JULY 2001

Discovery And Production of Documents, Part 2: Litigation Privilege Where Counsel Controls The Insurer's Investigation

What is the effect on the scope of privilege when the insurer's investigation of a claim on the policy is controlled by its solicitors? How much of the investigation file does the insurer have to produce? What effect does a bad faith claim have on the insurer's production obligations?

The Ontario Superior Court recently considered a case involving these issues in two decisions rendered in the same case, Davies v. American Home Assurance Co., [2001] O.J. No. 677 (S.C.J.) and Davies v American Home Assurance Co., [2001] O.J. No.960 (S.C.J.). Davies is an action on a disability policy in which the insured also claimed punitive damages for bad faith. The two decisions deal with different privilege and production issues. The issue in the first case was whether lawyers' opinion letters had to be produced. The second decision deals with the insurer's investigation file. Put another way, the first case deals with solicitor-client privilege; the second with the privilege now called the "litigation privilege: the privilege for material prepared under the dominant purpose of anticipation of litigation or for use in litigation. This note examines the second decision: [2001] O.J. No.960 (S.C.J.). Our April newsletter contains a note examining the first decision: [2001] O.J. No. 677 (S.C.J.).

There are three issues that arose on the facts of this case: (1) What is the effect on the scope of privilege when the insurer's investigation of a claim on the policy is controlled by its solicitors? (2) How much of the investigation file does the insurer have to produce? (3) What effect does a bad faith claim have on the insurer's production obligations?

A careful reading of the case shows that it contains nothing startling that amounts to a ruling on production issues. (1) Counsel's control of the investigation may result in the insurer losing the ability to claim privilege if the insurer and counsel do not take care to arrange things so that counsel's role is limited to giving advice and recommendations. (2) The insurer has to produce that part of the claims file which is not privileged. (3) The case neither adds nothing to the jurisprudence dealing with the significance of bad faith allegations to the insurer's production obligations. This conclusion is supported by the fact that Justice Kiteley did not refer to Samoila v Prudential (2000), 50 O.R. (3d) 65 (S.C.J.) on this issue even though Samoila is now the notorious and leading case on this issue. We will examine Samoila and recent cases applying it in a future newsletter.

Suggestions have been made by some that the decision increases the scope of what a defendant must produce; that it places important, new, limitations on the scope of the production privileges and, in the context of actions against insurers, important tools for plaintiffs seeking to compel more disclosure. However, when looked at closely, the decision is nothing of the sort. It is, notwithstanding some of the sweeping generalizations suggested by the judge, nothing more than a fact-based decision which does not change existing law. Indeed, the decision should be looked at as an application of existing law and at least arguably correct given the facts found by the judge.

Discussion

Davies, a dentist, lost a finger in an incident he alleged was an accident. He made a $500,000 claim on his accidental death and dismemberment policy issued by American Home. That was the amount payable under the policy in the event of an accident causing the loss of a finger. American Home declined to pay. The reasons do not disclose the insurer's actual reasons for not paying the claim prior to the commencement of the action. We can assume it was not satisfied that the situation was an accident or that, for some other reason, the insurer thought the policy did not apply. However, we are not told why. We are told that American Home denied the incident was an action in its Statement of Defence. There is no indication it relied on any other grounds.

Davies sued alleging breach of contract for failure to pay and claimed the $500,000 policy payment for loss of a finger due to injury caused by an accident. He also alleged bad faith and claimed punitive damages on the basis of the insurer's manner of investigation and failure to pay. The basis for American Home's refusal to pay is not explained in the reasons. All we are told is that there was no formal denial until the Statement of Defence was served. It was in its Statement of Defence that the insurer alleged, for the first time, that the injury was not due to an accident.

The incident giving rise to the claim occurred in September 1997. The proof of claim was provided to the insurer shortly afterwards. American Home first consulted counsel in November 1997. It had not denied the claim as of the time counsel was retained. After that, according to the reasons, American Home admitted that the rest of its investigation was "controlled by counsel" and the insurer "neither honoured or denied" the claim. The action was commenced and the Statement of Claim served in May 1988. The Statement of Defence was served on May 18, 1988. The formal denial did not occur until the insurer filed its Statement of Defence.

The plaintiff moved for production of "the complete claims file, the claims handling manuals, the reserve particulars, legal opinions, investigation details and the financial information about the defendant company." American Home resisted production on the basis of solicitor client privilege for some of the material (the correspondence with counsel including the opinions) and litigation privilege (material prepared in anticipation of or for use in the litigation) for the other material.

This question was whether American Home could claim privilege for its claims file, or at least that portion of the file that came into existence after it was served with the statement of claim, on the basis of litigation privilege; the privilege for material prepared with the dominant purpose of use in anticipated or existing litigation.

What was the result? Madame Justice Kiteley ordered American Home to produce its claims file (other than counsel's file) up to the commencement of trial. On the face of it, that is a startling result in terms of long standing law. And, the case contains some astonishing comments by the judge, rendered without reference to authorities. However, when looks at the basis upon which production was actually ordered, the case becomes entirely remarkable. It was on the basis that she was not satisfied, based n the rather sketchy material filed on behalf of American Home on the motion that American Home met its onus of establishing the claims file and contents were prepared with the dominant purpose of use in litigation. That is what the judge said. I'll leave it to others to wonder much sense that ruling makes, at least in respect of the material created after American Home was served with the Statement of Claim.

Justice Kiteley ruled that American Home had not satisfied her that any of the material qualified for privilege. That conclusion was enough to make the file subject to production. It was, after all, American Home's obligation to adduce sufficient evidence to show, at least on a prima facie basis, that the material had been prepared for the dominant purpose of use in anticipated or the litigation. And, in the particular circumstances of this case where the denial did not occur until the delivery of the defence, she was not prepared to hold that even that part of the claims file that was created after the denial was, merely on account of the date of its creation, within the "dominant purpose" requirement. What was before her on behalf of American Home? Nothing more than its affidavit of documents with the usual sort of Schedule B description for the litigation privilege.

To be fair to Justice Kiteley, though, though, we should bear in mind the way she actually put the problem: American Home had not provided her with sufficient information to permit her to distinguish between material prepared in respect of its obligation to investigate the claim -- which, in the unusual circumstances of this case she held continued even after the lawsuit commenced and American Home was served -- and material prepared with the dominant purpose of use in the litigation. The problem in Davies was that, because American Home had admitted that its counsel "controlled the investigation" it appears that the material in the claims file even after the lawsuit was commenced had at least one, if not both of those purposes.

The judge correctly pointed out that American Home had a duty to investigate the claim. She indicated that there was a distinction between documents created in fulfillment of that duty and those crated for the "dominant purpose of litigation." She held that American Home had failed to satisfy its burden that the documents were prepared for the dominant purpose of litigation rather than for the dominant purpose of investigation.

The problem with the case, if we do not restrict it to what Justice Kiteley actually decided, is in her sweeping generalizations regarding actions against insurers on first party claims and about privilege, generally, whether claimed by plaintiffs or defendants.

Let's go back, then, and examine what else Justice Kiteley said about production of the claims file. The key paragraphs are 18 through 22 which I'll set out in their entirety.

"¶17 It is important to remember that the file for which production is sought is not Mr. Regan's file. What is being sought is documents in the possession, power or control of the defendant which were created as a result of the defendant's obligation pursuant to the contract of insurance to investigate, evaluate, assess and decide whether or not to pay the claim, all in a balanced and reasonable manner.
In the absence of evidence that certain identified documents were created for the dominant purpose of investigation while other identified documents were created for the dominant purpose of litigation, I am not prepared to give the benefit of the doubt that all of them after the point of Mr. Regan's retainer were created for the dominant purpose of litigation. The fact that after early November, 1997 the investigation was "controlled by counsel" does not necessarily mean that the dominant purpose for the creation of all documents in the defendant's file was litigation."

As you can see, the problem stemmed from counsel's control of the investigation. That should not have been a surprise. It would have been better had Justice Kiteley referred to relevant authority. It existed. There are cases approaching a century or more old, by now, which are still good law and easily found, that establish the principle that where the lawyer acts in a multiple capacity for the client -- only one of which creates privilege -- the client has the obligation of establishing with "reasonable clearness and freedom from doubt" that the material was prepared in a privileged context: see, for example, Beale v City of Toronto, 16 P.R. 386; Curgrove v. McKay (1902), 3 O.L.R. 63; and, the somewhat more modern decision in Presswood v. International Chemalloy Corp. (1976), 11 O.R. (2d) 164 (H.C.J.)

The matter could well have been left there; however, Justice Kiteley chose not to. That lead to the next paragraph.

"¶18 Often in litigation, any contractual or other duty has ended or been breached by the time the statement of claim has been issued. In those cases, demarcation between documents created for the dominant purpose of litigation and those created for other dominant purposes such as business records, is readily identified. That demarcation is not readily apparent here. The defendant is entitled to take appropriate steps to defend the action. But simultaneously with defending itself, this defendant has an ongoing obligation towards its insured to act in good faith. The commencement of these proceedings did not terminate the contractual obligation on the insurer to investigate, evaluate, assess and decide whether or not to pay the claim, all in the context of its obligation to act in good faith. "

The first two sentences are probably the keys to her reasoning. They require us to conclude that Justice Kiteley was not suggesting that the commencement of a lawsuit can never be enough, of itself, to be the, in the words of Robert Frost, the fork leading to the road less travelled. So, her conclusions can be explained on the confusion resulting from counsel's dual capacities in this case: conducting the American Home investigation as well as merely providing legal advice about that investigation. They probably have to be, at least because Justice Kiteley did not cite precedent for the change in law that her comments entail if we do not look at the situation that way.

Is there anything problematic about the assertions that the insurer's duty to investigate continued through trial and the assertion that American Home was obliged to disclose documentation and information prepared pursuant to that duty? Not really. Davies was an American Home insured. He had been injured. He had made a claim on the policy. American Home had an obligation to investigate. It's denial of the claim did not end the obligation. What it did, though, was create a situation where it could either investigate or not and, if it investigated, either do that in compliance with policy obligations or not at all in compliance with policy obligations because it, either immediately given what it had been told, or after some cursory investigation, anticipated litigation. The problem, for American Home, is that, if the latter situation was what it intended, it did not paper its file properly. Or, it was less than diligent about putting the necessary information before Justice Kiteley to satisfy the onus of showing the material in issue had been prepared in a privileged context.

It would certainly have been better had Justice Kiteley explained why she did not consider that the material prepared after the denial in the Statement of Defence was, at least, prima facie, prepared for use in the litigation. The answer to that may be that the test is "dominant" purpose and that is hinted at in her reasons; that is, material prepared both for litigation purposes and in compliance with the insurer's investigation obligation is not going to be privileged unless the litigation purpose is the dominant purpose.

Of course, that leads to the question of why one would assume that claims file material prepared after the Statement of Claim was served and after the claim was denied in the Defence and at the request of counsel, would not be assumed to be, on its face, for the dominant purpose of use in litigation, absent evidence to the contrary. All we can do, as regards Justice Kiteley's reasoning, is assume she was satisfied the case never got this far because what was before her was, on its face, and in the unusual circumstances of an investigation controlled by defence counsel, at best sufficient for her to conclude that the material had, at best, both purposes. Therefore, American Home had to produce.

There should not be any dispute, though, that the ultimate basis for ordering production was that American Home had not met the onus. That makes everything else Justice Kiteley said obiter:

"¶19 Whatever the basis for the privilege claimed, the burden of proof is on the party claiming the privilege to establish entitlement. As Doherty J.A. said at page 348-9 in Chrusz, supra, "broad privilege claims which blanket many documents, some of which are described in the vaguest way, will often fail, not because the privilege has been strictly construed, but because the party asserting the privilege has failed to meet its burden". This is such a case."

Even after this, though, Justice Kiteley was not content. She chose to continue her comments about the scope of a party's disclosure obligations.

"¶20 The defendant first denied the claim in the statement of defence. Mr. Zeitz argues as an alternative, that at least at that point, any obligation to disclose ended. Again I disagree. The obligation on the insurer to investigate, evaluate, assess and decide whether or not to pay the claim does not end simply because a lawsuit starts. Indeed, as additional information became available after the lawsuit started, whether at it's initiative or as a result of the initiative of the plaintiff, the insurer would be required by contract to continue to evaluate and assess the strength of the claim and continue to turn its mind to whether the additional information has an impact on the previously made decision (as manifested in the statement of defence) to deny the claim. The obligation on the insurer to evaluate and assess continues until the commencement of the trial. Absent evidence as to "dominant purpose", I therefore agree with Ms. Gunter that the defendant is required to produce the claims file and the investigation details up to the commencement of the trial. "

As we see, the sweeping comments end, though, with the retreat into production on the basis that American Home had not adduced adequate evidence as to dominant purpose even in respect of the material that was produced between the time of the denial and the commencement of the trial. At least to the writer, it seems at given that that will be the dominant purpose except in the most unusual case; that Justice Kiteley overlooked this. Others might disagree.

The generalizations continued in paragraph 21, again, though, ending with the retreat into the procedural ruling that American Home had not satisfied its onus.

"¶21 The plaintiff has pleaded bad faith and punitive and exemplary damages. The insurer has an obligation to act in good faith from the moment the events giving rise to a claim on the policy occur. The information available to the insurer upon which it decided whether or not to pay the claim is critical and is therefor relevant. Disclosure of the contents of the insurer's file will foster a fair trial. On the record before me, those documents described in the affidavit of documents are not within the "zone of privacy".

What are we to make of this paragraph? Is Justice Kiteley suggesting that allegations of bad faith, claims of for punitive damages, are sufficient in and of themselves to "break" otherwise existing privilege? Probably not. Why do I say so? Because of the sentence: "The information available to the insurer upon which it decided whether or not to pay the claim is critical and is therefor relevant." What that sentence means is that the material facts can not be privileged. That proposition has long been good law. It is merely another way of saying that the insurer can not refuse to disclose the evidence upon which it bases its defence. The litigation privilege, it should be remembered, is not for the content of documents but just against compelled production of the documents themselves (except in respect of expert's reports which, now, in Ontario, can be hidden in their entirety provided the party obtaining them undertakes not to call that expert at trial.). Anyone who has any doubts about the obligation to disclose material facts should read Cook v. Cook, [1947] O.R. 287.

Is there any additional significance to the assertion that "Disclosure of the contents of the insurer's file will foster a fair trial"? How can there be? Either the documents were privileged or they were not. Unfairness is not a ground for breaking privilege although, in a case where privilege is questionable, the issue of "fairness" between the litigants is certainly something the court may, and will, look at in deciding if privilege applies.

Finally, we have the "zone of privacy" comment in the last sentence of the paragraph. That cannot be taken as anything more than a repeat of her previous comments that American Home had not put sufficient evidence before her to allow her to conclude the documents had been prepared for the dominant purpose of use in the litigation.

Justice Kiteley did not indicate where the "zone of privacy" description came from. The quotation marks she put around the description may indicate that she meant it as nothing more than verbal shorthand. The expectation of privacy, of confidentiality, is not part of the litigation privilege. The information in material falling under that heading is always subject to disclosure. It is merely the document, itself, which is not subject to compelled production. It does not matter, for example, that the other side knows that a litigant is investigation.

Conclusion

At the beginning of this note, I wrote that there were three issues that arose on the facts of this case: (1) What is the effect on the scope of privilege when the insurer's investigation of a claim on the policy is controlled by its solicitors? (2) How much of the investigation file does the insurer have to produce? (3) What effect does a bad faith claim have on the insurer's production obligations?

This case turns on its facts and is of no help to the development of jurisprudence. That should not be surprising, given that the lack of discussion of authorities and that, ultimately, production was ordered on the basis that American Home had not satisfied its onus of showing the file was prepared for the dominant purpose of use in litigation. Now, that last conclusion may be factually questionable, but that is irrelevant to everything except the result of the case.

The decision contains comments by the judge, and results, which appear to alter generations of settled law applicable to the solicitor-client and litigation privilege without reference to any case law, treatises, or commentary. Suggestions have been made by some that the decision increases the scope of what a defendant must produce; that it places important, new, limitations on the scope of the production privileges and, in the context of actions against insurers, important tools for plaintiffs seeking to compel more disclosure. However, when looked at closely, the decision is nothing of the sort. It is, notwithstanding some of the sweeping generalizations suggested by the judge, nothing more than a fact-based decision which does not change existing law. Indeed, the decision should be looked at as an application of existing law and at least arguably correct given the facts found by the judge. Whether those findings of fact were correct is an entirely different question that we do not need to consider. The generalizations by the judge which can be read as departures from existing law -- it is probably safe to assume the judge did not think she was departing from existing law given that she did not refer to any authorities -- if they are to be treated as departures are nothing other than obiter comments delivered without analysis of the issues.

D.C.

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