Confidential Investigations and Litigation Privilege 

publication 

May 2010 - (International Law Office)

Co-authored: Frank Palmay and R. Nairn Waterman
International Law Office

Adjusting insurance claims is central to the business of insurance. Insurers in Canada have wrestled and will continue to wrestle with their entitlement to protect adjusters files and internal investigations from disclosure to those suing the company. Each year dozens of cases attempt to set the parameters of privilege available to protect such files based on the circumstances and evidence available in the particular case. The courts have recognized that these claims for privilege raise difficult questions touching on the appropriate basis, scope and requirements of the two main privileges - solicitor-client and litigation privilege.

In 1999 the highest appellate court in Ontario highlighted the tension between an insurer's duty under its contract with its insured to investigate and adjust policy claims in good faith and the insurers' desire, when disputes arise, to restrict its insured's access to the insurers' confidential deliberations. The court concluded that where the investigation serves several purposes the dominant one must govern. When the dominant purpose of the investigation was to prepare for the disputes, litigation privilege applies to protect the records; however, when the dominant purpose of the investigation was to discharge the insurer's contractual obligations there is no privilege. The dominant purpose may change with the circumstances and be different for different documents.

In 2006 the Supreme Court of Canada analyzed in detail the distinction between the two most common privileges available to protect against disclosure of confidential records 1 .  The court determined that solicitor-client (or advice) privilege and litigation privilege were different in their basis, justification, elements, status and consequences. Each promotes a different interest and its scope, effect and consequences is determined by reference to its purpose. Advice privilege protected, and therefore was limited to, confidential communications within the solicitor-client relationship for the purpose of obtaining legal advice while litigation privilege protected private preparation for an anticipated, adversarial proceeding.

Either or both privileges could apply to documents and information in an investigation file. What is clear is that simply characterizing a review or investigation as related to something which might raise legal issues or be helpful in legal proceedings does not create privilege. Each situation, step and document must be carefully looked at against the requirements and purpose of a specific privilege.

Solicitor-client privilege may be available where legal questions arise during claims investigations. However, the nature and context of such investigations involving, as they do, the collection of information on a specific claim against the company, more frequently raise issues of litigation privilege. In analyzing how and when privilege might apply, the courts have looked at the adjuster's multiple functions and the evolution of such investigations from an initial review related to coverage to the collection of information to address the realistic possibility of a dispute with either the insured or third parties. The two issues addressed by the courts were (i) when did a dispute become a realistic possibility, and (ii) the dominant purpose of the investigation. If a dispute is realistically suggested by the circumstances and if the further investigation relates to it, litigation privilege may protect the investigator's activities, reviews, documents, collections and reports from disclosure. The key questions are "when" do the circumstances support a reasonable apprehension of adversarial proceedings and "why" was the document or collection of the information created? This has been called the "Two-Point Test". It is important that those planning and implementing the investigation understand these requirements.

The practical issue is to identify and retain the evidence needed to establish the elements of the privilege, i.e. evidence of the when, why, who and what relevant to the creation of the documents in issue. Many of the cases turn on the court's acceptance or rejection of the evidence presented. Courts look skeptically at ex post facto, self-serving statements of intent or purpose and test such statements against the contemporaneous records, context of and circumstances surrounding the document's creation. As such, it is important that those responsible for the investigation not only understand what is important but that they organize and record their dealings to provide a supportive contemporaneous record.

The analysis by the Court of Appeal in 1999 in Chrusz 2 demonstrates the importance of distinguishing the roles and purposes of the investigation. In that case, records and information created and collected during the early review into coverage for loss resulting from a fire were not privileged as they were ascribed to the good faith investigation by the insurer of its obligations under its policy. Once, however, it was determined that denial of coverage was a realistic possibility, the purpose and nature of the investigation changed and the resultant records and information were protected by litigation privilege. Both this analysis and subsequent cases highlight that when a future dispute was a realistic consideration and the purpose of the continued investigation are determined based on the entire circumstances or context. In subsequent cases, where contemporaneous documents indicated arson or insured negligence was suggested almost immediately, the "Two-Point Test" was satisfied almost immediately.

Those in charge of the investigation must be vigilant in identifying when the transition to a likely dispute occurs and diligent in creating a supporting record thereafter.

The conundrum for the insurer is to realistically identify when the circumstances support a change in the purpose and nature of the investigation and to maintain evidence supporting this change. The evidence will be included in the reports and analysis. To make and record the change too quickly exposes the insurer to breach of duty, contract and bad faith claims. To delay in making the determination may prejudice the insurer's later defence of a claim by exposing the insurer's confidential analysis to disclosure and providing evidence to be used against it. 

If privilege is to be protected, those in charge of the investigation must understand its requirements and the need to not only decide but to prove both the timing and justification for the conclusion that litigation was likely. Once the opportunity for a claim of privilege has been identified, protocols and templates for inserting into each subsequent document recitation of the privilege and its basis will help establish both the privileged nature of the document and the purpose underlying its creation.

Those planning and supervising such investigation must ensure that the investigators are trained to recognize the opportunity for claiming privilege and provided with the tools to benefit from it.

  1 Blank v. Canada [2006] 2 SCR 319

   2 General Accident Assurance Co. v. Chrusz (1999), 45 OR (3d) 321