plaintiff has a particularized and compelling need for

the production of the relevant work product of these

attorneys. Without discovery of the work product,

plaintiff will be unable to ascertain the basis and facts

upon which the opinions of these witnesses are based.

This will undoubtedly impair plaintiff's ability for

effective cross-examination on a crucial issue.

Handgards, 413 F. supp. at 931.

Similarly , in Leybold-Heraeus Technologies, Inc. v. Midwest Instrument Company

(E.D.WiS. 1987) , 118 F.R.D. 609, the district court held that by

'

calling their attorneys as witnesses the plaintiff waived the

attorney-client privilege. In that case, both attorneys were

listed for the purpose of testifying that the actions against the

defendant had been commenced in good faith. However, the plaintiff

sought to protect certain documents generated by those same

attorneys based on the attorney-client privilege. The district

court rejected that argument and held that:

Upon naming two of their attorneys as witnesses, LHT

and LHG assumed the risk that their claim of

attorney-client communication and/or attorney work

product would be abrogated. It is difficult for this

Court to anticipate the parameters of the testimony of

these two (2) attorneys, but certainly Minco would be

disadvantaged in cross-examining them, if it does not

have available the basis for their testimony.

Accordingly, this Court is of the view that many of the

documents which Attorneys Hemmingway and Zapfe

participated in, either as a recipient of communication

or the communicator as to prior art or as to the good

faith belief in the validity of the patents in question

and the good faith in maintaining the lawsuits of both

the present litigation and the Leco case, should be made

available for discovery to Minco.

This Court agrees with Minco's assertion that

LHT-LHG cannot selectively disclose portions of

privileged communications or give testimony favorable to

themselves, without concomitant disclosure of other

unfavorable portions of the privileged communications

relating to the same subject. See Handgards, Inc. v. Johnson &

Johnson, 413 F.Supp. at 929; Teachers Im., Etc. v. Shamrock

BroadcastingCo., 521 F-Supp. 638, 641 (S.D.N.Y. 1981); First

. .

Federal Savings & Loan v. Oppenheim, Appel, Dixon & Co. , 1.10 F R. D

557, 567 (S.D.N.Y. 1986); Duplun Cop. v. DeeringMilliken, Inc.,

397 F.Supp. at 1161.

Leybold-Heraeus Tech., 118 F. R. D. at 614.

Therefore, when the only remaining issue was whether or not

Farmers had acted reasonably based on the information that was

within its knowledge, and when, furthermore, Farmers notified

plaintiff that its attorneys would be called as witnesses to

establish that it acted reasonably, attorney-client privilege with

regard tothose attorneys* communications to Farmers was waived and

a specific exception to the work product doctrine was established.

The propriety of the District Court's order compelling

disclosure of Farmers' claims file was further established by later

developments. On September 13, 1989, plaintiff tookthe deposition

of Bud Rausch, defendant's branch claims supervisor who was in

charge of reviewing plaintiff's claim. He was obviously a critical

witness with regard to the issue of whether or not defendant had a

reasonable basis for denying Palmer's claim. Rausch testified that

the selective manner in which Farmers documented statements from

witnesses was based on advice of counsel. He stated that their

decision to retain a reconstruction expert, butthen not call that

expert at trial, was based on advice of counsel. He even stated

that Farmers' claims office had originally decided to pay

plaintiff's claim but then changed its mind, based on a

conversation with Marvin Smith who based his recommendation on the

investigation being conducted by the law firm*s investigator.

Rausch gave the following unequivocal testimony which

established that the only way Farmers could defend against

plaintiff's claim was based on advice of counsel:

Q. Okay. And you have already told us, and I will ask

you again, in case you want to change your mind

about this, in your initial conclusion to decline

the case, in February 1986, you relied on not only

the investigation, but the opinions and advice of

the law firm Smith, Baillie, and Walsh?

A. That is true.

Q. And you continued to rely on their work on the

trial and interviewing of the witnesses and their

opinions during the trial about trial strategy?

A. They were the only firm they had employed at the

time. We almost had to.

Q. Well, you did rely on it, whether you had to or not?

A. That's correct.

The majority opinion attempts to excuse Rausch's testimony

based on the contrived argument that since Farmers had not pled

"advice of counsel1'as an affirmative defense, it was not a basis

for waiving the attorney-client privilege. However, the important

fact is that the claims person employed by Farmers who was

principally responsible for denying plaintiff's claim testified

that he did so based on the advice of his attorneys. There was no

way for plaintiff to determine whether he did so reasonably without

knowing the substance of that advice. The only way to know the

substance of that advice was to produce the claims file, including

the correspondence which included the advice. The majority's

distinction between Rausch's testimony and an affirmative defense

is a distinction without a difference.

If there was any question about the purpose for which Farmers1

attorneys would be called as witnesses, that question was finally

resolved when Farmers was compelled by order of the District Court

to answer plaintiff's written interrogatories. The interrogatories

had been submitted by plaintiff prior to the underlying contract

case, but had never been answered by Farmers. Finally, on July 9,

1990, pursuant to the District Court's order dated June 18, 1990,

Farmers provided the following answer to Interrogatory No. 1 of

plaintiff's third set of written interrogatories:

Subject to the foregoing objections and without waiving

the same, defendant states that Marvin Smith, James

Walsh, and Bill Gregoire do have relevant knowledge

concerning their actions in preparing the defense of

defendant to plaintiff's underlying lawsuit for uninsured

motorist benefits and regarding what happened at the

trial of that case. Any of them may be called as

witnesses for the defendant as to those essentially

factual matters. If called as witnesses, those

individuals will not be examined regarding their

confidential privileged communications to defendant

regarding that underlying suit, or the instant bad faith

action.

The defendant also listed Billings attorney Steve Harman as an

expert, and in response to plaintiff's Interrogatory No. 6 stated

that:

Steve Harman is also expected to testify concerning the

defense efforts by the lawyers for Farmers Insurance

Exchange in defending and trying the underlying case and

whether those efforts were reasonable under the

circumstances of that case.

It is clear from these answers, that defendant intended to

call its attorneys as witnesses and that they intended to testify

regarding their conduct in handling the case. Their conduct in

handling the case is inseparable, as a factual matter, from the

conduct which gave rise to defendant's denial of plaintiff's claim.

It is equally clear that Farmers intended to call an expert to

testify regarding the reasonableness of its attorneys' conduct,

while at the same time denying plaintiff any access to the

contemporaneous records kept regarding those attorneys' conduct.

The majority opinion dismisses these answers to the

interrogatories, without fully quoting from them, by pointing out

Farmers' self-serving statement that the witnesses would not be

called for the purpose of disclosing confidential privileged

information. In essence, the majority has held that Farmers and

its attorneys can arbitrarily decide which of their communications

are privileged and which are not, and testify to those matters

which are favorable to Farmers* defense while precluding plaintiff

from discovering any matters which might be unfavorable to Farmers'

defense. Such a denial of meaningful cross-examination offends any

notion of due process with which I am familiar.

Some mention should also be made of the manner in which

Farmers actually defended itself at the time of trial. Plaintiff's

case was relatively brief. He called Bud Rausch, his treating

physician, his mother, and Lee Wise, an expert regarding the issue

of bad faith. Farmers' defense, however, consisted completely of

testimony from its former lawyers and their investigator, as well

as an expert consultant who based his testimony on a review of

Farmers' claims file, including the reports issued to Farmers by

its attorneys.

Vassar testified about the investigation he conducted; the

witnesses he contacted; the substance of what he was told by those

witnesses: and the difficulties he encountered when dealing with

the investigating highway patrolman.

Walsh testified that he assisted Gregoixe as one of the

defense attorneys representing Farmers in the underlying trial. He

gave extensive testimony about the expert witness that Farmers had

consulted and what that expert's conclusions were, even though the

witness had not been called in the underlying trial. He gave his

opinion about why they were able to defend during the trial without

calling an expert witness, and evaluated the testimony of Farmers'

principal factual witness in the underlying trial.

Gregoire, who also represented Farmers in the underlying

trial, testified extensively about tactical decisions and his

evaluation of witness testimony in the underlying case. He

testified about his interviews with witnesses; his investigation;

and his personal evaluation of the merits of plaintiff's underlying

claim. He explained how his firm arrived at the evaluation which

led to the denial of plaintiff's claim. He explained their mental

processes as they gathered sometimes contradictory information from

various witnesses, and told why some witnesses had greater

credibility, in his mind, than others. He was allowed to give his

personal evaluation of various experts who testified in the

underlying case, and repeatedly read from testimony in that case

and then gave his analysis of the testimony. He conceded that

Farmers spent $100,000 to defend plaintiff's underlying claim for

$50,000, and explained at length why it was reasonable to spend

twice as much as plaintiff was claiming in an effort to defeat him.

Frank Weedman was a retired claims representative for State

Farm Auto Insurance Company who was called by Farmers as an expert

to give his opinion that Farmers had acted reasonably. He

testified that he had been retained by George Dalthorp, Farmers'

attorney in Billings, to testify on numerous previous occasions.

He acknowledged that in forming his opinion it was necessary for

him to review Farmers' claims file, including correspondence from

Farmers' law firm to the claims department. If it was necessary

for Weedman to consult the file, how could it be any less necessary

for plaintiff's attorneys to have the same information?

It is clear from the November 15, 1988, correspondence,

defendant's answers to interrogatories, Rausch's deposition, and

the testimony that was actually given at trial, that defendant's

attorneys were always intended to be the principal factor in

Farmers' defense. Yet Farmers would have foisted that testimony on

the court and jury without any meaningful opportunity for plaintiff

to cross-examine these witnesses. The majority, by this opinion,

has approved of that trial tactic.

In doing so, the majority opinion also suggests that the

District Court turned over the Smith law firm's litigation files on

a wholesale basis without any justification for doing so. Nothing

could be further from the truth. The District Court's original

order compelling production of Farmers' files compelled production

of only those files generated prior to the time that plaintiff's

bad faith complaint was pursued. It did not include any of the

Smith Firm's litigation files. However, after Walsh was called to

testify on behalf of defendant, plaintiff's attorney requested the

court to order production of those witness files referred to during

Walsh's testimony. Plaintiff argued that Walsh waived any

privilege pertaining to those files as a result of his testimony.

Defense counsel conceded that there was a waiver of any privilege

concerning defendant's expert witness file, but disagreed that

there was a waiver with regard to any other witness. After

listening to arguments, the ~istrict Court agreed that the

privilege had not been waived with regard to the Smith Firm's

entire file. The following conversation took place:

THE COURT: That's where the difficulty comes in is where

do you draw the parameters on what's happened? And I

would just suggest that Mr. Walsh collect his files and

show it to counsel, and if there has to be an in camera

inspection, we'll do that.

MR. CONKLIN: Collect what files, your honor?

THE COURT: The files relative to his testimony. It is

a rather broad testimony, as Mr. Risjord has pointed out.

Speed, the truck being on the right side of the road. I

mean, you're getting right into the guts of the case.

THE COURT: I am going to request that -- and I don't

know how your files how, but would you collect those

files and show them to Mr. Nybo and Mr. Conklin sometime

this afternoon, and then we will have to sort through

this.

THE COURT: Produce it to your counsel for Farmers

Insurance Exchange, Mr. Nybo and Mr. Conklin. In that

way we can sort through it, okay? That's the only way

that I --

and then we can go from there. You are going

to produce -- you are going to go through the file and

produce to counsel for the plaintiff those matters that

you have no question about that have been waived. And I

take it then the matters that you have a question about

-- you are going to reserve that for an in camera

inspection.

As the actual transcript shows, the District Court was very

circumspect and cautious about ordering the production of

attorneys' files, while at the same time recognizing that it would

be inherently unfair to allow Farmers' attorney to testify about

his mental impressions while protecting the actual record of those

impressions from discovery by plaintiff. The District Judge stated

that when Walsh took the stand:

That placed the advice of counsel squarely at issue in

these proceedings. To rule any other way, it is this

Court's opinion, would create a very obvious unfairness

in this case. There would be no way for counsel for the

plaintiff to adequately cross-examine Mr. Walsh in terms

of his testimony that took place yesterday.

Most importantly, the court stated that:

The court's ruling is not to be interpreted as a general

broad ruling. The ruling is, of necessity, limited to

only the testimony that was transcribed yesterday

concerning Mr. Walsh's testimony. In other words,

counsel is only allowed to get into those areas that were

testified to by Mr. Walsh, and I am limiting this ruling

narrowly to that testimony. The entire file is not open.

It is only open in regard to the matters that were

testified to.

The District Court then ordered that Walsh's testimony be

transcribed. The following day the District Judge went through

that testimony line-by-line with counsel for both parties so that

a determination could be made as to the exact extent of the waiver.

As a result of that line-by-line examination, he ordered that all

information regarding the expert witnesses that Walsh worked with

be produced; he ordered production of information from witnesses

that Walsh talked to about plaintiff's speed; he ordered that files

which had to do with witnesses Atcheson and Diacon be produced; and

he ordered that Vassar8snotes be produced since he had testified.

Finally, the District Judge made it clear that if there was

something the parties could not agree on, they could contact the

court for an in camera inspection because the court, at that time,

did not know what was in the Smith firm's files. After that

hearing, the court recessed for the production of the records

indicated. After that recess, defendant's attorneys pointed out

that there were 32 subfiles in the Smith Firm's litigation records

and that some of them had been produced and others were not

produced. However, no further request was made by attorneys for

defendant for an in camera review of any disputed files.

The impression created in the majority opinion that wholesale

production of the Smith Firm's file was ordered, without any

in camera review, is a total distortion of the procedure followed

by the District Court.

At every step of the proceedings in this case, the District

Court ordered the minimal amount of disclosure that could be

permitted without denying plaintiff a meaningful opportunity to

develop the issue with which the case was concerned, and

cross-examine the witnesses that defendant intended to call. The

District Court's orders were a model of restraint and should serve

as an example for future bad faith litigation, rather than be the

majority s excuse for reversing another major verdict against

another insurance company found to have abused its insured.

either is it correct to conclude that defendant has satisfied

the burden imposed by 5 25-11-102, MCA, for reversal of the

District Court judgment. Even if the majority concluded that the

original communications which were the subject of the District

Court's order for production were privileged and should not have

been produced, there was nothing contained in those records which

were prejudicial to defendant. Almost all of the information in

the correspondence from the attorneys to Farmers was a factual

explanation or legal analysis of why Fanners was justified in

denying plaintiff I s claim. If the majority had reviewed these

records, it would be clear to them that production of the records

was not prejudicial to defendant. In fact, the majority of the

information included in those reports was relied upon by Farmers in

defense of the bad faith case.

Finally, I dissent from that part of the majority opinion

which holds that an insurer's decision to appeal the verdict in an

underlying case is not admissible as evidence of bad faith. The

insurer has a continuing obligation to pay a claim when liability

is reasonably clear, and the fact that it may have a technical

basis for retrying a case does not establish as a matter of law

that there is a reasonable issue about liability. The more

reasonable approach to this issue is that adapted by Montana's

Federal District Court in K r s v. Aetna Life and Casually Company (D.Mont

yh .

1986), 624 F. Supp. 1130. In that case, Aetna moved the Federal

District Court to strike that part of plaintiff's complaint which

alleged that Aetna acted in bad faith and solely for the purpose of

delay in appealing the underlying personal injury verdict to the

Supreme Court of Montana. In denying that motion, the court held

that:

Evidence that an appeal was taken in bad faith is neither

inconsistent with the general tort principles expressed

by the Montana Supreme Court, nor is it inconsistent with

the legislative intent expressed in g 33-18-201(6), MCA,

The statute speaks generally in terms of flclaims, but

does not indicate that llclaim@l to be given anything

is

but its ordinary meaning, which includes "cause of

action.

Aetnats jurisdictional argument f a i l s for the same

reasons. section 33-18-201 would be stripped of its

effectiveness if it did not allow the court to consider

all stages of the negotiation and litigation process.

Appeal is but one part of that process. Rule 32,

M.R.App.P., does not alter this conclusion; it merely

gives the Montana Supreme Court authority to award

Itpropergfdamages if it "is satisfied from the record and

the presentation of the appeal1#that the appeal was taken

for purposes of delay only. This rule does not deprive

a trial court, state or federal, of jurisdiction to

consider the motive behind a decision to appeal as one

factor in a claim f o r bad faith against an insurance

company. At the appellate level, the decision that an

appeal is frivolous is based purely on the trial record

and on the appellate briefs and arguments. In a bad

faith action, it becomes a question f o r the jury, t o be

considered in view of all the plaintiff's evidence of the

insurer's conduct in negotiations from start to finish.

Of course, if there is sufficient evidence to show a

good-faith basis for the appeal as a matter of law, an

appropriate motion for directed verdict may be

entertained. See, St. Paul Fire & Marine Ins. Co. v Curnkhzy, [204]

.

Mont. [350], 665 P.2d 223 (1983).

Similarly, Aetna's position that plaintiffls claims

constitute a 88chillingeffect8* AetnaWsright of access

on

to the courts is without merit. Parties to a state suit

in Montana are free to appeal an adverse decision to the

state supreme court: review is not discretionary. In

this case, the subject matter of AetnaVs appeal was the

underlying malpractice action, and the issue concerned

the proper standard of causation. The subject matter of

the instant action is the conduct of Aetna throughout the

pendency of plaintiff's malpractice claim--prior to,

during, and after trial. The issue of Aetna8s bad faith

in claims settlement practices is a jury question, and

the jury should consider all the facts of the case in

reaching its verdict. Montana has enacted a broad

legislative scheme for the regulation of insurance

companies in accordance with federal law and with the

Montana Constitution.

Kyriss, 624 F. Supp. at 1133.

Likewise, in this case, Farmers has a duty pursuant to

5 33-18-201, MCA, to effect prompt settlement of claims where

liability is reasonably clear. That obligation did not end when

plaintiff's complaint was filed. It continued through the pendency

of that claim and following judgment by the District Court.

Insurance companies have tremendous resources with which to

use litigation and appeals to drain their insureds financially and

leverage settlements which are otherwise unreasonable based upon

the facts of the claim. Whether or not Farmers did that in this

case was a factual issue for the jury to decide. Furthermore, that

issue was resolved by the jury in this case based on facts which

were not evident to the Supreme Court from the record on appeal

from the underlying trial. Therefore, any sanction that this Court

could have imposed based on the record in that appeal was not

adequate to deter an appeal taken solely for the purpose of

unreasonably delaying payment of plaintiff's claim.

This decision is a serious blow to those who believe in the

statutory obligation that insurance companies have to treat their

insureds in a reasonable manner. It is an even more serious blow

to those who believe that when one party calls a witness, our rules

of discovery were intended to provide the other party with a

reasonable opportunity to cross-examine that witness by discovering

the factual bases for that witness's opinions and conclusions.

The practical effect of this decision is that insurers can

delegate their statutory obligation to investigate claims to a law

firm, they can deny those claims based on the advice of that law

firm, and then, when the company is accused of violating Montana

law by denying the claim unreasonably, the insurer can defend on

the basis that it relied on the firm's investigation and advice,

while the plaintiff is denied an opportunity to discover the

substance of that advice or what the investigation disclosed.

As sure as night follows day, this opinon will spawn a series

of "Palmer" seminars around the State where claims adjusters for

insurance companies are taught how to mistreat their insureds with

impunity by running the records of their mistreatment through law

firms which will be glad to assist with their investigation for a

fee.

The majority opinion represents a classic example of the legal

profession taking care of its own at the expense of everyone else.

Hopefully, with the passage of time, this decision will become a

relic of an unenlightened period in this Court's history when the

rights of individuals were less important than the rights of

insurance companies and those law firms that represented them.

H o w e v e r , that will not be much conso3ation t o the ~ i s t r i c t

Court or jurors who gave so generously of their time to do the

right thing in this case. And, it will not do much good for David

Palmer who, at least briefly, thought the law was bigger than his

insurance company.

For these reasons, I dissent from the majority opinion.

Justice William E, Hunt, Sr., joins in the foregoing dissent.