The Whole File and Nothing But the File: A Precautionary Tale regarding Disclosure and Production of an Insurer’s Underwriting, and Claims and Investigation Files in the Context of Coverage and Bad Faith Claims

The scope of disclosure and corresponding production of documents typically becomes an issue in the context of an insured’s claim against an insurer for coverage and bad faith.  Inevitably, the insured will demand disclosure and production of the underwriting, and/or claims and investigation files, at least parts of which the insurer typically will be disinclined to produce.

Recently, the Ontario Superior Court addressed this issue in Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company¹.  The action involved the failure of two transformers that had been installed by Marnoch Electrical Services Inc. (a solar energy developer) on behalf of Sky Solar (Canada) Inc., as part of two solar energy systems.  As a term of the contract, Marnoch had to provide certain general liability insurance, with Sky being named as an additional insured under Marnoch’s policy, which had been issued by Economical Insurance.  Pursuant to the policy’s Additional Insured Endorsement, coverage had been afforded to Sky as an additional insured, but only for “liability arising out of the operations of the Named Insured [Marnoch]”. 

As a result of the two losses, Sky claimed damages under the policy.   Economical denied coverage on the basis that the loss did not arise from “liability arising out of” Marnoch’s operations, but from Sky’s independent acts of negligence, for which the policy did not provide cover. 

Sky sued Economical and its broker, Firstbrook, Cassie & Anderson Limited (collectively, the “Defendants”), for denial of coverage, and also claimed damages for the Defendants’ breach of duties of utmost good faith and fair dealing. 

During the course of the litigation, the Defendants refused to produce their underwriting, and claims and investigation files (including the files of their internal claims adjusters) relating to the loss.  Accordingly, Sky brought a motion for, inter alia, disclosure and production of those files.

Underwriting File

Sky asserted that the underwriting file was critical to understanding “Marnoch’s operations”<sup2, which, in turn, would have a bearing on the coverage available to Sky under the policy.  Economical countered that as it was not denying coverage based on the scope of Marnoch’s operations but rather on the fact that the loss arose from Sky’s independent acts of negligence (for which the policy did not provide coverage), the file was not relevant.  In any event, the scope of Marnoch’s operations was clearly defined on the Declarations page of the policy, so no further inquiry was necessary.  It further argued that the underwriting process had nothing to do with Sky. 

The Court disagreed with the Defendants, concluding that the underwriting process is important in order for an insurer to properly assess the risk, and determine the premium and the scope of coverage.  Accordingly, all of the documents and information received by the Defendants in relation to the issuance of the policy were relevant to the Court’s interpretation of Marnoch’s operations as underwritten by Economical, to the interpretation of the policy, and to the scope of the Additional Insured Endorsement.  The description of Marnoch’s operations on the face of the policy did not provide an answer regarding the underwriting process as to the assessment of risk, the determination of the premium and, in this case, the determination of coverage.

As Economical had taken an off-coverage position and had relied, in part, on the allegation that Sky’s losses did not arise from Marnoch’s operations, production of the complete underwriting file was relevant to the coverage issue, and therefore it was ordered that it be produced.

Claims and Investigation Files

In addition, Sky sought disclosure and production of the Defendants’ claims and investigations files in respect of both failures.  Sky pleaded that Economical had breached its duty of utmost good faith and had denied coverage “without conducting any adequate or competent investigation”.  In the Defendants’ statement of defence, Economical disputed this allegation, and asserted that Economical had fully investigated the losses before concluding that the fires did not arise from Marnoch’s operations².  Sky submitted that, as the Defendants had pleaded to having fully investigated both failures, they ought to produce the claims and investigation files.

The Defendants claimed that the files were subject to litigation privilege.  In order for litigation privilege to attach, the Defendants would have had to demonstrate that (a) litigation by Sky was contemplated³, and (b) the documents over which privilege was sought were created for the “dominant purpose” of litigation (a conjunctive test)⁴. Sky asserted that there could be no such privilege because many of the documents had arisen before Sky had made its demand for coverage, such that the documents could not have been created for the “dominant purpose” of litigation.  Furthermore, the Defendants had failed to provide a sufficient description of the documents, the circumstances of their creation, and their dominant purpose.

The Court disagreed, once again, with the Defendants.  It reasoned that there were two primary claims, namely (1) coverage and (2) bad faith.  In terms of the bad faith claim, a court will “look at the conduct of the insurer throughout the claims process to determine whether, in light of the circumstances as they then existed, the insurer had acted fairly and promptly in responding to the claim”.  Ontario courts have found that the only way that an insured can ascertain whether the coverage investigation was handled improperly and in bad faith is by the production of the insurer’s and broker’s internal files showing how they handled, or should have handled, the coverage request and the information available to them at the material time.  This would make almost every document in the insurer’s file critical and relevant to a claim of bad faith.

The Court held that the issues of coverage and the duty of utmost good faith were commingled in the pleadings, and that the Defendants had to produce their entire claims and investigation files (prior to the denial of coverage on 30 October 2013).

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What does this mean for insurers? 

A claim for coverage will almost always be accompanied by an allegation of bad faith, consequently resulting in a broadening of the scope of disclosure and production. Thus, the only way that an insured can ascertain how its coverage claim was handled would be by production of the insurer’s and broker’s internal files, which would disclose the information available to the insurer at the material time, and how the request for coverage, and corresponding investigation, were handled.  In order to mitigate the extent of that disclosure, it is imperative that defences are drafted carefully, so as not to create the opportunity for wider production and disclosure than is absolutely necessary.

Furthermore, when an insurer is claiming litigation privilege over otherwise relevant documents, it is important to remember that there is a heavy onus to provide ample evidence to justify the privilege claimed.  Courts are inclined to reject broad, vague assertions of privilege on the basis that the insurer did not meet its burden of proof.  Documents over which the insurer is claiming privilege need to be itemized, dated and adequately described (to include circumstances of their creation, and dominant purpose), stopping short at details that would destroy the benefit of any privilege which may properly attach. Furthermore, as part of its burden, the insurer must provide an evidentiary basis for the claim of privilege, such as an affidavit from the claims handler. 

A claim for coverage, accompanied by a claim for bad faith, will inevitably be ‘bad’ for an insurer, in terms of disclosure and production.  The key is to minimize the extent of that disclosure and production.

 

[1]2015 ONSC 4714.
   
[2] If an allegation is pleaded, then any related evidence becomes relevant and thus producible unless privileged.

[3] An insurer’s investigation of an insured’s loss would not be construed as anticipated litigation.  The mere submission of a claim does not cast the parties in an adversarial role.  It is the denial of coverage that starts the clock ticking in terms of a claim for litigation privilege:  see General Accident Assurance Company v. Chrusz 1999 CarswellOnt 2898 at paras. 38 and 50 (C.A.).

[4]Courts have refused to accept a claim of litigation privilege over documents prepared after litigation was contemplated, in circumstances where there was no evidence that the subject documents were prepared for the dominant purpose of litigation: Kennedy v. McKenzie, 2005 CarswellOnt 2109 at paras. 20 and 23 (S.C.J.).  Documents created for the purpose of investigation would not be protected by litigation privilege simply because there was a contemplation of a denial of coverage, and anticipated litigation to the anticipated denial: Heasley v. Labelle, 2013 CarswellOnt 17572 at para. 13.

[5] Royal & SunAlliance Insurance Co. of Canada v. Fiberglas Canada Inc., 2002 CarswellOnt 3232 at para. 16, aff’d 2002 CarswellOnt 8491 (S.C.J.).  See also Mamaca (Litigation Guardian of) v. Coseco Insurance Co. 2007 CarswellOnt 1828 at para. 12 (S.C.J.), aff’d 2007 CarswellOnt 8133 (S.C.J.), leave to appeal denied (S.C.J. Div. Ct.).