Canadian Underwriter

Why an adjuster’s notes are out of bounds in this subrogation case

December 14, 2020   by David Gambrill

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When The Co-operators quickly notified a third-party insurer, AIG Inc., upfront of its intention to pursue a subrogation claim against AIG’s client in an oil spill case, little did The Co-operators know the move would later backfire when it came time to accessing the notes of AIG’s claims adjuster.

The Nova Scotia Supreme Court recently held that the adjuster’s notes — which are central to a dispute between The Co-operators and AIG over the validity of a two-year limitation period — are protected by litigation privilege.

In Colman v. AAA Plumbing and Heating Limited, the court found that The Co-operators, a first-party insurer, and AIG, a third-party insurer, were in an adversarial relationship from the outset of a two-year settlement negotiation that dragged out until the two-year limitation period had ended.

The adjuster’s notes, the court found, were subject to litigation privilege because they were created at a time when litigation regarding a subrogation claim against the third-party insurer, AIG, was in “reasonable prospect,” and “the dominant purpose of the file was to prepare for that litigation, whether by a trial or negotiated settlement.”

The Co-operators contends that the adjuster’s notes prove an admission of liability on the part of AIG, which would re-set the limitations period. That dispute is still to be decided in court.

In Colman, the plaintiffs, Russell Colman and William Palanderan, discovered a fuel oil leak from a tank that had been installed on their property by the defendant, AAA Plumbing and Heating.

On the same day the leak was discovered, the plaintiffs contacted AAA and their own insurer, the Co-operators.

The Co-operators’ claims notes, dated on Dec. 29, 2016, indicate that a letter of notice would be sent out to AAA advising them of potential subrogation.

An insurance adjuster with the firm ClaimsPro, Shane Walker, was retained by AAA’s insurer, AIG Inc. On Jan. 23, 2017, Michael Buckley, a claims representative with the Co-operators, wrote a letter to Walker. The letter said in its entirety:

“Our investigation indicates that your insured [AAA] is responsible for damages sustained to our insured’s property. This letter serves as notice of our intent to recover our subrogated interest. We will forward our supporting documentation once the claim has been finalized. If you have any questions, please feel free to contact me.”

Over the next two years, between January 2017 and June 2019, Buckley and Walker, representing The Co-operators and AIG Inc. respectively, tried to reach an agreement about AAA’s liability for the leak and the value of the loss. The Co-operators contends that Walker’s correspondence made it “obvious” to Buckley that AIG had accepted liability and was interested in settling the claim.

But things changed on June 4, 2019. On that day, Buckley sent an email to Walker indicating that unless a settlement offer was received by June 7, 2019, Buckley would recommend that The Co-operators retain counsel and start a subrogation action.

Walker responded by saying AIG had instructed him to advise The Co-operators that, because the two-year limitation period had expired, AIG would not accept responsibility for the claim.

The Co-operators took AIG’s decision to court. It said that when it notified AAA of the oil leak and of the plaintiffs’ intent to recover the loss from AAA, there was no reason for any party to have anticipated litigation. “Many losses and claims are investigated, discussed, and settled by the insurers without any prospect that litigation will be required,” as the court framed The Co-operators’ position. “In this case, the exchanges between Mr. Buckley and Mr. Walker suggest that the parties were working on resolution of the matter.”

Also, The Co-operators argued, AAA could not rely on the two-year limitation period as a defence because they had acknowledged liability, which AAA denied in its statement of defence. The Co-operators said the proof of admission was contained in Walker’s notes, but the court found the adjuster’s notes to be protected by privilege.

“When the third-party insurer, AIG Inc., was advised [in The Co-operators’ January 2017 letter] that there would be a subrogation claim in this case, litigation became a reasonable prospect,” the Supreme Court of Nova Scotia ruled. “The nature and value of the claim was such that the notice provided by the Co-operators could not reasonably be considered an idle threat, a warning that the Co-operators were considering a claim or an opening gambit.

“The investigation done by the adjuster [Walker] was for the dominant purpose of responding to that litigation, whether by preparing for a trial or settlement of the claim.  The adjusters’ investigations in this case served no other purpose. The documents provided to the court for review confirm that.”

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