Last July we reported on the decision of Justice Cowdroy in the Federal Court upholding insurers’ claim for privilege over the reports of loss adjusters. That decision was important for insurers dealing with large and complex claims as the nature of such claims may be sufficient to support a reasonable anticipation of litigation very soon after an insured event occurs.

The Full Federal Court has now reinforced that first instance decision in a decision delivered immediately before Christmas (Ensham Resources v Aioi Insurance Company [2012] FCAFC 191). The insured’s appeal was dismissed and the court’s reasons are now, arguably, the leading decision on the issue of privilege and loss adjuster’s reports.

Background

The dispute concerned a flooded coal mine in the Bowen Basin in Central Queensland. The mine was flooded in January 2008 and swept to nationwide prominence when one of its draglines was inundated. The pictures of the dragline were picked up by numerous news outlets as illustrative of the biblical size of the flood. Over $500m was sought by the insured under the terms of its policy.

Within days of the flood, Ensham had notified insurers and the insurers had appointed loss adjusters. Solicitors were instructed to act for insurers within a fortnight. Shortly after that appointment, the insurers’ retainer of the loss adjusters was terminated and a new retainer between the solicitors and the loss adjusters was made.

The claim was subsequently declined due to material non-disclosure in September 2010. Proceedings were commenced by Ensham within days of the claim being declined.

First instance decision

Discovery orders were made in the litigation and insurers were asked to disclose reports prepared by the loss adjuster during 2008 (two years before litigation was commenced). Privilege was claimed (on the grounds of anticipated litigation) over all but one of those reports. Ensham challenged that claim on two main bases, namely:

  1. litigation could not have been anticipated in February 2008 when the solicitors retained the adjuster; and
  2. the adjuster’s reports served numerous purposes such that it could not be concluded that the dominant purpose of the reports was to provide information relevant to any anticipated litigation.

Justice Cowdroy dismissed Ensham’s challenge and found that “circumstances in February 2008 were of a kind that human experience (and the expertise of lawyers) would recognise as being highly conducive to litigation.”

Further detail of the first instance decision can be found here.

Ensham’s appeal

The essence of Ensham’s appeal was that Cowdroy J was wrong in concluding that the dominant purpose for the creation of the adjuster’s reports was to assist in contemplated litigation. In doing so Ensham also contended that Cowdroy J was wrong to rely on the state of mind of the solicitor who commissioned the report to determine the dominant purpose of those reports.

The majority (Lander and Jagot JJ) refused to grant leave to appeal to Ensham and their reasons for doing so include some important law on the issue of privilege and loss adjuster’s reports.

Firstly, they dealt with the test for determining when litigation could be reasonably anticipated. They referred with approval to the decision of Mitsubishi Electric (2002) 4 VR 332 in which Batt JA said that the test was that “there must be a real prospect of litigation, as distinct from a mere possibility, but it does not have to be more likely than not”. Lander and Jagot JJ found that the Mitsubishi Electric test should be followed in the Federal Court.

Secondly, their Honours addressed the issue of whose state of mind was relevant to the question of whether litigation was reasonably anticipated. Whilst it is trite law that the question must be determined objectively, they did not accept that Cowdroy J had to make any inquiry beyond the evidence of the instructing solicitor. Their Honours also rejected Ensham’s contention that the court should enquire into the state of mind of the solicitor’s client in determining whether there was a reasonable anticipation of litigation.

In reaching their decision, their Honours referred to the important first instance decision of Gummow J in Hartogen Energy ((1992) 36 FCR 557):

“The purpose for which a document is brought into existence is a question of fact ... The purpose will ordinarily be that of the maker of the document, but this will not always be the case. ... [In] situations where, for example, solicitors commission the provision of a technical report; the relevant intention will not be that of the author but the solicitor.”

Thirdly, Ensham had contended that once there was a reasonable anticipation of litigation by insurers, they were obliged to inform the policyholder. If such a contention were accepted, that would create a significant burden on insurers in their handling of claims. Their Honours rejected this contention, holding that “an insurer is not under an obligation to advise the insured that the insurer is considering declining indemnity.

Importance of the decision

This decision reinforces our comments on the importance of the first instance decision. The appeal and first instance decisions:

  1. are authority for the proposition that the very nature of a claim may be sufficient to form the view that litigation is anticipated. In other words, litigation may well be anticipated by an insurer (and its advisors) well in advance of any dispute crystallising; and
  2. indicate that 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. If the dominant purpose relates to anticipated litigation, privilege can be validly claimed.

The court’s dismissal of Ensham’s contention that insurers’ obligation of good faith extended to informing a policyholder when consideration was being given to declining indemnity is also of importance, as it does not unnecessarily extend the scope of the obligation of utmost good faith all insurers owe to their policyholders.