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Indemnity funding agreements: an issue of privilege

A recent Ontario Superior Court of Justice decision highlights important legal issues concerning privilege as it relates to indemnity and funding agreements, says BridgePoint Indemnity Company Chairman and CEO John Rossos.

“This matter is instructive because it emphasizes the need for counsel to claim privilege for these types of agreements to ensure the client’s interests are properly protected,” he tells AdvocateDaily.com.

“It’s important for counsel to understand that litigation privilege applies to legal cost protection agreements. If lawyers disclose the key terms of litigation financing and legal cost indemnity agreements it compromises their clients’ legal claims by giving the defendant access to the fundamental elements of their litigation strategy. In particular, this will have important implications for the commercial and class action bars where litigation risk management involves more complex financing and indemnity arrangements for substantially higher dollar values."

The matter, Cobb v. Long Estate, 2015 ONSC 7373, relates to a personal injury matter arising from a car crash. Two people are seeking recovery from a defendant who died. The defendant is being represented by the executor of the estate as there is a potential claim against the assets of the estate.

A central issue in the case focuses on the defence request for disclosure of the plaintiffs litigation insurance policy.

While the court said at the end of the day that it wasn’t going to decide on the issue because it wasn’t relevant, the matter still raises issues around the disclosure of such agreements, says Rossos.

“What the defendants are trying to ascertain from these documents is the terms of protection. The insurer would to like to know how much was purchased to enable them to create exposure that exceeds the limits of protection to compel the plaintiff to settle for a lower amount. If they do not know how much protection was purchased it keeps them off balance,” he says. “These agreements are privileged and should not be produced.”

Rossos, who is both a Chartered Financial Analyst and a member of the Ontario Bar, notes the plaintiff didn’t argue the issue of privilege in this matter and simply argued that the documents aren’t relevant, indicating that if there was indemnity protection it was a matter between themselves and the law firm.

Rossos believes that counsel would have a much more effective argument if they focused on the issue of litigation privilege.

“Pointing out these documents are subject to privilege is the most effective method of blunting the insurer’s attack,” he says. “We’ve been successful obtaining precedents across the country where courts have held that these agreements are subject to privilege and it’s important that it remains to be protected.”

Rossos notes that courts in British Columbia, Alberta and Nova Scotia have all determined that financing and indemnity agreements are subject to privilege.

“Counsel has had similar success in personal injury cases where there’s been an application for security for costs,” he says. “Privilege has been an effective way of preventing defendants from getting access to these agreements.”

Rossos says protecting these agreements is critical in such cases.

“In a class action, for example, the plaintiffs may have access to an indemnity for a few million dollars and the indemnity arrangement may cascade — in other words the limits of the indemnity may increase and the funding associated with it may increase as the litigation progresses and reaches certain agreed milestones,” he says. “In certain cases, the agreements themselves may disclose how we value collectively the litigation in the event the funding rate changes at different levels of recovery (i.e. a stepped rate agreement.)”

To disclose this would provide a defendant with the plaintiff’s litigation strategy, he says.

“They will know precisely the limits of the client’s indemnity; they will know precisely the limits of funding; the milestones for drawing further funds; the implied valuation of the claim for the purposes of setting the funding rate; and the termination provisions governing the availability of funding and indemnity protection,” he says. “That gives them an unfair advantage in the litigation.”

Compelling one party to disclose the nature of their risk management strategy and not the other creates an uneven playing field that undermines the integrity of the adversarial process. This is exacerbated by the fact that in most cases the defendant is a well-funded insurer with access to billions of dollars of capital, and the claimant is an ordinary Canadian with limited savings who is trying to maintain a household, says Rossos.

The economic imbalance is particularly acute in personal injury cases where defendants put pressure on plaintiffs to settle by threatening to take their homes and their savings if they fail to meet their offer to settle. In these cases, the protection of indemnity agreements is key, he adds.

“If they know how much (financial) protection you have, they will know exactly how far to push you,” says Rossos. “In other words, if a defendant knows a plaintiff only has $25,000 of protection they will be motivated to drive up costs to the point where the defendant’s costs will exceed $25,000 and use that exposure to force the plaintiff to settle for substantially less than the fair value of their claim.

“If they do not know the amount of protection that the plaintiff has acquired, it makes it difficult to intimidate the plaintiff. That’s why it’s such an important issue.”

Rossos says the issue is becoming increasingly relevant as legal costs protection is becoming more available for most types of legal claims.

“Law firms across the country are increasingly purchasing indemnity protection to protect their clients against adverse cost exposure and their investment in disbursements,” he says. “This is becoming a big issue. In fact, the prevailing view is that lawyers have a duty to advise their clients of the fact that this product exists so they can protect themselves against a professional negligence claim. In many ways it is becoming one of the most important new innovations in the legal services market. However, the problem is many lawyers don’t know how to deal with the nuances of the product and how it can be used most effectively. It still is not well understood. That presents both a tremendous challenge and opportunity.”

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