Last Friday, the Federal Court of Australia delivered a decision of interest on the extent to which loss adjusters’ reports are privileged.
The extent to which loss adjusters’ reports attract privilege is an important issue for all insurers as the disclosure of a loss adjuster’s report in a contested insurance claim has the potential to significantly alter the playing field particularly in circumstances where such reports contain recommendations as to reserves and negotiations are ongoing. In his decision in Ensham Resources Pty Ltd v Aioi Insurance Company Limited  FCA 70, Cowdroy J importantly found that loss adjusters’ reports attracted privilege where the reports had been provided to insurers’ solicitors for the dominant purpose of informing their legal advice to insurers and litigation was reasonably anticipated, This was notwithstanding that the reports had been prepared a number of years before litigation was commenced.
The decision of Cowdroy J arises out of a long running dispute concerning a coal mine located in Queensland’s Bowen Basin that suffered catastrophic flooding in January 2008. The pleaded claim seeks $535M plus interest and costs and is understood to be the single largest piece of insurance litigation currently before the Australian courts.
Whilst the Ensham mine was not the only Queensland mine to be affected by the significant rainfall event in January 2008, images (such as those below) of a dragline from the Ensham mine stuck in the flood waters were used by numerous news outlets to represent the widespread damage suffered across the region.
Click here to view images.
Very shortly after the flood, Ensham notified insurers of a forthcoming claim and insurers retained loss adjusters within a matter of days. Solicitors were retained on 1 February 2008 (less than two weeks post-flood).
The claim was investigated and in September 2010, insurers declined the claim on grounds of material non-disclosure. Ensham shortly thereafter commenced the proceedings.
The loss adjuster’s reports
In the usual course discovery orders were made and insurers were, relevantly, ordered to discover reports prepared by the loss adjuster during the 2008 calendar year. Insurers claimed privilege (on the basis of anticipated litigation) over all but the first report in time – that report having been prepared subject to a direct retainer between the insurers and the adjuster.
Shortly after insurers retained solicitors, the solicitors directly retained the loss adjuster by letter dated 19 February 2008. The loss adjuster then reported to the solicitor for the first time on 5 March 2008 with further reports provided during the remainder of 2008.
Ensham disputed insurers’ privilege claim on two main bases, namely:-
- litigation could not have been anticipated in February 2008 when the solicitors retained the adjuster; and
- the adjuster’s reports served numerous purposes such that it could not be concluded that dominant purpose the reports was to provide information relevant to any anticipated litigation.
Cowdroy J dismissed Ensham’s challenge to the privilege claim. He found that litigation was anticipated in February 2008 and that whilst the adjuster’s reports may have served a number of purposes, the dominant purpose was to provide information to the solicitors for the anticipated litigation. In making these findings, His Honour provided some useful guidance and clarification of the law concerning loss adjusters’ reports and privilege.
In seeking to maintain privilege over loss adjusters’ reports obtained prior to litigation commencing, insurers usually rely upon the decision in Mitsubishi Electric v Victorian Workcover Authority (2002) 4 VR 332. His Honour not only relied on that decision but added some useful guidance on determining whether litigation could have been reasonably contemplated. Importantly for insurers (especially those dealing with large losses or claims where there are likely to be significant policy coverage disputes), Cowdroy J accepted that litigation could be reasonably anticipated at a very early stage in these proceedings as by February 2008:-
- it was clear that this was a significant claim;
- there was a real issue over whether certain property said to be damaged by the flood was insured; and
- the costs of pumping water from the mine pits would significantly exceed a de-watering sub-limit.
His Honour found that:-
“To paraphrase the decision in Mitsubishi Electric, the circumstances in February 2008 were of a kind that human experience (and the expertise of lawyers) would recognise as being highly conducive to litigation. … The possibility of litigation was clearly evident at this early stage.”
In addressing the dominant purpose of the loss adjuster’s reports, His Honour found:-
“Although the information in the reports would have been of interest to the insurers generally and would have provided them with necessary information to factor in the cost of the potential claim against them, the reports primarily provide the insurer’s (sic) solicitors with information relevant to the potential litigation.”
Importance of the decision
This decision is important for insurers dealing with large claims or claims with significant policy coverage issues for two reasons.
Firstly, the decision is authority for the proposition that the very nature of a claim may be sufficient to form the view that litigation is anticipated such that litigation may well be anticipated by an insurer (and its advisors) well in advance of any dispute crystallising. Secondly, whilst communications with loss adjusters may be for a number of purposes, these multiple purposes do not of themselves preclude a finding that the communications are privileged. So long as the dominant purpose of the communication relates to anticipated litigation, privilege can be validly claimed over such communications.
Whilst each case will very much turn on its facts, the decision should provide some comfort to insurers that privilege can attach to communications with loss adjusters at a very early stage of a claim where the circumstances indicate that the claims process will not be consensual.