Australia: Legal professional privilege: the insurer's guide to protecting sensitive pre-litigation investigations
Insurance Alert

Focus: Ensham Resources Pty Ltd v AIOI Insurance Company Limited [2012] FCA 710
Services: Insurance
Industry Focus: Insurance

Ensham Resources Pty Ltd v AIOI Insurance Company Limited [2012] FCA 710

Introduction

The Federal Court of Australia recently had cause to consider the application of legal professional privilege to a series of loss adjuster reports, which were obtained by the solicitors for an insurer. This decision provides a useful cue to insurers to seek legal advice with respect to potentially litigious indemnity disputes, prior to engaging external loss adjusters.

Facts

As a result of heavy rain fall in January 2008, the Nagoa River and Old Winton Creek overflowed, breaching earth levees adjacent to an open cut mine which was owned and operated by the applicant, Ensham Resources Pty Limited ("Ensham"), causing flooding to three of its pits.

On 22 January 2008, Ensham gave notice to the respondent, AIOI Insurance Company Limited ("AIOI"), of a potential claim under its industrial special risk insurance policy (the "Policy"). Ensham made further claims under the Policy between 18 August 2008 and 8 April 2010, none of which were paid by AIOI. On 24 September 2010, Ensham commenced proceedings for recovery of loss allegedly suffered as a result of AIOI's failure to indemnify Ensham under the Policy (the "Primary Proceedings").

Issues in dispute in the Primary Proceedings included whether a particular levee was the insured property of Ensham and, if so, whether the Policy covered property damage to the levee or any business interruption loss suffered as a result of its failure.

In order to investigate Ensham's claim and AIOI's corresponding liability, AIOI engaged legal representation (the "Respondent's Solicitors") and also the services of a loss adjuster, Greg Bickle of Crawford & Company (Australia) Pty Ltd ("Crawford"). Crawford was initially retained to carry out investigations into the quantum of Ensham's claim.

A conversation subsequently took place between the Respondent's Solicitors and Mr Bickle on 13 February 2008, the details of which were documented in the solicitors' file note of the same date. The file note outlined various contentious issues including Mr Bickle's view that the levee did not form part of Ensham's insured property and that the cause of the flooding at the mine remained unclear. From this conversation, it was further established that the loss suffered by Ensham would likely be in the sum of $60 million – only $5 million of which could potentially be recovered under the Policy.

In light of the complexity of the issues discussed, Mr Bickle and the Respondent's Solicitors concluded that any reports should be the subject of privilege and that AIOI's retainer with Crawford should be replaced with a retainer between the Respondent's Solicitors and Crawford. The letter of retainer from the Respondent's Solicitors provided that, in light of the likely quantum of the claim and the number of issues which they considered were likely to result in litigation, Mr Bickle's investigations and corresponding report should be prepared on a privileged and confidential basis in anticipation of future litigation. Mr Bickle ultimately provided 10 reports for the Respondent's Solicitors relating not only to quantum but to the significant policy coverage issues in dispute.

On 18 February 2011, the Court directed that Ensham and AIOI provide certain discovery. The Respondent's Solicitors refused to disclose three of the loss adjuster's reports and redacted information from two others, claiming legal professional privilege over those documents (the "Reports") and asserting that the Reports were prepared in anticipation of future litigation. Ensham disputed AIOI's claims submitting that the Reports were brought into existence generally as part of AIOI's normal investigations into Ensham's claim. Ensham applied to the Federal Court seeking orders that they be allowed to inspect each of the Reports.

In deciding the validity of AIOI's claim for legal professional privilege, Justice Cowdroy considered the circumstances surrounding the obtaining of the Reports, their content and the purpose for which they were produced. Cowdroy J recognised the principle from Esso Australia Resources v Federal Commissioner Taxation (1999) 201 CLR 49 ("Esso") and noted that in order to establish legal professional privilege, litigation must be reasonably contemplated and it must be established that the relevant documents were prepared for the dominant purpose of providing assistance or advice with respect to that anticipated litigation. The onus of proof is on the person claiming privilege.

Cowdroy J confirmed that the question of whether litigation is reasonably contemplated is an objective one, the yardstick for measurement falling somewhere between a reasonably held belief that litigation is absolutely certain and the mere speculation as to the possibility of proceedings. Cowdroy J further considered the authority from Mitsubishi Electric Pty Ltd v Victorian Workcover Authority (2002) 4 VR 332 ("Mitsubishi") where it was held that the occurrence of an event which, in common experience, very often leads to litigation, may found a reasonable conclusion that litigation is expected, and accordingly may form the basis of a valid claim for privilege. In determining the dominant purpose of the Reports, Cowdroy J similarly favoured an objective assessment and queried whether the Reports were brought into existence for the dominant purpose of providing legal advice in relation to litigation. Cowdroy J noted that the state of mind of the solicitor, rather than that of the loss adjuster or the insurer, was relevant to making such a determination. In considering the subject claim, Cowdroy J reinforced that any decision with respect to whether privilege is appropriately claimed requires careful scrutiny.

Decision

The Federal Court dismissed Ensham's application, finding that legal professional privilege attached to the Reports.

Cowdroy J was satisfied that the evidence supported AIOI's contention that, at the time the Reports were made (from March 2008), there was a real prospect of litigation and the Reports were therefore prepared for the dominant purpose of providing advice in relation to those anticipated proceedings. The deliberate (and documented) attempt by AIOI's solicitors to attract legal professional privilege to the Reports did not, without more, qualify the documents as being privileged communication. In this respect, it was accepted that the Respondent's Solicitors formed the view in February 2008 (based on their experience and their preliminary discussion with loss adjusters) that the claim was conducive to litigation. That the Reports contained information relevant to that potential litigation, further validated AIOI's claim of privilege. It was irrelevant that the Reports could be used by the insurer for the secondary purpose of assessing the potential cost of the claim.

Implications

The Court's view of legal professional privilege will ultimately turn on the individual circumstances of each case, including consideration of the tests enunciated in Esso and Mitsubishi. The subject decision demonstrates the importance of giving early consideration to whether a matter is likely to become litigious and structuring one's investigations accordingly. It is pertinent to note that, had the insurer obtained the subject reports from loss adjusters in the course of exploring the veracity of the claim generally – legal professional privilege could not have protected against the release of such sensitive information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.