between its abandoned insured and the insured's attorney,
whenever the insured signs a stipulated judgment containing a
covenant not to execute, at a settlement that is judicially
supervised but otherwise lacks independent adjudication, I
decline the invitation.
Hartford reads too much into Smith v. State Farm Mut. Auto.
Ins. Co., which disapproved stipulated judgments containing a
covenant not to execute as "transactions without substance" that
would encourage collusion between insureds and claimants.
5 Cal.App.4th 1104, 1114, 7 Cal.Rptr.2d 131 (1992). Hartford would
take the Smith rule, which finds this type of settlement almost
collusive per se, and graft it onto the law of privilege to
invoke the crime-fraud exception automatically.
Smith's impact has been seriously circumscribed by subsequent
state case law, which favors a case by case analysis of each
settlement and stipulated judgment to assess whether it is
sufficiently reliable to justify enforcement against the insurer.
National Steel Corp. v. Golden Eagle Ins. Co., 121 F.3d 496,
501 (9th Cir. 1997); McLaughlin v. National Union Fire Ins.
Co., 23 Cal.App.4th 1132, 1154, 29 Cal.Rptr.2d 559 (1994).*fn5
Far more importantly, Hartford confuses two very different
legal doctrines. Smith, McLaughlin, and related cases seek to
address a whole spectrum of problematic settlements — from
"unreasonable" awards to outright fraud. They do so with a single
broad approach, assessing the reliability of the underlying
settlement, even though the particular tests applied vary from
case to case. The underlying policy concern remains the same,
however, and that concern is clearly for the proper allocation of
risk between insurer and insured in the realm of insurance
The crime-fraud exception to the attorney-client privilege
rests on an entirely different legal doctrine. The party seeking
to invade the privilege has the burden ultimately of
demonstrating that there is "reasonable cause to believe that the
attorney's services were utilized in furtherance of [an] ongoing
unlawful scheme." Chen, 99 F.3d at 1503 (9th Cir. 1996)
(quoting In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th
Cir. 1996)). The evidence must point to an actionable fraud,
and not merely an "unreasonable" or otherwise unreliable
settlement.*fn6 The standard is high because the legal right at
stake is the oldest and most established evidentiary privilege. §
2290 Wigmore on Evidence (McNaughton). Invading that privilege,
even for in camera review, goes far beyond the mere shifting of
burdens or allocation of risks between insurer and insured; the
attorney-client privilege, it has been said, "is essential to
preservation of liberty against a powerful government." Chen,
99 F.3d at 1499.
Thus, I do not find that the mere structure of this settlement
supports a per se suspicion of fraud, and Hartford offers nothing
more. There is no evidence that the settlement activities were
hidden from Hartford. See Andrade v. Jennings, 54 Cal.App.4th 307,
335, 62 Cal.Rptr.2d 787
(1997) (collusion indicated where insured concealed true amount
of settlement demand and agreement from excess insurer). There is
no evidence that UEDC received a financial "pay-back" from the
settlement. See, e.g., Cunningham v. Goettl Air Conditioning,
Inc., ___ P.2d ___, 1997 WL 633728 (Ariz. App. Div. 1 1997). The
settlement was judicially supervised, by a judge who appears to
have been actively involved. Williams Depo. at 115. The
settlement terms were not hidden from the judge, but rather
placed on the record. See Andrade at 333, 62 Cal.Rptr.2d 787
(collusion indicated where parties at prove-up hearing did not
inform Magistrate Judge of settlement covenants and expert
witness described hearings as a "one-sided sham").
Finally, even if this were a close case, I would exercise my
discretion in this matter in favor of Ekeh. Zolin, 491 U.S. at
572, 109 S.Ct. 2619. To the extent Hartford is claiming this
settlement was objectively unreasonable, because the amount was
excessive and the defamation claim was weak, it does not need the
privileged communications to prove its case. To the extent
Hartford is claiming something more, such as fraud, it should
proffer some factual evidence linking Ekeh or his attorney with a
fraud before I would invade the privilege by conducting an in
camera review. This is not done.
For the reasons appearing above, IT IS HEREBY ORDERED that
Defendant's request for an in camera review of privileged
documents is DENIED.