Important Ruling on Litigation Privilege

In what appears to have been a longstanding battle between Coseco Insurance Company and one of its insureds, Mr. Justice John Macdonald has released an important decision on the issue of litigation privilege. He dismissed the insurer’s appeal from a master’s decision, requiring Coseco to produce a portion of its claims file in litigation relating to accident benefits. Along the way, he discussed, in some detail, the law governing litigation privilege, particularly in the context of bad faith litigation against insurers. He has made some interesting proposals about how these kinds of cases should be dealt with in the future.

Mamaca v. Coseco Insurance Company was an appeal to Justice Macdonald from a March 30, 2007 decision of Master Dash. The action arose out of a 1998 motor vehicle accident. The plaintiff had made a claim to his insurer, Coseco for income replacement and other kinds of accident benefits. Most, but not all of the claim was rejected and this led to the litigation. In addition to the claim for benefits, the plaintiff claimed damages against Coseco for bad faith.

In the documentary discovery phase of the proceedings, the insurer claimed litigation privilege as of August 3, 1999 (the date on which, it said, it had first reasonably anticipated that there would be litigation between it and its insured). The Master rejected Coseco’s argument, finding instead that the company had not had a reasonable anticipation of litigation until September 5, 2001. That would have meant that about two years’ of documents for which Coseco had claimed privilege would have to be produced to the plaintiff.

Not only that, but Coseco had provided the Master with copies of the documents of which its insured sought production, so that the Master could consider whether or not a prima facie case of actionable misconduct had been made out against the insurer. The Master reviewed the documents and, without receiving any submissions about them from counsel for Coseco, released a decision that contained a finding that the documents in question constituted prima facie evidence of bad faith:

I have however examined the Schedule B documents over which the defendant claims litigation privilege. I have agreed not to refer to the specific contents of these documents except in a general way since any decision that I make may be appealed. Some of these documents reveal the process by which the defendant arrived at its various decisions. I take particular notice of one document, a report from Patricia Riopelle dated November 29, 2000, and in particular the section entitled “Recommendations”, which gives substantial insight into the defendant’s past and ongoing strategy with respect to determination of the plaintiff’s benefits. In my view at a minimum this is evidence of an approach to the determination of Mr. Mamaca’s claim that could be seen as unfair and not balanced and in my view is prima facie evidence of bad faith. It will be up to the trial judge to determine whether this document, together with the other evidence, establishes bad faith that would warrant the imposition of punitive damages.

The insurer appealed to Justice Macdonald, who concluded that the Master had been in error in certain respects but upheld, on other grounds, the Master’s finding that the documents in question were not privileged. The reasons of Macdonald J. bear careful review, as the case is certain to be referred to by other courts, grappling with the issue of litigation privilege in bad faith claims. (And the decision is not limited, in its application, to insurance cases.)

The Master’s Two Errors

Justice Macdonald found that the Master’s analysis of the law of litigation privilege had been mistaken in two respects. First, the Master had held that once there was a real prospect of litigation, the next question to be answered, in relation to any particular document, was whether the dominant purpose for which it had been prepared was to investigate the accident or to assist the insurer in the contemplated litigation. Justice Macdonald said that the Master appeared to have felt that there was necessarily a difference between investigation and preparing for litigation and in that, he had been wrong.

His Honour also made it clear that a document can be prepared for more than one purpose; so long as the dominant purpose is for reasonably-anticipated litigation, a claim of litigation privilege can be maintained, regardless of what other purposes there might have been.

The second (and probably more important) error in the Master’s reasons, according to Justice Macdonald, was the Master’s apparent finding that, in cases involving bad faith claims against insurers, insureds require the evidence in the insurer’s file in order to prove their case and so, that need “trumps” litigation privilege. Master Dash referred back to a 2000 decision of Justice Brockenshire (that we don’t hear too much about any more): Samoila v. Prudential of America General Insurance Co. (Canada) (2000) 50 O.R. (3d) 65. (Samoila was a case in which an insurer was ordered to produce its entire file, including the legal opinion received from its solicitor.)

Justice Macdonald said of Samoila, that it had been based entirely on the principle of relevance of the documents in question and had not contained any discussion of litigation privilege. Referring to the more recent decision of the Supreme Court of Canada in Blank v. Canada (Minister of Justice), Justice Macdonald said that the law in Ontario is that “litigation privilege overwhelms or ‘trumps’ relevance in most cases, even if that deprives the plaintiff of necessary proof.” He went on to hold that “The Blank decision therefore overrules the conclusion in Samoila [supra] that, in bad faith claims between insured and insurer, the nature of their relationship, the insurer’s responsibilities and the insured’s need for proof of bad faith are a sufficient basis for ordering disclosure of the insurer’s claims file, despite its assertion of litigation privilege.”

Blank creates an exception to this principle, however. If the insured (or the party seeking production of the privileged document) can make a prima facie showing of “actionable misconduct” on the part of the insurer (the party asserting the claim for privilege) in the litigation in which the claim for privilege has been advanced, the court may still order production. In other words, although litigation privilege trumps relevance, actionable misconduct may trump privilege.

One Step or Two Step?

Justice Macdonald concluded that the Master had misapprehended the evidence about the date on which Coseco had reasonably anticipated that there would be litigation. (We haven’t bothered to summarize that part of the decision, as it turns on the particular facts of this case.) Suffice it to say, that Macdonald J. was satisfied that Coseco had reasonably anticipated litigation in 1999, not 2001, as the Master had held.

Of more interest is the legal analysis on which His Honour then embarked. The court having satisfied itself that August 3, 1999 was the date on which litigation privilege was triggered, were all of Coseco’s documents created after that date protected by privilege or did the insurer have to go on to prove, in the case of each document for which privilege was claimed, that the dominant purpose for its creation was the anticipated litigation? As Justice Macdonald put it, is the test a “one step” or “two step” one?

He ruled that in this case, a two-step test was called for. Essentially, his analysis was this. If there were only one issue beween the parties so that after litigation was anticipated, all subsequent documents related only to that one issue, it would be reasonable to conclude that all of those documents are protected by litigation privilege. Going through them individually would not be necessary.

But in other cases, the relationship between the parties might involve several issues, some litigious and some not. This was, said Macdonald J., one such case. The litigation related to benefits that had been denied, but there were some benefits that the insurer had continued to pay. Documents relating to the latter would not be exempt from disclosure. So in this case, for all documents for which privilege was claimed, the insurer had to prove that litigation had been reasonably anticipated and that the litigation was the dominant purpose for the document was created. That is the “two step” approach.

Coseco met the first part of the test (having satisfied Justice Macdonald that litigation had been anticipated as of August 3, 1999) but not the second. His Honour reviewed the evidence that had been put forward by Coseco (primarily an affidavit of a law clerk in the employ of the solicitor for the insurer) and was not satisfied that the “dominant purpose” test had been met.

Thus, although Justice Macdonald disagreed with the Master about when litigation had been reasonably anticipated by Coseco, in the end, he agreed that litigation privilege had not been established and the documents had to be produced.

Prime Facie Evidence of Bad Faith

Finally, Justice Macdonald disagreed strongly with the Master’s finding that Coseco’s documents, which had been given to the Master to review, were prima facie evidence of bad faith. Macdonald J. said it was “most unfortunate” that such a “serious” finding had been made without Coseco having had a chance to make submissions to the Master. Justice Macdonald said that the Master’s ruling on this issue “cannot stand”.

The “Misconduct Hearing”

In an earlier post about a Divisional Court decision on this issue, Smith v. London Life Insurance Company, we wondered just how a court would go about determining whether “actionable misconduct” had been established, such that production of privileged documents would be ordered. Justice Macdonald has volunteered a suggestion as to what the procedure ought to be in these situations. He envisions a two-stage process:

I wish to address what I think is the preferred course in hearing and deciding litigation privilege claims when there is an assertion that actionable misconduct by the party asserting litigation privilege should result in disclosure of the documents in issue. I think the preferred course is to determine first whether litigation privilege exists, and not to combine that hearing with a hearing in which the party seeking disclosure attempts to prove a prima facie case of actionable misconduct. Of course, if the party asserting litigation privilege fails to prove that it applies, there is no need for a “misconduct hearing”. If litigation privilege is established, a separate hearing to determine whether there is a prima facie case of actionable misconduct avoids the risk of procedural unfairness, and the substantive risk of the separate issues being merged in a fashion which could deprive litigation privilege of its proper role in the adversarial process. Rules 30.04(6) and 30.06(d) may well play a role in the resolution of these issues. However, I would think that their proper role should be determined by reference to the adversarial process, and to the fact that Masters and Judges are not engaged in an inquisitorial process.

In the present case, the claim of litigation privilege not having been upheld, the “misconduct hearing” contemplated by Justice Macdonald is unnecessary. The documents in question have been ordered to be produced, based on the first phase of this process. As His Honour said, “the parties are now able to address the issue of bad faith in the usual fashion”.

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