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Bad Faith Insurance Defense and Reliance on Advice of Counsel

In Mississippi, for a plaintiff to recover punitive damages against an insurance company for bad faith refusal to pay a claim or to fulfill an obligation existing under the terms of an insurance policy, the insured must be able to demonstrate the following: “(1) The insurer breached the insurance contract; (2) the insurer had no arguable reason to deny the claim; and (3) the insurer’s denial of the claim rose to the level of an independent tort.” 5 MS Prac. Encyclopedia MS Law § 40:74 (2d ed.). Although there is not a general consensus as to the essential elements of a bad faith claim, the points discussed above provide a basic framework from which to evaluate a claim alleging bad faith refusal to pay an insurance claim, or refusal to honor an obligation under an insurance contract.

In the context of bad faith insurance defense, an insurance carrier’s assertion that it relied on the advice of counsel is a valid and effective defense tactic when used appropriately. However, attorneys may be reluctant to employ this defense due to the implications on the attorney-client privilege. When asserting a defense either based in whole or in part on the advice of counsel the defendants have waived the attorney-client privilege and must produce communications, documents, etc. that would normally be privileged and not disclosed over the course of traditional discovery. Flanagan v. Nationwide Property and Casualty Ins. Co., 2017 WL 3337267, *4 (S.D. Miss. 2017). This “emptying of the closet” so to speak of the communications between counsel and clients involving the decision to deny coverage is an important decision and should not be made without a thorough review of the file and discussions with the client regarding the implications of asserting this defense. On that basis, the insurance carrier must make a deliberate choice between disclosing confidential communications by raising this defense or electing to maintain the attorney-client privilege and utilizing other available defenses.

Although the advice of counsel defense may prevent a claim for punitive damages, an insurance carrier singularly relying on the advice of counsel must still show that the carrier’s reason for denying a claim was arguably reasonable. Szumigala v. Nationwide Mut. Ins. Co., 853 F.2d 274, 282 (5th Cir. 1988). “The advice of counsel is but one factor to be considered in deciding whether the carrier’s reason for denying a claim was arguably reasonable.” Murphree v. Fed. Ins. Co., 707 So. 2d 523, 533 (Miss. 1997). With that in mind, an insurance carrier must still perform a thorough analysis of the factors at issue in denying an insured’s claim and cannot blindly rely on the advice of counsel with the misguided expectation of immunity pursuant to the attorney’s advice. Id. Lastly, and possibly the most important aspect of this defense is that the advice of counsel must be sought in good faith. See Henderson v. U.S. Fid. & Guar. Co., 695 F.2d 109, 113 (5th Cir. 1983). Accordingly, if the insurance carrier legitimately questions the validity and reliability of the attorney’s advice, then the carrier’s reliance is not in good faith.

Although the advice of counsel defense is but one element to incorporate in an overall defense strategy, with proper planning and a mind toward the process by which legal advice and opinions are obtained this defense is an effective tool to include in the defense of a claim alleging bad faith.

Authored by: Benjamin Z. (Ben) Claxton, Sr.