Loss of Privilege: The New Discoverability of Reinsurance Information[dagger]

I.

INTRODUCTION

A growing concern in United States insurance coverage litigation is claims by policyholders that any information or document provided by its insurer to that insurer's reinsurer cannot be deemed privileged under the law in this country. Thus, for reporting purposes, when a ceding company has given its reinsurer notice of a potential loss for which coverage is being denied and litigated, policyholders maintain that they are entitled to review whatever was used to provide that information, including any reports and evaluations of the insurer's defense or coverage counsel that would otherwise be protected by the attorneyclient or work-product privilege.

II.

RELEVANCE OF REINSURANCE INFORMATION IN LITIGATION

Courts seem to prefer looking at the discoverability of reinsurance information question from the perspective of relevance, rather than initially addressing the contention that the information is privileged. Thus, reinsurance information has been ordered produced when there is an issue of lost policies. For example, in Biddle Sawyer Corp. v. Fireman's Fund Insurance Co.1 the trial court had denied the policyholder's motion to compel reinsurance information when the insurers had not admitted to all the terms and conditions of lost policies. The Appellate Division summarily reversed the trial court's denial of that motion to compel.

Reinsurance information may also be relevant to demonstrate the state of mind of the insurer when it raises a defense such as misrepresentation. In National Union Fire Insurance Co. v. Continental Illinois Corp.,2 the insurer raised the defense that the insured had misrepresented its financial condition on the policy application. In ordering that the reinsurance information be disclosed, the court not only held that reinsurance contracts were "insurance agreements," which had to be produced within the meaning of Federal Rule of Civil Procedure 26(b)(2), but also ruled that the reinsurance information may reveal whether the insurer relied upon that information when issuing the policy of insurance.

Reported decisions in the United States are divided as to whether disclosure of such information to reinsurers constitutes a waiver of any existing privilege. In Home Insurance Co. v. Uniroyal, Inc.,3 a judge in an environmental declaratory judgment action ordered the insurers to gather all reinsurance policies that related to the policyholder's policies. As a result of the court's concern with the withdrawal by counsel for two insolvent insurers, the court noted that reinsurance contracts could contain cut-through provisions that might provide the original policyholder with a direct action against the reinsurer. The judge's order provided that, within twenty-four hours of the filing of an insolvency petition, counsel must notify the court in writing "so that actions appropriate to protect any rights that may arise or actions against reinsurers can be acted upon by the [policyholder]."4 In Waste Management Inc. v. Admiral Insurance. Co.,5 the court held that reinsurance documents and reserve information were not relevant in the environmental declaratory judgment action brought by the policyholder. However, other trial court decisions have ruled that such documents are relevant and may have to be produced to the policyholder.

There are a number of cases in which a policyholder has argued that reinsurance information is relevant to the issue of determining the insurer's intent and understanding of coverage provided under the original policy. According to this argument, the reinsurance information must therefore be produced in the coverage litigation.6 Insurers have responded by arguing that reinsurance information is not relevant to the issue of intent, and many courts have agreed with that position.7 One court ruling that reinsurance information was not discoverable relied on the rationale that reinsurance information would, at most, be evidence of undisclosed unilateral intention and not be material in the underlying policyholder coverage litigation.8

Courts ruling that reinsurance information is irrelevant in coverage litigation often rely on the argument that reinsurance information is extrinsic evidence. Such extrinsic evidence would not normally be admissible in a contract dispute when there has been no finding of ambiguity. Courts have also ruled that reinsurance is distinct and unrelated to the issuance of the original policy and, therefore, that the insurer's intent when issuing the original policy might well be different than its intent when obtaining reinsurance. In that regard, some courts have recognized that reinsurance is a mechanism that a ceding company will use to spread its business risks and merely reflects that company's attempt to spread some of its indemnification risk to the reinsurer. Under the reasoning of those above cases, reinsurance has little or no relevance to the original policies at issue in the coverage action.

Finally, courts have also found that there are public policy reasons to deem reinsurance irrelevant in coverage actions. They have recognized that reinsurance is used to spread the risk of insurance companies and that disclosure of reinsurance information in litigation might have either a chilling effect on spreading that risk or a prejudicial effect on the companies themselves. Thus, there are grounds for keeping that information confidential. If insurers were concerned that reinsurance communications would be disclosed in litigation, they might be discouraged from seeking out reinsurance to increase their financial stability. That stability is good not only for the policyholder involved in the coverage lawsuit, but also for all policyholders in general. Thus, it has been argued that insurers should not have to fear that their reinsurance communications will be used against them in coverage litigation. Other courts, however, have required the production of reinsurance information.9

Moreover, some trial court rulings, which have not been appealed, have ordered the production of reinsurance information in coverage litigation.10 In many of these trial court opinions, the courts articulated no reasoning as to how the information was relevant; they simply concluded that the information was relevant and ordered its production.

III.

IS THE PRIVILEGE WAIVED WHEN INFORMATION IS SHARED WITH REINSURERS?

A. Cases Finding No Waiver of Privilege

A number of cases have deemed certain reinsurance information privileged under the attorney-client privilege under a community of interest doctrine. These cases base the finding of privilege on the nature of the insurer-reinsurer relationship, finding that the parties do share a "community of interest" for purposes of sharing certain communication and information. Thus, the court in Durham Industries, Inc. v. North River Insurance Co.,11 ruled that the attorney-client privilege protected the requested information because the insurer and reinsurer shared a common interest that was adverse to the policyholder. Specifically, that interest was the parties' shared risk of exposure to liability in connection with the bond that had been issued to the policyholder by the insurer.

In Pfizer v. Employers Insurance of Wausau,12 the court found a qualitatively identical interest by the insurer and reinsurer in the outcome of the coverage litigation and concluded that it was not useful for the law to abrogate the privilege that would otherwise attach to the requested information that had been authored after that litigation had commenced and concerned the litigation itself. The court did not believe that the privilege should be deemed waived because the information was communicated to the reinsurer.

In Great American Surplus Lines Insurance Co. v Ace Oil Co.,13 where the ceding company filed a motion for a protective order compelling the return of documents that had been produced by the reinsurer to the policyholder, the court found that the documents involved were protected by the attorney-client privilege and then turned to the question of whether the reinsurer's production of those documents waived that privilege. It analyzed this question under governing California law and decided that the reinsurer was not a joint holder of the attorney-client privilege. Therefore, the reinsurer could not have effectively waived the privilege when it produced the documents in the ongoing coverage litigation. Note that it was the reinsurer, and not the direct insurer, that had produced the documents that the insurer claimed were privileged.

Having determined that the reinsurer's production of the documents could not constitute a waiver of the insurer's attorney-client privilege, the court in Great American Surplus Lines then turned to the question of whether the attorney-client privilege was waived by production of the documents to the reinsurer. Even though the reinsurer was not a holder of the privilege, the court ruled that the privilege had not been waived by sharing the information with the reinsurer. Under the California evidence code, disclosure in confidence of privileged documents does not waive the privilege if the disclosure is '"reasonably necessary for the accomplishment of the purpose for which the lawyer . . . was consulted.'"14 Analogizing the insurer-reinsurer relationship to that between business partners and noting that the reinsurer bore ultimate responsibility for the greatest proportion of the policy at issue, the court held that good business practice required a reinsurer to peruse privileged documents relating to the extent of its exposure. This finding of "reasonable necessity" preserved the privilege even though the documents were provided to the reinsurer-a third party that did not itself hold the attorney-client privilege.

B. Cases Finding Waiver of Privilege

A court's analysis leading to the opposite result can be found in Allendale Mutual Insurance Co. v. Bull Data Systems, Inc.15 Here, the court considered a cedent's request for a protective order that would prevent its policyholder from obtaining reinsurance documents in a coverage action. It first analyzed and rejected the cedent's claim that the documents were protected by either the attorney-client or work-product privilege. Given this finding, the court did not need to address the question of whether, had the documents been privileged, that privilege would have been waived by disclosure to the reinsurers. Nevertheless, it did so, noting in dicta that, had the documents been privileged initially, disclosure to reinsurers would have rendered the documents discoverable to the policyholder.

The analysis of the Allendale court centered on the "common interest" doctrine - when a third party shares a common interest with the disclosing party that is adverse to that of the party seeking discovery, an existing privilege is not waived.16 The common interest doctrine requires that the parties asserting the existence of a common interest have identical legal interests. The privilege will be deemed waived if the interests are merely similar or are only commercial in nature. In looking at the documents at issue in Allendale, the court determined that they had all been produced in the ordinary course of business and that there could be no reasonable expectation that the communications would remain confidential once disclosed to the reinsurers. Accordingly, the cedent was held to have waived any privileges that might have existed when it disclosed information to the reinsurers.

This analysis was also adopted in the case of McLean v. Continental Casualty Co.17 In that case the court specifically held that the relationship between cedent and reinsurer was not sufficient to create a "common interest" between them. Otherwise privileged documents that had been disclosed by the cedent to its reinsurer were deemed discoverable to the policyholder in the ongoing coverage litigation.

In an environmental coverage case the court's opinion seems close to suggesting that no privilege exists when dealing with communications between an insurer and non-attorney reinsurers. In Morion International, Inc. v. Liberty Mutual Insurance Co.,18 the state court ruled that the insurer failed to meet its burden of showing that the requests were burdensome, overbroad or oppressive, or that privilege would be violated. The court stated that it would not extend the attorney-client privilege or attorney word product exception to communications with non-attorney insurers, and ordered the communications discoverable.

IV.

PRACTICAL TIPS FOR PRESERVING PRIVILEGE

Given this disparate treatment of a very sensitive and potentially serious issue by the United States courts, what can a cedent do to protect confidential documents while still complying with the requirements of an inspection of records clause or a subpoena or request for production in an underlying case? At least one author has suggested that courts expressly recognize a privilege for communication between cedents and reinsurers.19 Additionally, cedents may certainly argue that any disclosures to reinsurers cannot be considered voluntary so as to waive any privilege because it is done in order to comply with legal requirements. The cedent can seek some form of interim declaratory relief, withholding documents from disclosure to reinsurers or parties in the underlying case until a court rules whether in light of the particular documents involved an applicable privilege may be waived. Unfortunately, this process could take considerable time and there is no assurance that the court would deem such an action ripe for adjudication.

Although possible mechanisms for avoiding this conundrum are limited only by one's fertile imagination, there are simply no guarantees that any theory will work in an American court and there are likely to be serious potential drawbacks in failure. The best solution is a case-by-case assessment of the issue. For example, a cedent and reinsurer who are disputing the production of allegedly privileged documents should probably consider in each instance the nature of the documents themselves, the ability of the reinsurer to assess the claims without the information, the need for the information before resolution of the underlying case, the ability of the parties to postpone payment of any sums potentially owing as a result of the underlying litigation until such time as the case can be resolved, the tenacity with which the policyholder is likely to pursue discovery of the documents, the leanings and views of the court which will be asked to rule on the issue, the precise holdings of courts in the particular jurisdiction in which the dispute will be heard and the skill and knowledge of the attorneys involved. These are exceedingly difficult questions, and all of the "confidential" and "privileged document" stamps in the world cannot guarantee that the documents will be protected from disclosure.

Absent an agreement between the cedent and the reinsurer on how to handle this issue and if the documents involved are truly meaningful and in need of protection from disclosure to the policyholder, the cedent may wish to consider simply and politely refusing in writing to allow the reinsurer access to those particular records. The grounds and rationale for this refusal should be cited and specific reference to the possible waiver of privilege, which would negatively impact both the cedent and the reinsurer, should be made. Even if the reinsurer is not persuaded, an American court is less likely to impose a severe sanction on the cedent in those circumstances. As noted above, however, even if the court is not particularly sympathetic to the cedent, the penalty for a simple breach of the inspection of records clause is likely to be limited to an order allowing the reinsurer to withhold payment for the claims affected and, possibly, the imposition of costs. If, on the other hand, the breach of the inspection of records clause is but one of several breaches, the cedent runs a much greater risk of a court finding those breaches to be material and allowing the reinsurer to repudiate the reinsurance agreement.

Clearly, the cedent needs to carefully weigh its options and goals in these circumstances and would be well-advised to seek a legal opinion on how to proceed in light of the particular venue and documents involved. The cedent should also discuss these problems frankly with the reinsurer so that, whatever choice about disclosure is eventually made, the reinsurer understands the cedent's concerns. On the other hand, if the dispute is between the cedent and a policyholder in the course of the underlying coverage claim, the opportunity for agreement is less likely. Past experience suggests that the key to maintaining privilege may be in building a strong case for privilege before the dispute ever arises, in the manner in which the documents are handled by those involved.

Only the client can waive the attorney-client privilege. Therefore, when insurers, intermediaries or any other entity involved in the reinsurance chain send reinsurance communications about litigation, those documents and all transmittal cover letters should be marked: "Confidential, Subject To Attorney-Client Privilege Or Work Product Doctrine." While these mere designations do not make an otherwise discoverable document confidential and privileged, the better view is that reinsurance information is indeed confidential and is protected by the attorney-client privilege and should be designated in this manner.

It is also important for the judge or special discovery master to see such objective, careful treatment of reinsurance information. One court has held that the trial court erred in requiring production of reinsurance information without conducting a prior in camera inspection to determine whether the reinsurance information contained any privileged or sensitive information.20 Accordingly, if all of the reinsurance information and communication is, in the first instance, marked confidential and privileged, that alone will give the court that is inspecting those documents further grounds for ruling that they are indeed privileged and that production cannot be compelled in the coverage litigation.

Additionally, parties should take care to maintain the confidential and privileged nature of this information. For example, insurers should, if at all possible, communicate directly with the reinsurer rather than through a third party. If this communication must be made through an intermediary, the cover letter to the intermediary should be marked confidential, attorney/client privileged and should state to the intermediary that the information should not be disclosed to any party other than the reinsurer.

Likewise, the intermediary should continue to restrict dissemination of this information to only those reinsurers that need the information. The cover letters that intermediaries send should also designate the information as confidential and attorney/client privileged. If at all possible, reinsurance communications should be segregated from the underlying coverage claim file. If materials must be produced from the claim file, all of the reinsurance information and communication that are contained in a separate folder can be held back from production more easily than redacting such information from the general claim file. Of course, the reinsurance folder should be marked "confidential" and "attorney-client privileged" in big, bright, bold letters.

Last, if this information must be disclosed to third parties for some reason, such as in the course of arbitration, confidentiality agreements should be executed and the communications should not be copied to any unnecessary third parties. A good question to ask is who else but the reinsurer would most want to read this information. The answer is no one other than policyholder attorneys, so do not copy or send reinsurance communications to any unnecessary third parties.

V.

DOES ACCESS TO RECORDS CLAUSE WAIVE CLAIMS OF PRIVILEGE BY CEDENT?

Some reinsurers have, in the context of a dispute with their cedents, attempted to compel production of documents that would be privileged to the cedent. For example, the reinsurer, if it wishes to contest its liability for the settlement entered into by the cedent, may seek production of opinion letters from the cedent's defense or coverage counsel. Given the view of at least some courts that the cedent and reinsurer do not share a "common interest," it would seem that the cedent could argue that such documents are privileged and need not be produced to the reinsurer in the context of their dispute. In turn, reinsurers can argue that they are entitled to those documents under the inspection of records clause. Does that clause constitute a waiver by the insured of its claims of privilege?

The case of North River Insurance Co. v. Philadelphia Reinsurance Co.,21 suggests that no waiver can be read into the access to records clause. In that case, the reinsurer sought to obtain copies of documents containing legal advice from the cedent's lawyer to the cedent, including some advice about the cedent's reinsurance recoveries. The court rejected the reinsurer's argument that the access to records clause waived the cedent's privilege, stating that, by agreeing to such language, the cedent does not "give up wholesale its right to preserve the confidentiality of any consultation it may have with its attorney concerning the underlying claim and its coverage determination."22 The court did suggest that there could be circumstances where waiver could be found, such as where the cedent has not been forthright in making its knowledge and information about the claim available to the reinsurer. Another court has found waiver where the cedent had previously provided the contested documents to another reinsurer.23

Reported decisions in this area suggest that, without special circumstances, courts in the United States will be loathe to find that the mere existence of an inspection of records clause in a reinsurance agreement waives the cedent's right to claim privilege in a later dispute arising under that agreement. No case to date has made such a finding, so it appears that reinsurers will be compelled to craft other arguments in order to demonstrate to a court that they should be entitled to otherwise privileged documents. The chances for success with such arguments will be directly proportionate to the degree of the cedent's bad faith that the reinsurer is able to demonstrate to the court.

VI.

CONCLUSION

There can be little doubt but that reliance on the attorney-client privilege or work product doctrine to protect communications between insurer and reinsurer is a risky business. Given the relative sanctity afforded this privilege in other circumstances, it is difficult to see what social benefit is gained by deeming that privilege waived when an insurance company discusses a claim with its own insurer, the reinsurer. Nevertheless, whether out of fear that recognizing the privilege will give insurers free reign to deny claims to their policyholders while protecting themselves with reinsurers or otherwise, finding that the privilege has been waived is not uncommon. The prudent insurer and reinsurer will be extremely careful in their communications, especially when underlying policyholder claims are underway or anticipated. If a "common interest" in such litigation does indeed exist between insurer and reinsurer, they would do well to find an alternative to the exchange of information that will harm that shared interest if disclosed to or discovered by the policyholder. Although good arguments for preserving privilege are plentiful and have been accepted by many courts, all insurers should recognize the great risk of blindly expecting that privilege to protect their reinsurance information.

The question of whether courts will protect reinsurance information from discovery by policyholders and other third parties is likely to remain unanswered for many years to come. In the meantime, both insurers and reinsurers need to be aware of the distinct possibility that their communications will be discovered and to transact their business accordingly. If reinsurance has been a special class of business, the loss of its attendant privilege may indeed make for interesting and difficult times.

[dagger] Submitted by the author on behalf of the FDCC Reinsurance Section.

1 No. AM-1368-9115F (N.J. Super. Ct. App. Div. Sept. 8, 1992), 4-11 MEALEY'S LITIG. REP. REINSURANCE 8 (1993).

2 116 F.R.D. 78 (N.D. Ill. 1987).

3 No. CV 93 5 22740 S (Conn. Super. Ct. 1995).

4 Id. Report of Proceedings of Jan. 13, 1995.

5 No. HUD-L-931-92 (N.J. Sup. Ct. November 16, 1994).

6 See, e.g., Hoechst Celanese Corp. v. Nat'l Union Fire Ins. Co., 623 A.2d 1099 (Del. Super. Ct. 1991); see also N. Am. Philips Corp. v. Aetna Cas. & Sur. Co., No. CV-91-0395790S (Conn. Super. Ct. June 7, 1993), 4-5 MEALEY'S LITIG. REP. REINSURANCE (1993).

7 See, e.g., Leski, Inc. v. Federal Ins. Co., 129 F.R.D. 99, 106 (D.N.J. 1989); Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 139 F.R.D. 609, 611-12 (E.D. Pa. 1991); Fruit of the Loom, Inc. v. Travelers Indem. Co., No. 89 CH 9846, slip op. at 13 (Ill. Cir. Ct. Cook County Co., Chancery Div. May 17, 1991).

8 Am. Med. Sys. v. Nat'l Union Fire Ins. Co., No. 98-1788 § C, 1999 U.S. Dist. Lexis 19230 (E.D. La. 1999) (citing Leski).

9 See, e.g., Lipton v. Superior Court, 56 Cal. Rptr. 2d 341 (Ct. App. 1996); Nat'l Union Fire Ins. Co. v. Stauffer Chem. Co. 558 A.2d 1091 (Del. Super. Ct. 1989); Potomac Elec. Power v. Cal. Union Ins. Co., 136 F.R.D. 1 (D.D.C. 1990) (relying on FED. R. CIV. P. 26(b)(2) which requires production of insurance policies); but see Rhone-Poulenc Rarer, 139 F.R.D. at 613 (Rule 26(b)(2) applies only in actions seeking monetary award and therefore reinsurance agreements would not be considered "any insurance agreement" under Rule).

10 See Golden Eagle Refinery Co., Inc. v. Assoc'd Int'l Ins. Co., Case No. BC 128622 (Cal. Super. Ct., L.A. County July 8, 1997); Asarco, Inc. v. Am. Home Assurance Co., No. 90-2-235602, (Wash. Super Ct. King County July 1991); Remington Arms Co. v. Liberty Mut. Ins. Co., No. 89-420 JLL, (D. Del. September 11, 1990).

11 1980 WL 112701 (S.D. N.Y. 1980).

12 No. C-108-92 (N.J. Super. Ct. Feb. 9, 1998), 8-20 MEALEY'S LITIG. REP. REINSURANCE 3 (1998).

13 120 F.R.D. 533 (E.D. Cal. 1988).

14 Id. at 538.

15 152 F.R.D. 132 (N.D. Ill. 1993).

16 Id. at 140.

17 No. 95 Civ. 10415 (S.D. N.Y. Nov. 21, 1996), 7-15 MEALEY'S LITIG. REP. REINSURANCE (1996).

18 No 93-C-2126 (W.Va. Cir. Ct., Kanawha County) 6 MEALEY'S LITIG. REP. REINSURANCE Section E.

19 See Kathryn P. Broderick, Reinsurers "Access to Cedents" Records, presented to the Joint Meeting of the Excess and Surplus Lines and Reinsurance Sections of the Federation of Insurance & Corporate Counsel at 42 (March 1997).

20 Fireman's Fund Ins. Co. v. Superior Court, 286 Cal. Rptr. 50 (Ct. App. 1991).

21 797 F. Supp. 363 (D.N.J. 1992).

22 Id. at 369; see also U. S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. 1992), 4-4 MEALEY'S LITIG. REP. REINSURANCE 9, aff'd, 598 N.Y.S.2d 939 (App. Div. 1993).

23 North River Ins. Co. v. Columbia Cas. Co., 1995 WL 5792 (S.D. N.Y. 1995).

Mitchell A. Orpett is a founding member and the managing director of the Chicago firm of Tribler Orpett & Meyer, P.C. He is a graduate of the University of Illinois, where he earned his bachelors and masters of arts degrees. He is a 1978 graduate of that institution's College of Law. Mr. Orpett's practice is devoted primarily to the defense of various professional and product liability claims and to the resolution of insurance and reinsurance disputes. He is an active member of the American Bar Association, holding numerous leadership positions and chairing several seminars. Mr. Orpett is currently the chair of the ABA's Section Officers Conference, which represents the approximately 240,000 members of the sections and divisions of the American Bar Association. Previously, he was the chair of the ABA's 25,000 member Tort Trial and Insurance Practice Section and of the ABA's Standing Committee on Continuing Education of the Bar. Mr. Orpett is also a member of the Federation of Defense & Corporate Counsel and the Defense Research Institute. He is the author of Reinsurance, a chapter in West Group's LAW AND PRACTICE OF INSURANCE COVERAGE LITIGATION, and a host of other publications dealing with litigation and insurance issues.

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