Rechtsanwältin, Senior Associate
Senior Associate Forensic Accountant
Out-Law Guide | 17 Mar 2011 | 10:05 am | 5 min. read
AXA Seguros S.A. De C.V. v Allianz Insurance PLC and others
The claimant insurer provided insurance cover against all risks of physical damage to a network of toll roads in Mexico. The insured was a bank owned by the Mexican State.
The insurer obtained facultative reinsurance. 70% of the risk was placed with the defendant reinsurers in the London market.
Between 30th September and 2nd October 2001, Hurricane Juliette caused torrential rainfall in parts of Mexico and damaged one of the highways in the insured network.
The underlying insured first notified the claim in October 2001. The matter was referred to arbitration in Mexico and, on 15th January 2003, the insurer was ordered to pay the insured over US$14 million, which it did.
The insurer claimed on its reinsurance. Reinsurers denied cover on the grounds that it was a condition precedent that the roads were constructed to "internationally acceptable standards" and that sections of the relevant highway were not. Alternatively, they argued the damage was not covered because it was caused or contributed to by inherent vice, wear and tear or gradual deterioration.
This hearing concerned disclosure of reports produced between 2002 and 2003 by Halcrow, the civil engineering firm appointed by reinsurers. Reinsurers said they were not obliged to disclose the material because it was subject to litigation privilege.
The reinsurance slip policy specified that the cover applied to roads "constructed to internationally acceptable standards". Surveys were to be carried out within a "reasonable time from inception hereof" to confirm the quality of construction.
A survey was carried out in February 2001 and a report delivered to reinsurers in May. But in July 2001, reinsurers said it did not contain the level of detail they were expecting. A two-page list of issues was attached.
In addition, the policy was endorsed "with immediate effect" with a "reversed onus of proof" clause. This meant that in any dispute, the insurer would have to prove the condition had been fulfilled.
After the hurricane, loss adjusters were appointed jointly by the insurer and reinsurers to investigate the loss. Their preliminary reports of October and December 2001 showed increasing consideration being given to whether the hurricane had caused certain parts of the highway to subside.
On 7th January 2002, a file note by the lead reinsurer's claims manager said reinsurers needed to appoint an independent civil engineering expert to investigate whether the roads were constructed to internationally accepted standards, whether the quantum figures for remedial work were reasonable and the precise nature of any mitigation/improvement work envisaged. In addition, “we […] need to give consideration to the appointment of a lawyer to protect privilege".
On the same date, the claims manager emailed the loss adjusters to state that any further investigations on reinsurers' part were to be on an entirely without prejudice basis. Reinsurers appointed Halcrow a few days later.
Halcrow produced three main reports: March 2002, December 2002 and May 2003. By the time of this hearing, the December 2002 report was already in the insurer’s possession, having been found on a file obtained from the broker. It expressed the view that the damage inspected was not related to the hurricane but was routine deterioration. This supported reinsurers' contention that the work carried out after the hurricane was of a maintenance nature.
It is for the party claiming privilege to establish a right to it. For litigation privilege, two conditions must be satisfied - litigation must be reasonably in prospect and the document must have been made with either the sole, or at least the dominant, purpose of using it for obtaining advice about actual or anticipated litigation.
It is not enough that there is a mere possibility of litigation or that sooner or later someone might make a claim. But it is not necessary to show there is more than a 50% chance of litigation.
The insurer said the documents were not privileged because litigation was not reasonably in prospect before 2003, when the arbitration award was made.
In any event, the documents were not made for the dominant purpose of litigation. At most, Halcrow was instructed for a dual purpose, only one of which might lead to litigation: (1) to investigate the underlying claim against the insurer and the extent of the damage caused by the hurricane and (2) to examine the pre-accident condition of the highway. Both of these were of equal importance and so could not attract privilege (Waugh v British Railways Board ).
As for the December 2002, report, the insurer said confidentiality – and therefore privilege – had already been lost. Lastly, it argued that, since Halcrow was to be the reinsurers' expert in the court action, it could not be right for the court not to know what the firm's contemporaneous view had been.
The judge found that there had been a reasonable prospect of litigation in January 2002, when Halcrow was appointed. But their instruction was not for the predominant purpose of anticipated litigation. Consequently, litigation privilege did not attach to Halcrow’s reports.
The dividing line between a reasonable prospect of litigation and a mere possibility is not always clear and the judge thought this came close to a borderline case.
However, he took into account that cover was only available for roads constructed to a certain standard, to be confirmed by a survey carried out within a reasonable time. The survey did not provide that confirmation and, as a result, reinsurers had imposed a reversed burden of proof clause.
In these circumstances, there could be said to be a reasonable prospect that Halcrow’s reports would reveal that the reason the insurer had not fulfilled its obligation was because the roads were not constructed to an acceptable standard, with the result that reinsurers would reject the claim and litigation would inevitably follow.
"It seems to me that a reasonable prospect of litigation does not depend solely on knowledge of the facts that justify rejection of the claim […] but on what was reasonably to be regarded as in prospect, upon which question the failure of the [insurer] to produce the confirmation promised was highly material," the judge concluded.
"Such failure was, in my judgment, one of the factors that took the prospect of litigation beyond that of a mere possibility."
However, reinsurers failed to establish that the predominant purpose of the instruction was anticipated litigation. Insofar as Halcrow was instructed to advise on quantum, the insurer and reinsurers had a common, not an adverse, interest.
In the judge’s view, this was a dual purpose situation where the two purposes were of equal importance and the reports in question could not be separated out into distinct parts. As a result, litigation privilege could not attach.
This made it unnecessary to decide on confidentiality, although the judge commented that he did not consider reinsurers had waived or abandoned any claim to confidentiality over the December 2002 report.
He also found it "profoundly unsatisfactory" that reinsurers were claiming litigation privilege while retaining Halcrow as their expert in the litigation. If reinsurers were entitled to privilege they had a right to it, but it seemed likely that much of the material in dispute was going to have to be disclosed anyway and it was "wasteful and inefficient" to spend time arguing a claim to privilege which within a short period would become irrelevant.
This claim for litigation privilege foundered because the civil engineers were instructed for two purposes of equal importance, only one of which might have led to a denial of cover and potential litigation.
The judge’s comments, however, suggest that he might have reached a different conclusion had the instruction and the resulting reports been separated into distinct parts – one on quantum (where the insurer and reinsurers had common issues) and the other on the more contentious issue of coverage (over which reinsurers wished to claim privilege).
On the other hand, the judge clearly took a dim view of reinsurers claiming privilege over documents that would probably have to be disclosed anyway when Halcrow provided expert evidence to the court. Even if reinsurers had succeeded in their application, they may in due course have found themselves at the wrong end of a costs order.
Rechtsanwältin, Senior Associate
Senior Associate Forensic Accountant