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.,  O.J. No. 677
(S.C.J.) and Davies v American Home Assurance Co., 
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:  O.J. No.960 (S.C.J.).
Our April newsletter contains a note examining the first decision:
 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.
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
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
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
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
"¶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
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,  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
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.
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
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.
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