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Uncertainty over privilege likely to lead to insurance case appeal

Out-Law Analysis | 20 Mar 2018 | 9:46 am | 3 min. read

ANALYSIS: The High Court's ruling that an insurance policy holder cannot be forced to disclose documents covered by litigation privilege is open to appeal because of apparent inconsistencies in the ruling's approach to privilege.

Litigation privilege allows people or companies to keep secret any documents that relate to investigations and legal advice relating to that case. The High Court has ruled that insurer AIG could not force KeyMed (Medical and Industrial Equipment) Limited officers to disclose emails related to a dispute about insurance for legal costs.

After former directors of KeyMed and claimants in the case Michael Woodford and Paul Hillman left KeyMed parent company Olympus, KeyMed took a case against them claiming they breached their directors' duties in relation to a corporate pension fund. Woodford and Hillman had, as former directors, cover under KeyMed's directors' and officers' insurance policy which was underwritten by AIG. The costs had already reached £4 million because of the complexity of the case, which is still ongoing.

AIG wanted to know when the officers of KeyMed came to the conclusion that Woodford and Hillman had breached their duties. If KeyMed had that knowledge prior to 1 August 2015, cover could be declined. KeyMed initially refused to provide the information sought, or copies of emails exchanged between its officers on the subject prior to 1 August 2015, citing litigation privilege, which is available as soon as litigation is in 'reasonable contemplation'.

In response AIG declined cover, suggesting that KeyMed's "evasive reply" and reliance on privilege was an indirect admission of knowledge prior to 1 August 2015, and in any case the failure to provide information promptly was a "deliberate breach" of policy terms requiring the provision of information relevant to the question of cover. Woodford and Hillman then took legal action against AIG.

The High Court refused to force disclosure, meaning that its view is that a policyholder cannot be compelled to waive privilege over documents even if the information relates to a claim and is legitimately requested under the terms of the policy.

But the court heard witness statements which gave evidence of the officer's purported knowledge prior to 1 August 2015. This should mean that KeyMed had waived privilege. It is a principle of English law that privilege cannot be waived selectively, so it cannot be right that the witnesses may waive privilege to allow them to claim one version of events, while simultaneously maintaining privilege over communications which might show quite another.

Mrs Justice Moulder refused to hear argument on this in the face of KeyMed's refusal to waive privilege, which she said she had no power to overrule. This is likely to provide grounds for appeal. 

The policy had clauses requiring the company to provide information. But in not forcing disclosure of the emails the ruling seems to say that the exercise of privilege did not breach those clauses. Perhaps this was because the witness statements satisfied the clauses, so no further disclosure was necessary, but it is hard to see why this would be the case, and it is possible that the failure to address this point expressly may also give rise to an appeal.

The court did not say what the position would have been if KeyMed had not provided witness statements, and had maintained a blanket claim of privilege over events before 1 August 2015. The insurance policy was under German law and there was dispute between the expert witnesses on German law as to whether this would have breached the information clause and triggered the exclusion, but the point must await an appeal, or a case on different facts.       

How can insurers avoid the withholding of information by policyholders?

Insurers can remove any doubt about the effect of a policy holder's claim of privilege by ensuring that clauses requiring the provision of information expressly exclude privilege as a reason for withholding information. Such clauses should also make clear that information must be provided within at fixed, or at least a reasonable, period. 

In the absence of a clause prohibiting the policyholder relying on privilege, or if a 'belt-and-braces' approach is preferred, in the case of clauses relying on the state of knowledge of the policyholder of a potential or actual claim at any particular time, insurers should ensure that the basis for the exclusion matches the basis for a claim of privilege. If the exclusion in this case had been based on the anticipation or "reasonable contemplation" of litigation, rather than a definite conclusion that a breach had occurred and a claim could ensue, then reliance on litigation privilege would inevitably have inferred the very same knowledge required to trigger the exclusion. 

Finally, the decision confirms that even in the context of an insurer/insured relationship, the court will not require a policyholder to waive privilege, even if the information sought goes directly to the question of cover.

Warren McIntosh is an insurance expert at Pinsent Masons, the law firm behind Out-Law.com.