In the recent case of Axa Seguros S.A. de C.V. v Allianz Insurance plc and others [2011] EWHC 268 (Comm), Mr Justice Christopher Clarke considered whether reinsurers could assert privilege over engineers' reports into the damage suffered by the original insured. The Judge held that, although litigation was reasonably in prospect, the reports were not produced for the dominant purpose of obtaining advice about actual or anticipated litigation. The reports were not, therefore, subject to litigation privilege.

Background

Axa Seguros S.A. de C.V. ("Axa") insured Nacional de Obras y Servicios SA de C.V. ("Banobras") in respect of all risks of physical damage to a road network in Mexico between November 2000 and December 2001. One of the roads covered by the policy was the Don Nogales highway.

Axa reinsured 70% of the risk into the London market. It was an express term of the reinsurance contract that cover only applied to roads constructed to internationally acceptable standards, and a survey was to be carried out to confirm the quality of construction of the roads. The survey was carried out in February 2001, but the surveyor's report was not entirely satisfactory to reinsurers, who introduced a "Reverse Onus of Proof" clause requiring Axa to prove that the roads were built to the requisite standard.

Between 30 September and 2 October 2001, Hurricane Juliette caused considerable damage to parts of the Don Nogales highway. Banobras sought to recover under its insurance policy with Axa.

In January 2002, reinsurers appointed engineering firm Halcrow Group Limited ("Halcrow") to inspect the damaged road.

A coverage dispute arose between Axa and Banobras which was referred to arbitration. In January 2003 the arbitrator found for the insured and required Axa to pay US$14.8m.

Reinsurers refused cover under the reinsurance contract, prompting Axa to commence proceedings in September 2008. A dispute arose as to whether reinsurers could assert privilege over three reports produced by Halcrow between 2002 and 2003 during its investigation of the Don Nogales highway and related documents. One of the reports was already in Axa's possession, as it had received the report through its brokers.

Axa resisted reinsurers' claim for privilege on four grounds: (a) litigation between Axa and reinsurers was not reasonably in prospect; (b) the documents were not made for the dominant purpose of such litigation; (c) confidentiality in the reports had been lost; and (d) as Halcrow was reinsurers' Part 35 expert, the court should know Halcrow's views at the time they inspected the roads.

Decision

Christopher Clarke J set out the two well-established conditions which must be satisfied in order to claim litigation privilege:

  1. At the time the document was created, litigation was reasonably in prospect and not a mere possibility; and
  1. The document was created with the sole or dominant purpose of obtaining advice about actual or anticipated litigation.

Litigation reasonably in prospect

Christopher Clarke J noted that the dividing line between circumstances where litigation is reasonably in prospect and where it is merely a possibility is not always clear, and that this case was close to the borderline. The fact that a number of conditions must be fulfilled in order for litigation to ensue does not necessarily mean that litigation is only a possibility; one must consider the prospects that those conditions will be fulfilled.

In this case, reinsurance cover was only available for roads constructed to internationally acceptable standards. The February 2001 survey did not confirm the acceptability of the construction, and indeed the fact that it failed to provide adequate confirmation was highly material. By the time Halcrow was appointed in January 2002, there was a reasonable prospect that Halcrow's reports would show that the roads were not constructed to an acceptable standard, resulting in reinsurers rejecting Axa's claim. Litigation would inevitably follow. Hence, the Judge agreed with reinsurers that litigation was reasonably in prospect.

In reaching this conclusion, Christopher Clarke J held that contemporaneous evidence of the perception of reinsurers and their lawyers was some guide as to whether there was a reasonable prospect of litigation.

Predominant purpose

Christopher Clarke J held that reinsurers had, however, failed to establish that the Halcrow reports were produced for the predominant purpose of anticipated litigation between Axa and reinsurers.

The reports were produced for the dual purposes of: (a) assessing whether the highway had been constructed to the requisite standard; and (b) determining to what extent damage was caused by the hurricane and verifying the figures for the remedial work. Axa and reinsurers had a common interest in the latter purpose. Since neither purpose was predominant, reinsurers' claim for privilege failed.

Loss of confidentiality

Since litigation privilege did not attach to the Halcrow documents, it was not necessary for the Judge to consider Axa's arguments on confidentiality. However, Christopher Clarke J rejected Axa's assertion that confidentiality had been lost in the reports and other related materials. To the extent that such documents had been disclosed (e.g. to loss adjusters jointly appointed by Axa and reinsurers; or, in the case of one of the reports, to Axa), this did not destroy or constitute a waiver of confidentiality.

Halcrow as experts

Again, in light of his findings regarding litigation privilege, Christopher Clarke J did not need to decide whether Halcrow's documents should be disclosed by virtue of its appointment as reinsurers' expert in the proceedings. However, he noted that, as an expert, Halcrow had an obligation to act independently and to inform the court of any matter known to it which was inconsistent with or cast doubt on its opinion. Documentary evidence of Halcrow's investigations could not, in the Judge's view, properly be withheld if Halcrow was to give expert evidence.

The Judge was unimpressed by reinsurers' argument that, once privilege had been established, they could then waive privilege to the extent necessary to enable Halcrow to act as experts. If the material was going to be disclosed in any event, it was "wasteful and inefficient" to dispute privilege.

Comment

Christopher Clarke J accepted that litigation between insurers and reinsurers was reasonably in prospect from an early stage, even before Axa's liability to the original insured had been ascertained. This may be explained (at least in part) by the specific facts of the case. The Judge was clearly influenced by the fact that, due to the inconclusive nature of the February 2001 survey, reinsurers had cause to suspect from the outset that the road was not constructed to an acceptable standard and cover may not, therefore, attach. Reinsurers sought Halcrow's advice to confirm this suspicion.

Further, although not conclusive, the Judge was willing to take into account contemporaneous file notes and other documents prepared by the reinsurers' claims manager in deciding whether litigation was reasonably in prospect. If a party instructing expert advisers to prepare a report in connection with a claim believes litigation is reasonably in prospect at that time, they should therefore consider recording their belief in writing in case privilege in the report should be disputed at a later date.

Axa Seguros is also notable as it is one of very few cases since Re Highgrade Trades Ltd [1984] BCLC 151 to consider the "dominant purpose" test in the insurance context. There are marked differences between the two cases, however. In Highgrade, the Court of Appeal found that the two purposes for which the reports in question were created (namely, to enable the insurer to decide whether to resist the insurance claim and to obtain the advice of solicitors) were inseparable. If the claim was resisted, litigation would inevitably follow; hence, the report was created for a single wider privileged purpose. By contrast, in Axa Seguros the Judge could not identify a single wider purpose. The two purposes of the Halcrow reports were distinct; only one was a privileged purpose and neither was predominant.

The judgment in Axa Seguros demonstrates the importance of ensuring that, before instructing expert advisers to prepare a report, one must consider the purpose of the report. If there are multiple purposes, are some or all of those purposes to obtain legal advice? Will it be necessary to assert privilege over the report at a later date? A different outcome may have been achieved in Axa Seguros if reinsurers had requested separate reports, one in respect of the quality of construction (which would have been privileged) and one in respect of quantum (which would not).