The Alberta Court of Queen’s Bench analyzed the application of solicitor-client and litigation privilege in separate, but related tort and insurance actions and confirmed that both the insureds and the insurer are clients of insurer-appointed counsel in the tort action.
Pederson v Allstate Insurance, 2019 ABQB 531, per Henderson, J.
Facts + Issues
The plaintiff, Pederson, was injured in a motor vehicle collision on February 23, 2003. Her vehicle was rear ended by a Dodge Shadow which then fled the scene of the collision.
Ms. Danyluk was the registered owner of the Dodge Shadow and she had an insurance policy with the Defendant, Allstate Insurance Company of Canada (“Allstate”), which covered the Dodge Shadow. Danyluk claimed that the Dodge Shadow had been stolen from her before the collision and that it had never been recovered.
Two months after the collision Danyluk applied to remove the Dodge Shadow from the policy, although she had not reported the collision. Her insurer Allstate later learned of the collision for the first time in May 2003 when Pederson inquired as to whether or not the vehicle was stolen. Allstate was thus prompted to open its investigation into the claim pursuant to a Non-Waiver Agreement entered into with Danyluk. In August 2003 Danyluk submitted a claim for the vehicular damage to Allstate supported by a Proof of Loss.
In July 2004, Pederson commenced a personal injury action for damages she suffered in the collision (the “personal injury action”). She initially advanced the claim against the Administrator of the Motor Vehicle Claims Act on the basis that the vehicle had been stolen at the time of the collision. In January 2005, Pederson amended her claim to name Danyluk as a Defendant and in December 2005 Allstate filed a Defence on her behalf, alleging that the vehicle had been stolen.
In September 2006, the Motor Vehicle Accident Claims fund paid Pederson the statutory maximum of $200,000.
In March 2008, Pederson further amended her claim in the personal injury action to name Danyluk’s son Norton as a Defendant. In July 2008 Allstate appointed Sermet as counsel to defend Norton pursuant to a Non-Waiver Agreement entered into by him.
In April 2010, Norton’s partner testified in an examination on affidavit that at the time of the accident Norton was driving the vehicle and that she, Norton and their child lived in Danyluk’s home.
In July 2010, after Allstate denied coverage to her, Danyluk signed a second Non-Waiver Agreement with Allstate which “specified that the Dodge Shadow was owned and ‘utilized’ by Mr. Norton and that Ms. Danyluk did not have an insurable interest in the vehicle”. Allstate went on to broaden Sermet’s retainer and continue to defend Danyluk and Norton. The Defence continued to maintain that the Dodge Shadow had been stolen.
At the liability trial of the personal injury action in 2012, the trial judge found that the Dodge Shadow had not been stolen, but instead had been operated by Norton at the time of the collision. The trial judge found that Danyluk and Norton were liable for Pederson’s injuries and, in November 2016, the Court awarded Pederson damages of $1.5 million.
In July 2017, Pederson commenced action against Allstate in July 2017 to recover from Allstate pursuant to s. 579(1) of the Insurance Act (the “s. 579(1) Action”) damages over and above the minimum statutory limits of $200,000 (which amount the Fund had already paid). Allstate defended on the basis of breach of policy on the part of Danyluk, denying that it had waived its right to rely on her policy breaches and fraud and denying that it was estopped from relying on said breaches.
In the s. 579(1) Action, Allstate refused to produce certain records in its possession relating to the personal injury action against Danyluk and Norton on the basis that the records were protected by solicitor-client or litigation privilege. Allstate also refused to answer undertakings given at Questioning because it claimed some were covered by litigation privilege and others were irrelevant.
Pederson applied for the disclosure of some of the records which Allstate claimed were privileged and sought answers to the refused undertakings.
The Court was therefore faced with the following main issue: to what extent did claims for privilege that arise in relation to the personal injury action survive and protect the disclosure of documents in the related s. 579(1) action?
HELD: For the plaintiff in part; Allstate did not have to disclose records or portions of records from the personal injury action were covered by solicitor-client privilege, but had to disclose records and answer undertakings over which it claimed litigation privilege, and answer some of the undertakings refused on the basis of irrelevancy.
The Court commented on solicitor-client privilege as a concept that had come to be substantive law:
 The Supreme Court has on numerous occasions underlined the paramount significance of “solicitor-client privilege” which has evolved from a rule of evidence to a rule of substantive law. The Court has emphasized that this form of privilege “must be as close to absolute as possible to ensure public confidence and retain relevance”: Blank v Canada (Department of Justice),  2 SCR 319, 2006 SCC 39 (CanLII) at para 24; R v McClure,  1 SCR 445, 2001 SCC 14 (CanLII). As a result, “solicitor-client privilege” has been strengthened, reaffirmed and elevated in recent years and has been broadly interpreted by the Supreme Court: Blank at paras 50 and 61.
 The purpose of “solicitor-client privilege” is to protect the relationship between a lawyer and a client by facilitating full, free and frank communication between a lawyer and client in a way which permits the client to obtain appropriate legal advice. Confidentiality is the “sine qua non” of “solicitor-client privilege” and therefore the privilege applies only to confidential communications between a solicitor and a client: Blank at para 32.
 Solicitor‑client privilege is subject to very limited exceptions including public safety, innocence of the accused at stake and criminal communications. A further exception recognized in Blank relates to evidence of the claimant party’s abuse of process or similar blameworthy conduct. Other exceptions may be identified in the future, but they will always be based on narrow classes that apply in specific circumstances.
The Court went on to hold that solicitor-client privilege applied to communications between Sermet and Danyluk in the personal injury action, as well as Allstate’s internal communications discussing legal advice and that this solicitor-client privilege survived the end of the personal injury action. As such, Allstate did not have to disclose those records covered by the privilege in the s. 579(1) action:
 The Plaintiff acknowledges that the solicitor-client privilege asserted by Allstate survives the conclusion of the underlying litigation and therefore she does not seek the disclosure of any documents on that basis. Furthermore, the Plaintiff does not argue that the solicitor-client privilege asserted by Allstate has come to an end by waiver of privilege or otherwise. Instead, the Plaintiff argues that even in those situations where a document may be subject to solicitor-client privilege, the whole of the document is not necessarily protected by privilege. The Plaintiff argues that portions of the document may be properly privileged but other portions may not be privileged. The Plaintiff seeks disclosure of the non-privileged portions of the documents.
With respect to the communications between Sermet and Danyluk in the personal injury action, the Court determined that both Danyluk and Allstate were Sermet’s clients and the solicitor-client privilege applied to the communication of legal advice to both.
- The Court held as follows:
 With respect to the communications between Mr. Sermet and Ms. Danyluk, it is necessary to consider the nature of the relationship between Allstate, Ms. Danyluk and Mr. Sermet. Where an auto insurer such as Allstate retains counsel to defend an action on behalf of a person who is insured under a policy of insurance, the lawyer owes a duty of good faith and loyalty to both the insurer and the insured. Both are clients. The clients may have different interests and for this reason the retainer of the lawyer must necessarily be restricted to the issues where the interests of the two clients are common. Thus, for example, Mr. Sermet would have been prohibited from providing either Allstate or Ms. Danyluk with any advice with respect to the insurance coverage issues that may have existed at that time. Instead, his retainer must necessarily have been restricted to the issues relating to the Collision, both liability and quantum.
 As clients, both Allstate and Ms. Danyluk were entitled to confidentiality as between the lawyer and the outside world, but there was no confidentiality obligation as between the two clients. Any information obtained by Mr. Sermet, whether from Allstate, Ms. Danyluk or from any other source, would necessarily have been available for disclosure to either or both of the clients.
 The communications between Mr. Sermet and Ms. Danyluk occurred while a solicitor-client relationship existed. Those communications are, on their face, privileged. Several of the documents are specifically referred to in the Affidavit of Records as having been created for the purpose of giving legal advice – for example Document E56 refers to a communication between Ms. Sermet and Ms. Danyluk as being “legal advice”. Document E82 refers to a communication between Mr. Sermet and Ms. Danyluk and is described “re: status of file and providing legal advice”. Some of the documents are innocuous. For example, Document E3 is described as “Correspondence from counsel Jeffrey Sermet to Rayona Mae Danyluk advising of retainer.
 The privilege which arises in relation to all of these documents is for the benefit of both Allstate and Ms. Danyluk. Ms. Danyluk is not a party to these proceedings and has not been asked whether she wishes to make any submissions as to privilege over the documents. She has certainly not waived any privilege.
 The documents on their face are privileged. Bearing in mind the privilege “must be as close to absolute as possible to ensure public confidence and retain relevance”, it would not be appropriate to require Allstate to disclose the documents which consist of communications between Mr. Sermet and Ms. Danyluk. The communications are subject to solicitor-client privilege.
- With respect to documents consisting of internal Allstate communications, the Court held that solicitor-client privilege only applied to those portions discussing legal advice but not those portions that were merely status updates. Allstate was ordered to produce the latter:
 With respect to the five documents that consist of internal Allstate communications, different considerations apply. The Affidavit of Records generally describes these documents as “Status of file and legal advice”.
 The portions of the documents that describe legal advice received are subject to privilege. That legal advice may have been from Mr. Sermet or from Mr. Carr or from some other lawyer who had been retained to provide advice with respect to the coverage issues. No matter the source of the legal advice discussed in the Allstate communications, those portions of the documents which relate in any way to the legal advice are subject to solicitor-client privilege and may not be produced.
 However, to the extent that the documents are status reports that do not relate to legal advice received, there is no solicitor-client privilege associated with those portions of the documents. A party cannot shield a relevant document from production simply by making reference in one part of the document to legal advice.
The Court set out the principles relating to litigation privilege and distinguished it from solicitor-client privilege:
- The Court held as follows:
 In Lizotte v Aviva Insurance Company of Canada,  2 SCR 521, 2016 SCC 52 (CanLII), the Supreme Court of Canada considered the nature and scope of litigation privilege. The Court explained that although litigation privilege is distinguishable from solicitor‑client privilege, it is nevertheless a class privilege and gives rise to a presumption of inadmissibility for a class of communications, namely those whose dominant purpose is preparation for litigation. Thus, any document that meets the conditions for the application of litigation privilege will be protected by an immunity from disclosure unless the case is one to which one of the exceptions to that privilege applies.
 The exceptions that apply to solicitor‑client privilege discussed above, apply equally to litigation privilege.
 Litigation privilege does not have the same status and is less absolute than solicitor‑client privilege. However, Lizotte makes it clear that litigation privilege is fundamental to the proper functioning of our legal system and is central to the adversarial system. The parties’ ability to confidently develop strategies knowing that they cannot be compelled to disclose them is essential to the effectiveness of the adversarial process. Litigation privilege cannot therefore be abrogated by inference, and clear, explicit and unequivocal language is required in order to lift it.
- In particular, the Court noted that unlike solicitor-client privilege, litigation privilege does not survive the conclusion of the subject litigation:
 One significant difference between solicitor-client privilege and litigation privilege is the duration of the privilege. Solicitor-client privilege is permanent whereas litigation privilege is for a limited duration. This is because the purpose of the litigation privilege is intended to create a “zone of privacy” in relation to pending or apprehended litigation. When that litigation is concluded, there is no need and no reason to maintain the “zone of privacy” and thus the purpose of the privilege has come to an end. For this reason, there is no need to protect from discovery in other litigation anything that would have been subject to litigation privilege in the first litigation.
 As a result, the general rule is that litigation privilege comes to an end at the conclusion of the litigation because there is no longer any need or reason to protect the records from disclosure.
- The Court noted that determining the point at which the litigation concludes along with its related litigation privilege, is not always straightforward. The subject litigation can include separate but related actions that qualify as “closely related proceedings”.
 Determining when litigation privilege comes to an end can pose some challenges where other related litigation is in progress. As Justice Fish in Blank explained at para 36:
... litigation privilege comes to an end, absent closely related proceedings, upon the termination of the litigation that gave rise to the privilege: Lifford; Chrusz; Big Canoe; Boulianne v. Flynn, 1970 CanLII 339 (ON SC),  3 O.R. 84 (H.C.J.); Wujda v. Smith (1974), 1974 CanLII 1350 (MB QB), 49 D.L.R. (3d) 476 (Man. Q.B.); Meaney v. Busby (1977), 1977 CanLII 1311 (ON SC), 15 O.R. (2d) 71 (H.C.J.); Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co. (1995), 176 A.R. 134 (Q.B.). See also Sopinka, Lederman and Bryant; Paciocco and Stuesser
(emphasis added by the Court)
 This principle was more colourfully expressed by Justice Fish at para 34 of Blank:
But to borrow a phrase, the litigation is not over until it is over: It cannot be said to have “terminated”, in any meaningful sense of that term, where litigants or related parties remain locked in what is essentially the same legal combat.
(emphasis added by the Court)
 At para 39, Justice Fish reiterated that, at a minimum, the enlarged definition of “litigation” for the purpose of maintaining litigation privilege includes separate proceedings that have some of the following characteristics:
- The same or related parities
- Litigation arising from the same or related cause of action (or juridical source)
- Litigation raising issues common to the initial action
- Litigation that shares the essential purpose of the initial action.
 Finally, Justice Fish emphasised at para 40 that the boundaries of the continuation of the litigation privilege in the second litigation are limited by the purpose for which litigation privilege is granted, namely, “the need for a protected area to facilitate investigation and preparation of a case for trial by the adversarial advocate (Sharpe, [(“Claiming Privilege in the Discovery Process”, in Special Lectures of the Law Society of Upper Canada (1984), 163] at p. 165)”
 Therefore, the proper test, as established in Blank, for determining whether litigation privilege arising from the first action continues to protect disclosure in relation to a second action, is whether the two actions are closely related proceedings that involve the same or related parties that arise from the same or related cause of action (or juridical source) or which raise common issues and share the same essential purpose.
The Court found that litigation privilege claimed over records prepared for the dominant purpose of the personal injury action did not survive the end of that Action. The Court ordered Allstate to produce documents and answer undertakings over which it claimed litigation privilege relating to the personal injury action.
- Referencing the Blank factors the Court held:
- The s. 579(1) Action was “closely related” to the personal injury action, favouring the continuation of the litigation privilege.
- The two actions did not advance the same cause of action. The personal injury action was based on the tort of negligence and the s. 579(1) Action was based on a statutory cause of action, mitigating against the continuation of the litigation privilege.
- There were no issues common to the two Actions mitigating against the continuation of the litigation privilege:
 There are no issues common to the two actions. In the underlying personal injury action, there were several fundamental issues:
- Who was operating the Dodge Shadow at the time of the collision?
- Was the operator of the Dodge Shadow negligent in the manner of operation?
- Did the negligence of the operator of the Dodge Shadow cause the Collision?
- Was the operator of the Dodge Shadow operating the vehicle with the express or implied consent of the registered owner, Ms. Danyluk?
- Did the Plaintiff suffer any damages as a result of the negligence of the operator of the Dodge Shadow?
- What was the quantum of damages?
 The present action under s 579 of the Insurance Act shares none of those issues. Instead the issues in the present action are:
- Did Allstate issue a motor vehicle liability policy of insurance covering the Dodge Shadow which was in force at the time of the Collision?
- Would the equities as between Allstate and Ms. Danyluk and Mr. Norton have permitted Allstate to deny coverage pursuant to s. 579(12) of the Insurance Act as a result of the breach of the policy or a breach the statutory conditions?
- Has Allstate waived or acquiesced in any policy breaches?
- Has Allstate affirmed coverage despite any policy breaches?
- Is Allstate estopped from relying on any policy breaches?
- Is Allstate liable for punitive damages as a result of its conduct in the handing of the claim?
- The two Actions shared some common purposes but not others, being a neutral factor in this case:
 The Plaintiff’s ultimate goal is to be compensated for her injuries. That was her goal and her purpose in commencing the underlying personal injury action. That continues to be her goal and her purpose in relation to the present proceedings. Viewed from this perspective, the two actions share a common purpose.
 More broadly however, the purpose of the underlying personal injury action was to provide a mechanism to permit the Plaintiff to prove that the individual defendants were liable to her in tort and to prove the damages to which she was entitled. On the other hand, the present action under the Insurance Act is a mechanism which the Legislature has created to permit a balancing of the rights of injured motorists with the rights of Insurance companies that issue motor vehicle liability policies.
- The Court concluded that the two Actions were not sufficiently closely related so as to allow the litigation privilege relating to the personal injury action to continue with respect to the s. 579(1) Action:
 Litigation privilege arose and served to protect the production of records developed by Allstate in the defence of the underlying personal injury litigation. When that litigation ended, so did the litigation privilege. The action commenced by the Plaintiff pursuant to s. 579 of the Insurance Act is not a “closely related proceeding” which would permit the continuation of the litigation privilege arising from the underlying litigation and to prevent the production of documents in the present litigation.
Lastly, the Court ordered that Allstate need not answer undertakings that were hypothetical questions or asked for irrelevant information.
This decision is important for its comments on the extent to which claims of privilege that arise in relation to separate but related tort and insurance actions.
Notably, the Court recognized that when a lawyer is appointed by an insurer to act for its insured, both the insurer and the insured are the lawyer’s clients. As such, solicitor-client privilege applies to communications of legal advice to both the insured and the insurer and that privilege survives the end of a personal injury action. Litigation privilege does not survive the end of a personal injury action to apply in subsequent litigation that is not a ‘closely related proceeding’. This was the case here for Pederson’s s. 579(1) action.