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March 19, 2003

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 16, #22, p. 19 (March 19, 2003). © Copyright Butler 2003.


The involvement of legal counsel to provide advice concerning the settlement of property and liability claims has become increasingly commonplace. This is primarily due to the general proliferation of litigation and specifically “bad-faith” claims. As the involvement of legal counsel becomes more prevalent, so does the “defense” of “advice of counsel.” This commentary will address this so-called “defense” in the context of “bad-faith” cases.

I.  Advice of Counsel as a “Defense”

A “bad-faith” claim will look at the actions undertaken by the insurer to determine whether the insurer exercised good faith in investigating, evaluating, and settling claims. Theoretically, it is incumbent upon the trier of fact to assume the perspective of the insurer at the time it makes its decisions. To the extent legal counsel was retained to assist the insurer in reaching its decisions, the reliance upon advice of counsel may be evidence that the insurer acted reasonably. The “advice of counsel defense” is typically raised as an Affirmative Defense to refute the allegation that the insurer acted in “bad-faith” by showing that it retained expert legal counsel to specifically address the issues regarding the coverage of a property claim or settlement of a liability action. Technically speaking, however, it is not a “defense” at all, but rather additional evidence that the insurer’s conduct was reasonable. By raising the “advice of counsel defense,” the insurer states that it relied on this expert legal advice in making its determination and by doing so, it acted in good-faith when making its decision.

II.  In the Context of “Bad-Faith”

What constitutes “bad-faith,” if it even exists, is controlled by state law. An action for “bad-faith” against an insurer may be founded in contract(1) or in tort.(2) Depending on the forum state of the “bad-faith” action, it can find its roots based in common law(3) or in statute.(4) However, regardless of the underlying basis of the “bad-faith” action, almost always will the action allege that the insurer acted in an unreasonable fashion in its investigation and evaluation of the case, and in doing so consciously made a decision to deny a first-party claim or not settle a liability claim that by all rights should have been paid or settled. The plaintiff must show how the insurer proceeded unreasonably, maybe even maliciously.

Most “bad-faith” actions are based upon one of two premises: (1) that the insurer failed to make a proper decision in declining or delaying payment of a first-party property claim; or (2) that the insurer failed to settle a third-party claim where it had an opportunity to do so. In proving “bad-faith,” it is generally incumbent upon the plaintiff to show that the insurer acted unreasonably in coming to its decision or acted in an intentional fashion to fail to come to the appropriate decision. The unreasonable or intentional conduct usually presents itself in arguments that the insurer: (1) failed to conduct a reasonable and full investigation and evaluation of the claim presented; (2) failed to pay a claim, which by all rights, was due and owing under the terms and conditions of the insurance contract; (3) failed to properly evaluate the potential consequences of a liability action, which resulted in an excess verdict against the insured; (4) failed to timely make payment of a proper claim; or (5) breached the implied covenant of good faith and fair dealing. The idea of “bad-faith” is still an amorphous one that, more often than not, requires looking at the totality of the circumstances surrounding the evaluation of the claim in order to properly evaluate the actions of the insurer.(5) 

In evaluating any potential “bad-faith” action, it is important to be able to place yourself in the position of the insurer at the time that the decision was made to deny coverage on the property loss or to decline settling the underlying liability claim. This is because it is not so much the ultimate decision that is the subject of the “bad-faith” action, but rather the methodology implemented by the insurer to arrive at the decision. Specifically, did the insurer act in a reasonable and prudent fashion in evaluating the claim? Accordingly, the reasonableness of the conduct and fact gathering behind the decision is essential in determining whether there was “bad-faith.” In a recent federal decision out of Montana, the presiding court held that:

In evaluating the evidence to see if there was any unreasonable conduct by the insurer, “it is essential that no hindsight test be applied. The reasonable or unreasonable action by the [insurer] must be measured as of the time it was confronted with the factual situation to which it was called upon to respond.”(6)

The California courts have also reached a similar conclusion in addressing the actions of an insurer in determining culpability for “bad-faith” in holding:

Under California law, all insurance contracts contain an implied covenant of good faith and fair dealing which requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefit of the agreement. . . .  An insurer may breach this covenant if it fails to properly investigate its insured’s claim, . . . or when it refuses, without proper cause, to compensate its insured for a loss covered by the policy. . . .  Denial of benefits alone, however, does not demonstrate bad faith. . . .  The withholding of benefits must be “unreasonable,” . . . or “without proper cause.” . . .  In evaluating the evidence to see if there was any unreasonable conduct by the insurer, “it is essential that no hindsight test be applied. The reasonable or unreasonable action by the [insurer] must be measured as of the time it was confronted with the factual situation to which it was called upon to respond.” (Citations omitted).(7)

The same has also held true in Indiana:

Thus, poor judgment and negligence do not amount to bad faith; the additional element of conscious wrongdoing must also be present. . . .  “A finding of bad faith requires evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or ill will.” . . .  As such, a bad faith determination inherently includes an element of culpability. . . .  Finally, fact issues may preclude summary judgment in favor of an insurer on an insured’s bad faith claim. (Citations omitted).(8)

Clearly, an insurer who pays for competent, experienced, and ethical counsel, and who relies upon that counsel’s independent advice, has less chance of being the recipient of a “bad-faith” judgment. Although it is not a “failsafe,” it should provide some measure of security.

III.  The Essentials of the “Advice of Counsel Defense”

The “advice of counsel defense” is key in determining whether an insurer has acted in a reasonable fashion, and with appropriate intent, when deciding on a claim. Accordingly, the involvement of legal counsel in assisting the insurer in the decision-making process, and the following of that advice, can go a long way towards establishing that the insurer acted in a reasonable and prudent fashion regarding the instant claim and did not intend to harm its insured. However, the fact that legal counsel rendered an opinion that was followed by the insurer, does not in and of itself relieve the insurer of liability for “bad faith.”

While the utilization of legal counsel in arriving at the decision, and reliance on that legal advice, is intended to show a good faith state of mind on the part of the insurer, the basis of the advice of legal counsel is as important to the determination of “bad-faith” as the advice itself. Specifically, courts and juries tend to look at the rationale and factual support behind the legal opinion of the legal counsel involved in the matter. This rationale and support extends to: (1) the investigation and evaluation of the facts of the claim presented; (2) the competency of the legal counsel in the area of expertise presented for his or her opinion; (3) the current status of the law incorporated in the legal reasoning of legal counsel in issuing his or her advice; (4) the independence of the counsel hired by the insurer; and (5) previous experiences by the insurer in the area of law presented for the analysis by legal counsel.

A.   The Investigation of the Claim

In many cases, claims will be presented to legal counsel for assistance at the inception of the claims process. However, it is likely an attorney will not get involved in a claim until the claims investigation has come to a standstill and adjustment has been nearly completed. By this time, many discussions have taken place with the insured(s) and the determination of many important facts have been substantially completed. This can even include the implementation of an expert regarding the claim submitted. The importance of the complete documentation and accurate representation of the adjustment process and evaluation of the claim becomes greater as the time between the date of loss and the referral of the matter to an attorney for consideration becomes more remote. The legal counsel must be able to depend upon the accuracy of the claims file and claims notes in rendering an effective legal opinion in either a property or liability claim. To the extent that certain matters are not properly documented with information provided to the legal counsel in addressing the issues presented, the argument remains to be made that the insurer acted in “bad-faith” by failing to construe important facts or even worse, misrepresenting those facts upon which the legal opinion was based, therefore negating the good-faith reliance on the advice of counsel. Accordingly, it is imperative that, should legal counsel not be retained until after the adjustment process has begun, all contact with the insured and all investigatory notes be scrupulously maintained so as to support the integrity of the legal opinion rendered. Simply “buying” a legal opinion unsupported by fact will not only not be a defense to “bad-faith,” but may actually be used as affirmative evidence of “bad-faith.”

B.   The Expertise of Legal Counsel

It is equally important that the legal opinion provided be issued by an attorney with expertise in the area of law governing the opinion. An extreme example of an “advice of counsel defense” gone south would be where a multi-million dollar property collapse claim is denied by an insurer based upon the legal opinion issued by an attorney that has practiced only in the area of worker’s compensation. Obviously, when the collapse claim is resolved in favor of the insured, and the “bad-faith” claim ensues, the argument will be that involving an attorney with no experience in collapse claims, or even first-party property claims, was itself “bad-faith.” Certainly if that attorney made mistakes, the problem is exacerbated. If such attorney was hired over another, more competent attorney, because the former’s hourly rates were ten dollars less, the insurer may have additional problems. Remember, the mantra of all “bad-faith” claims is that an insurer chooses its own profit at the expense of its own insured.

In order for an insurer to act in good faith in obtaining a legal opinion to consider in making its claim determination, it must utilize legal counsel that maintains a good reputation and expertise in the subject area of law.(9) Accordingly, an insurer should pay special attention to assigning matters for consideration to those attorneys that have the requisite experience and knowledge to evaluate the facts presented and the applicable law in rendering an opinion that the insurer will use in making its decision. This is a cornerstone in determining whether the insurer acted in good faith in relying on the advice of counsel and utilizing the “advice of counsel defense.” Otherwise, the “reasonableness” of relying on the advice of counsel is undermined from the outset.(10)

C.   Currency

The law within each jurisdiction is ever-changing. As important as it is to have your legal counsel experienced in the particular discipline in which he or she will render the opinion, it is equally important to make sure that your legal counsel is well aware of the most recent changes in the law. This should be apparent in the decisions cited within the opinion letter prepared for the issues presented. In either respect, the utilization of an attorney with significant experience in the area of law presented for consultation should provide the insurer with a basis for claiming that the decision ultimately reached in reliance on the advice of counsel is one that supports the good faith effort of the insurer in addressing the claim presented.

D.   Independence

By definition, this issue of independence will be a prime target in any “advice of counsel defense.” Any lawyer that meets all the other criteria for such counsel, will undoubtedly have a long personal, professional, and ethical relationship with the insurance industry and, more than likely, the particular insurer under attack. Essentially, the only counter to such an attack is the integrity of the counsel in question, and the ability of that counsel to communicate such integrity while under oath to judge and jury. Nowadays, an insurer is not just hiring a lawyer for legal advice and representation, but, sadly, is also hiring an expert witness.

E.   The Previous Experience of the Insurer

An insurer cannot insulate itself from “bad-faith” by simply hiring and relying upon counsel – no matter how competent, ethical and independent. Arguably, an insurer’s obligations to its insured are non-delegatable.

It is rare that a unique claim will be presented to an insurer. Most claims are factual variations on common fact patterns. Where the insurer has participated in similar claims or actions on claims and has witnessed the rulings of the court and ultimate resolution of a disputed issue, the application of that knowledge, in conjunction with the advice of counsel, can provide a defense for the insurer to a claim of “bad faith.” Of course, such documented experience can also prove that an insurer did act in “bad-faith.” The experience gained from prior claims handling and litigation proceedings, when properly documented in the claims handling process can clearly outline the thought processes of the insurer to support the ultimate decision on a claim. However, to the extent that prior experiences of the claims representative are contradicted by the advice of counsel, then there should be clear documentation as to the reconciliation of the opinion of legal counsel and the prior experiences of the claims representative in supporting the decision on the claim. Under the inherently inaccurate microscope of a trial, inconsistency and contradiction are an opportunistic lawyer’s fodder for “spin;” therefore, inconsistencies and contradictions should be reconciled or an insurer better be prepared to explain them.

IV.  Raising The “Advice of Counsel” Defense

When raising the advice of counsel as a defense against a “bad-faith” claim, it is usually best to do so early in the “bad-faith” litigation. Such a “defense” has far-reaching implications in the discovery phase of the litigation. The insurer waives attorney-client privilege and work-product protection as to the documentation revolving around the advice provided by legal counsel that supports the decision relied upon by the insurer.(11) To the extent that an insurer fails to make full disclosure of this information and corresponding documentation during the action, then the defense may be waived.(12) Additionally, it has been held that an insurer’s conduct during the discovery phase of litigation can preclude that carrier from subsequently raising the “defense” of “advice of counsel.”(13)

Note, while the general proposition is that unless the “advice of counsel” is raised by the insurer as evidence of its “good-faith” claim handling, even where the advice of counsel was not followed,(14) there are courts that have held that the advice of counsel is so intertwined with the actions of the insurer, that just raising the defense that the carrier acted reasonably will serve to waive the attorney-client privilege and work-product protection as to the relevant documentation.(15) Accordingly, the proper documentation of the file and the basis for all decisions, remains one of the highest importance.

V.  Rejecting Advice of Counsel

Of course, an insurer may refuse to follow the advice of counsel. A few years ago, in a first-party property “bad-faith” case I was defending, (I was also involved in the underlying property claim before it was settled), my client sought a second legal opinion.(16) That counsel called me to discuss the “bad-faith” defense. The discussion went something like this:


John, we have the pleadings and discovery that has been conducted to date. It looks good to us.




However, we note you failed to raise the Affirmative Defense of “Advice of Counsel.”


That’s true.


Well, we think you should immediately amend the pleadings to raise such a defense.


Well, that may be a problem.


Oh, and why is that? (Said rather testily)


Well, my understanding is that the Affirmative Defense of “Advice of Counsel” is only valid if the client follows such advice. Very early in the claim process I told the client to pay this claim. They chose not to follow my advice until many months later, after litigation had ensued.


Oh, (chuckles). I guess we won’t be raising “Advice of Counsel” as an Affirmative Defense.


Nah, didn’t think so. . . . 

One of the most important decisions that an insurer will make on any claim is the involvement of legal counsel. The decision as to when, and which counsel will be retained for the purposes of analyzing a claim is paramount. In making these decisions, a skilled claims representative is envisioning a possible future in the event that the decision may result in a “bad-faith” action. Once the decision has been made to assign the matter to legal counsel, the insurer places its faith in that counsel, and that counsel will provide the legal reasoning necessary to properly evaluate the claim and provide the basis for the decision the insurer will ultimately follow. This is the logical sequence of events one would presume, so it stands to reason that the refusal of the insurer to follow the advice of its counsel is one that will, more often than not, have dire consequences if addressed in a “bad-faith” action.(17) This is true even in those cases where attorney-client privileged communications are not disclosed and are not required to be disclosed. How will the insurer explain and justify its conduct if its story is devoid of all communications to and from counsel? Frankly, in many cases it would be a practical impossibility.

While the failure to follow advice of counsel can present dire consequences, it is not the dispositive fact upon which a “bad-faith” judgment will be based. As previously mentioned, most courts will look to the total circumstances surrounding the decision of the insurer. While great deference is normally accorded to a legal opinion obtained by the insurer from its legal counsel, the experience of the claims representative in handling numerous other similar claims will be taken into consideration. However, the differences in direction undertaken by the insurer should be well documented in the event that the failure to follow a legal opinion becomes known in “bad-faith” litigation.

VI.  Strategies

Nevertheless, the decision to raise the “advice of counsel” as evidence is not automatic, even when your counsel is competent, ethical, independent and articulate. In those “bad-faith” cases where the attorney-client privilege and work-product protection is not automatically “waived,” the raising of evidence of “advice of counsel” will indeed waive such a privilege, and work-product protection as well. Such a decision should not be taken lightly. You should review all that which is otherwise protected and evaluate whether your defense is stronger with such disclosed and your attorney a witness or stronger in the absence of such – even if the latter leaves a void in the story to be told. Usually the attorney makes such a capable witness for the insurer, the decision to waive the discovery protections and use “advice of counsel” as evidence is rather easy. If not, maybe it’s a “bad-faith” claim that should be settled.


Using “advice of counsel” as evidence against a “bad-faith” claim is one that can have significant impact on a “bad-faith” action. The “defense,” in and of itself, will not completely shield the insurer from a “bad-faith” verdict, however, when coupled with sound and careful claims handling practices the protection afforded can be substantial. If the insured didn’t commit “bad-faith,” and its legal counsel is all he or she should be, then the insurer has an intelligent, knowledgeable, articulate, and poised expert individual whose “summation” in the insurer’s behalf will actually be in the form of many hours of sworn testimony – on the witness stand.


  1. Ryder Truck Rental, Inc. v. UTF Carriers, Inc., 790 F. Supp. 637 (W.D. Va. 1992).
  2. Pioneer Chlor Alkali Co., Inc. v. National Union Fire Co. of Pittsburgh, Pennsylvania, 863 F. Supp. 1237 (D. Nev. 1994).
  3. Pioneer Chlor Alkali Co., Inc. v. National Union Fire Co. of Pittsburgh, Pennsylvania, 863 F. Supp. 1237 (D. Nev. 1994).
  4. See Florida Statute, Section 626.9541 and Nevada Revised Statutes, Chapter 686A.
  5. State Farm Mutual Automobile Ins. Co. v. Laforet, 658 So. 2d 55 (Fla. 1995).
  6. Troutt v. Colorado Western Ins. Co., 246 F.3d 1150 (9th Cir. Mont. 2001).
  7. Paulson v. State Farm Mutual Auto Ins. Co., 867 F. Supp. 911 (C.D. Cal. 1994).
  8. Hoosier Ins. Co. v. Audiology Foundation of America, 745 N.E.2d 300 (Ind. App. 2001).
  9. Trask v. Iowa Kemper Mutual Ins. Co., 248 N.W.2d 97 (Iowa 1976).
  10. Robertson v. Allstate Insurance Company, 1999 WL 179754 (E.D. Pa. – March 10, 1999).
  11. Vicinanzo v. Brunschwig & Fils, Inc., 739 F. Supp. 891 (S.D.N.Y. 1990).
  12. Id.
  13. Great Northern Storehouse, Inc. v. Peerless Insurance Company, et al., 2000 WL 1901266 (D. Maine – December 29, 2000).
  14. Martin v. American Bankers Life Assurance Company of Florida, 184 F.R.D. 263 (D. Virgin Islands 1998).
  15. Jones v. Nationwide Insurance Company, 2000 WL 1231402 (M.D. Pa. – July 20, 2000).
  16. “Go figure!”
  17. Henke v. Iowa Home Mutual Casualty Co., 97 N.W.2d 168 (Iowa 1959).