Settlement Privilege

Settlement privilege is unequivocally about access to justice. The very purpose of settlement privilege is to promote settlement and avoid the expense and time in extended litigation. The law of privilege establishes the scope of protection to facilitate settlement discussions so that disputes can be resolved efficiently.

The insurance industry in Canada revolves around risk assessment and the efficient means to resolve claims disputes. While in contemplation of litigation, any settlement negotiations about insurance claims are protected under the common law rule of privilege whereby such communications are presumed inadmissible.

The elements of settlement privilege are: “(1) litigation had been commenced or was within contemplation; (2) the communication was made with the express or implied intention it would not be disclosed; and (3) the purpose of the communication was to bring about a settlement,” (The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension v. SNC Group Inc., 2013, ONSC 6297). For privilege, it is unnecessary to expressly denote communications as “without prejudice” or “in contemplation of litigation,” although the practice is recommended.

There may be early attempts to settle insurance claims where the issues are clear and fault ascertainable. Legal counsel may explore settlement upon review of the relevant documents and expert reports, and throughout the stages of litigation. For example, settlement opportunities may arise at the various stages of production, discoveries, mediation, pre-trial and trial. Strategically, the plaintiff may enter into a settlement agreement with one or more defendants so as to increase pressure on the remaining parties and achieve a global settlement. This strategy has been effective for mediation in complex claims involving multiple parties.

Another example is where the plaintiff settles early with one or more defendants to demonstrate that it is open to compromise or where such an arrangement would provide access to key witnesses, experts, and documents or other information that could facilitate the trial of the action as against the remaining parties. There may be groups of defendants with common issues or positions that call for early settlement, even if only to avoid the risk of costs against. Insurance policy limits and coverage issues may come into play. The plaintiff may also settle with third parties to shift the focus and increase pressure back to the remaining defendants.

Partial settlement can be especially effective where the remaining parties are ill prepared for trial and lack expert opinion or key witnesses. This form of settlement can quickly change the tone of a mediation or trial, for example, and instill uncertainty or even fear in the minds of opponents. At least, the strategies focus dispute resolution and narrow the pending trial, and therefore minimize legal costs.

For more complex disputes involving multiple parties and issues, the plaintiff may wish to settle with some but not all defendants. There is value where partial settlement results in the plaintiff receiving money now from the settling defendants, and where the remaining defendants are no worse off and possibly in a better position in their exposure at trial. Over the years the law has fashioned a framework for the protection of settlement negotiations from disclosure and any exceptions, culminating in a recent decision by Canada’s highest court.

Last summer, the Supreme Court of Canada released Sable Offshore Energy Inc. v. Ameron International Corporation (2013 S.C.C. 37), which considers the issue of settlement privilege and the disclosure of partial settlement agreements and amounts for the first time. The Supreme Court endorsed the Pierringer agreement, which came from the 1963 Wisconsin decision of Pierringer v. Hoger, 124 NW 2d 106 (Wis 1963). It provides plaintiffs with a way to discontinue their action against the settling defendants while still proceeding against the remaining defendants. This form of agreement severs joint liability between the settling and remaining defendants so that the latter are responsible for only the loss they actually caused.

In Sable Offshore, the owner of a number of offshore structures and onshore gas processing facilities in Nova Scotia brought a number of actions in negligence, negligent misrepresentation and breach of collateral warranty against the contractors and applicators responsible for preparing surfaces and applying paint to parts of these structures, and then settled with some of the defendants under Pierringer agreements. At issue is the failure of paint to prevent corrosion.

Although the terms of the Pierringer agreements were disclosed to the remaining defendants, the amount of the settlement was not. The remaining defendants then brought a motion to disclose the amounts, arguing that non-disclosure would undermine their fundamental right to know the case to meet. The motion was dismissed at trial. The Nova Scotia Court of Appeal overturned the trial decision and granted disclosure of the amounts.

The Supreme Court of Canada in Sable Offshore disagreed and found that the Pierringer agreement was acceptable and that settlement negotiations are protected, whether or not a settlement is reached. In a well-written decision, Justice Abella for the entire Supreme Court confirms that settlement privilege is a class privilege that creates a presumption of inadmissibility. The public interest in encouraging settlement outweighs the competing public interest in disclosure.

The effect of a Pierringer agreement is that joint liability between the settling defendants and the remaining defendants is severed so there is no right of contribution and indemnity between these two groups. While the settling defendants are removed from the action, the exposure of the remaining defendants to judgment is reduced by the settlement amounts.

(The Pierringer agreement is often compared to another form of settlement, the Mary Carter agreement, where the settling defendant settles with the plaintiff but remains in the action and may pursue cross-claims against the remaining defendants. In the latter situation, the settling defendants guarantee the plaintiff a certain amount of recovery and the exposure of the settling defendant is then capped at that amount. The settling defendant’s liability is then decreased in direct proportion to any recovery above the specified amount.)

Pierringer agreements in Canada have evolved since their adoption from American jurisprudence. Sable Offshore solidifies settlement privilege and recognizes a narrow public interest exception. Settlement privilege applies regardless of whether negotiations lead to settlement or not. Settlement amounts in Pierringer agreements are privileged but must be disclosed to courts after trial and upon a finding of liability so as to avoid any over-compensation of the plaintiff.

As a result of Sable Offshore, the legal landscape for settlement discussions and agreements has become more transparent. Partial settlement agreements, such as Pierringer and Mary Carter agreements, provide yet another method in the litigator’s array that can assist the insurance industry towards more timely and efficient resolution of disputes.

Albert Wallrap is a member of Canadian Defence Lawyers (CDL) and an associate at Dutton Brock LLP. His practice focuses on insurance defence, subrogation, and coverage matters, often with engineering or construction issues. CDL is the only national organization representing the interests of civil defence lawyers. It offers broad opportunities to unite the defense bar over common issues as well as providing accredited continuing legal education.