The Crime-Fraud Exception
A waiver of the privilege also may result when the carrier is sued for bad faith and/or fraud. For example, California Evidence Code Section 956 provides: “there is no privilege under this article if the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit a crime or a fraud.” Even without a statute, the license to practice law, is not a license to commit a crime.
One federal court ruled that a bad faith claim not involving fraud is insufficient to trigger the exception. In Freedom Trust, the insured argued that the privilege had been waived because the insurer denied coverage in bad faith. The court recognized that the attorney “does not have to be aware of the fraud for the crime-fraud exception to apply” and that the fraud exception includes civil fraud. The court noted a split in authority nationally as to whether a bad faith claim triggers the crime-fraud exception.
The court concluded that an allegation of a bad-faith denial of insurance coverage was not sufficient to trigger the exception:
Bad faith denial of insurance coverage means simply that the insurer breached an implied contractual agreement to act faithfully to an agreed common purpose consistent with the reasonably justified expectations of the other party. … This need not implicate false or misleading statements by the insurer. For example, an insurer may act in bad faith if it simply denies coverage without any explanation. The gravamen of fraud, however, is falsity. Thus, bad faith denial of insurance coverage is not inherently similar to fraud.
This decision was not meant to imply that an insurer cannot engage in activities that implicate both bad faith denial of coverage and fraud. Rather, it means that simple bad faith is not per se within the crime-fraud exception. In many circumstances, an insurer’s bad faith involves fraud or allegations of fraud. Conduct that constitutes a breach of the implied covenant of good faith and fair dealing is often alleged to be fraudulent conduct. California courts have noted that “bad faith conduct, involving deceit, has often been regarded as fraudulent.” If a carrier denied coverage for a claim that it knows is covered, it may have engaged in fraud.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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