UK: Litigation Privilege Over Survey Reports

The "dominant purpose" test.

Axa Seguros SA v. Allianz Insurance Plc & Ors [2011]¹
Commercial Court, 2 March 2011

This was a case concerning a claim for privilege over an engineering report commissioned in the course of investigations into a claim for hurricane damage sustained to an insured highway in Mexico.

It is settled law that a party seeking to assert litigation privilege over such a document must satisfy two conditions:

The Claimant in this case ("Axa") was a Mexican-based property insurer that had agreed to insure against physical loss and damage to the "Road Toll Concession", a network of 38 roads in Mexico, managed under the responsibility of the entity Nacional de Obras y Servicios ("Banobras").

The risk was reinsured with the London market defendants on a facultative basis, under a reinsurance contract that restricted cover to roads "constructed to internationally acceptable standards". The reinsurance also stipulated that:

A survey report was duly provided to reinsurers some months after inception, but they considered it to be insufficiently detailed to offer any assurance about the quality of the property. Accordingly, they responded by endorsing the reinsurance policy with immediate effect "to include a 'Reverse Burden of Proof' Clause".

Two months later, Hurricane Juliette struck the Pacific coast of Mexico, causing considerable damage to the Don Nogales Highway, one of the 38 insured roads. Initially, loss adjusters, Cunningham Lindsey, were appointed on behalf of both Axa and reinsurers, and their reports were made available to both. Subsequently, however, reinsurers also appointed engineering surveyors, Halcrow, who undertook their first inspection of the road four months after the storm.

The underlying policy claim was pursued by Banobras by means of arbitration in Mexico, leading to a final quantified award against Axa in early 2003. Axa, in turn, sought indemnity under the reinsurance in the present English action. Reinsurers denied liability, on the grounds that the Don Nogales Highway was not of "internationally acceptable standard" and/or that the cause of loss was "inherent vice and/or wear and tear and/or gradual deterioration" [etc].

In the course of the litigation, Axa sought disclosure by reinsurers of all reports rendered to them by Halcrow, which the latter refused to provide, contending that they were privileged from production.

In considering whether the tests for privilege were satisfied, the court analysed in detail the developing dispute between Axa and its reinsurers, and in particular as recorded in a succession of Cunningham Lindsey reports over the months in question. Even when Halcrow were first appointed, it was noted that their involvement was, at least in part, to comment upon whether the road was of an international standard. In subsequent reports, Cunninghams observed that reinsurers had issued a reservation of rights, and that coverage under the reinsurance contract was in doubt.

Although close to the borderline, the court accepted that these documents revealed a reasonable expectation of litigation between Axa and the reinsurers, as at the time when Halcrow were appointed. The situation had already developed beyond merely a "distinct possibility that sooner or later someone might make a claim".²Since cover was only available in respect of roads constructed to internationally acceptable standards, there was a reasonable prospect that Halcrow's reports would reveal this not to be so, and that this was why Axa had failed to produce proper survey reports prior to the loss. Even if Halcrow's reports left the position unclear, this still produced a reasonable prospect of litigation because, on the reinsurers' case, the burden of proof lay with Axa.

However, the court found that reinsurers had failed to satisfy the second privilege test. While litigation between Axa and reinsurers might have been within reasonable contemplation, it could not be said that Halcrow were instructed for the "dominant purpose" of the said litigation. Rather, this was one of a dual purpose, the other being to determine how far the damage had been caused by the hurricane and to verify the insured's quantum figures for remedial work. The issues were of equal importance, or at least neither predominated. Moreover, the court was not satisfied that the reports could be separated into two distinct parts, each wholly or predominantly attributable to a separate purpose. Accordingly, reinsurers' claim for privilege failed.

Finally, the court also noted that reinsurers had gone on to appoint the same Halcrow as their expert witness in the litigation itself. This created an inevitable tension between the reinsurers' claim for privilege, on the one hand, and Halcrow's duties as an expert witness on the other, since an appointed expert is obliged to act independently of the party appointing it, and to offer to the court all information known to it which is inconsistent with any expression of expert opinion. Halcrow would therefore be bound to disclose their earlier reports if and in so far as they were relevant to their expert opinion, and particularly if they were unhelpful to the reinsurers' case. Consequently, even if the court had found in favour of reinsurers on their privilege claim, the substance of that finding would likely have gone on to be overridden by virtue of Halcrow's expert appointment.

Result: Judgment for the reinsured

Footnotes

1. [2011] EWHC 268 (Comm)

2.USA v. Philip Morris Inc [2004] 1 CLC 811

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