Insurance lawyers generally treat correspondence with their insured and insurer clients as either subject to advice privilege or litigation privilege and correspondence between insured and insurer as not waiving privilege because of the common interest between their insured and insurer clients. However, the recent Federal Court case of Asahi Holdings (Australia) v. Pacific Equity Partners Pty Ltd (2004) FCA 481 demonstrates that common interest privilege does not always and at all times operate as between the insured, insurer and their solicitor. This case involved most of the Lloyds Syndicates operating in Australia in the area of warranty and indemnity insurance and much of the population of Victoria.

The proceedings involved a claim by the applicant purchasers of misleading and deceptive conduct in relation to overstated earnings of the vendor’s business. The solicitor conceded that the subject report had been prepared partly for the litigation and partly to accompany a claim to the insurer. A redacted version of the report was provided by the applicant to the respondents in the litigation, privilege being claimed in respect of the redacted portion. The respondent asserted that privilege had been waived by the earlier provision of the unredacted report to the insurer (albeit the provision to the insurer was accompanied by correspondence marked “privileged and confidential”).

The court found that privilege had been waived because there was no shared commonality of interest between insured and insurer let alone the necessary identity of interests required to found the privilege contended for. His Honour adopted the following passage from Giles J in Ampolex Limited v. Perpetual Trustee (Canberra Limited) (1995) 37 NSW Law Reports 405 (at 6):

“What is important is that, as Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Limited v. Network 10 itself show, two persons’ interests in a particular question will not have a common interest for the purposes of the common interest privilege if their individual interests in the question are selfish and potentially adverse to each other. In such a case there will not be the necessary identity of interest.”

In the particular circumstances of the case His Honour observed as follows:

“Unlike many situations where an insurer and its insured may have a commonality of interest, the respondents contended that the particular and somewhat unique terms of both the policy and share sale agreement, have, in the context of the claims made by the applicants both against the insurer and the respondents, created an alignment of interest between the insurer and the respondents and a corresponding divergence of interests as between the applicants and the insurer and the applicants and the respondents. The respondents relied upon the terms of the policy and of the share sale agreement which I have earlier described…

Shortly stated the respondents contended that it is in the interests of the applicants, in relation to both the claim made to the insurer and the claim made in the proceedings, to establish that the sellers engaged in misleading and deceptive conduct in relation to… in relation to that same subject matter, and so as to avoid liability, it is in the interest of the insurer and the interest of the respondents to establish that the sellers did not engage in misleading or deceptive conduct.

The applicants had no answer to that analysis and at least for the purposes of this application it should be accepted as correct.”

His Honour also considered it was significant that, at the time the report was given to the insurers, indemnity had not been confirmed (and so their unanimity of interest had not been established).

As with other forms of property and liability insurance, information in a notification of claim may in some circumstances be subject to litigation privilege and in others it may not. Unless advice or litigation privilege applies, there can be no issue of waiver or non-waiver because of common interest privilege. In other words, for legal professional privilege to apply to communications between insured and insurer they must:

  • firstly, be for the dominant purpose of litigation (present or pending); and,
  • secondly, be the subject of shared commonality of interest which is not merely co-incidental and selfish.

Frequently liability cases such as those against brokers or financial advisers will involve considerable analysis and scrutiny before litigation and before any thought of a claim to the insurer. In providing documents to the insurer it is important to consider the balancing obligations of the duty of utmost good faith to the insurer and the possible waiver of legal professional privilege in relation to the provision of such reports to the insurer.