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Legal cost indemnity protection and the question of privilege

By John Rossos

With the introduction of legal cost protection, defendant insurers are increasingly requesting the production of legal cost protection indemnity agreements (Indemnity Agreement). In some cases, it is simply requested as an undertaking from discovery; in other cases, the defendant insurer is arguing that disclosure is required based on statute or regulatory provisions that require the disclosure of “insurance” contracts. The issue of production has also arisen in situations where the Indemnity Agreement has been advanced to defeat a security for costs motion. Irrespective of the defendant insurer’s motivation for seeking production, the question is whether these agreements, unlike the defendant’s insurance policies, are privileged and required to be produced.

Strategic Reasons for Not Disclosing the Agreements

There are several strategic issues that counsel should consider in refusing to disclose the Indemnity Agreement or even the amount of protection offered:

  1. If the amount of protection is known to the defendant, this puts the plaintiff at a disadvantage when it comes time to negotiate costs as the defendant may not settle for less than, or equal to, the amount of protection obtained;
  2. The defendant could try to escalate the costs of the litigation beyond the coverage offered. If the plaintiff is unable to obtain supplementary coverage to cover the extra costs, then the litigation may be abandoned; and
  3. The defendant may also attempt to exploit the exclusions if they know the terms of the indemnity agreement such that the plaintiff may be forced to abandon the claim.

The consequences for disclosure are brought to bear more acutely in class-action litigation, where litigation financing and indemnity agreements essentially provide a “road map” for the representative plaintiff’s litigation plan by revealing the limits, conditions and staging of funding; changes in the amount of indemnity protection during the course of litigation; and, where applicable, plaintiff’s counsel’s valuation of the claim where fees represent a percentage of the claim and change over predefined intervals.

In Canada, BridgePoint was the first litigation financing organization to address this issue. In Hobshawn v. ATCO Gas and Pipelines Ltd., the Alberta Court of Queen’s Bench allowed class counsel to seek and obtain an ex-parte order approving BridgePoint’s Financing and Indemnity Agreement with the terms of the agreement sealed by court order on the basis that the agreement was protected by common interest privilege. Class counsel in MacQueen v. Sydney Steel Corp. obtained a Confidentiality Order when it obtained ex-parte approval of BridgePoint’s Financing and Indemnity Agreement. In British Columbia, the court permitted only a redacted version of BridgePoint’s Litigation Financing Agreement to be reviewed by defendant’s counsel in Stanway v. Wyeth Canada Inc., 2013 BCSC 1585, when class counsel sought approval of the agreement.  

It should be noted that in Stanway, approval of the agreement was sought well after certification of the action and the litigation of the action had been significantly advanced. The court wrote that in future cases, “the defendant may not always be granted [standing to make submissions] with respect to applications for court approval of [litigation funding agreements].” These practices are in stark contrast to the current practice in Ontario, where plaintiffs’ counsel set the precedent for allowing the defendant(s) standing for the approval motion and full access to the terms of the financing and indemnity agreement effectively waiving their clients’ privilege. The position in Ontario is at odds with most, if not virtually all, common-law jurisdictions that have considered the issue of whether financing and indemnity agreements are protected by privilege.

The U.K. Experience

Over the past 16 years in the U.K., legal cost protection, known there as After the Event (ATE) insurance, has been institutionalized, particularly in personal injury litigation, as a “standard” purchase much like title insurance in Canada. As of April 1, 2013, demand for this product has been affected by reforms to the U.K. civil justice system, which introduced qualified one way cost shifting and shifted the burden of paying ATE insurance premium onto the plaintiff. Nevertheless, the issue of whether ATE policies are subject to privilege has been addressed by U.K. courts. In Arroyo & Ors v BP Exploration Company (Colombia) Ltd. [2010] EWHC 1643 (QB) (Arroyo), the plaintiffs were involved in group litigation (the U.K. equivalent to a class action). The plaintiffs’ lawyers had negotiated a bespoke ATE policy for their clients with FirstAssist Insurance Services Limited. In accordance with the U.K. Civil Procedure Rules in force at the time, the plaintiffs provided the defendant with notices of funding as they intended to recover the premium from the defendant. These notices included basic details about the ATE policy but not the policy itself.  

The defendant sought production of the plaintiff’s ATE policy on the following basis:

  1. The policy was relevant;
  2. The policy was not privileged; and
  3. Without the production, the defendant could not properly assess whether it is likely to be able to recover its litigation costs against the plaintiffs in the event that it succeeded in the litigation.

Further, the defendant sought production of the plaintiffs’ ATE policy to determine if an application for security for costs should be brought. The defendant argued that it would be a waste of time to make an application for security for costs simply to find out whether the plaintiffs’ ATE policy provided them with adequate protection against adverse costs.

The court held at paragraphs 59 and 60 of the decision that the plaintiffs were not required to disclose the ATE policy and it would be prejudicial if it were ordered to be disclosed:

“. . . Equally, the policy will have come into existence for the purpose of supporting litigation, as its purpose is to aid the Claimants to obtain legal advice or to conduct or aid in the conduct of litigation (Lord Edmund Davies in Waugh v BRB [1980] AC 521 (HL). It is therefore, in my judgment, subject to litigation privilege in any event.

“It seems to me to be plain that by its nature, knowledge of the terms of an ATE policy would be of tactical advantage to the opposing party in the litigation. I have no doubt that that is why the opportunity was not taken in the [Civil Procedure Rules] to make a party give information about the terms of such a policy as well as about the premium payable under it during the course of the litigation before assessment. It would be very surprising if it were not protected by litigation privilege in these circumstances. The defendant has identified no reason for supposing that it is not. It concedes that the documents connected to the negotiation of the policy would be privileged, but simply asserts that the end product of the negotiations enjoys no protection. I agree with Mr. Layton that this is not a position which makes sense.”

To review a copy of Arroyo, please click here.

Protecting a Client's Litigation Privilege

Accordingly, counsel may use the Canadian precedents and Arroyo to address a defendant insurer’s request for production by advancing the following positions:

  1. Unlike a standard insurance contract, legal cost protection is purchased after an event that has created loss for the plaintiff, and is fundamental to establishing a strategy with their counsel for managing litigation risk and the conduct of the litigation. In essence, litigation financing and indemnity agreements represent an extension of the contingency fee agreement with counsel, which shares risk between counsel and the plaintiff. Its terms reflect counsel’s advice and views concerning the value and exposure of their client and, as mentioned above, for class-action litigation, to provide an effective road map of the plaintiff’s litigation strategy. For these reasons, Canadian courts have held that they are protected by litigation privilege;
  2. Indemnity Agreements are not documents of any relevance to the substantive proceedings in the case. Production of same would not advance the plaintiff’s action nor damage the defendant’s defence. It would be relevant only in enforcement proceedings, or proceedings to assess costs;
  3. Parties are only required to provide information that must relate to matters that are relevant or have a semblance of relevance to the litigation. An Indemnity Agreement is not the subject of the litigation;
  4. The question as to whether the plaintiff has money to satisfy a cost award would not be raised by the existence of an Indemnity Agreement. The defendant would be in the same position as any other defendant faced with a claim by plaintiff of uncertain means. The existence of an Indemnity Agreement gives the plaintiff access to monies, in contractually prescribed circumstances, which they would not otherwise have. There is no civil procedure rule that requires the plaintiff to disclose their available assets; and
  5. Knowledge of the terms of an Indemnity Agreement would be of tactical advantage to the defendant.

Security for Costs

Where the plaintiff is facing a security for costs motion, plaintiff’s counsel should remember, in addition to the foregoing, that the rules governing security for costs motions do not require that the Indemnity Agreement be produced. Where the defendant has been advised by an affidavit as to the potential amount available or that legal cost protection exists, the defendant has to establish that there was a reason to doubt the truth of the affidavit.

As this area develops in Canada, we will continue to monitor and report on any new developments. Please contact us at info@bicocanada.cahave any questions.

BridgePoint Indemnity Company (BICO) is Canada's leading provider of legal cost protection for commercial, class action, and personal injury litigation, providing protection for more than 40,000 personal injury claims.

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