COURT FILE AND PARTIES

COURT FILE NO.: CV-09-380884
DATE: 20120918

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

Intact Insurance Company (Plaintiff/Appellant) - and – 1367229 Ontario Inc. (Defendant / Respondent), SSY Marathon Insurance Brokers Inc. (Defendant), Teskey Construction Company Limited (Defendant) and The Dominion of Canada General Insurance Company (Defendant/Respondent) BETWEEN: 1367229 Ontario Inc. (Plaintiff by Counterclaim) - and – Intact Insurance Company, SSY Marathon Insurance Brokers Inc. and John Moulatziotis (Defendants to the Counterclaim)

Michael Burgar , for the Plaintiff/Defendant to the Counterclaim/Appellant, Intact Insurance Company
Conor Wyche for the Defendant/Plaintiff by Counterclaim/Respondent, 1367229 Ontario Inc.
Stephanie Quesnelle for the Defendant/Respondent, The Dominion of Canada General Insurance Company
No one appearing for the remaining Parties

HEARD: August 30, 2012

Allen J.

R E A S O N S F O R J U D G M E N T

BACKGROUND

[ 1 ] This is an appeal of an order made by Master Graham dated May 3, 2012 on a refusals and undertakings motion. Master Graham ordered Intact Insurance Company (“Intact”) to answer certain refusals made by Julie Pingree, a representative of Intact, during her discovery conducted in March and July 2010.

[ 2 ] The factual context to this motion is an explosion that occurred on August 10, 2008 at the premises of 1367229 Ontario Inc. (“Sunrise”), a propane storage and distribution facility in Toronto. Damage was caused to the land and buildings occupied by Sunrise and to surrounding properties.

[ 3 ] At the time of the explosion Sunrise was covered by a commercial general liability policy with Intact (“the Policy”). SSY Marathon Insurance Brokers is the brokerage firm that arranged the Policy with Sunrise. Teskey Construction Limited is the landlord of the premises occupied by Sunrise. The Dominion of Canada General Insurance Company (“Dominion”) is the insurer of Teskey.

[ 4 ] From August 2008 to May 2009 Intact conducted an investigation into coverage. Intact concluded it was not obligated to provide coverage and on May 5, 2009 Intact refused coverage under the Policy. Certain documents and communications generated during that period are the subject matter of the questions and refusals on this motion.

[ 5 ] On June 12, 2009, Intact commenced an action seeking, among other relief, a declaration that the Policy is void ab initio . Sunrise counterclaimed that the Policy was in force and among other claims, that Intact had breached its duty of good faith.

The Questions and Refusals

[ 6 ] Counsel for Sunrise examined Ms. Pingree for discovery as a representative of Intact who was involved in the decision to refuse coverage. Sunrise brought the motion before Master Graham to compel answers to refusals to the following questions:

Q 650 To produce the memo of August 2008 that says Michelle Pencham was the underwriter who originally accepted the risk for 1367229 Ontario Inc.

Q 720 To produce the August 18, 2008 memo/minutes from the meeting with Erin Imbeau, Tracey Laughlin, and Michelle Pencham, and the January 20, 2009 memo/minutes from the meeting with Erin Imbeau, John David and Angela Emerson

Q 1373 To produce a complete copy of the claims file

Q 1541 To produce a copy of a note from Angela Emerson stating: “... ING does not wish to do anything which might later be suggestive of a firm coverage...”

Q 1550 To produce the entire claims file up until the point counsel was appointed

COUNSEL’S ARGUMENT AND COURT’S ANALYSIS

Standard of Review

[ 7 ] Intact did not seek the protection from disclosure of the refused documents on the basis of lawyer/client privilege. Intact based its argument before Master Graham on litigation privilege.

[ 8 ] Intact submits it is appropriate to raise lawyer/client privilege on this appeal. That is, Intact argues the appellate court reviewing a master’s decision has the jurisdiction to conduct a de novo hearing into matters that were before the master where privilege is an issue. For that proposition Intact relies on two rather dated cases of this court [ Smithiyapalan v. The Citadel General Assurance Company , File No 01-CV-206366, July 22, 2004 (Ont. S.C.J.), (unreported) and Agrico Canada Ltd. v. Stewart, Smith (Canada) Ltd. (Insurers and Underwriters of) , [1994] O.J. No. 2334 (O.C.J – Gen. Div.]. In those cases a hearing de novo was allowed under circumstances where the privileged nature of documents was at issue.

[ 9 ] A later case changed the direction of the law in this area. The Ontario Divisional Court in Zeitoun v. Economical Insurance Group , 2008 20996 (ON SCDC) , upheld by the Ontario Court of Appeal, addressed the issue of de novo hearings of masters’ motions in the context of considering the deference that should be accorded masters’ decisions. Low, J. had this to say:

In my view there is no justification in principle why the standard of review applied on appeals from judges ought not to be applied equally to appeals from masters. That appeals from masters have been permitted to be treated as a de novo hearings in some circumstances appears to have been driven in large degree by historical notions of hierarchy and prerogative that now warrant re-examination in light of (a) the evolution and rationalization of standards of review in Canadian jurisprudence, (b) the expansion of the role of the master within Ontario’s civil justice system, (c) the values of economy and expediency expressed in the general principles underlying the Rules of Civil Procedure (see Rule 1.04), and (d) the difficulty and contentiousness in deciding in each case whether the interlocutory order appealed from is one which is vital to the final issue in the case.

[ Zeitoun v. Economical Insurance Group , 2008 20996 (ON SCDC) , [2008] O.J. No. 1771, (Ont. S.C.J. – Div. Ct); affirmed by Ont. C.A. at 2009 ONCA 415 ].

[ 10 ] Low, J. held that a master’s decision can only be interfered with on an error of law, on an exercise of discretion on the wrong principles or on a misapprehension of the evidence by the master such that there is a palpable and overriding error [ Zeitoun v. Economical , supra , para. 40].

[ 11 ] In a subsequent decision, the Ontario Court of Appeal held:

Based on this court’s recent decision in Zeitoun v . Insurance Group (2009) ONCA 415, it is now settled law in Ontario that an appeal from a master’s decision is not a rehearing. Rather, on questions of fact and mixed fact and law, deference applies and the role of the reviewing court is limited. An appellate court cannot substitute its interpretation of the facts or reweigh the evidence simply because it takes a different view of the evidence from that of the master. On questions of law, the correctness standard applies:

[ Wellwood v. Ontario (Provincial Police) , 2010 ONCA 386 , para. 28 , (Ont. C.A.) . Also see Moore v. Bertuzzi , 2012 ONSC 3248 , paras. 61-63 , (Ont. S.C.J.) and Kennedy v. Toronto Hydro-Electric System Ltd , 2012 ONSC 2582 , at para. 22 , Ont. S.C.J.)]

[ 12 ] On a standard of correctness my review is therefore restricted to determining whether the master erred in law, applied wrong principles or misapprehended the evidence. I have no jurisdiction to hear the matter again or consider evidence and issues that were not before Master Graham.

Lawyer/Client Privilege

[ 13 ] Even assuming for the purpose of dealing with some of Intact’s arguments that I were to consider lawyer/client privilege, I find Intact would not meet the requirements to establish lawyer/client privilege.

[ 14 ] The basic principles that govern lawyer/client privilege are commonly known. The party seeking the privilege has the onus of showing on a balance of probabilities an evidentiary basis for the privilege [ General Accident Assurance Co. v. Chrusz , 1999 7320 (ON CA) , [1999] O.J. No. 3291, at para. 95 , (Ont. C.A.)]. It is well known that privilege does not attach to all communications or documents that pass between a lawyer and their client. The privilege attaches only when legal advice is sought from or provided by the client’s lawyer [ Davies v. American Home Assurance Co. (2002), 2002 62442 (ON SCDC) , 60 O.R. (3d) 512, at para. 22 , (Ont. S.C.J.-Div. Ct.)].

[ 15 ] The party seeking the privilege must show on a balance of probabilities that the documents in question are (a) a communication between a solicitor and client for the purpose seeking or giving legal advice and (b) the parties intended it to be confidential [ Belgravia Investments Ltd. v. Canada , [2002] F.C.J. No. 870, para. 48, (F.C.T.D.) ].

[ 16 ] Intact contends Master Graham erred in not considering lawyer/client privilege in ordering answers to the refusals. Intact points to the sanctity of the privilege and the critical role the privilege plays in protecting rights of litigants and ensuring the proper conduct of litigation. It argues the issue of lawyer/client privilege naturally emerges from the portions of the claims investigation record that involve Intact’s lawyers meeting and communicating with Intact representatives − that the record before the Master was replete with references where lawyer/client privilege might have been considered.

[ 17 ] For instance, Intact points to areas of the transcript that refer to:

• the claim being transferred from the claims department to legal counsel on August 18, 2008 (Transcript, p. 307, Q. 1368);

• the presence of the two lawyers’ retained in discussions about coverage and in decisions before the May 5, 2009 refusal (Transcript, p. 246 , Q. 1099, p.p. 246-248, Q. 1103-1112);

• the August 18, 2008 discussions by two lawyers retained by Intact with Intact underwriting personnel (Transcript, p. 267, Q. 1191);

• the agreement on the record by Sunrise’s counsel that the discussions between the lawyers retained by Intact and Intact representatives would be covered by privilege. (Transcript, p. 266, Q. 1190); and

• the notes resulting from the January 20, 2009 meeting with the lawyers Intact retained and a witness (Transcript, p. 267, Q. 1193); and the reference that the lawyers for all parties were involved from the “get-go” in August 2008 (Transcript, p. 331, Q. 1476).

[ 18 ] The respondents Sunrise and Dominion made substantially similar arguments on both lawyer/client and litigation privilege. To avoid duplication, Dominion relied in large part on Sunrise’s materials.

[ 19 ] As a general submission, the respondents assert it is not their intention to seek access to material that is covered by lawyer/client privilege. They are simply challenging Intact’s attempt to gain blanket protection over documents when it has failed in its obligation to show a clear evidentiary basis to justify the protection.

[ 20 ] As the respondents submit, and I agree, Intact’s above references from the record go no distance in discharging Intact’s burden to demonstrate an evidentiary basis for the privilege. At best the references give only cursory information. They inform us that lawyers were present at telephone conferences and interviews where coverage and refusal were discussed, that the claims file was referred to counsel on August 18, 2008 and that lawyers were present when a witness was interviewed on January 20, 2009. Regarding Sunrise’s counsel’s acknowledgment during discovery that lawyer/client privilege applied to some documents, it is not a novel notion that comments by lawyers are not evidence [ Belgravia Investments Ltd. v. Canada , supra , at para. 66].

[ 21 ] Privilege does not attach to all communications between a lawyer and their client. A party seeking privilege cannot simply cloak notes, documents or communications with privilege merely because a lawyer was involved or handled the documents [ Davies v. American Home, supra , para. 22]. Intact provided no details as to the nature of the lawyer’s involvement − no proof that the memoranda and emails that are the subject of the refusals establish the giving or receiving of legal advice. That is, t here are no statements in either the transcripts of Ms. Pingree’s discovery or in the affidavit of Intact’s counsel Krista Springstead − that were before Master Graham − that any of the subject documents contain legal advice or were generated for the purpose of giving or receiving legal advice.

[ 22 ] A claim of privilege will not be established by merely asserting it. With respect to the claim to lawyer/client privilege on portions of the January 20, 2009 memo /minutes and the claims file, Intact was required at a minimum to provide a sworn affidavit or viva voce evidence setting out the basis of the claim to lawyer client privilege.

[ 23 ] Intact neither met that requirement before the master nor before me on this appeal, despite its request for another chance to make its case.

[ 24 ] Master Graham held there was no evidence before him as to the specific roles played by the lawyers. He stated:

Although lawyers were involved in the creation of those documents, in the absence of any evidence as to the role of the lawyers at the time that the documents were prepared…

[Decision of Master Graham, May 3, 2012, at para. 9]

[ 25 ] I therefore cannot find Master Graham made an error of law or exercised his discretion on the wrong principles or misapprehended the evidence such that there is a palpable and overriding error.

Litigation Privilege

[ 26 ] A party seeking litigation privilege is required to establish (a) that litigation was contemplated and (b) that the documents for which privilege is sought were created for the dominant purpose of litigation [ Mamaca (Litigation Guardian of) v. Coseco Insurance Co , 2007 9890 (ON SC) , [2007] O.J. 1190, at paras. 6 , 14, 16, 17, 22 and 23 (Ont. S.C.J.) and Kennedy v. McKenzie and Tischler , 2005 18295 , at paras. 20 and 23 (Ont. S.C.J)].

[ 27 ] Intact claims against Sunrise’s bad faith allegation. Courts have held that where the documents at issue are pertinent to a bad faith claim by an insured against their insurer, the insurer asserting litigation privilege over the documents must provide an evidentiary basis for the claim to privilege. The insurer must provide affidavit evidence from the claims handler to establish on a balance of probabilities that litigation was likely and that the ongoing investigation and generation of the documents was for the dominant purpose of assisting in the defence of that litigation [ Mamaca , supra , paras. 6, 15, 16, 18, 19 and 22 and Davies v. American Home , supra , para. 36].

[ 28 ] Again, Intact makes a broad assertion with respect to its entitlement to the protection of litigation privilege over the subject documents. Intact asserts that with such a momentous explosion it stands to reason that litigation would be contemplated from August 2008 and hence during the investigation period until the refusal on May 5, 2009. The problem with Intact’s position, as the respondents point out, is that a good faith defence runs counter to the requirement that litigation be the dominant purpose for communications and the generation of documents. Put another way, good faith during the claims investigation phase requires an open mind or neutrality on the part of the insurer, not an orientation toward litigation.

[ 29 ] In her answers to questions about the dominant purpose for the generation of the subject documents, Ms. Pingree’s responses displayed the tension in Intact’s position. The following excerpt from Ms. Pingree’s viva voce evidence at discovery, I find, belies Intact’s position.

Q. 1587 And until you made your final decision you had not pre-determined what the result of that investigation would be? You had not said, “We are going to do this investigation and then we are going to deny coverage.”

What you were doing is saying, “we are going to give this investigation and if there is a misrepresentation we will deny coverage, but until we have made that determination we have got an open mind”; that is fair?

A. That is fair, yes,

Q. 1592 Were you contemplating litigation?

Was Intact contemplating that you were going to be bringing an application to deny coverage to void the policy before you made up your mind as to whether or not there was coverage? Were you saying, “We think, we are going to bring an action to say that”, I will call them Sunrise, but, “The numbered Company has no coverage under this policy before we made the decision”?

A. We were contemplating all possibilities, so that was one possibility that was contemplated, yes.

Q. 1593 Well, was it the major possibility or was the major [sic] when you were doing this investigation was to do a good faith investigation as to whether or not there was coverage?

A. Well, of course we were doing a good faith investigation into coverage. The end result of all of that investigation could have been a number of different things happening.

Q. 1594 It could have been that there was coverage?

A. That is right.

Q. In which case there would be no litigation?

A. That is right

[ 30 ] Master Graham held as follows at paragraph 2 of his decision applying the principles expressed in Mamaca v Coseco Insurance , supra :

1. The document was prepared for the dominant purpose of assisting the party in actual or contemplated litigation. There must be a reasonable prospect of litigation but more than a mere suspicion. ( see Mamaca v. Coseco Insurance Co. 2007 9890 (ON SC) , [2007] O.J. No. 1190 at paragraph 13 ).

2. In an insurance context, there is a distinction between the creation of a document for the dominant purpose of investigation and claim determination as opposed to creation of the document for the dominant purpose of anticipated litigation. ( Mamaca , supra , at paragraph 14 ).

3. The onus is on the party claiming litigation privilege to lay an evidentiary foundation for that privilege. The best evidence would be an affidavit from the claims handler as to when she reasonably anticipated that litigation was likely and why her ongoing investigation and document creation as to assist in the defence of the litigation.

( Mamaca , supra , at paragraph 15 )

[ 31 ] The determination of when there is a dominant purpose of litigation is a question of fact. Therefore a finding by a master on this issue should be interfered with only where there is an overriding and palpable error [ Juliana Fine Furniture v. Zurich 5014 (ONSC), at para, 18, (Ont. S.C.J.)].

[ 32 ] Intact put forth no sworn evidence that litigation was being contemplated as a dominant purpose. Insurers have an obligation to conduct a good faith investigation into whether or not there would be coverage and until that investigation is complete the insurer could not logically contemplate litigation as a dominant consideration. Ms. Pingree confirmed that Intact was conducting a good faith investigation into coverage before it refused the claim.

[ 33 ] Master Graham cited Ms. Pingree’s answers to questions 1591 to 1596 and found as a fact that litigation was one among other possibilities being contemplated and that there was a possibility there would be coverage and therefore no litigation.

[ 34 ] Intact submits the master erred in conflating the issues of lawyer/client and litigation privilege in the last sentence of paragraph 9 of his decision. I find that sentence perhaps is not stated as clearly as it might have been. However, I see no error in law that detracts from the master’s ultimate determination that Intact failed to establish that lawyer/client or litigation privilege apply to protect the subject documents.

[ 35 ] I cannot find Master Graham erred in his finding there was insufficient evidence to support a claim of litigation privilege.

CONCLUSION

[ 36 ] Intact failed to provide evidence to support the applicability of privilege. Accordingly, the documents at issue are producible.

COSTS

[ 37 ] Counsel submitted costs outlines. Inclusive of disbursements and H.S.T., Intact’s counsel seeks $6,808.82, Sunrise’s counsel $6,355.34 and Dominion’s counsel $2,642.72. Sunrise and Dominion were successful and are entitled to costs. I fix costs to Sunrise at $6,500 and to Dominion at $2,500 inclusive of disbursements and H.S.T.

ORDER

[ 38 ] Order accordingly.

Allen J.

Released: September 18, 2012

COURT FILE NO.: CV-09-380884
DATE: 20120918

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Intact Insurance Company (Plaintiff/Appellant) - and – 1367229 Ontario Inc. (Defendant / Respondent), SSY Marathon Insurance Brokers Inc. (Defendant), Teskey Construction Company Limited (Defendant) and The Dominion of Canada General Insurance Company (Defendant/Respondent) BETWEEN: 1367229 Ontario Inc. (Plaintiff by Counterclaim) - and – Intact Insurance Company, SSY Marathon Insurance Brokers Inc. and John Moulatziotis (Defendants to the Counterclaim)

REASONS FOR JUDGMENT

ALLEN J.

Released: September 18, 2012