Court File and Parties

COURT FILE NO.: CV-14-495750 DATE: 20161003 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TD BANK, N.A., Plaintiff

AND:

LLOYD'S UNDERWRITERS" THAT SUBSCRIBE TO POLICY NUMBER MMF/1710, PRIMARY LONDON REFERENCE NUMBER B0509QA025509 AND EXCESS LONDON REFERENCE NUMBERS QA025609, QA025709, QA025809, AND QA025909, ANTARES UNDERWRITING LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 1274 (AUL)FOR THE OPERATING YEAR OF 2009, CATLIN SYNDICATE LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2003 (SJC) FOR THE OPERATING YEAR OF 2009, NOVAE CORPORATE UNDERWRITING LIMITED AND/OR NOVAE SYNDICATES LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2007 (NVA)FOR THE OPERATING YEAR OF 2009, ACE CAPITAL LIMITED, AVE CAPITAL IV LIMITED, AND ACE CAPITAL V LIMITED FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2488 (AGM) FOR THE OPERATING YEAR OF 2009, BRIT UW LIMITED FOR ITSELF AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 2987 (BRIT) FOR THE OPERATING YEAR OF 2009, CHAUCER CORPORATE CAPITAL (NO. 3) LIMITED, CHAUCER CORPORATE CAPITAL (NO. 2) LIMITED, AND/OR IRONSHORE CORPORATE CAPITAL LTD. FOR THEMSELVES AND ON BEHALF OF ALL MEMBERS OF LLOYD'S SYNDICATE 4000 (PEM) FOR THE OPERATING YEAR OF 2009, ASPEN INSURANCE UK LIMITED, GREAT LAKES REINSURANCE (UK) PLC, LEXINGTON INSURANCE COMPANY, AIG INSURANCE COMPANY OF CANADA (FORMERLY KNOWN AS AIG COMMERCIAL INSURANCE COMPANY OF CANADA), AIG COMMERCIAL INSURANCE COMPANY OF CANADA, CHARTIS EXCESS LIMITED (FORMERLY KNOWN AS AIG EXCESS LIABILITY INSURANCE INTERNATIONAL LIMITED), ALLIED WORLD ASSURANCE COMPANY LTD., ARCH INSURANCE COMPANY, AXIS SPECIALTY INSURANCE COMPANY, AXIS SPECIALTY LIMITED, CHUBB INSURANCE COMPANY OF CANADA, HOUSTON CASUALTY COMPANY, LIBERTY MUTUAL INSURANCE COMPANY, MARKEL BERMUDA LIMITED (FORMERLY KNOWN AS MAX BERMUDA LTD.) AND OR MAX BERMUDA LTD., XL INSURANCE COMPANY PLC (FORMERLY KNOWN AS XL INSURANCE COMPANY LIMITED) AND OR XL INSURANCE COMPANY LIMITED and ENDURANCE SPECIALTY INSURANCE LTD., Defendants

BEFORE: S. F. Dunphy, J.

COUNSEL: W. G. Scott, H. Afarian and S. C. D’Souza, for the Plaintiff G. Luftspring and S. Sasso, for the Defendants Underwriters and Axis J. Halfnight and A. Juntunen, for the Defendant Liberty Mutual Insurance P. Green and D. Vaillancourt, for the Defendant AIG C. Reain, for the Defendant ARCH Insurance G. Gill, for the Defendant Allied World

HEARD: August 24, 2016

Endorsement

[1] This is a second of a set of two related motions brought by the defendants seeking to clarify the plaintiff TD’s discovery obligations in relation to certain identified categories of documents while the task of collecting and collating documents is still underway. The first motion was argued in June 2016 my decision was released on June 28, 2016: TD Bank, N.A. v Lloyd’s Underwriters, 2016 ONSC 4188.

[2] This motion raises three further issues that are sufficiently defined to enable me to deal with them usefully notwithstanding the preliminary nature of the motion. I concur with the parties that this motion offers a practical means of handling the dispute that has emerged with a view to keeping the matter moving forward towards efficient resolution.

[3] This is large and complex litigation for which I have been named by the Regional Senior Judge as case management judge. While it is generally inadvisable to entertain motions in relation to discovery of documents motions in advance of the actual delivery of an affidavit of documents, exceptions can be justified where the procedural benefits to be gained outweigh the policy reasons underlying the rule or practice. This is such a case.

[4] The parties are in the process of organizing under my direction and in a reasonably co-operative manner the disclosure of tens of thousands of documents relating to 19 separate pieces of litigation in the United States. The settlement of those claims is the foundation of the plaintiff’s claims under the indemnity policies it holds from the defendant insurers.

[5] The documents sought are all relevant to the settlements entered into by TD of the underlying actions and are thus relevant matters at issue in this action claiming reimbursement of a portion of those payments. TD has asserted three categories of privilege over those documents that the defendants wish to challenge with this motion: (i) solicitor-client privilege; (ii) litigation/work-product privilege; and (iii) settlement/mediation privilege.

[6] For the reasons that follow, I have decided to allow this motion in part and reject it in part. The plaintiff has not placed its state of mind in reliance upon legal advice in issue in this case and cannot be found to have waived solicitor-client privilege in relation to settlement documents. There is a sufficiently close connection between the issues raised in the underlying litigation that has settled and this litigation that the litigation privilege extending to documents created for the dominant purpose of the underlying litigation claims has not been lost by reason of the termination of that litigation through settlement. However, the settlement/mediation privilege arising from documents created for settlement or mediation purposes in the underlying litigation must be produced since the resulting settlements are the measure of substantially all of the damages claimed by TD and it would be manifestly unfair to require the insurers to proceed to trial if deprived of an opportunity to probe the fairness and reasonableness of those settlements. The defendants claim that some or all of the amounts paid was in relation to matters not covered by their policies. The classification of settlement damages paid in relation to the underlying theories of liability will thus be of critical importance to the question of coverage.

[7] It is common ground that my ruling will remain subject to possible further objections by TD on the basis of proportionality should the categories of documents required to be produced result in a requirement to incur expense or delay out of proportion to the potential value of the documents being sought having regard to the nature of the case and a consideration of the importance of the issues to which the documents may relate.

[8] This ruling is intended to facilitate the process of organizing the tens of thousands of potentially relevant documents so as to permit this matter to be brought through the litigation process for assessment on its merits in a reasonably efficient and expeditious fashion. It is not expected to resolve every single dispute about discovery obligations and there may well be issues where a closer document-by-document examination will be called for.

Factual Overview

[9] For the sake of context, I reproduce below the summary of this case contained in my prior endorsement in this matter released June 28, 2016 (at paras. 3-8):

“[3] A Florida subsidiary of TD was found to have become implicated in a Ponzi scheme perpetrated on a number of investors in Florida by a name-partner of a now-bankrupt law firm (“Rothstein”). The Rothstein firm was a client of TD’s subsidiary. A former employee of that subsidiary (Mr. Spinosa) was alleged to have knowingly aided and assisted Rothstein in the carrying out of the fraud. The TD employee pleaded guilty to some but not all charges made against him as part of a plea bargain. He was given a term in jail. The law firm became bankrupt and the name-partner who was the mastermind of the scheme has been given an exceptionally long sentence as a guest of a local penal institution to consider whether crime pays.

[4] The fraud was also the object of investigations by two United States regulators supervising TD’s operations – the Office of the Comptroller of the Currency (or “OCC”) and the Financial Crimes Enforcement Network (or “FinCEN”). These investigations also resulted in adverse findings against TD.

[5] While the penal and administrative/regulatory consequences of the scheme were swiftly attended to, the civil aspects took somewhat longer.

[6] A number of the defrauded investors sued TD and claimed that it was vicariously liable for Mr. Spinosa’s role in the scheme. TD notified its fidelity insurers (the defendants in this case) but they declined to undertake TD’s defence. The first such civil case to get to trial ( Coquina Investments v. TD Bank et al. ) resulted in a jury verdict in favour of the plaintiff investor which verdict included a substantial award of punitive damages. After an unsuccessful appeal, TD found it more advisable to settle the remaining civil claims rather than run the risk of still further adverse jury verdicts.

[7] All told, TD spent almost $500 million (including costs) to resolve its potential exposure under the various civil actions brought by the investors. TD commenced this action in 2015 against its insurers under its fidelity policy. The insurers have initially denied coverage also challenge the reasonableness of the settlements reached. TD is claiming the right to recover $300 million of its loss under the relevant policies having regard to claims limits and the applicable deductible.

[8] This action is still at an early stage. Neither side has produced an affidavit of documents. At my direction, the parties have begun exchanging documents and having their clerks collaborate in formulating an electronic discovery plan to maximize litigation and trial efficiency despite a number of issues pertaining to the finalization of the affidavit of documents that have been identified as requiring resolution. TD has delivered approximately 20,000 documents thus far and there will be many, many more to be delivered regardless of the outcome of this motion.”

Issues to be Decided

[10] Is TD required to produce documents related to its settlements with the investors in the underlying Rothstein litigation that are subject to solicitor-client communication privilege?

[11] Is TD required to produce documents related to its settlements with the investors in the underlying Rothstein litigation that are subject to litigation/work-product privilege?

[12] Is TD required to produce documents related to its settlements with the investors in the underlying Rothstein litigation that are subject to settlement/mediation privilege?

Analysis and Discussion

[13] The defendants’ written argument focused quite extensively on why the documents sought are relevant and necessary. Discovery obligations are always bound by relevance – it is only relevant documents that need be produced. Necessity in and of itself is not an answer when privilege is at stake. Necessity is not calibrated by what one side or the other requires to prevail – it is calibrated by what is necessary to achieve a fair resolution of the dispute in question. Privilege itself arises as a product of the search for fairness. Fairness is best considered in the context of the particular privilege claimed relative to the case to which it relates. Not all privilege claims are equal in weight in the pursuit of a fair and just determination of a litigation claim on its merits.

(a) Solicitor-client privilege

[14] The defendants submit that TD has waived solicitor-client privilege in this litigation. The implicit waiver is said to arise because TD is seeking indemnity for amounts paid pursuant to negotiated settlements rather than arising from binding judgments. As such, the defendants submit that TD is implicitly placing its state of mind at issue since it must establish the causal connection between the amounts paid and the insured peril. Since TD’s decisions to settle litigation were taken in the context of receiving legal advice from its internal and external counsel, the defendants submit TD has implicitly placed its state of mind as informed by legal advice at issue and must therefore be taken to have waived privilege.

[15] The defendants relied upon the decision of Swinton J. in FCMI Financial Corporation and Fez Financial Corporation v. Curtis International Ltd, . However, in FCMI, Swinton J. found that the mere fact the defendants pleaded that they had received legal advice was insufficient to establish that they had put their state of mind in issue (at para. 27).

[16] Solicitor-client privilege is a bedrock value of our legal system. It cannot be waived by anyone other than the client for whose benefit it exists. While waiver can be express or implied, it must not be equivocal. It is only where disclosure of the legal advice is necessary to achieve fairness in the legal proceeding that disclosure is required. A party who pleads a state of mind arising from legal advice cannot resist attempts to probe what that advice was.

[17] The defendant insurers in this case cannot put TD’s state of mind arising from legal advice at issue by anything they themselves have pleaded. If waiver there be, it must emanate from TD’s own pleading.

[18] I have been directed to nothing in TD’s statement of claim that can be construed as placing its state of mind arising from legal advice in issue. I have reviewed it and found no such allegation. TD’s replies to the statements of defence similarly contain no reference to legal advice at all but merely assert that the settlements were “reasonable and prudent” – both words importing an objective and not subjective standard and thus not dependent on actual advice received.

[19] I cannot presume at this preliminary stage that TD will put its own state of mind at issue at some point down the road in responding to the defences raised. If, as the defendants claim, TD will necessarily be required to disclose legal advice in order to prove the causal connection between settlement payments made and the insured perils as described in the defendants’ policies, TD will need to determine whether it will or will not waive privilege at that time.

[20] If there is a road that permits proof of the claim without waiving privilege, TD is entitled to take it. I cannot conclude at this early stage that no such road exists.

[21] TD argues that there are myriad objective yardsticks against which the settlements reached might be measured, most importantly the Coquina verdict, but other objective findings as well. It is not for me to make findings at this early stage as to how proof at trial will proceed – it is sufficient for me to conclude as I do that TD has not voluntarily placed its own state of mind arising from legal advice at issue.

[22] This portion of the defendants’ claim for relief must therefore be denied. I find that TD has not impliedly waived solicitor-client privilege through its pleadings.

(b) Litigation/work-product privilege

[23] The plaintiff TD was itself defendant in 19 separate pieces of litigation. In the ordinary course, a litigation file will have been built up for each of them containing a mixture of documents. Some will be subject to solicitor-client privilege in any event. Still others will be documents produced by the investor plaintiffs in the underlying actions as part of the discovery process that were subject to protective orders in the United States (discussed in my ruling of June 28, 2016).

[24] This motion does not concern documents where the dominant purpose behind their creation was this litigation since such documents are, of course, subject to litigation privilege that is in no way impacted by the settlement of the underlying litigation brought by the investors against TD. I am here concerned only with documents that are not covered by any of those descriptions but which are otherwise subject to litigation or litigation work-product privilege as having been produced for the dominant purpose of the underlying litigation that has now been settled.

[25] The defendants take the position that litigation privilege fell away when the actions giving rise to it were settled. They cite the Supreme Court of Canada decision in Blank v. Canada (Minister of Justice), [2006] 2 SCR 319, 2006 SCC 39 to the effect that “the common law litigation privilege comes to an end, absent closely related proceedings, upon the termination of the litigation that gave rise to the privilege”: Blank at para. 36. Litigation privilege, unlike solicitor-client privilege is neither absolute in scope nor permanent in duration: Blank at para. 37.

[26] The “closely related proceedings” exception in Blank effectively extends litigation privilege to documents created with only an ancillary purpose of the surviving litigation providing the dominant purpose behind their creation was the now-settled litigation in a closely-related proceeding.

[27] The defendants submit that the insurance coverage issues raised in this litigation are independent of the issues at play in the underlying investor litigation such that the rationale for the privilege no longer exists. Furthermore, they have pleaded that the settlements were not reasonable – an issue that they submit cannot be probed without access to all evidence of the considerations that underlay TD’s decision to settle. It would be manifestly unfair, they claim, to call upon the defendant insurers to answer this claim without full access to all of the relevant evidence.

[28] TD takes the position that it notified the insurers of the litigation claims as they were received and the insurers reserved their rights in lieu of electing to defend. As a result, TD claims that litigation concerning the question of insurance coverage was reasonably contemplated throughout the defence of each of the underlying claims and that there are significant common issues between the matters raised in the underlying claims and in the insurance coverage litigation.

[29] Who is right?

[30] In my view it is quite clear that there are common issues behind the underlying investor claims that were settled and the once simmering and foreseeable insurance coverage dispute that has given rise to this action. The alleged fraud of the TD employee Spinosa - its particulars and true nature - went to the core of the investor claims against TD and is also highly relevant to TD’s case as against its insurers under the fidelity bond. The insurers have pleaded a fraud exclusion that also reasonably required investigation by TD.

[31] In Blank, Fish J. recognized that “the privilege may retain its purpose — and, therefore, its effect — where the litigation that gave rise to the privilege has ended, but related litigation remains pending or may reasonably be apprehended”: Blank at para. 38. Master Peterson faced a remarkably similar issue in London Guarantee Insurance Company v. The Guarantee Company of North America, 1995 CarswellOnt 610, [1995] O.J. No. 4316 and concluded that documents prepared in connection with investigating the alleged fraud of an employee and the quantification of the loss arising retained their privilege notwithstanding the termination of the litigation against the insured.

[32] Interestingly, many of the cases cited by TD are effectively the inverse of this one. They consider whether reports prepared and investigations undertaken with respect to the insurance claim are subject to disclosure in the tort litigation.

[33] The defendants claim that they will be crippled in their ability to probe the reasonableness of the settlements if they are denied access to internal reports and documents subject to litigation privilege. They submit that TD is attempting to apply the single Coquina verdict to all of the 19 actions and settlements and to deprive the insurers of their right to require proof of each separate claim in its own right. I disagree. The facts underlying the claims of the investors remain entirely open to discovery, exploration and probing. All of the documents TD was obliged to produce in response to that litigation are open to discovery, exploration and probing by the defendants in this case. Subject to my prior ruling, all of the documents produced by the plaintiffs in those actions are similarly open to discovery, exploration and probing. What the defendants are denied by litigation privilege is an opportunity, in effect, to go along for a free ride on TD’s investigations of those same facts. It is simply untrue, as the defendants assert that “TD’s case on the causal links between the alleged insured peril and TD’s alleged loss remains secret and cannot be explored by the Insurer’s”. It remains TD’s burden to establish that link.

[34] While I rather suspect that most if not all documents to which litigation privilege may apply are very likely also subject to solicitor-client privilege (which has not been waived), my analysis of the facts leads me to the conclusion that litigation privilege has not been lost merely by settlement of the underlying litigation. The insurance litigation (in contract) and the tort litigation both have the same underlying factual foundation and raised closely overlapping issues. It will be a question of fact however as to whether a given document was prepared in relation to a subject-matter that was in fact in common between the tort and contract claims.

[35] I therefore find that litigation privilege has not automatically been lost upon settlement of the underlying litigation and may potentially subsist if the documents in question were prepared in relation to issues in common between the tort and contract claims. This aspect of the defendants’ motion must also be denied.

(c) Settlement Privilege

[36] Only one of the underlying litigation claims went to trial (resulting in the Coquina verdict). Each of the other cases was settled – the process leading to settlement being somewhat different in each case. The defendants seek production of documents created in connection with that settlement process such as settlement proposals, mediation briefs and similar documents. These documents are necessary in their view to probing whether the settlements reached were fair and reasonable in all of the circumstances.

[37] The Supreme Court of Canada reviewed the law in relation to settlement and mediation privilege at some length in Sable Offshore Energy Inc. v. Ameron International Corp., [2013] 2 SCR 623, 2013 SCC 37. Abella J. found (at para. 2) that “[t]he purpose of settlement privilege is to promote settlement. The privilege wraps a protective veil around the efforts parties make to settle their disputes by ensuring that communications made in the course of these negotiations are inadmissible.”

[38] The facts in Sable were quite different from the present case, even if the principles explored by Abella J. are of broader application. In Sable, co-defendants against whom an action was continuing sought access to documents exchanged in reaching settlements with defendants released from the action. The settling defendants had entered into “Pierringer” agreements under which the plaintiff took upon itself the risk of having misjudged the potential contributory responsibility of the settling defendants, restricting itself only to the damages caused by the continuing defendants. Abella J. found that the privilege is a class privilege, creating a prima facie presumption of inadmissibility subject to exceptions “when the justice of the case requires it”: Sable at para. 12. It is a privilege “based on the understanding that parties will be more likely to settle if they have confidence from the outset that their negotiations will not be disclosed” since negotiations “will be more open, and therefore more fruitful, if the parties know that it cannot be subsequently disclosed”: Sable at para. 13.

[39] The defendants submit that the public policy rationale underlying settlement privilege extending to settlement negotiations among the parties to the underlying litigation does not apply to this coverage litigation. Settlement privilege does not extend to documents sought for purposes other than to obtain admissions of liability weakness in the case: Sabre Inc. v. International Air Transport Association, 2009 CarswellOnt 1157 (Commercial List); Canadian Imperial Bank of Commerce v. R., 2015 TCC 280. The defendants need access to the settlement agreement and negotiations that preceded them in order to assess what precisely lay behind the payments TD agreed to make. Were the settlements solely in relation to matters that are subject to coverage or were other, non-covered matters also part of the claim? The answer to this question can only be found through an examination of the settlement documents that gave rise to the payments made.

[40] The defendants urge me to apply the reasoning applied by Strathy J. (as he then was) in IPEX Inc. v. AT Plastics Inc., 2011 ONSC 4734. In IPEX, the plaintiff had been sued in 25 separate pieces of litigation in the United States arising from pipe manufactured by it. The plaintiff alleged that the defendant had supplied it with defective raw materials used in the production of its pipe and sought contribution and indemnity.

[41] In IPEX, Strathy J. identified the question to be answered in terms the defendants submit apply with equal force to this case (at para. 82):

“Unlike many claims for indemnity, which are capable of independent determination, an ex post facto claim for recovery of settlement amounts can only be resolved based on an analysis of the terms of the settlement and the circumstances and considerations that led to it. To what extent did it reflect matters for which the defendant had responsibility and to what extent did it reflect other factors including: (a) the fault of other tortfeasors; (b) the contributory fault of the plaintiff; (c) goodwill, contingencies, other risk factors?”

[42] The defendants submit that, similar to IPEX, the very foundation of TD’s claim here is the settlements reached with the investor plaintiffs. Without a close analysis of the settlements, they claim they will be unable fairly to determine the degree to which the amounts paid reflected matters for which they may be liable to indemnify as opposed to other matters where they are not. The non-punitive damages assessed in the Coquina verdict are dwarfed by more than $400 million in settlement payments made. The defendants have alleged a variety of factors other than liability fed into the decisions to make those settlements and submit that features of the Coquina verdict may be unique to that case and absent from some or all of the other settled cases. Classification of damages and the precise means by which they occurred will be critical to deciding the coverage issues in this case.

[43] TD for its part takes strong issue with the alleged distinguishing features of the Coquina verdict. It submits that IPEX must be referred to with caution since it preceded Sable and was in part overruled by it (Abella J. found the privilege to be a class privilege in direct disagreement with Strathy J.). TD submits that the defendants are well able to assess the reasonableness of the settlements paid relative to the tangible financial losses proved by the plaintiffs in the underlying claims. The punitive damages objection is effectively a straw man. TD submits that the rationale that justified the extension of litigation privilege to this case applies to the process of negotiating settlements of the underlying litigation. The issues being settled in the underlying cases are materially identical to the issues raised in this coverage litigation and the privilege ought to be maintained for the same reasons.

[44] Settlement privilege is not an absolute privilege and the rationale for the claim can be appropriately examined in each case in which it arises. The fundamental rationale for the privilege is that it serves to encourage the settlement process and there is a strong public policy in favour of encouraging voluntary settlement of court proceedings. The privilege necessarily extends beyond the settlement of the litigation in which the privilege is asserted, but also extends to other claims entirely. The reason for this is straightforward. Criminal or administrative claims, for example, might prove more difficult to resolve if discussions leading to settlements were admissible in associated civil claims. Settlement of disputes is a social good in and of itself and the potentially chilling effect of piercing the settlement privilege in subsequent litigation might detract from the pursuit of that social good.

[45] I favour the conceptual approach to analyzing the privilege adopted by Pepall J. (as she then was) in Sabre – a case that includes an extensive review of the policies underlying the privilege and exceptions to it. A balancing of the potential chilling impact of a claimed exception to the privilege as against the overall policy enshrined in Rule 1.04(1) of the Rules of Civil Procedure to secure “the just, most expeditious and least expensive determination of every civil proceeding on its merits” is called for. However, in light of Sable, the burden of justifying the claimed exception to the privilege must lie with the party claiming it.

[46] In my view, the potential chilling effects of admitting an exception to the privilege in this case is slight whereas the obstacles that a confirmation of the privilege would place before a just determination of this claim on its merits would be considerable. The balancing of interests warrants an exception to the privilege in this case.

[47] The potential chilling effect of the exception can be examined from the perspective of documents sent by TD (to the underlying plaintiffs) and documents received by TD from them.

[48] In the case of documents sent to TD from the underlying plaintiffs (assuming they are not covered by Protective Orders dealt with in my prior ruling), it is hard to see what chilling effect could be imagined on the settlement process if such documents were subject to review by insurers potentially charged with indemnifying the claim being settled. In sending settlement proposals to TD or negotiating settlement agreements, the underlying plaintiffs had no reason to be privy to the state of the coverage issues between TD and its insurers. It is very often the case that insurers participate actively in monitoring the defence of claims for which indemnity may be sought even where they are not formally funding that defence. I can see little reason to suppose that a plaintiff in such circumstances would be inhibited in pursuing settlement discussions for fear that the defendant’s insurer might also see the documents being conveyed. To the contrary, plaintiffs would normally be quite encouraged by the presence of insurers on the scene as the prospect of additional (potentially contributing) deep pockets in litigation is seldom an unwelcome development for plaintiffs.

[49] There is nothing in the record that would lead me to conclude that the underlying plaintiffs had any expectation that their settlement-related correspondence would be kept confidential from any insurers who might be called upon to participate in funding the settlement of the claims in question whether before or after the settlement was concluded.

[50] The potential chilling effect inhibiting the transmission of settlement-related correspondence may be different when viewed from the perspective of the insured (TD in this case). However, I cannot find that the potential prejudice is material whereas the potential for harming the just adjudication of claims on their merits is substantial.

[51] The defendants raise claims that the settlements were unreasonable as having been motivated by considerations other than the merits of the underlying claims (such as a desire to avoid negative publicity in an allegedly key marketplace). As well, technical issues of policy language are raised which may make the precise nature of the underlying loss and the way it came about material (e.g., what funds transited through a TD account is of potential relevance). The plaintiffs in the underlying claims of course drafted their statements of claim and potentially negotiated settlements of them heedless of how the precise categorization of their damages might impact issues of coverage. As a result, the insurers take the position that a careful analysis of the settlements reached in relation to the precise facts of each case will be necessitated in order to determine the degree to which (if at all) the loss is an insured one.

[52] If, by way of simple example, the settlement negotiation process steered the allocation of damages towards a category or categories of damages that was potentially covered and away from categories that were more likely not covered, the reasonableness of the classification of the damages arising from a settlement may potentially be open to question.

[53] The classification of damages and the means by which they arose is thus a potentially critical issue to the insurers. Without binding determinations made at trial, it seems to me that there is simply no adequate means of assessing the reasonableness of settlements without being able to peer behind the veil to see what passed between the settling parties on the issue of classification of the claims and damages. By contrast, the settling insured can have had no reasonable expectation of confidentiality (as against the insurer) in dealings with the plaintiffs in the underlying claims. Settlement privilege cannot be invoked to mask the true nature of a settlement from the party being asked to pay for it. There is no public good served in incenting parties in litigation to fashion their settlements in ways that might maximize the chance of insurance being provided by a third party not present for those discussions.

[54] While there is substantial overlap between the issues in the underlying litigation and the issues in the coverage litigation, they are not identical. As such, the fundamental need for such documents in this case is to test the classification of damages paid by way of settlement rather than for any admissions of liability or weakness in relation to the underlying claims the documents may contain. In this regard, this case has considerable parallels with the decision of Rossiter C. J. in the Canadian Imperial Bank of Commerce case where the classification of a settlement for tax purposes was at issue.

[55] While TD may be correct that the Coquina verdict answers all questions of reasonableness of the settlements reached that might be posed in this case, it would be premature of me to attempt to make that determination at this early stage. The degree to which the Coquina verdict is a reliable proxy for TD’s exposure in the case of the claims of the other investors cannot readily be determined without examining the process by which those settlements were reached.

[56] I find the analysis of Strathy J. in IPEX and that of Rossiter C.J. in Canadian Imperial Bank of Commerce to be compelling. Both cases contain a number of very close parallels to the present case. I am fully aware that IPEX predates Sable and that Strathy J. (as he then was) came to the opposite conclusion of Abella J. on the question of whether settlement privilege is a class privilege. Clearly the burden of proof must be viewed differently now in light of Sable.

[57] However, the settlements are the very foundation of TD’s claim against the insurers. The defences raised require a precise analysis of the settlements reached in relation to the potentially insured and uninsured theories of liability giving rise to them. In such circumstances, TD can have had no reasonable expectation of confidentiality to enable it potentially to shape such settlements to the detriment of its insurers without the settlements themselves being opened up to close scrutiny.

[58] In so finding, I ought not to be taken as ruling that any such documents are necessarily admissible at trial. The trial judge will be in a better position to assess the question anew if circumstances warrant. I am also not to be taken as disturbing my ruling of June 28, 2016. In the event any documents subject to the settlement privilege I have found may not be asserted here are also subject to existing Protective Orders, the production of those documents remains subject to my order of June 28, 2016.

Disposition

[59] Accordingly, I find as follows:

a. The plaintiff has not waived solicitor-client privilege in this case to date and is thus entitled to assert that privilege in preparing its affidavit of documents;

b. The plaintiff has not lost the ability to assert litigation privilege attaching to documents prepared in contemplation of the underlying litigation by reason of the settlement of that underlying litigation given the close and connected nature of this litigation; and

c. The plaintiff is not entitled to assert settlement privilege over documents created in connection with the underlying litigation subject to any Protective Orders referenced in my order of June 28, 2016 and subject to any further order of the trial judge.

[60] Success has been divided on this motion and the issues raised at this preliminary stage have served to focus and clarify the task of TD in relation to what will doubtless be a very large and complex discovery process. These motions have been planned long in advance and developed co-operatively by both sides even if one was the moving party and one the responding. There shall be no order as to costs.

S.F. Dunphy, J. Date: October 3, 2016