The Federal Court of Australia has considered circumstances in which the exchange of privileged material between an insurer and an insured may result in a waiver of legal professional privilege.

Asahi Holdings purchased shares in a business. As part of the share sale agreement, Asahi took out a Warranty and Indemnity insurance policy to insure against breaches of various warranties given by the seller in the share sale agreement.

The sale went through and Asahi later accused the seller of misrepresenting its financial position prior to the sale. Asahi made a claim under the policy for breach of those warranties and, given that its alleged loss was greater than the sum insured, also issued a proceeding against the seller claiming loss and damage caused by the seller’s misleading and deceptive conduct.

In anticipation of the litigation, Asahi’s solicitors prepared a report which purported to analyse the true financial position of the seller at the relevant time. Asahi sent a copy of the report to its insurer, which it labelled “privileged and confidential.” The seller argued that by providing the report to its insurer, Asahi had waived its right to assert privilege over the document.

The leading High Court authority on the waiver of legal professional privilege, Mann v Carnell, essentially provides that a party will waive its right to assert legal professional privilege over a document if it acts in a manner that is inconsistent with the maintenance of that privilege. This is to be measured objectively. There may be an implied waiver of privilege in circumstances where a party has acted inconsistently with privilege even if that party’s subjective intention was to maintain privilege.

Ordinarily if a party voluntarily provides another party with a privileged document, this will be regarded as conduct that is inconsistent with the maintenance of privilege. However, there is an exception to this rule where two parties have such a commonality of interest that sharing privileged information is consistent, rather than inconsistent, with maintaining privilege. This may be the case where an insured shares privileged information with its insurer (and vice versa). In the context of a typical liability claim, an insured and an insurer share a common interest in defending a claim against an insured. Accordingly, in such circumstances, there will not be a waiver of privilege if the insurer and insured exchange privileged documents.

However, the facts in this case were distinct from an ordinary liability claim. The unusual terms of Asahi’s Warranty and Indemnity policy and the terms of the share sale agreement meant that there was no commonality of interest between Asahi and its insurer (which had not granted indemnity). In fact, the insurer’s interests were aligned with those of the seller. While it was in Asahi’s interest to establish that the seller had engaged in misleading and deceptive conduct and breached its warranties, in order to avoid liability, it was in the interest of both the insurer and the seller to establish that there had not been any misleading and deceptive conduct. It is important to note that the policy limited the insurer’s right of subrogation against the seller to circumstances in which the seller had acted fraudulently, of which there was no evidence in this case. Accordingly the insurer and Asahi did not have a common interest.

The report prepared by Asahi’s lawyers was protected by litigation privilege which served to protect the document from Asahi’s actual or potential opponents in litigation. However, by providing a copy of the report to its insurer, a potential opponent in litigation, Asahi waived its right to assert privilege over the report.

The Court noted that the policy did not require Asahi to disclose privileged information to the insurer and that it did so voluntarily. The fact that there was no obligation in the policy or elsewhere for the insurer to keep the information in the report confidential (the label on the report was considered inadequate) and the fact that Asahi had made no effort to obtain an assurance that the information would be kept confidential was also indicative of privilege having been waived.

Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2) [2014] FCA 481

While this decision may cause concern for insurers who commonly exchange privileged material with insureds, so long as there is a commonality of interest privilege will not be waived. This obviously applies where indemnity has been granted. But even if indemnity has not yet been confirmed or may later be in issue, provided the insurer and insured are essentially on the same side in relation to a claim made by or against another party, privilege should be maintained. It is in circumstances where there is no commonality of interest that privilege may be waived.