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The Quebec Court of Appeal, in its decision of August 18, 2003 in Groupe DMR inc. v. Kansa General International Insurance Company Ltd. et al. (No.:  500-09-012340-022), has sent some clear signals regarding the conduct of counsel appointed by a liability insurer to take up an insured's defence.

The Quebec Court of Appeal was asked to review two interlocutory rulings by the Superior Court sustaining objections formulated at trial by the respondent Kansa General International Insurance Company Ltd. the effect of which was to prevent Kansa's insured, the appellant DMR Group Inc., from communicating and filing into evidence certain documents pertaining to DMR's claim that were part of its insurer's file.

DMR had been engaged to develop and implement an integrated, centralized computer system at Groupe Promutuel. In the course of the mandate, relations between the parties deteriorated and DMR, whose liability insurer at the time was Kansa, notified its insurance brokers that it planned to sue Promutuel for its fees and that it feared such suit would lead in turn to an action in damages being taken against it.

In October 1987, Kansa asked a claims adjuster to investigate the matter, and in December 1987, DMR took proceedings against Promutuel, which then made a cross-demand against DMR for a total amount in excess of $4M. DMR appeared in the case through counsel of its own choosing. In March 1988, Kansa decided to take up its insured's defence and retained the services of other counsel for that purpose. On April 19, 1990, a substitution of attorneys was filed substituting the attorneys assigned by Kansa for the attorneys that had originally appeared for DMR.

Promutuel amended its statement of claim in March 1993, and in May 1993, Kansa advised DMR that the amendments had led it to conclude that the errors/omissions alleged against DMR and the damages claimed by Promutuel were not covered by the insurance policy, and consequently, that it was withdrawing from the defence. DMR then called Kansa in warranty, seeking to compel Kansa to continue defending it and calling upon Kansa to reimburse it for all its defence costs and to indemnify it in the event that damages were awarded to Promutuel. In April 1999, an out-of-court settlement was reached which resulted in DMR paying Promutuel an amount of $1.5M, principal, interest and costs.

In its defence of the action in warranty, Kansa maintained that it was only after it received a copy of the amended statement of claim that it was able to comprehend for the first time the true nature of Promutuel's claim, which was why it decided, in May 1993, to deny coverage and withdraw from the case. At trial, DMR tried to establish what Kansa knew at the time the original decision was made to take up DMR's defence, and for that purpose, wished to file into evidence the documents and information available to Kansa at the time. In that connection, DMR's counsel proceeded to examine the attorneys assigned by Kansa, along with one of Kansa's representatives, on the subject of the opinions and reports pertaining to the Promutuel claim that were submitted to Kansa by these attorneys between 1988 and 1993. The attorneys assigned by Kansa objected to the introduction of these documents into evidence, invoking solicitor-client privilege. The Superior Court sustained the objections on the basis that the client of the attorneys assigned by Kansa was Kansa, not DMR, and that these attorneys were accordingly bound by solicitor-client privilege. These interlocutory rulings were appealed by DMR.

At the appeal hearing, DMR argued that an attorney appointed by a liability insurer to take up the defence of an insured acts, first and foremost, as attorney for the insured, not for the insurer. Kansa, for its part, maintained the opposite.

The Court of Appeal found that it was well established that an attorney named by a liability insurer to take up an insured's defence acts, first and foremost, as attorney for the insured, not for the insurer, notwithstanding that it is the insurer that makes the appointment and controls the conduct of the defence, and that as such, the insured enjoys all the rights attaching to the solicitor-client relationship, including the right to the attorney's undivided loyalty from the time the attorney appears on the insured's behalf.

The Court went on to say that the insured's statements made to the attorney under the protection of solicitor-client privilege must not be disclosed to the insurer and the insured is entitled to have access to all documents that pertain to the case in which the attorney is acting for the insured, including those exchanged between the insurer and the attorney concerning the defence or settlement of the third party's action. The Court noted further that documents falling in the latter category are the only documents that the insurer and the attorney appointed to defend the insured are permitted to exchange between themselves since the attorney should as a rule refrain from advising the insurer on any matter that relates to the contract of insurance. An attorney that abdicated his or her duty of loyalty by advising the insurer on a matter on which the insurer and the insured had conflicting or potentially conflicting interests - for example, on the scope and applicability of the insurance coverage - could not hide behind solicitor-client privilege to justify his or her actions.

Based on these considerations, the Court allowed the appeal and concluded that DMR was entitled to obtain copies of all reports prepared by the attorneys assigned by Kansa dating from the time the attorneys appeared on DMR's behalf.

DMR had made a secondary argument to the effect that if the Court were to find that all or part of the reports sent to Kansa by the attorneys appointed to take up DMR's defence had in fact been protected by solicitor-client privilege enforceable against DMR, the benefit of that privilege was forfeited. DMR submitted that since Kansa, in its own proceedings, had alluded to the state of its knowledge at the time it made its original decision to take up its insured's defence, DMR was entitled, through the discovery process, to probe into the exact extent of the knowledge its insurer had on the date in question.

The Court of Appeal allowed DMR access to the report of the claims adjuster containing information that was known to Kansa at the time it decided to take up DMR's defence, but refused DMR access to the letters from the attorneys assigned by Kansa that were sent to Kansa before the attorneys appeared for DMR. The Court explained that the mere fact that a party had alluded to the state of its knowledge on a given date did not imply that it had waived, in a sufficiently clear and explicit manner, the confidentiality of its communications with its legal counsel. The Court went on to affirm that entitlement to the protection of solicitor-client privilege was too important to warrant concluding so lightly that a waiver had been given. However, the Court pointed out that its finding would have been different if Kansa had asserted that a course of action taken by it was driven by a legal opinion it had received, with the legal opinion then becoming a focus of the dispute. In the Court's view, an allegation of that kind would have entailed an explicit waiver of the benefit of solicitor-client privilege, which was not the case here.

With this ruling, the Court of Appeal has shed some light on the delicate situation that can sometimes confront an attorney appointed by a liability insurer to take up an insured's defence, a situation which the Court characterized as unique inasmuch as the attorney has a form of "dual mandate" in such cases.

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