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Newsletter > June 2001

Production Of Lawyer’s Opinion Letters Regarding Coverage

What is the effect on the scope of solicitor-client privilege and litigation privilege (material prepared with the dominant purpose of use in anticipated or existing litigation) 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 will examine the first decision. Our May newsletter contains a note examining the second decision.

Both decisions contain comments by the judge, and results, which appear startling at first blush and appear to alter generations of settled law applicable to the solicitor-client and litigation privilege without reference to any case law, treatises, or commentary. Both decisions have been held out, by some in the industry, as important, new, limitations on the scope of the privileges and, in the context of actions against insurers, important tools for plaintiffs seeking to compel more disclosure. However, when looked at closely, the decisions are nothing of the sort. They are, notwithstanding some of the sweeping generalizations suggested by the judge, nothing more than fact based decisions which do not change existing law; indeed, should be looked at as applications of existing law and are arguably correct given the facts as 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.

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 grounds for the denial prior to the commencement of the action.

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 and that it was in its Statement of Defence that the insurer, alleged, for the first time, that the injury was not due to an accident but was intentionally self inflicted.

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. Plaintiffs’ counsel did not suggest that defence counsel’s letters to American Home were not privileged under solicitor-client privilege. Rather, plaintiff’s counsel submitted that the privilege had been waived because American Home had put its state of mind in issue in the action. The Statement of Defence is not quoted in the reasons; however, this sort of argument makes sense only if American Home, in its Statement of Defence or at discovery, stated that it was relying on the nature of the advice given to it by counsel and that the investigation was controlled by counsel as defences to the allegations of bad faith against it.

The court ordered production of the opinions.

The first issue was whether, assuming the opinions were privileged, the privilege had been waived when American Home put its state of mind in issue; that is, when it defended the bad faith claim on the basis that it had not acted in bad faith as it was relying on the advice and direction of counsel. It has long been settled that privilege is waived when a party puts into issue its state of mind and relies on legal advice as the basis, in whole or in part, for that state of mind: see, for example, Samoila v. Prudential [2000] O.J. No. 2746 (S.C.J.) and Bank Leu Ag v Gameng Lottery Corp. [1999] O.J. No. 3949 (S.C.J.). That should have been the end of the matter with production ordered on this basis. However, it was not even though Court accepted that that was the law and American Home did not challenge that law. Instead, American Home tried to distinguish the law on the basis that the insurer’s state of mind had first been put in issue by the plaintiff. The judge was not inclined to accept that distinction; however, avoided the issue by deciding to not decide the question on the basis of waiver.

It is also long settled law that an insurer has to produce the documents that are created in the process of it fulfilling its policy obligations. The judge held, properly, that American Home had a duty to investigate the claim and then stated, on that basis, without reference to any authorities whatsoever — no prior cases, no treatises, no articles – that the solicitor-client privilege “cannot be raised to protect communications during the investigation, evaluation, assessment and decision stages.” Taken literally, that proposition amounts to a radical departure from existing law. It would mean that a party could not claim privilege for any legal advice it sought as to what it should do. However, it is unlikely that the judge intended that meaning, given the next sentence in the reasons. The judge wrote: “If legal opinions were protected by client-solicitor privilege where “the investigation was controlled by counsel” instead of by the insurer, whose duty it is to act in good faith towards the insured, then that would encourage insurers to delegate such responsibility to counsel.

The conclusion that should be drawn from the second quotation is that the judge viewed the conduct of the lawyers, in the circumstances, as not being conduct as American Home’s solicitors in their capacity as lawyers, but as American Home’s agents to fulfill its non-delegable duty to investigate. Since the lawyers were not acting as lawyers, the solicitor-client privilege never attached. Therefore, the judge concluded that the opinion letters had never been privileged and so ordered their production.

Contrary to some of the suggestions floating around the insurance bar and industry, the case is not good authority for the proposition that correspondence with counsel is never privileged, or somehow loses privilege, whenever bad faith is alleged against the insurer. Any uncertainty about that that might arise from some of the sweeping generalizations in the reasons is dispelled by the terms of the order made by the judge, which she set out specifically in the reasons: production of lawyers opinions was limited to a the period ending 3 days after the action was commended, which seems to be the date the Statement of Claim was served. So, the case is authority for the proposition that where the insurer delegates its investigation duty to counsel, it risks a court concluding that counsel’s conduct was not as lawyers but merely as, in substance, agents for the insurer to conduct the investigation. That is what the court found happened. As such, it was conduct outside of the solicitor-client relationship and therefore subject to discovery. There should not be anything surprising about that conclusion.

The concern that appears to have underlain the judge’s conclusions was a sort of “floodgates” worry that allowing American Home to claim privilege for these documents might allow it to hide the entire investigation within the ambit of privilege. That was stretching the point too far and American Home did not make the argument. It would have been applicable if American Home had tried to shelter its entire claims file under either branch of the privilege, but it did not. So, while this concern really was not there, it does show the problem resulting from counsel’s involvement in the insurer’s performance of the investigation duty in a capacity which is not clearly limited to that of giving legal advice.

We should not lose sight of the fact that American Home had not denied the claim when counsel was appointed. The claim was never denied, formally, until the delivery of the defence. American Home “simply” did not pay the loss on receipt of the formal claim. The propositions of law that a case turns literally establishes depend on its facts. Its conclusions have to be understood in that context. Anything else is obiter. Obiter comments by our appellate courts (with or without analysis of law) have to be listened to. Obitercomments by judges on preliminary motions are of far less significance.

There is nothing particularly novel about the proposition that clients who allow their lawyers to take on responsibilities beyond providing legal advice may find that that privilege does not apply to that conduct and material relating to that conduct. We are aware of that limitation in other circumstances: the limitations on solicitor-client privilege where the lawyer is in-house and has corporate (non legal) responsibilities as well solicitor’s responsibilities. A corporation cannot bring the lawyer’s conduct of his or her corporate obligations within the ambit of solicitor-client privilege.

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.)

One would be remiss if one did not mention that the judge made all of her comments about the privilege obiter by ruling, after spending numerous paragraphs explaining why the privilege did not apply, that American Home’s material did not satisfy its onus “to establish an evidentiary basis for the assertion of privilege” so that, therefore, “the evidentiary basis to protect solicitor and client communications has not been established.” This was not offered as a restatement of the meaning of her views on the significance of counsel’s conduct in controlling the American Home investigation. It was given as additional reason for ruling that production would be ordered.

In any event, what the case stands for, then, is that: (1) where counsel controls the conduct of the insurer’s investigation before and counsel is appointed before the denial of the claim, and (2) the insurer relies on that fact in the defence of a bad faith claim, then all of the material relating to the conduct of the investigation including the instructions and advice of counsel is relevant. The judge did not specifically mention the importance of the reliance issue in her grounds for dismissing the privilege claim; however, she said enough to make it clear that was part of her reasons. She stated that opinions whose productions were sought (she called them evidence) was “relevant to the allegations of bad faith as pleaded.” Relevance controls production of documents. If a document is not relevant, it does not have to be produced.

What made the opinions relevant is that, according to the reasons, American Home relied on the advice of counsel as the explanation for its refusal to pay and for how it conduct the investigation. Given that, is it at all surprising that production was ordered?

In passing, it should be noted that the judge was probably wrong in concluding that American Home had neither honoured or denied the claim, prior to the commencement of the action, although that error is irrelevant to the result. Given the nature of the policy, it is probably safe to assume that it was accident insurance to which Part VII of the Insurance Act applies. If so, then under section 300, Statutory Condition 10, the $500,000 became payable once 60 days had passed after the delivery of the proof. After that, American Home did not need to make a formal denial. The fact it had not paid was, in effect, a denial of the claim. It is probably safe to assume there was a time for payment clause that applied even if the Statutory Condition did not. So, American Home was, in fact, in breach of its policy by not paying, assuming the claim was valid, probably from about the time it retained counsel. It was, at the least, in breach of its obligation to respond to the claim in some fashion.

Should the fact that American Home had, effectively, denied the claim by not paying the claim on or before the expiration of the period for payment have made a difference to the result? Would it have made a difference? The answer to those questions seems to depend on how one classifies the opinion letters. It seems there should and would be no difference on the judge’s analysis of the facts and the law, since American Home claimed privilege solely on the basis of the solicitor-privilege and the judge held, essentially, that the lawyers were not acting just as lawyers for the insurer but were conducting American Home’s investigation: carrying out the insurer’s contractual duty to the insured to investigate the claim so that the solicitor-client privilege did not apply. However, on these facts, American Home might have (although it did not do so) also claimed privilege, if the facts permitted, for the lawyers’ opinions under the litigation privilege. It is certainly reasonable to suspect that a good argument could be made that a lawyer’s opinion which is sought after the insurer is in breach of its policy obligations may be characterized, properly, as being sought because the insurer is very concerned about litigation; indeed that might be the dominant purpose.

We have to conclude that argument was made because the reasons indicate that the only basis upon which privilege was claimed was solicitor-client. There is, though, a very good reason why American Home would not have bothered to claim litigation privilege for the opinions. That privilege means only that one cannot be compelled to produce the document. It does not protect the contents of the document. The opposing side is entitled to ask about the contents and find out everything in there by asking the right questions. So, the litigation privilege would not have helped American Home if what it was concerned about was disclosure of the advice in the opinions.

The court faced three production related issues: (1) the effect on the scope of solicitor-client privilege and litigation privilege (material prepared with the dominant purpose of use in anticipated or existing litigation) 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? The decision under consideration provides some guidance on the first and third questions. As to the first, solicitor-client privilege may be lost. As to the third, nothing, really, unless we say that the case tells us the insurer will have to produce the material upon which it relies for its defence including legal opinions upon which it purports to justify its conduct. That, of course, is nothing novel. 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, she referred to it for other reasons: on the issue of the insurer having put its state of mind in issue. Samoila is now the notorious and leading case on the issue of the effect of bad faith claims on an insurer’s production obligations. We will examine Samoila and recent cases applying it in a future newsletter. Of interest is the following: The opinions in issue either supported American Home’s defence against the bad faith allegations or they would not. If they would not, why did American Home try to rely on them? If they did, why not produce them? What did American Home have to lose by producing the reports and avoiding setting a problematic precedent, if the case is precedent at all?


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