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Advice Of Counsel: Insurance Companies’ First And Last Line Of Defense / Mealey’s Litigation Reports: Bad Faith

July 20, 1999

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Bad Faith, Vol. 13, #6, p. 41 (July 20, 1999). Copyright Butler 1999.

I.  The Advice Of Counsel Defense

A.  What Is It?

The dynamic nature of bad faith law throughout the country practically mandates that insurers have ongoing legal advice to protect the interests of the company, the shareholders and all insureds. Such advice can prevent unwitting misconduct by the insurer. The “advice of counsel defense” in the context of insurance bad faith litigation issimply an insurer asserting, as proof that it did not act in bad faith, that it reasonably relied on the advice given by its legal advisors.

The law recognizes the importance of the relationship between insurers and their legal counsel. When an insurer accepts, and acts in accordance with, the advice ofc ounsel, it may use this fact as evidence that there could be no bad faith in its actions. by contrast, an insurance company’s rejection of counsel’s advice may be evidence itself of bad faith.(1) It must be cautioned that most courts do not treat the advice of counsel as an absolute defense. Reliance on the advice of counsel is but one factor to be considered in determining whether an insurer did, or did not, act in bad faith.(2)

B.  The Elements of the Defense

The following elements are essential to the advice of counsel defense:

    • The insurer sought counsel’s advice in good faith;
    • The insurer disclosed all pertinent information to counsel;
    • The insurer acted on the advice in good faith; and
    • counsel was competent in the particular area of law, and disinterestedin the matter.

Let us consider each element. First, the advice must be sought in good faith. If the insurer honestly consulted its legal counsel to verify the propriety of its action, then this element is met.(3) If an insurer “shops” among several attorneys for a predetermined opinion, then the insurer did not seek legal advice in good faith.(4)

Second, the insurer is required to make full disclosure of all material facts. Where counsel is not informed of all the facts known to the insurer, the advice of counsel of defense may fail.(5) Of course, if an insurer intentionally misrepresents facts to the attorney, then the insurer neither sought the legal advice in good faith nor provided full disclosure of material facts.(6) Even an innocent failure to provide material facts to the attorney may defeat the advice of counsel defense.(7) On the other hand, an honest mistake of fact will not automatically preclude the advice of counsel defense.(8)

Third, the insurer must be acting on counsel’s advice in good faith. If the insured does not believe the advice is sound, then reliance on it cannot be in good faith.(9) Moreover, if the insurer discovers additional material facts, and does not share them with counsel, then the insurer has not acted in good faith.(10)

The insurer always is required to act “reasonably” when it relies on the advice of counsel. It may happen that an insurer’s evaluation of a claim or coverage issue is different from the opinion of counsel. The insurer may not follow blindly the legal advice.(11)

Finally, the insurer’s counsel must be both competent to give the advice and disinterested in the ultimate course of the insurer’s conduct.(12) The attorney’s reputation, experience and expertise are factors to be considered.(13) Where the insurer uses the same legal counsel to provide both initial advice on a claim, and later to handle litigation in which the advice is used, the insurer can argue more credibly that the attorney was competent to give the advice in the first instance.(14) Where the insurer agrees with its counsel’s advice, based upon its own independent assessment of the claim, the competence of counsel and the reasonableness of the insurer’s reliance on the advice both are bolstered.(15) In fact, the experience level of both the insurer and its counsel may be considered in determining whether the insurer acted reasonably in reliance on the advice of counsel.(16)

Naturally, the facts and circumstances of any given case may strengthen or weaken each of the elements above. An advice of counsel defense may be attacked on any or all of these elements. Thus, while the foregoing elements must be established to assert the advice of counsel defense, the defense itself is but one factor in determining whether an insurer committed bad faith. That is, good faith reliance on the advise of counsel is not an absolute defense. Even if all of the above factors are met, the advice of counsel defense may not preclude a determination of insurer bad faith.

C.  Scope of the Advice

The role of the attorney is important also in evaluating whether the advice of counsel defense is viable. When an attorney acts essentially as an investigator or adjuster, without providing legal advice, the defense is unavailing. On the other hand, the attorney is not constrained from giving legal advice based upon specific facts developed in the attorney’s or the insurer’s investigation. Nor does the advice have to be purely legal.(17) In Zeitounianv. Farmers Ins. Group,(18) a California appellate court stated:

[W]e find it difficult to conclude that an attorney’s advice somehow is undermined as “legal advice” when it is mixed with conclusions of a factual nature resulting from that attorney’s or some other expert’s investigation. Legal counsel might infrequently perform some portion of a case’s investigatory aspects, and certainly weigh and counsel respecting factual as well as legal matters in issue. While a menial factual investigator not employed to render legal advice probably cannot furnish the basis for an “advice of counsel” defense, we see no merit in attempting to limit the defense to advice received from armchair lawyers who do not go into the field to investigate facts.

II.  Presentation Of The Defense

A.  Pleading the Defense

The advice of counsel defense amounts to a denial that the insurer acted in bad faith. It is a means of showing that the insurer acted reasonably. Thus, the advice of counsel defense need not be pleaded affirmatively. That is, the insured need not be advised in the pleadings (via affirmative defense or as a separate cause of action) that the insurer intends to assert the advice of counsel defense.(19) However, because of the dearth of case law on point, a trial court may misapprehend the nature of the defense. There is a danger that unknowledgeable trial judges may preclude the defense for failure of an insurer to allege it in the pleadings.(20) Caution is warranted.

B.  Burden of Proof

Caution, however, has a price. Typically, the party pleading an issue has the burden of proving it. Thus, by asserting the advice of counsel defense affirmatively, the insurer may be shouldering the burden of proof at trial. Then again, other factors suggest that the insurer has the burden of proof in any case, even if the defense is not alleged affirmatively. The rationale is this. A party must bear the burden of proof on each fact essential to any claim or defense it asserts. The insurer is also in a unique position to know whether it followed the advice of counsel. “In light of the pivotal role of advice of counsel evidence and the insurer’s sole command of it . . . an insurer must bear the burden of establishing . . . good faith reliance on advice of counsel” even if it is not alleged as an affirmative defense.(21)

C.  Waiving Attorney-Client Privilege

Ultimately, the insurer must choose between protecting its attorney-client confidential communications or raising the advice of counsel defense. An insurer may not protect the confidentiality of attorney-client privileged communications while asserting the defense. Once the advice of counsel defense is asserted, all communications between the insurer and the attorney will be discoverable. (22) The privilege will be waived.(23) Conversely, if the insurer fails to make full disclosure of attorney-client communications during discovery, it will waive the advice of counsel defense.(24)

D.  Instructing the Jury

Once properly asserted at trial, the insurer is entitled to a jury instruction explaining the advice of counsel defense. A trial court refusing to instruct the jury on the defense commits reversible error.(25)

III.  Strategic Considerations

Based upon the foregoing, the following guidelines for an insurer seem to suggest themselves. An insurer ought:

    • not predetermine its course of action.
    • to seek advice of legal counsel early.
    • to use only counsel with expertise in the pertinent area of law.
    • to define clearly the role of counsel as advisor.
    • to present counsel with all material information.
    • to involve counsel in the factual development of the matter and request that he or she apply the facts to the legal issues presented.
    • to require counsel’s opinion in writing.
    • to follow counsel’s advice but only if believed to be sound.
    • to present additional facts to counsel as they develop.
    • to permit discovery of attorney-client communications prior to the discovery cutoff if it intends to pursue the advice of counsel defense at trial.

In conclusion, the insurer has the tactical advantage with the advice of counsel defense in a bad faith lawsuit. As one prominent defense attorney has opined in these pages:

I have a personal bias in favor of the defense, because I think that it’s a tool that the insurance company, if they plan carefully, can make excellent use of. For example, if a terrible accident happens and the insurance company knows there is going to be a terrific dispute concerning insurance coverage –that company can go out and retain a first-rate lawyer whom they have a lot of confidence in. It can be someone with stature in the community and, most importantly, a lawyer who’s going to make a good witness before a jury — somebody that the jury is going to like.

They get this lawyer to investigate the matter and render an opinion to the company in writing. Then, if the company ultimately denies coverage and gets sued for bad faith, they can rely upon the advice of the lawyer and put the lawyer on the witness stand to tell the story of the case. There is one person to tell the story; one person to explain why there’s no coverage.(26)

Even though the defense is not absolute, an educated insurer, taking care to protect the process by which it obtains legal advice, may wield a powerful weapon in defense of a bad faith suit.


  1. Accord, James M. Fischer, Should Advice of Counsel Constitute a Defense forInsurer Bad Faith? 72 Tex. L. Rev. 1447 (1994), citing, American Mut. Liab. Ins.Co. v. Cooper, 61 F.2d 446, 448 (5th Cir.1932), cert. denied, 289 U.S. 736 (1933);Maryland Cas. Co. v. Elmira Coal Co., 69 F.2d 616, 620 (8th Cir. 1934); CottonStates Mut. Ins. Co. v. Trevethan, 390 So. 2d 724, 728 (Fla. Dist. Ct. App.), appealdenied, 392 So. 2d 1373 (Fla. 1980).
  2. See Annotation, Reliance on, or Rejection of, Advice of Counsel as Factor Affecting Liability in Action Against Liability Insurer for Wrongful Refusal to Settle Claim, 63A.L.R. 3d, 725, 730 (1975); James C. Nielsen, Advice of Counsel in Insurance BadFaith Litigation: A Substantive Framework for Pleading, Discovery and Proof, 25Tort & Ins. L.J. 533 (1990); 7A Am. Jur. 2d, Automobile Ins. § 376(c. 1998) citing Worden v. Tri-State Ins. Co., 347 F.2d 336 (10th Cir.); Fowler v. State Farm Mut.Auto. Ins. Co., 454 P.2d 76.
  3. 3 Restatement (Second) of Torts § 666, Comment d.
  4. Id.; see, e.g., MacDonald v. Joslyn, 275 Cal. App. 2d 282, 292, 79 Cal. Rptr 707(1969).
  5. See, e.g., Douglas v. U.S. Fid. & Guar. Co., 127 A. 708, 710 (N.H. 1924).
  6. Drake v. Anderson, 215 Or. 291, 334 P.2d 477, 480 (1959).
  7. See Moore v. York, 271 P.2d 469 (Okla. 1962).
  8. See, e.g., Consumer Filling Station Co. v. Durante, 79 Wyo. 237, 333 P.2d 691, 696(1958).
  9. Accord James C. Nielsen, Advice of Counsel In Insurance Bad Faith Litigation: ASubstantive Framework for Pleadings, Discovery and Proof, 25 Tort & Ins. L.J. 533(1990), citing Comment, Worley v. Columbia Gas, Inc.: Advice of Counsel as aDefense to an Action for Malicious Prosecution – The Kentucky Position, 63 Ky. L.J. 237, 243, 244 (No. 1, 1974—75).
  10. Clarke v. Montgomer Ward & Co., 298 F.2d 346, 348 (4th Cir. 1962).
  11. See, e.g., Allen v. Allstate Ins. Co., 656 F.2d 487 (9th Cir. 1981).
  12. State Farm Mut. Auto. Ins. Co. v. Superior Ct, 228 Cal. App. 3d 721, 725—26 (1991).
  13. Mark L. Sherman, Insurance Bad Faith Actions – “Advice-of-Counsel” Defense, 16 Am. Jur. 3d, Proof of Facts, 419; see, e.g., Olson v. Union Fire Ins. Co., 118 N.W.2d318, 321 (Neb. 1962); Ferris v. Employers Mut. Cas. Co., 122 N.W.2d 263 (Iowa1963); Berk v. Milwaukee Auto. Ins. Co., 15 N.W.2d 834, 839 (Wis. 1994).
  14. Ferris v. Employers Mut. Cas. Co., 122 N.W.2d 263 (Iowa 1963).
  15. See, e.g., Perry v. United States Fid. & Guar. Co., 359 S.W.2d 1 (Tenn. Ct. App.1962).
  16. Berk v. Milwaukee Auto. Ins. Co., 15 N.W.2d 834 (Wis. Ct. App. 1944).
  17. Zeitounian v. Farmers Ins. Group, 25 Cal. App. 4th 929, 30 Cal. Rptr. 2d 882, 94Cal. Daily Op. Service 4287 (Ct. of App. Calif. 1994)
  18. 25 Cal. App. 4th 929, 30 Cal. Rptr. 2d 882, 94 Cal. Daily Op. Service 4287 (Ct. ofApp. Calif. 1994)
  19. See, e.g., State Farm Mut. Auto. Ins. Co. v. Superior Ct. of San Diego County, 228Cal. App. 3d 721, 279 Cal. Rptr. 116, 91 Cal. Daily Op. Service 2174 (Ct. of App.Calif. 1991) (“an insurer is not required to affirmatively allege advice of counsel asa defense to . . . and insurance bad faith action”).
  20. Accord James C. Nielsen, Advice of Counsel in Insurance Bad Faith Litigation: ASubstantive Framework for Pleading, Discovery and Proof, 25 Tort & Ins. L.J. 533(1990); see, e.g., Arbuckle Broadcasters, Inc. v. Rockwell Int’l Corp., 513F. Supp. 412 (N.D. Tex. 1981) (insurer waived any advice of counsel defense by itsfailure to plead or prove such defense at trial).
  21. James C. Nielsen, Advice of Counsel in Insurance Bad Faith Litigation: ASubstantive Framework for Pleading, Discovery and Proof, 25 Tort & Ins. L.J. 533,542 (1990), citing J.P. Whigmore, 9 Evidence § 2486 (Chadbourne rev. 1981).
  22. See, e.g., Palmer by Diacon v. Farmers Ins. Group, 261 Mont. 91, 861 P.2d 895(Mont. 1993); Dion v. Nationwide Mut. Ins. Co., 185 F.R.D. 288 (D. Mont. 1998); Vicinanzo v. Brunschwig & Fils, Inc., 739 F. Supp. 891 (S.D.N.Y. 1990).
  23. Id.
  24. Vicinanzo v. Brunschwig & Fils, Inc., 739 F. Supp. 891 (S.D.N.Y. 1990); c.f.Cunkling v. Turner, 883 F.2d 431 (5th Cir. 1989); Board of Trustees v. CoulterCorp., 118 F.R.D. 532 (S.D. Fla. 1987); Wender v. United Servs. Auto. Ass’n, 434A.2d 1372 (D.C. 1981); Russell v. Curtin Matheson Scientific, Inc., 493 F. Supp. 456(S.D. Tex. 1980); Handgards, Inc. v. Johnson & Johnson, 413 F. Supp 926 (N.D.Cal. 1976); Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975).
  25. Zeitounian v. Farmers Ins. Group, 25 Cal. App. 4th 929, 30 Cal. Rptr. 2d 882, 94Cal. Daily Op. Service 4287 (Ct. of App. Calif. 1994).
  26. The Defendants’ Perspective: Part One, Interview of Michael J. Brady, Esquire,Mealey’s Litigation Report: Bad Faith (April 20, 1999).