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.”