In Steel v. Philadelphia Indemnity Co., 381 P.3d 111 (2016), a daycare center employee was convicted of child rape and child molestation while working at a daycare center. The parents brought a negligence action against the center. The daycare center had $1 million in coverage. Plaintiffs offered to settle for $4 million, which was rejected by Philadelphia. As trial approached, the insureds entered into a $25 million covenant judgment settlement with the plaintiffs. As part of the settlement the insureds received a covenant not to execute and the plaintiffs received an assignment of the insured’s bad faith claims.
In later proceedings, insurance companies sought discovery regarding the reasonableness of the covenant judgment settlement. Although the insureds provided numerous documents to the insurer, the insureds refused to provide documents involving attorney-client communications and attorney work product. It was Philadelphia’s contention that those privileges were waived regarding documentation involving the covenant judgment settlement. The trial court granted the insurer’s motion to compel but the Washington Court of Appeals reversed, finding no waiver.
The insureds argued to the court that when an insured seeks a court’s approval of a settlement, it does not waive attorney-client privilege because the reasonableness of any settlement is always judged under an objective standard. The court rejected this argument, emphasizing that such issues are decided on a case-by-case basis by the court. The focus of the court’s analysis was Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975). Under the Hearn analysis, three factors must be looked at to determine whether there has been a waiver of the privilege. First, there must be an assertion of the privilege by some affirmative act by the asserting party; second, through the affirmative act, the asserting party puts the protected information at issue by making it relevant to the case; and third, application of the privilege would have denied the opposing party access to vital information necessary for the defense. Under these principles, the insureds argued that they did not perform an affirmative act because they were required by RCW 4.22.061(1) to seek a judicial determination of the consent judgment settlement’s reasonableness. The court rejected this argument, finding that the insured did in fact perform an affirmative act by voluntarily entering into the covenant judgment settlement that was then subject to a hearing on reasonableness. The parties had the option of proceeding to trial instead of a stipulated settlement. However, the insurance company also failed to demonstrate that the reasonableness of the settlement “depended on” the attorney-client communications and failed to explain how those communications were integral to a determination of reasonableness of the settlement given the fact that the insurance company had available to it a significant amount of discovery bearing on the merits of the underlying case. As such, the court found that the insurance company failed to show that the attorney-client communications were integral to the reasonableness determination and therefore were not vital.