Fortuity - Canadian Insurance News and Trends - May 2025

The Supreme Court of British Columbia’s recent decision in Pacific Sands Beach Resort Ltd. v. Co-Operators General Insurance, 2025 BCSC 858, serves as a cautionary reminder to insurers facing bad faith claims: selectively waiving privilege—even over seemingly innocuous or helpful documents—can result in a much broader, unintended waiver.

In Pacific Sands, the insured owner of a property in Tofino, filed a claim under a course of construction insurance policy. The insurer denied coverage, prompting the insured to sue for breach of contract and bad faith in the handling of the first-party loss.

During the litigation, the insurer voluntarily waived privilege over 454 documents, hoping to avoid a document disclosure application. The insured responded by arguing that the waiver extended not only to the disclosed documents but to the broader subject matter they addressed. The plaintiffs sought production of all documents relating to what they broadly described as “the plaintiffs’ claim for coverage under the policy of insurance.”

The Court agreed with the insured, holding that the insurer had impliedly waived privilege over the subject matter of the 454 documents for two key reasons. First, the selective waiver of the 454 documents created an implied waiver over their subject matter to ensure fairness and consistency. Second, the insurer had put its state of mind in issue in defending the bad faith claim, which precluded it from shielding related privileged communications.

On the issue of selective waiver, the Court held that fairness required the production of all documents covering the same subject matter to prevent the insurer from "cherry-picking" favourable communications while withholding others.

On the state of mind defence, the Court found that:

1. The privileged materials were disclosed in response to the bad faith allegations;
2. The documents were capable of proving or disproving material facts at issue;
3. They related directly to how the insurer assessed the insured’s coverage claim; and
4. The insurer’s representative confirmed at discovery that legal advice was at least partially relied upon in the claim’s assessment.

Together, these elements supported an implied waiver of privilege over the broader subject matter.

Pacific Sands underscores the importance for insurers of carefully guarding privileged materials in bad faith litigation. Even if disclosure may appear strategically advantageous in the short term, protecting privilege may be the wiser long-term risk management strategy.

Insurers can also mitigate the risk of broad disclosure by seeking to bifurcate the bad faith and breach of contract claims—allowing the contract claim to proceed first. If the insured fails to prove a breach of the policy, any claim for bad faith (and the accompanying disclosure risks) may become moot.