Lessons about privilege to be learnt from Axa Seguros v Allianz Insurance plc
Very often an insurer will commission reports from an “expert” to assist with their assessment of whether a claim, and how much of it, is covered by the policy. These reports are potentially dynamite. A question which often arises is whether the policyholder is entitled to see them.
This question was considered recently by Christopher Clarke J in the context of the reinsurance of a Mexican highway which suffered substantial damage as a consequence of a hurricane.
The highway was insured by Axa which in turn reinsured it with a number of reinsurers under a facultative reinsurance contract. The reinsurance was not “back-to-back” with the original in that it covered the highway only on condition that it was built to “internationally acceptable standards”.
Before inception of the reinsurance, the reinsurers had asked for surveys confirming the acceptability of the highway. When this was not forthcoming to the level of detail required by the reinsurers they imposed a “reverse onus of proof” clause. In essence, Axa was required to satisfy the condition in the event of a claim.
Following the loss, reinsurers commissioned their own reports from an engineer who was asked to advise on the extent of the damage (quantum) and the general nature of construction of the highway (liability). Axa asked for sight of the reports but the reinsurers refused on the basis of litigation privilege.
The law in this area is well settled. Litigation privilege attaches to a document where (1) at the time it was created litigation was reasonably in prospect and (2) the document was produced for the dominant purpose of the litigation in prospect.
Litigation reasonably in prospect Often the dividing line between the circumstances where litigation is reasonably in prospect and where it is merely a possibility is not always clear. This was recognised by the judge who thought this was a “borderline case”.
He held that at the time the reports were produced litigation was reasonably in prospect because Axa had failed to provide surveys confirming the acceptability of the highway and the likely reason for this was that they had not been built to an acceptable standard. Equally, if the engineer’s report left the issue unclear, this too would have given rise to a reasonable prospect of litigation (because of the operation of the “reverse onus of proof” clause).
The reinsurers failed to convince the judge that the reports were produced for the dominant purpose of providing advice for the litigation in prospect. While they had been obtained for the purpose of assessing whether the highway had been built to the requisite standards ie, advice on the litigation in prospect; there was a separate and distinct purpose of assessing the extent of the damage caused and the correctness of the figures supplied for the remedial works ie, quantum. In the context of a reinsurance contract, Axa and the reinsurers shared a common interest.
The judge did not consider either purpose was predominant and the material contained in the reports was not separable. Therefore reinsurers’ claim for privilege failed.
The test of whether litigation is reasonably in prospect is an objective one and a court will consider all the contemporaneous documents. Subjective endorsements/scratches by (re)insurers are “without prejudice” to cover, although relevant, are not conclusive as to whether litigation was in prospect.
One way round this outcome may have been for the reinsurers to address the issue of the construction of the highway in a separate report since it was obviously the battleground between the parties (given reinsurers’ suspicions about the quality of the roads and Axa’s failure to provide surveys to confirm the position). They could then have addressed separately the issue of quantum in relation to which there was a community of interest.
Beware that the claim for privilege could be diluted if the “expert” producing the report is subsequently to act as the expert in the proceedings, since in discharging his duty to the court he will almost inevitably have to disclose details of earlier inspections if they cast doubt on his formed view.