Adjusters’ Files – Privilege & Production
By Jason D. Bennett
Under Ontario law, a party to an action is required to disclose “ all documents relating to any matter in issue in the action that are or have been in the party’s possession, control or power.”(1) Insurers regularly find themselves involved in litigation and are often, therefore, faced with this rule of discovery. While all relevant documents must be disclosed in an action, a party does not need to produce documents that are privileged. Privileged documents are safeguarded because they reflect interests or relationships which demand protection, such as the relationship between lawyer and client and the need to promote frank and open communications.(2)
Traditionally, large parts of an adjuster’s file (including internal company manuals, guidelines, directives, financial statements and reserve information) have been treated as either irrelevant to most law suits or privileged. In either case, the documents have not typically been producible. Lately, however, this traditional sphere of protection has been under pressue as more than one lower Court has ordered an insurer to hand over internal policies, guidelines and directives that relate to particular claims and their adjustment.(3)
The Expansion of Relevance
In order to circumvent the traditional protections of relevancy and privilege, able plaintiff counsel have started to make fairly specific allegations of bad faith against insurers in their pleadings. For example, in a decision released January 30, 2004(4) Master Michael Kelly referred to the unreported decision of McCullogh v. AXA Insurance(5) in which the plaintiff sued his insurer for unpaid accident benefits and substantial damages for bad faith. The Statement of Claim alleged that:
“…the defendant created, implemented, utilized and followed policies, procedures, guidelines and directives leading to a course of conduct whereby the plaintiff was to be treated as an adversary…contrary to the defendant’s duty of good faith and uberrima fides [utmost good faith].”
The Court found that the contents of the insurer’s manuals were directly relevant to proving or disproving the existence of policies, guidelines and directives which allegedly breached the insurer’s duty of good faith. Those internal documents were, therefore, relevant to the allegations of bad faith as set out in the Statement of Claim and the Court ordered that they be turned over to the insured.
Master Kelly decided that the case before him was different because the insured had not specifically pleaded that the insurer “had a policy of denying valid claims and issued directives and guidelines for its adjusters to implement such policy.” Nor did the insurer’s Statement of Defence make its own internal policy manuals or guidelines an issue in the action. In the end, Master Kelly found that the insurer’s internal documents of general application lacked relevance to the issues pleaded. It is safe to say that if these documents related to the insured specifically, they probably would have been producible.
The overall effect has been to expand the number of issues that are viewed as relevant to certain proceedings, which in turn has expanded the number and types of documents that may be producible. In Ontario, the test for what is relevant is not particularly stringent. A document is relevant if it has a “semblance of relevance” to issues in the proceedings.(6) Tempering this rather broad definition is the fact that even the most relevant of documents may yet be privileged and therefore free from production.
Despite a trend towards more discovery and greater transparency in litigation, privilege remains a useful tool for protecting those documents in an adjuster’s file that are increasingly viewed as relevant. The bottom line is that an insurer’s duty of good faith demands that claims be investigated fairly and fully. As a guiding principle, an adjuster should always remember that his/her notes and records may someday end up in the hands of opposing counsel or before the Court. An adjuster may be required to explain why certain comments were made and how certain conclusions were reached.(7) While there are no guaranteed protections, there are ways to restrict relevance and maintain privilege.
There are two distinct and separate types of privilege that can apply to documents in an adjuster’s file: (i.) solicitor-client privilege, and (ii.) litigation privilege. Solicitor-client privilege protects confidential matters between client and solicitor forever, while litigation privilege protects a lawyer’s ‘work product’ until the end of the litigation.(8) The leading authority in Ontario is General Accident Assurance Co. v. Chrusz(9) in which the insured sought production of an independent adjuster’s report and a witness statement from his insurer. According to Chrusz , a claim for privilege can be properly made in respect of any document that meets one of the following tests:
“Where legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications relating to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser, except the protection be waived.”(10)
Therefore, any part of an adjuster’s file which contains communications between the insurer and its lawyer(s) is protected by solicitor-client privilege and need not be produced. Privilege over such documents continues indefinitely until it is waived by the client.
“…communications between the client or his solicitor of record and third parties if made for the solicitor’s information for the purpose of pending or contemplated litigation….Litigation privilege applies to communications of a non-confidential nature between the solicitor and third parties…Litigation privilege…applies only in the context of litigation itself…[and] is based upon the need for a protected area to facilitate investigation and preparation of a case for trial by the adversarial advocate.”(11)
A party which has been served with a Statement of Claim is obviously engaged in litigation, with the result that most documents will be litigation privileged. In most cases, however, the “context of litigation” arises long before a Statement of Claim is issued. For example, a person injured in a motor vehicle accident has two years to issue a claim, but the “context of litigation” arises the moment the defendant receives notice of his/her intention to sue for damages. The difficulty with litigation privilege, therefore, is knowing exactly when this so-called “context of litigation” begins. Is an insurer engaged in litigation when a notice letter is received? When it suspects a policy breach? When it retains counsel?
The case law has made it clear that there need not be a certainty of litigation in order for litigation privilege to arise and begin attaching to documents. On the other hand, there must be more than a mere suspicion that litigation might be possible.(12) Provided that there is a reasonable prospect of litigation, or that litigation is in the reasonable contemplation of the insurer, litigation privilege will attach to documents created from that date forward.(13)
Triggers of Litigation Privilege
Determining when a reasonable prospect of litigation actually arises in any given case is difficult. Generally, a reasonable prospect of litigation begins when an adjuster stops investigating a claim (i.e. fulfilling his/her duty of good faith to the insured) and beings denying the claim (thereby giving rise to a dispute between insured and insurer, which may or may not result in litigation).
There are several actions or events that the Court views as indicative of a reasonable prospect of litigation. The following list of triggers is not exhaustive, nor is any one more important than the others, but each has been recognized as capable of moving documents out of an adjuster’s ‘investigation file’ and into his/her ‘litigation file’:
an adjuster denies a claim due to a policy breach;(14)
an expert report shows that fire loss was caused by faulty electrical system;(15)
a plaintiff threatens to commence an action against the insurer;(16)
a plaintiff applies for mediation at FSCO;(17)
an insurer retains counsel to handle a dispute with an insured.(18)
The Dominant Purpose Test
Finally, not only must the document in question have been created for the purpose of actual or anticipated litigation, but the dominant purpose for its creation must have been that litigation. The Chrusz decision made it clear that the dominant purpose test applies in Ontario. The Court found that, given the “modern trend in the direction of complete discovery”, the dominant purpose test for litigation privilege should be adopted.(19)
This means that any document which is created for reasons other than protecting or advancing a party’s interests in litigation may be vulnerable to production because its dominant purpose may not be the litigation itself. An example would be reports from a fire loss expert retained by an insurer to investigate a claim. The expert’s Preliminary Report might only estimate the extent of the loss to be covered, in which case the report was not created for the dominant purpose of litigation. However, the expert’s Final Report may reveal a reasonable suspicion of insured-caused arson, in which case the dominant purpose of the report would be to alert the adjuster that a reasonable prospect of litigation exists.
Again, the distinction to be made is between the investigation ending and the possibility of litigation arising. To continue with the example above, if the expert prepares a single report of which 75 percent deals with the extent of the loss and 25 percent with an accelerant found at the fire site, the Court could very well conclude that the report’s dominant purpose was not litigation, and that it therefore should be produced.
It is important to note that solicitor-client privilege can be waived at any time by the client, and that litigation privilege can be waived by disclosing a document to an opposing or third party. In Cappadocia v. Canadian General Insurance the Court found that providing a doctor with certain surveillance reports and videotapes for use in his assessment of the plaintiff amounted to waiver of privilege over those documents.(20) Waiving privilege over certain documents does not, however, mean that privilege over related documents is also automatically waived.(21)
The best defence against increased production is to (a.) restrict relevance and (b.) be aware of when litigation privilege is likely to arise. If a Statement of Claim sets out specific allegations of bad faith in an attempt to expand the number of relevant issues in an action, counsel should in turn make specific denials in the Statement of Defence. In other words, counsel should specifically plead that the plaintiff’s allegations of bad faith are no more than bald assertions without evidence, and that the plaintiff is simply conducting a fishing expedition.
Further, once an adjuster’s good faith investigation concludes he/she should move as quickly as possible to engage one or more of the litigation privilege triggers noted above. There are no guarantees that a Court will see litigation privilege arising as early as most adjusters do, but these measures will make it more likely that relevance will be kept in check and privilege extended as far back in time as possible.
(1) Rule 30.03, Rules of Civil Procedure , R.R.O. 1990, Reg. 194.
(2) McCormick, Evidence (1984, 3d ed.), at p. 171.
(3) McCullough v. AXA Insurance Company, Stinson J., released July 21, 2000. See also Correa v. CIBC General Insurance Company Ltd.,  1 L.R. (S.C.J.).
(4) Sathiyapalan v. Citadel General Insurance Company,  O.J. No. 364 (On.Sup.Ct.Jus.), Master Kelly, hereinafter “Sathiyapalan”.
(5) McCullough v. AXA Insurance Company, Stinson J., released July 21, 2000.
(6) Bensuro Holdings Inc. v. Avenor Inc. (2000), 186 D.L.R. (4 th ) 182 (S.C.J.).
(7) Nelligan/Power Newsletter, Insurance Binder, Adjusters’ Files – For Your Eyes Only? , Vol. 1, No. 1, Winter 1998.
(8) Ontario (Attorney General) v. Big Canoe, (2002), 220 D.L.R. (4 th ) 467 (Ont.C.A.). Settlement negotiation privilege and Crown privilege are the other two types of privilege.
(9) (1999), 45 O.R. (3d) 321 (Ont.C.A.), hereinafter “Chrusz”.
(10) Chrusz, at para. 89.
(11) Ibid., at para. 22, citing Sopinka, Lederman and Bryant, The Law of Evidence in Canada , (Toronto: Butterworths, 1992) at p. 653 and at para. 23 citing R.J. Sharpe, “Claiming Privilege in the Discovery Process” in Law in Transition: Evidence, L.S.U.C. Special Lectures (Toronto: De Boo, 1984) at p. 163.
(12) Chrusz at para. 53.
(13) Turgeon v. Edmonton (City) (1986), 72 A.R. 366 (Q.B.).
(14) Sathiyapalan, at para. 4.
(15) Yong Men’s Christian Association v. 331783 Ontario Ltd.,  O.J. No. 4027 (S.C.J.), at para. 13.
(16) Garratt v. CGU Insurance Co. of Canada,  O.J. No. 3441 (S.C.J.)
(18) Refco Futures (Canada) Ltd. V. American Home Assurance Co.,  O.J. No. 1720 (S.C.J.). See also Torchia v. Royal Insurance Co. of Canada  O.J. No. 1827 (S.C.J.).
(19) Chrusz at para. 24 & 32.
(20) Cappadocia v. Canadian General Insurance,  O.J. No. 5681 (S.C.J.).
(21) Masnyk v. Lincoln Electric Co. of Canada,  O.J. 398 (S.C.J.).
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