Reinsurer's access to cedent's records

Broderick, Kathryn P

Reinsurer's Access to Cedent's Records*

INTRODUCTION

For many years, it has been common for reinsurance contracts placed in both the United States and London markets to include access to records clauses.1 These provisions confer on the reinsurer an express right of access to the cedent's records having to do with the risk being assumed by the reinsurer.2

Practitioners and other commentators are by now accustomed to decrying the passing from the reinsurance scene of a high level of mutual trust and confidence between cedent and reinsurer, long since replaced by an atmosphere of suspicion, contention, and outright hostility. It was thus perhaps to be expected that eventually even such an apparently mundane topic as the access of reinsurers to cedents' records would erupt into a source of friction, or worse, between reinsurance partners.

Before examining the specific areas in which access to records clauses may give rise to issues of interpretation and possible dispute, it may be useful to consider the background and rationale for inclusion of those provisions in contracts of reinsurance.

II.

CONTRACTUAL FRAMEWORK FOR THE RIGHT OF ACCESS

A. Typical Contractual Provisions

Compared to other subjects covered in a typical reinsurance contract, one sees less variety among records inspection clauses. The wordings, with few exceptions, are remarkably similar. A few examples for purposes of orientation follow.

CLAUSE 1

The Reinsurer may at all reasonable times inspect by its agents, or any other authorized person, at the Head Offices of the Company the books, accounts, and all documents referring to the business under this Agreement or concerning the subject matter hereof.

CLAUSE 2

The Reinsurers or their duly accredited representatives shall have free access to the books and records of the Company at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter hereof.

CLAUSE 3

The Reinsurers or their duly authorized representatives may examine at all reasonable times at the office of the Company the books, records, and papers pertaining to the risks reinsured hereunder; but it is understood and agreed that the business of the Company in which the Reinsurers have a reinsurance interest hereunder is the sole and absolute property of the Company, and the Reinsurers agree not to use any information so acquired for any purpose other than that as contemplated herein.

CLAUSE 4

The Company shall cooperate and shall make available for inspection, and place at the disposal of the Reinsurer, through its authorized representatives, at all reasonable times during the currency of this Certificate and thereafter, Company personnel and all books, records and documents of the Company relating to this certificate of reinsurance or claims in connection therewith.

CLAUSE 5

The Company shall furnish the Reinsurer with a copy of its policy and all endorsements thereto which in any manner affect this certificate, and shall make available for inspection and place at the disposal of the Reinsurer at reasonable times any of its records relating to this reinsurance or claims in connection therewith.

B. Origin and Rationale for the Right of Access

The concept of reinsurer access to records appears to have originated in the context of treaty reinsurance. In the facultative context, a reinsurer has access to full information concerning the risk and elects whether to reinsure that risk. As reinsurance began to be conducted on an automatic cession basis and treaty reinsurance emerged as an alternative to facultative reinsurance, the reinsurer necessarily left the details of underwriting more to the unfettered discretion of the cedent. Particularly in the context of proportional treaty business, the practice was often to make payment based on accounts rendered in very summary form. It became important for the reinsurer to have a right to information "running parallel to the direct insurer's largely unlimited right of business management."3 As one treatise explains:

The cedant's obligation to provide information to the reinsurer . . . moved from being an active one, as it is under facultative reinsurance, to a passive one. Instead of the active obligation to provide information when each individual risk was accepted or each claim was made, the cedant had a passive obligation to allow its reinsurer to inspect the books and records.4

Interestingly, despite the historical perception of a greater need for records access in the treaty context, facultative certificates, at least in the modern era, have typically included access to records wording that is virtually identical to that contained in treaties.5

C. Rights of Inspection by Implication?

Before examining what records are encompassed, either literally or by inference, under specific access provisions, it is worth considering whether any right of access exists absent a specific provision granting it. In the author's experience, it is unusual to find a United States contract that is silent on the issue of inspection rights. Perhaps for that reason, there appear to be no reported United States cases on the issue of whether those rights are to be implied in the absence of an express provision.

Although at least one commentator has expressed skepticism,6 others hold firmly to the view that access to records is so vital to the reinsurance relationship as to be an implied right of the reinsurer even absent express contractual provisions.7 While at least two English cases have considered the issue, they take somewhat contradictory approaches. In Phoenix General Insurance Co. v. Halvanon Insurance Co.,8 Judge Hobhouse opined that among the implied duties of a cedent under a treaty was to keep in a proper manner all accounting, claims, and other documents and records, and to make these reasonably available to reinsurers. It should be noted, however, that this point does not appear to have been the subject of any real dispute between the parties.

On the other hand, in Farex Gie v. Societe Anonyme d'Intermediaries,9 the relevant contracts contained no inspection clause. The trial judge refused the reinsurer's request for leave to defend and to adjourn the cedent's motion for summary judgment in order to permit inspection of records. This ruling was upheld by the court of appeal:

Reinsurers are free to stipulate for whatever rights of inspection they please. This is a matter of commercial negotiation between the parties. If they are not entitled to inspection as a matter of contractual right and a dispute arises, English law gives them no procedural means of inspection unless they are first able to raise a triable issue on the material otherwise available to them. This may mean that reinsurers are unable to uncover defences which greater rights of inspection would have revealed. But this is a commercial risk which they accept at the time when the contract is made.10

Just as the precedential value of the ruling in Phoenix v. Halvanon may be limited by the lack of any real dispute between the parties, the ruling in Farex may also be of limited applicability. There are numerous indications in the decision that the reinsurer was attempting to engage in a fishing expedition rather than seeking to conduct a good faith inspection. Thus, the state of the law on implied rights of inspection may be said to be equally unsettled in the United States, where no decisions have been rendered, and in the United Kingdom, where at least two decisions exist.

III.

INTERPRETIVE ISSUES ARISING UNDER ACCESS PROVISIONS

A. Records Encompassed By the Right of Inspection

By their terms, many clauses define very broadly the records to which the reinsurer is entitled. As may be seen from the quoted examples, clauses entitling the reinsurer to see "all documents referring to the business under this Agreement or concerning the subject matter hereof," or "any . . . records relating to this reinsurance or claims in connection therewith" are typical. Under that wordings, cedents will be hard-pressed in most cases to impose significant restrictions on reinsurers' access. When a claim noticed to the reinsurer is the subject of litigation, for example, the cedent's files relating to the litigation (or, indeed, the cedent's outside counsel's files) would appear literally to constitute records relating to a claim under the reinsurance contract. Copies of underlying policies, and of documents reflecting the negotiation and drafting of those policies would also appear fairly to be encompassed under most wordings. Accounting records tracing the flow of premium from the cedent to the reinsurer likewise would seem to be included within the general concept of documents referring to the business under a reinsurance agreement.

One sometimes sees wording more restrictive on its face. For example, it is not unknown for records inspection clauses to grant access to "accounting books and records," with no other types of records specified. While sometimes found in an ordinary reinsurance agreement, those provisions appear more common in governing agreements for pooling associations, where it may be seen as desirable and appropriate to limit pool members' access to records in recognition both of potential logistical difficulties in affording fuller access and of the trust imposed in the pool manager to act on the members' behalf. Whatever the context, clauses that afford access to particular types of records will have to be interpreted so as to give effect to any limitations embodied therein.

It should be noted that a typical records inspection clause purports only to require that the reinsurer be given access to records that are within the actual possession or control of the cedent or its agents. It does not purport to require the cedent to obtain, from its policyholder or otherwise, documentation that was not considered necessary by the cedent in the handling of the claim but that the reinsurer, for whatever reason, believes would be informative. The cedent's failure to produce that information may have implications for its ultimate ability to persuade the reinsurer (or, if it goes that far, a court or arbitration panel) that a claim is properly payable, but it is not a breach of an access to records clause.

A recent trend on the part of some cedents is to offer, as a substitute for documentary records, to make its personnel who are knowledgeable about particular claims available for discussion with the reinsurers. These discussions can undoubtedly be useful. Indeed, under sample clause 4, reproduced above, the cedent is expressly required to make personnel, as well as books and records, available. Under any typical wording, however, there can be little serious contention that discussions with the cedent's personnel, standing alone, constitute compliance with a contractual requirement to place documentation at the reinsurer's disposal.11

Disputes sometimes arise if the cedent wishes to place a strict interpretation on how records relating to the reinsurance agreement are to be interpreted. For example, some cedents take the position that even if the wording of a particular contract provision whose interpretation is now in dispute predated a reinsurer's subscription to a treaty, the reinsurer is not entitled to see reinsurance negotiation or contract drafting documentation predating the reinsurer's actual period of participation. Or the cedent may argue that it need not make available to Reinsurer A correspondence with Reinsurer B, a co-participant on the same reinsurance treaty. It may behoove the cedent to show flexibility in some of these areas, given the very real possibility that a court or arbitration panel will allow discovery that is not strictly limited to the specific reinsurer's participation. On the other hand, a cedent who perceives that its relationship with a particular reinsurer is inevitably heading for dispute may conclude that it would be just as well to await the court or panel rulings than make concessions that may ultimately not be required. Once matters have reached the stage at which the parties are engaging in these kinds of calculations, access to records is apt to be the least of the concerns.

B. "Authorized Representatives" Entitled To Inspect And "Reasonable Times" For Inspection: What Are The Limits?

1. Authorized Representatives

Access to records clauses purport to confer rights of inspection only on the reinsurer or, as some wordings put it, "the Reinsurer or its duly accredited representatives." As the magnitude and complexity of claims has increased, particularly in long-tail casualty lines, reinsurers are increasingly turning to independent auditors, consultants, or attorneys to perform records inspections. Although typical wordings might lend themselves to technical arguments that only employees of the reinsurer qualify to have access to records, it is doubtful that United States courts or arbitration panels would so hold.

Indeed, some respected practitioners and commentators have suggested that reinsurers enjoy virtually unfettered discretion to designate whomever they wish as inspector.12 This view finds some support in an Irish case, Winterthur Swiss Insurance Co. v. Insurance Corp. of Ireland.13 There, while conceding that the cedent might have a valid objection in the fairly extreme hypothetical case of a reinsurer appointing as inspector "a journalist . . . who had absolutely no knowledge of insurance," the Irish high court rejected a challenge to an inspector on grounds of bias. It noted that the inspector was not required by the records inspection provision to be impartial or unbiased, and that lack of bias was not necessary in an inspector as it would be in, for example, an arbitrator, because the ultimate decisions would be made by the reinsurer and not the inspector.

On the other hand, one suspects that it goes too far, at least under United States law, to say that there are no limits on the reinsurer's entitlement to designate whatever representatives it chooses. A recent federal court decision in Massachusetts, Mant v. ITT New England Management Co.,14 dismissed a complaint by an English reinsurance inspection firm that it had been improperly barred from conducting an audit of the defendant-cedent's books and records. The judge found that the cedent's refusal to allow the firm to inspect its records was justifiable under circumstances in which the two parties were already in litigation over the propriety of the firm's past audits.

The facts as reported in the decision are fairly extreme. The defendantcedents were successors of NERCO. An English reinsurance inspection firm first did an audit on behalf of certain reinsurers on contracts known as the CLONE treaties. The same English firm was then hired by another group of reinsurers to inspect NERCO's records on another treaty, the NERFAC treaty. Following these audits, both groups of reinsurers ceased payment on the respective treaties. NERCO brought suit against the English firm in Massachusetts, alleging that the audits were carried out in bad faith and accusing the inspectors of "intentionally seeking to further their clients' interest in delay by taking nearly a year to complete an inspection that should have taken a few weeks."'5 While the suit was pending, the same inspection firm was retained by Yasuda Fire and Marine to do still another audit of NERCO's books and records, and NERCO refused to grant the firm access, citing the allegations in the Massachusetts litigation.

Yasuda then applied to the English Commercial Court for an order permitting the English firm to perform the audit. The application was denied. The English firm thereafter sued NERCO and its successors, alleging tortious interference with business relationships, abuse of process, and unfair and deceptive trade practices.

The court reviewed the English firm's complaint and found several of the claims to be time-barred. With respect to the merits, it found nothing improper about the cedent's refusal to allow the firm access to its books and records in connection with the Yasuda audit. The court thought it reasonable for NERCO to want "to avoid the uncomfortable situation that would inevitably result from allowing the auditors whom the cedents were suing based on alleged inadequacy of past performance to have `unfettered and immediate access' to their books and records yet again.16

In many ways, Mant is not a typical access to records case. Not only were the facts somewhat unusual, but the court's opinion never mentions, let alone construes, an access to records provision in any of the reinsurance contracts involved in the dispute. Instead, the opinion turns on the required elements for the various business tort causes of action alleged.

It will be interesting to see whether cedents seek to expand the Mant decision to more common and less extreme fact patterns. For example, in the United States market, it is not uncommon for retired insurance and reinsurance executives to offer their services both as independent consultants and as party-appointed arbitrators or expert witnesses. One can envision situations in which a reinsurer wishes to designate, as an inspector, an individual who is also acting as an expert witness adverse to the cedent in an otherwise unrelated matter that involves some of the same books and records as those within the scope of the desired inspection. A cedent might have an understandable concern about such an individual acting in both capacities. Or, similar to the situation in Mant, the inspector may be someone with an extensive network of clients, some of whom may have an interest in the very books and records being audited. Whether these concerns rise to a level sufficient to permit a cedent to prohibit the designated individual from acting on behalf of his or her principal is likely to generate further debate and even litigation or arbitration.17

2. Reasonable Times for Inspection

Issues having to do with limitations on the times when inspections can be performed may also arise. To begin with, is it clear, absent an express provision, that the right of inspection survives the termination of the reinsurance contract? Some commentators advise making express provision that it does.18 As always, to make explicit provision for what might seem to go without saying raises at least an arguable issue as to whether it really does. One suspects, however, that even absent an express provision, the right of inspection will be deemed to continue for some time beyond contract termination. After all, one purpose of the right of access is to enable a reinsurer to make its own assessment of the severity of reported losses and to identify unreported losses. That being so, as long as claims are still being incurred under the reinsurance contract at issue, fairness would seem to dictate that the right of access continue at least as to these functions. The proffered justification for making express provision for a post-termination right of access serves equally well as a rationale for granting access beyond termination in the absence of such a provision: "[A] s long as the ceding company can hold the reinsurer liable under the treaty, the reinsurer should have access to the ceding company's records."19

But should that access be unlimited, even under a terminated contract that is demonstrably still generating claims activity? It may be reasonable for a reinsurer to demand access to records on new claims being notified to the contract and claims incurred but not reported. But what about, for example, premium registers for each and every risk ceded to a low-level casualty treaty originally written in the 1950s, before anyone had any idea that such a treaty could continue to generate losses even into the end of the 20th century and very likely the next as well? One commentator recommends including a time frame during which the right of inspection may be exercised as a way of pre-empting such interpretive difficulties.20 Sample wordings recommended by this commentator specify a time period for which the cedent is obliged to retain copies of "loss transaction papers." Such wording arguably creates an implication that other records within the scope of the inspection clause, notably premium records, would have to be kept indefinitely. In the author's experience, and as a matter of actual industry practice, premium records are not always retained years after the actual receipt of and accounting for premium.

Obviously, records that no longer exist or cannot be located with diligent effort are incapable of being made available for inspection. Even if it is not a question of destruction or unavailability, however, a cedent could construct an argument that the burden of searching for or reconstructing ancient records, weighed against the reinsurer's failure to make a more timely request for them when they would readily have been available, should enable the cedent to deny the inspection because it comes at an unreasonable time. The merits of such a position are heavily fact-dependent.

In most cases, however, the timing and other logistics of an inspection do not present insurmountable difficulties between cedent and reinsurer. Perhaps reflecting the few horror stories that prove this rule, one commentator recommends making express provision that the reinsurer must provide the ceding company with prior notice of its intent to inspect so as to allow the cedent sufficient time to make arrangements.21 While such a provision may do no affirmative harm, it is difficult to believe that the requirement would not be deemed implicit, particularly since such a prior notification procedure has become fairly standard in the industry. Many larger cedents go further, setting aside certain periods of time for audits on a periodic basis, typically annually or semiannually. They insist that all reinsurers who wish to audit arrange their visits during those periods. It is customary to limit the reinsurer's access to records to the normal business hours maintained by the cedent. Obviously, one can envision extreme demands by either side that would implicate the "reasonable times" concept, but those situations are very much the exception rather than the rule.

A former "hot topic" that seems to have cooled down is the matter of photocopying. One commentator recommends making express provision that the reinsurer may not only inspect, but also may photocopy relevant documents.22 Some cedents have occasionally tried to maintain that the reinsurer's right of inspection did not extend to copying. That position is infrequently, if at all, asserted today, and was rejected by the Irish High Court in Winterthur Swiss Insurance Co. v. Insurance Corp. of Ireland.23 The court took judicial notice of the fact that documentation relating to the reinsurance contract would be voluminous and that the normal method of copying in business was now photocopying. Thus, while it acknowledged that the right to photocopy documents was not expressly conferred by the reinsurance contract, the court concluded that it must have been intended by the parties.

C. Conditions of Inspection

1. Confidentiality Agreements

Probably no aspect of records inspections has generated more controversy in the United States market than the growing tendency for cedents to request that reinsurers sign confidentiality agreements before they are permitted access to records. It has been argued, on behalf of reinsurers, that because the typical access to records clause says nothing about confidentiality agreements, a request for such an agreement is in essence an attempt to rewrite the contract and impose obligations not fairly within the terms of the contract as originally negotiated and agreed:

In attempting to obtain a confidentiality agreement, the reinsured is seeking to redraft the policy wording .... Furthermore, the concept of a confidentiality agreement is contrary to the general principle of utmost good faith, as the only parties who could be interested in the inspection are the other reinsurers who have participated in the treaty.24

It is interesting that one of the grounds offered by these authors for objecting to confidentiality agreements in general is the notion that only reinsurers have any legitimate interest in records under a reinsurance contract. If anything, it could be argued that this is a valid reason for restricting a reinsurer's ability to share that information with third parties. In effect, the authors may be saying that a confidentiality agreement prohibiting third party disclosure is unnecessary because such a restriction is implicit already in the reinsurance relationship. If true, however, then it is difficult to see why reinsurers should react negatively to a request for a reaffirmation of intent to abide by an obligation that is deemed currently to exist.

It is interesting to note that sample clause 3, set forth above, expressly purports to prohibit the reinsurer from using information obtained through the inspection process "for any purpose other than that as contemplated herein." Under that wording, a respectable argument could certainly be made that sharing the information with third parties who are strangers to the reinsurance relationship is not a purpose contemplated under the contract.25

On the other hand, in the hands of reinsurers determined to push the envelope or of cedents determined to impose severe restrictions, one can imagine disputes over just what purposes are contemplated under the reinsurance contract. Restrictions on the rights of individual reinsurers to share documentation with co-reinsurers, for example, present a closer question. Some commentators advise cedents to structure confidentiality agreements so as to limit or eliminate a reinsurer's ability to engage in that sharing.26 On the other hand, all reinsurers on the same contract would presumably have an identical entitlement to information encompassed under the inspection clause. It has been observed:

The idea that a cedant would wish to prevent other reinsurers receiving information which may be material to them could arouse grave suspicions in the minds of reinsurers who hear about this proposal. If these reinsurers have written shares of other treaties protecting the cedant's book of business, this could cause difficulties on unconnected contracts.27

As a practical matter, while it is possible to engage in philosophical and legal debates on whether cedents have the right to condition access to records on confidentiality agreements, most reinsurers operating in the United States market are not greatly troubled that their cedents wish them to sign confidentiality agreements. Rather, what is probably most disturbing is an unfortunate tendency of some cedents to put forth agreements that are unreasonably broad. Read literally, some agreements purport to treat as confidential, with substantial penalties for disclosure to third parties, any and all documents provided for review. This would include even those documents which consist of material in the public record - such as pleadings filed in court that have not been sealed, copies of news clippings relating to the claim at issue, and the like. In some cases, the proffered agreement is such that by signing it the reinsurer commits to confidential treatment of documents received in the inspection, even if it already has copies of those documents from other sources such as from reinsuring other cedents with involvement in the same original claim. Other agreements contain no provision for the reinsurer to make necessary disclosures of reviewed records to its own reinsurers or to regulatory authorities - even with the benefit of assurances of confidential treatment.

In any case, it seems likely that most United States courts and arbitration panels would permit cedents to condition records inspections on confidentiality agreements, so long as those agreements are deemed reasonable in scope. While research has revealed no published decision on the matter, there is a general trend for arbitration panels, in other areas, to impose obligations on the parties beyond those strictly provided for in the reinsurance contract. Many United States arbitrators believe, for example, that arbitration panels should be empowered to order the parties to treat not only the result of an arbitration, but the entire proceedings, as confidential. A panel composed of those arbitrators will have little difficulty in ordering that production of records be made subject to a reasonable confidentiality agreement, and most judges would probably adopt a like approach. Indeed, as a practical matter, unless it is unable to offer a persuasive objection to doing so, the reinsurer who resists signing a reasonable agreement runs a risk of alienating the judge or arbitration panel.

Finally, before leaving the subject of confidentiality agreements, it should be noted that the preceding discussion has assumed that the cedent itself is not under any restrictions as to the use it can make of documents subject to the reinsurer's inspection. It will often be the case, however, that in the context of underlying litigation or arbitration, the cedent will have obtained documents subject to a protective order (whether entered into voluntarily or imposed by a court or arbitration panel) that restricts the cedent's ability to share the documents. Typical access to records provisions should not be deemed to be violated by a cedent's insistence that its reinsurers adhere to the same restrictions on dissemination of documents that apply to the documents in the cedent's hands. By definition, a reinsurer's liability is derivative of the cedent's liability. Absent unusual circumstances, it would thus appear that a cedent fully complies with an access to records clause by affording its reinsurer the same degree of access to records that the cedent itself enjoys.

2. Payment of Outstanding Billings

Cedents frequently wish to condition reinsurers' access to records on payment of outstanding balances. At least when reinsurers have not invoked inspection rights in apparent bad faith, that tactics may not succeed under English law. In the case of In Re A Company (Nos. 008725/91 and 008727/91) ex parte Pritchard,28 Lloyd's syndicates denied the reinsurers inspection until all existing liabilities had been paid. The cedents then sought to enforce their reinsurance claims by bringing winding up proceedings against the reinsurer. The court rejected the cedent's argument that it could condition access to records on payment of outstanding balances:

If there was evidence that a proposed inspection was excessive in scope or otherwise in bad faith, I would take a different view. All that is said, however, is that it is an attempt to postpone payment because the company is insolvent. That does not, however, cast doubt upon the good faith of the exercise of the contractual right .... Even an insolvent company is entitled to exercise its contractual rights and to be treated fairly in accordance with the treaty.... [T]he creditor is not, in my view, entitled in breach of contract to deny the debtor access to the only material which would show whether or not the debt is owing and then claim that he has no material problem on which to contradict the bare assertion that it is due.29

At least one decision suggests that United States courts cannot be relied upon to take the same view. American Home Assurance Co. v. Instituto Nacional de Reaseguros,30 involved a proportional reinsurer who received quarterly statements of account covering the second quarter of 1984 through the second quarter of 1987 and failed to object to or question them until the cedent filed a legal action for recovery in 1988. The court noted that under New York law, an agreement to pay a particular amount could be implied, if a party failed to object to the contents of a statement of account within a reasonable period. It held that in the circumstances the reinsurer's failure to protest or inquire about the statements converted them into an account stated and thus shifted the burden to the reinsurer to "prove the sort of mistakes cognizable in law to support an adjustment of the stated account."31 Concluding that this burden had not been carried, the court stated that it would grant the cedent's motion for summary judgment for the amounts claimed. This would occur unless the reinsurer, within prescribed time periods, filed an affidavit attesting to its intent to conduct a further inquiry, also within a prescribed time period, into the pertinent questions on the basis of the documentation presently at hand.

The court also noted the reinsurer's complaint that the cedent had refused it access to records on one of the treaties at issue, and gave it short shrift:

That is a commercially reasonable position for [the cedent] to take, given [the reinsurer's] failure to either object to the statements of account or pay them. [The cedent] has stated its willingness to reinstate [the reinsurer's] right to audit under the Treaty, and to make any adjustment required by that audit, if [the reinsurer] is prepared to "bring its payments current - or even close." That is all the protection [the reinsurer] may equitably claim.32

The precedential value of this decision may be limited by the fact that it dealt with a reinsurance relationship in which the parties' course of dealing was one in which the reinsurer was expected to make payment based on bordereautype reporting, as contrasted with a facultative arrangement or nonproportional treaty relationship. In addition, it may well be that other courts or arbitration panels will take a less harsh view, particularly if the reinsurer is more prompt to invoke its inspection rights. In particular, it seems doubtful that a majority of courts or arbitration panels would condition the reinsurer's access to records on prior payment. In the author's experience, it is still the exception rather than the rule for arbitration panels to order reinsurers to make payment of the amounts at issue pending the result of the arbitration,33 although the reinsurer may be pressed by the panel to pay any amounts that cannot be shown to be genuinely disputed. Moreover, courts in many United States jurisdictions will not routinely order that security be posted by a defendant for amounts claimed.34

IV.

BREACH OF AN INSPECTION OF RECORDS CLAUSE

A. Consequences Under United Kingdom Law

The law on breach of inspection of records clauses and the consequences of such a breach is more fully developed in the United Kingdom than in the United States. In large part, this is due to the existence of certain procedural devices available to cedents in the United Kingdom which can have the effect of placing access to records issues before the courts at a very early stage in litigation. Typically, the cedent will apply under Order 14 for summary judgment by issuing a writ with brief points of claim and swearing that the claims are due. The reinsurer cannot, as a matter of course, obtain document discovery before the Order 14 application is heard in court. Instead, the reinsurer must show that it has an arguable defense to the cedent's claims, based on evidence already available to the reinsurer.

A tactic sometimes used by reinsurers in this situation is to request that the court adjourn the summary judgment proceeding in order to permit it to conduct an inspection of records pursuant to the applicable clause in the reinsurance contract. Whether such a request will be granted is very much a factdependent inquiry, although two leading practitioners in the London market have generally summarized the present state of English law as follows:

Where there is no specific defence being advanced by the reinsurers to the claim, other than the fact that an inspection may reveal a defence, then providing a cedant has not unreasonably refused a request for inspection and the reinsurer has had reasonable time to conduct an inspection, the cedant will in principle be entitled to judgement on the outstanding claims.35

These principles emerge from analysis of several recent English decisions. Probably the most important of these is Pacifica & General Insurance Co. v. Baltica Insurance Co.36 Reviewing prior decisions on the subject, Mr. Justice Rix discerned three considerations governing the resolution by a court of competing claims by the cedent for payment, on the one hand, and by the reinsurer for entitlement to review records first, on the other. First, he considered whether the reinsured had given or refused to the reinsurer the latter's contractual right of inspection. Second, he considered the circumstance in which the claim to inspect came forward - that is, whether the reinsurer has invoked its rights of inspection in a timely manner. Third, the court should consider whether some substantial reason has been advanced for why inspection is requested and what the reinsurer hopes to find upon that such inspection.

The facts in Pacific & General were that the cedent made a reinsurance claim, which caused the reinsurer to realize that there had been a significant lapse in notification of claims. The reinsurer demanded an inspection of records. The cedent objected, issued proceedings against the reinsurer, and sought summary judgment.

Applying the three principles set forth above, Mr. Justice Rix found that the cedent had put obstacles in the way of inspection for about a year after the first request, and that the refusal to allow inspection was wrongful. Further, he found that the reinsurer's concerns and its interest in inspection existed well before proceedings were issued. Accordingly, he adjourned the summary judgment application in order to permit the reinsurer a limited inspection. He observed that "a court should be cautious about giving summary judgment before an inspection which has been long claimed has been allowed to take place."37

The importance in English law of the reinsurer being able to put forth an arguable defense to the cedent's claim may be seen from another recent unreported decision, Aetna Reinsurance Co. (UK) Ltd v. Central Re Corporation Ltd.38 There, the reinsurer had complained about deteriorating experience under the reinsurance contract and asked the cedent's brokers for inspection, a request the brokers apparently failed to convey to the cedent. One month later, an account was submitted to the reinsurer, which it failed to pay. No further steps were taken for roughly a year and a half, at which time the reinsurer requested an inspection of certain documents. One month later, the cedents issued a writ and sought summary judgment.

The judge allowed the reinsurer leave to defend, because it had raised a defense of misapplication of risks to the treaty. However, the judge also declared the reinsurer liable to pay all balances currently due. The judge expressly rejected the reinsurer's argument that the inspection might reveal further defenses. Given Mr. Justice Rix's admonition in the Pacific & General case that courts should hesitate before giving summary judgment when an inspection claimed has not been allowed to take place, the Aetna decision is perhaps best understood as an indication that under English law, the right to inspect is subject to the qualification that the reinsurer cannot take an indefinite time to uncover a potential defense.

Finally, in an earlier unreported case, Trinity Insurance Co. v. Overseas Union Insurance Ltd.,39 the inspection request came only after the cedent had instituted proceedings against the non-paying reinsurer. Moreover, the cedent had not actually refused inspection; it had simply proven difficult to arrange. In these circumstances, the court refused to adjourn summary judgment proceedings until inspection could be completed.

B. Consequences Under United States Law

There is little United States decisional law on the legal consequences for the cedent of a breach of an access to records clause. Not only does United States law not offer a cedent the procedural device of an Order 14 summary judgment proceeding, but many reinsurance disputes under contracts placed in the United States market must be arbitrated rather than litigated. It has been held in Philadelphia Reinsurance Corp. v. Universale Ruckversicherungs A.G.,40 that a reinsurer may not insist on an examination of records as a prerequisite to the cedent's invoking the arbitration process. The court in this case added that, while the treaty language clearly afforded the reinsurer a right of inspection, it was for the arbitration panel to decide whether the inspection clause had been breached.

As a practical matter, the damages proximately caused by a breach of the access to records provision would not often be great enough to justify the expense of litigation to recover them. The more intriguing question is whether a reinsurer may use the cedent's breach of the access to records clause as a basis for rescinding the contract as a whole. In general, a breach must be material, in the sense that it is destructive of the contract essence, in order to justify the nonbreaching party to treat its obligations under the contract as having come to an end.

In Manhattan Life Insurance Co. v. Prussian Life Insurance Co.,41 the court held that a cedent's refusal to permit examination of its books, coupled with a deliberate refusal to pay premiums on numerous risks encompassed in the scope of a treaty, discharged the reinsurer from its obligations. The court's opinion can be read to suggest that each of the two breaches was material. By inference, the breach of the access to records provision, standing alone, would relieve a reinsurer from further obligations under the contract. However, it is extremely unlikely that such a proposition would ever find general acceptance by United States courts or arbitration panels.42 Indeed, research has revealed no subsequent United States court decision holding or suggesting that a breach of an access to records clause operates as a material breach sufficient to discharge a reinsurer from further obligations. Particularly in circumstances in which the purported "breach" consists not of an outright refusal to allow any records inspection whatever, but instead of placing unreasonable conditions on such an inspection, courts and panels will be reluctant to impose the sanction of rescission.

V.

EXERCISING OR FAILING TO EXERCISE INSPECTION RIGHTS: TRAPS FOR THE UNWARY?

Both United States and English cases suggest that there may be unintended consequences to both the exercise of a reinsurer's right of inspection and a failure to exercise that right. Under English law, for example, a reinsurer who might otherwise be in a position to seek rescission of treaties apparently invokes inspection at its peril, because the court may deem that invocation to be an affirmation of the treaties. Such was the result in Iron Trades Mutual Insurance Co. v. Companhia de Seguros Imperio,43 in which reinsurers invoked inspection clauses nearly a year and a half after they became aware of a factual basis for rescission:

This was the express invocation of a contractual right. No qualification or reservation of right was introduced and it can only have been a further affirmation of the contracts.

The insurer is under no obligation to elect to treat the contract at an end within any particular length of time and accordingly mere delay, without more, does not deprive him of his right to do so. However if he does some act in affirmation of the contract, that is to say, some act which is only consistent with an intention not to treat the contract as at an end, he will thereafter have lost his right to do so provided he had actual knowledge of the facts which gave rise to the right.44

On the other hand, a reinsurer may also prejudice itself by failing to take advantage of its inspection opportunities. That may occur if a court or arbitration panel later deems the opportunity to inspect to be a defense to the reinsurer's claim of concealment or misrepresentation on the part of the cedent. It must be conceded here that the law in the United States, in particular, is in something of a state of flux, and that concrete predictions as to particular fact patterns thus present a challenge.

In one case, Gerling Global Reinsurance Corp. v. Safety Mutual Casualty Corp.,45 the court found "untenable" a reinsurer's claim of fraudulent concealment in light of the presence in the reinsurance contracts of a typical access to records clause. The court reasoned that in the absence of any indication that the cedent failed to honor that clause, it defeated the fraudulent concealment claim. On the other hand, New York's highest court recently held that reinsurers fraudulently induced to underwrite certain reinsurance treaties were entitled to rescind the contracts, even though it had vigorously been argued on behalf of the cedent's liquidator that in order to demonstrate justifiable reliance the reinsurers should have been required to show that they conducted due diligence review of the cedent's books and records.46

In the face of these conflicting signals, about all one can say is that there may indeed be unintended consequences to the invocation of, or the failure to invoke, inspection rights, or indeed of both.

VI.

ACCESS TO DOCUMENTS PROTECTED BY ATTORNEY-CLIENT OR OTHER PRIVILEGES

Probably the thorniest issues arising under access to records clauses have to do with the extent to which these clauses entitle reinsurers to access documents that are subject to attorney-client privilege or to work product protection. The typical fact pattern is that the cedent is in the throes of hotly contested coverage litigation with major implications for the scope of the cedent's liability, and by extension that of the reinsurer. As to each of the issues being litigated, coverage counsel representing the cedent in that case has prepared a detailed litigation assessment, with specific recommendations as to settlement ranges. The cedent believes that assessment clearly demonstrates the wisdom of attempting to settle on terms that will necessarily lead to some liability on the part of the reinsurer, although not in an amount that even approaches what the liability would be if the policyholder were to prevail in all respects. Must a cedent, under an access to records clause, share that litigation assessment with the reinsurer? If the cedent wishes to do so, perhaps because it believes the document will demonstrate to the reinsurer that its approach to settlement negotiations is correct and reflects good faith, can it thereafter maintain its claim of privilege as to the document against efforts by the policyholder to discover it? Addressing these issues requires an understanding of two separate and somewhat conflicting lines of United States case law.47

A. The "Common Interest" Doctrine

1. Documents Original Insurers Shared With Reinsurers A large number of decisions have addressed precisely the situation outlined above. The context is a pretrial discovery request by a policyholders for documents, otherwise privileged, that have been shared by an insurer with its reinsurers. The majority of reported cases, decided in this context, stand for the proposition that disclosure of privileged material by a cedent to its reinsurer does not effect a waiver of the privilege.48

One decision that sets forth the general rule well is Hartford Steam Boiler Inspection & Insurance Co. v. Stauffer Chemical Co.49 The original insured sought discovery from a reinsurer in an environmental pollution coverage action. The court upheld the joint claim by the reinsurer and the cedent of privilege for documents authored by the cedent's attorney and shared with the reinsurer:

The Insureds contend that [the cedent] has waived the attorney-client privilege because it disclosed the communications to a third party. The Court disagrees. The legal and economic interests of [the cedent] and [reinsurer] in the EIL insurance claim and lawsuits are inextricably linked by the reinsurance treaty. The fact that [the reinsurer] is not a party defendant in those lawsuits is of little significance because [the reinsurer] will automatically share in any liability suffered by [the cedent].... Furthermore, ... the treaty provides that [the cedent] must cooperate with [the reinsurer] so that the latter can determine whether and to what extent it should provide defense efforts in addition to the required. . . financial contribution. Such cooperation would naturally include communications between [the cedent's] attorneys and [the reinsurer] and other communications subject to the privilege.50

2. Documents Sought by Reinsurer After Reinsurance Dispute Arose The second line of case law consists of decisions rendered in a different factual context. In these cases, the underlying coverage and liability disputes have been resolved, and there is no obvious danger of the policyholder seeking access to privileged documents. Rather, the cedent now seeks to compel the reinsurer to reimburse its share of the amounts paid to settle the claim. The reinsurer, in discovery, seeks access to documents reflecting advice of the cedent's counsel received in connection with the underlying dispute. The cedent withholds the documents, arguing that it is not in a position of common interest with the reinsurer, and asserting privilege as to the documents. The reinsurer responds by citing the access to records provision in the relevant reinsurance contract.

This line of cases reaches a result opposite to those previously noted. The courts have refused to accept the notion that cedent and reinsurer, now engaged in a dispute, are parties to a relationship of common interest. One case, decided in this context, suggested a possible analytical means by which the two lines of authority could be reconciled. In United States Fire Insurance Co. v. Phoenix Assurance Co.,51 a reinsurer, engaged in litigation with the cedent, sought production of attorney-client documents relating to an underlying arbitration between the cedent and its original insured over the scope of coverage under the cedent's policy. The cedent asserted that the documents were privileged from discovery; the reinsurer asserted that any privilege was waived by virtue of an access to records provision in the applicable facultative certificates. The court concluded that due to the dispute between the cedent and the reinsurer, the cedent should be freed from its obligations that otherwise might exist under the access to records clause. Attorney-client privilege, in other words, "was not waived by the promise of open 'records' alone, given the parties' present contractual dispute."52

In addition, the court rejected the reinsurer's claim that because the cedent had shared privileged documents with that reinsurer in the past, there had been a waiver of privilege for all documents relating to the same subject matter. The court suggested that because the parties had shared a common interest at the time of disclosure, no waiver was effected by the disclosure.53

If this were the only decision on the issue, one might conclude that disclosure of privileged material to reinsurers at an early stage, before an actual dispute between cedent and reinsurer had materialized, could be made without waiving the privilege. On the other hand, requests for privileged material, made at a time when the cedent and reinsurer had become adverse as to the coverage issues addressed in that material, would presumably be denied even in the face of clear access to records wording. It would have to be said that even under such an analysis, close questions could arise as to whether the cedent and reinsurer were still aligned or, in fact, had reached the point of dispute in a particular case. Nonetheless, under such an analysis, reinsurers could at least be assured of obtaining access to privileged material relevant to potential claims against them at an early stage, provided they were vigilant in seeking it.

However, other cases in this context go much further in rejecting the notion that common interest ever exists between cedent and reinsurer, even at the pre-dispute stage. In North River Insurance Co. v. Philadelphia Reinsurance Co.,54 for example, the reinsurer sought discovery of documents reflecting legal advice to the cedent in connection with the cedent's decision not to appeal from an adverse arbitration decision. The reinsurer suspected that the decision was motivated by a desire to improve the cedent's case for reinsurance recovery.

The court analyzed the common interest doctrine in very narrow terms, holding that the doctrine should properly be viewed as limited to cases in which there was dual legal representation. A mere common interest in the outcome of a particular issue, in the court's analysis, was insufficient. The court considered and expressly rejected the reinsurer's argument that an access to records clause provided a basis for the reinsurer to claim entitlement to confidential documents. That clause, referred to by the court as a "claims cooperation clause," was in fact a fairly typical access to records clause:

The company shall furnish the Reinsurer with a copy of its policy and all endorsements thereto which in any manner affect this certificate, and shall make available for inspection and place at the disposal of the Reinsurer at reasonable times any of its records relating to this reinsurance or claims in connection therewith.55

The court squarely held that this wording did not entitle the reinsurer to documents reflecting legal advice to the cedent on the underlying coverage dispute:

Although a reinsured may contractually be bound to provide its reinsurer with all documents or information in its possession that may be relevant to the underlying claim adjustment and coverage determination, absent more explicit language, it does not through a cooperation clause 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. Provided that the reinsured has been forthright in making available to its reinsurer all factual knowledge or documentation in its possession relevant to the underlying claim or the handling of that claim, it has satisfied its obligations under the cooperation clause. The reinsurer is not entitled under a cooperation clause to learn of any and all legal service obtained by a reinsured with a "reasonable expectation of confidentiality."56 In response to the reinsurer's contention that these documents were customarily made available for review in the industry, the court said, "[a]lthough [the cedent] was free to produce such documents if it chose, to facilitate adjustment of its claim, it was not required under the contract to do so."57

Finally, the court addressed the so-called "in issue" doctrine under which a party that places an attorney-client communication in issue is deemed to have waived the privilege as to that communication. However, the court interpreted this doctrine very narrowly, to the detriment of the reinsurer, ruling that the privilege would be waived only by putting in issue the specific contents of the communication. The fact that coverage or the overall reasonableness of the cedent's conduct is at issue is not sufficient under this analysis.58

Another decision, North River Insurance Co. v. Columbia Casualty Co.,59 involved a reinsurer who made both a general request for privileged documents based on the common interest doctrine, but also specifically requested two documents on the further ground that they had been disclosed to another reinsurer. As to the general issue of common interest, the court held that the mere fact of a reinsurance relationship was insufficient. The court agreed, however, that the two documents previously provided to another reinsurer were required to be produced. As to those two, the cedent argued that it was still in a relationship of common interest with the reinsurer to whom disclosure was made at the time of disclosure, even though ultimately it reached the stage of dispute with that reinsurer as well. The court said:

[I]t is clear that [the cedent] and [the reinsurer] had no common legal interest. On the contrary, their interests in this instance were antagonistic. In the process of seeking payment from [the reinsurer] . . . [the cedent] provided the [documents in question], apparently hoping that [the reinsurer] would be persuaded to pay. It was not, and litigation ensued. At no point did [the cedent] and [the reinsurer] engage in a common legal enterprise, and the common interest doctrine therefore does not apply.60

The unwillingness of these courts to find a relationship of common interest between cedent and reinsurer gave rise to some concern that the majority line of cases rejecting policyholder discovery of privileged documents shared with reinsurers might start to crumble as a similar analysis was applied in that context. As the court noted in North River, "[w]hether two parties share a common interest is a question subject to the analysis discussed above, independent of whether the party asserting such an interest is seeking to discover or protect from discovery an attorney-client communication."61

Until recently there was a sort of peaceful coexistence between the two lines of case law. Concerns that the no-common-interest analysis would begin to affect rulings in the context of pretrial discovery requests by policyholders were dismissed. For example, one commentary, addressing the North River and United States Fire decisions, suggested that they would not be applied in the more general context of pretrial discovery in the course of underlying coverage litigation:

Each case involved litigation between the ceding company and reinsurer, and they have no application as support for a cedent's refusal to permit a reinsurer access to privileged documents merely for the purposes of evaluating the reinsurer's exposure. To expand the North River and United States Fire cases beyond their factual situations would unduly hinder reinsurers in exercising their inspection rights.62

Contrary to these predictions, the two lines of cases recently came together in McLean v. Continental Casualty Co.63 There a federal magistrate, presented with a motion to compel production of documents, ruled that an insurance company's disclosure of certain documents to its reinsurer had the effect of waiving any privilege that might otherwise have been applicable. On the one hand, one decision of a federal magistrate hardly qualifies as a trend or as a signal that the tide is turning. Nevertheless, it is disturbing that the result in this case was expressly grounded on the more recent line of cases that appeared to reject out of hand the notion of any common interest in the reinsurance relationship. The magistrate expressly relied on North River in holding that "the relationship between insurer and reinsurer is simply not sufficient to give rise to the common interest privilege." The theory hopefully offered by some commentators that the recent no-common-interest decisions would not be applied in the pretrial discovery context, where no adversity had yet developed between cedent and reinsurer, cannot be squared with this decision.

B. Is "Common Interest" The Appropriate Analytical Framework?

As a result of the court decisions summarized in the preceding section, cedents and reinsurers operating in the United States market face increasing uncertainty as to the effect of the cedent's sharing privileged material with a reinsurer. It should be noted that this is not a problem shared by those for whom such issues will be decided under English law. Unless the reinsurer has asserted that the reinsurance contract is subject to rescission and that it intends to treat the contract as having no ongoing effect, referred to in English law as "avoiding" the contract, English law apparently will deem the cedent and reinsurer to be in a position of common interest.64

None of the obvious possible solutions to this uncertainty is entirely satisfactory. Some cedents may continue to share coverage counsel assessments and similar privileged material on the theory that they have more to gain from frank exchanges of information with their reinsurers than will be forfeited in what probably will still be relatively few cases. Other cedents may differentiate between cases based on the state of the law in the relevant jurisdiction, the relative aggressiveness of the policyholder in seeking reinsurance-related discovery, and the degree of the court's apparent willingness to permit such discovery. Such assessments, however, are complicated by a number of factors. The absence of any significant body of law at the appellate court level, coupled with the near impossibility of obtaining interim review of most discovery rulings, means that the cedent is largely at the mercy of the judge presiding over the coverage litigation or, increasingly, a magistrate ruling on discovery matters subject to that judge's review.

It has sometimes been suggested that privilege waiver problems may be avoided through the device of having the reinsurer retain as its counsel the same attorney who represents the cedent in the underlying claim or coverage dispute. Such a step might carry some weight with those courts that have rejected the argument that the reinsurance relationship, standing alone, amounts to a common legal enterprise for purposes of maintaining privilege. Arguably the case for a common legal enterprise, and thus against privilege waiver, would be strengthened still further if the reinsurer, in addition to retaining the cedent's counsel, expressly invoked its right to associate in the defense of the underlying action.

On further examination, however, this solution is fraught with its own set of perils. Formally associating in the defense of the underlying action brings into play a line of cases, beyond the scope of this paper but well known to reinsurance practitioners, suggesting that too much involvement by a reinsurer in the handling of a claim may open the reinsurer to direct action by policyholders or third party claimants. On the other hand, mere retention of the same counsel without any meaningful involvement in the direction of the underlying action is apt to be perceived by many courts as a sham and thus given no weight in the privilege waiver analysis. If nothing else, counsel sought to be retained jointly by cedent and reinsurer would need very clear marching orders as to the implications of that joint retention on the ability to act in connection with a later dispute between those parties. At a minimum, counsel is probably required to make disclosure to both parties as to the potential advantages and disadvantages of the joint representation and to secure the written consent of both parties.65 The reinsurer may be understandably reluctant to consent to counsel's later representing the cedent in a dispute with the reinsurer over the claim, particularly if it views the access to records clause as obligating the cedent to share privileged information in any case. If the reinsurer purports to consent, there is at least some uncertainty whether that consent will be effective if challenged.66 Even if consent is given and proves effective, it is arguable that such express contemplation of adversity between cedent and reinsurer would be used as a ground for finding, by a court that was otherwise so inclined, that the joint retention of counsel did not create a true common legal interest.

One fears that some cedents may increasingly be deterred from sharing privileged material with reinsurers out of fear that in the present state of United States law, the privileged status of such documents cannot be guaranteed once they are disclosed, at any time, to any reinsurer. Indeed, for those cedents who would otherwise like to share such information, a serious dilemma exists as to the optimum timing for that disclosure. All other things being equal, disclosure at an early stage of the underlying claim or coverage litigation may create a better case for maintaining that common interest existed between cedent and reinsurer at that time. This assumes, however, that the court will not reject out of hand the idea that the reinsurance relationship can ever give rise to a common interest. If it does, then the timing of the disclosure will make no difference.

Alternatively, the cedent could seek to delay the production of the privileged material to the reinsurer until after the underlying dispute had been resolved. At that point, the risk of being compelled to disclose the material in discovery to the policyholder should be dramatically reduced, if perhaps not completely eliminated.67 On the other hand, if the court is apt to give any weight at all to the timing of the disclosure, an exchange following resolution of the original claim may more easily lead to a finding that common interest no longer exists with the reinsurer, particularly if that reinsurer has begun to raise questions or challenge the cedent's reinsurance submission. It may also lead to a finding that, in sharing the privileged document with an apparently friendly reinsurer, the cedent has waived any privilege that may be deemed to exist as to other, adverse reinsurers.68

One hopes the courts will be receptive to arguments in future cases that the reinsurance relationship should be deemed to entail a common interest sufficient to avoid waiver through disclosure. On the other hand, the difficulties some courts have had in fitting the reinsurance relationship into the common interest framework suggests that other avenues must be pursued with equal aggressiveness. These include the argument, accepted by some courts,69 that the whole area of reinsurance ought to be off limits in discovery because it is irrelevant and not reasonably calculated to lead to the discovery of admissible evidence. Rule 26(b)(2) of the Federal Rules of Civil Procedure, which has a counterpart in many if not all state codes of procedure, permits discovery of the existence and content of insurance policies that are potentially applicable to the claims being asserted in the litigation. The status of reinsurance as an obligation of indemnity rather than a contract of insurance affords a basis for arguing that reinsurance discovery should not generally be permitted at all.70 Indeed, if one accepts the rationale of recent decisions rejecting common interest in the reinsurance context because the status of reinsurance as an indemnity obligation makes the reinsurer's interest similar but not identical, or commercial rather than legal, with that of the cedent, that rationale can be invoked as a shield against reinsurance-related discovery altogether.71

Cedents may also argue, invoking access to records provisions, that their disclosure of privileged information to reinsurers should not be deemed to be voluntary in nature, and thus should give rise to no waiver. Some cedents may be uncomfortable strongly arguing this point, however, lest it come back to haunt them in disputes with reinsurers over the proper interpretation of access to records clauses.

Another avenue is suggested by the case law dealing with discoverability of reserves posted by an insurer for the claim at issue in litigation. Many courts have agreed with industry concerns that if insurers were compelled to reveal their reserving decisions in coverage disputes, when policyholders argue that the setting of a particular reserve is some type of admission of coverage, insurers would be less inclined to establish sound reserves and the public's interest in the financial integrity of insurance companies would be compromised.72 Equally strong arguments can be made that the courts should not, through rulings in discovery, create impediments to the full and frank exchange of information between cedents and reinsurers that will assist reinsurers in setting appropriate reserves for claims they may ultimately be called upon to pay.

Ultimately, what is required may be no less than the creation of a new and distinct privilege for cedent-reinsurer disclosure. While privileges are disfavored in law, their advocacy should not be deterred when they meet the criteria for creation of privileges. Dean Wigmore sets out four "particularly influential" essential conditions for the establishment of a privilege. A strong case can be made that communications of privileged material directly bearing on the cedent's liability, and by extension that of the reinsurer, meet those criteria:

(1) The communications must originate in a confidence they will not be disclosed;

(2) This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties;

(3) The relation must be one which in the opinion of the community ought to be sedulously fostered;

(4) The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.73

Even if insufficient to lead a court to announce the creation of a new privilege, these arguments may persuade a court that it should use other grounds, including relevance and undue burden, to deny a policyholder's request for discovery of documents disclosed to reinsurers.

Unless and until the courts give reason for more sanguinity as to the fate of privileged documents in the hands of reinsurers, cedents are probably faced with making an uncomfortable choice whether they most fear compelled disclosure of privileged material to their policyholders or to their reinsurers. One hopes the prospect of compelled disclosure to reinsurers is the one that is more acceptable. After all, leaving aside whether disclosure is compelled under an inspection clause, most cedents probably want to share coverage evaluations with at least those reinsurers that have not yet indicated an intent to challenge or deny the reinsurance claim. This suggests that reinsurers may need to be flexible in response to reasonable requests from cedents to delay production of privileged material until a comfortable stage of the underlying litigation. In some jurisdictions this may be the completion of litigation. Cedents in turn may have to face the need to make disclosure at a stage when that disclosure to friendly reinsurers may mean they will not be successful in withholding the relevant documents from adverse reinsurers. VII.

CONCLUSION

It probably is no coincidence that disputes over access to records appear to be on the increase at the same time that reinsurers are being presented with significantly increasing payment requests arising from environmental pollution and other long-tail casualty exposures. The absence of a significant body of decisional law on access to records clauses, together with a breakdown of traditional relationships of trust and good faith, make it difficult for either party to the reinsurance relationship to deal effectively and economically with a situation in which the other party is behaving unreasonably. Experience suggests that to the extent such issues are presented to courts in the United States, the result may well be precedents that are difficult for either party to accept. In the long run, the obvious solution probably is to draft access to records clauses in new contracts that are more specific and detailed as to the parties' rights and obligations. Unfortunately, that leaves a significant body of claim and other activity to be dealt with under wordings that, in this as in other areas, are probably not up to the demands now being placed upon them.

*This article is presented for educational purposes only, and not as an expression of the views of the author's firm or its clients.

1This article will refer to such clauses either as access to records clauses or inspection clauses. 2Although they do not appear to have gained much currency in the U.S. market, one sees from time to time proposed clauses that, in addition to conferring a right of access on the reinsurer, purport to give the cedent a right of access to the reinsurer's records pertaining to the reinsurance contract. As the bulk of the reinsurer's records will have emanated from the cedent, and the remainder may well be proprietary in nature (e.g., rating information), it is difficult to see what legitimate purpose such provisions are designed to serve.

3KLAUS GERATHEWOHL ET AL., REINSURANCE: PRINCIPLES AND PRACTICE, quoted in BARLOW LYDE & GILBERT, REINSURANCE PRACTICE AND THE LAW 18.2 (1993 & 1996 Supp.).

4BARLOW LYDE & GILBERT, supra note 3, at 18.2.

5Compare sample clauses 1-3 (treaty reinsurance) with sample clauses 4-5 (facultative reinsurance) above.

6See C.E. GOLDING, THE LAW AND PRACTICE OF REINSURANCE 72 (1987) ("It is doubtful whether [inspection of records] could be made as a matter of right unless the clause were included in the contract since this is not an implied condition of such an agreement as a reinsurance treaty").

7See ROBERT W. HAMMESFAHR & SCOTT W. WRIGHT, THE LAW OF REINSURANCE CLAIMS 6.4 (1994) ("Expressly or implicitly, a reinsurer has the right to full and complete access to all of its cedent's records"); Barlow, supra note 3, at 18.2 ("the right of inspection is probably necessarily implied into any reinsurance treaty, except if it is specifically excluded").

8(1987) 2 W.L.R. 512 (Q.B. July 31, 1985).

9(1985) LRLR 116 (C.A. July 22, 1994)(LEXIS, Enggen Library, Cases file).

10ld. at 50.

11Technically, one could also debate whether, under wordings making no express reference to personnel, a cedent must permit the reinsurer to communicate with its employees as well as review documents. It has been argued that "[t]he right to audit does not mean that the reinsurer has a right to interrogate." See Larry P. Schiffer, A Practical Guide to Reinsurance Audits, 5 MEALEY'S LITIG. REP. (REINSURANCE) No. 11 (Oct. 11, 1994) 15, 17. On the other hand, it is questionable, to say the least, whether a cedent can withhold from the reinsurer even that level of dialogue with its personnel that is reasonably necessary for the records inspection to have any meaning to the reinsurer. See id. ("[S]omeone should be available to assist the auditors in answering questions concerning file interpretation and other technical file handling questions").

12For example, one treatise states:

[T]he reinsurer is entitled to appoint as an inspector anybody that he chooses. Unless there is evidence that the person appointed is seeking, with ulterior motives, to carry out anything beyond the ambit of an inspection of the books and records of the cedant pertaining to the treaties in question, the cedant cannot and should not object. BARLOW, supra note 3, at 18.5.1.

13[1989] I.L.R.M. 13 (Ir. H. Ct. 1986).

14No. 95-11294-PBS (D. Mass. Nov. 13, 1996), 7 MEALEY'S LTG. REP. (REINSURANCE) No. 14 (Nov. 20, 1996) at F-1. 15Id. slip op. at 4.

16Id. Slip op. at 10 (citation omitted).

17See Schiffer, supra note 11, at 16-17 ("If the proposed auditor is someone who in the past has interfered with ongoing business operations or who has served as an expert witness against the company for another reinsurer on the same business, there may be a basis to object").

18Marilyn J. Laughlin, General Clauses for Most Treaties, reprinted in REINSURANCE CONTRACT WORDING 40, 42 (Robt. W. Strain ed. 1992).

19Laughlin, supra note 18 at 42. See also Charles E. Heiden, Contract Drafting Techniques, reprinted in REINSURANCE CONTRACT WORDING (Robt. W. Strain ed. 1992) 702, 727 ("Some drafters add language that the access to pertinent papers will survive the termination or expiration of the contract. This addition is felt to be unobjectionable but may not be necessary in all cases.").

20See Laughlin, supra note 18, at 43.

21See id.

22Id.; GRAYDON S. STARING, LAW OF REINSURANCE 15:8 (1993). 23[1989] I.L.R.M. 13 (1986).

24BARLOW, supra note 3, at 18.5.3.

25See also Winterthur Swiss Ins. Co. v. Insurance Corp. of Ireland [ 19891 I.L.R.M. 13 (Ir. H. Ct. 1986) (it would be an abuse of the reinsurance relationship of confidence and trust if information obtained through inspection "is divulged to those other than those to whom it might legitimately be divulged").

26See Schiffer, supra note 11, at 21 (confidentiality agreement "helps prevent an auditor from audit [sic] offering information or findings to other reinsurers, and helps curtail a reinsurer from trying to join with another reinsurer on a potential dispute"). 27BARLOW, supra note 3, at 18.5.3.

28[1992] No. BCLC 633 (Ch. Oct. 9, 1991)(LEXIS, Enggen Library, Cases file).

29Id.

30 No. 88 Civ. 0917 (CSH) 1991 WL 4461 (S.DN.Y. Jan. 10, 1991). 31Id. at *4.

321d. at *5 (citation omitted).

33At least some decisions uphold a panel's authority to make such orders, however. See Pacific Reinsurance Management Corp. v. Ohio Reinsurance Corp., 935 F.2d 1019 (9th Cir. 1991).

34Note, however, that in some jurisdictions there may be statutory provisions requiring unauthorized insurers or reinsurers to post security for amounts claimed prior to filing responsive pleadings. See, e.g., N.Y. INS. LAW 1213(c)(1) (McKinney 1997).

35Richard Leedham & Jonathan Sacher, An Inspector Calls, REINSURANCE 29 (July 1996). 361996 LRLR 8 (Q.B. Nov. 3, 1995), reprinted in 6 MEALEY'S LITIG. REP. (REINSURANCE) No. 22 (March 27, 1996) at D-1.

37Id. at 9; see also In Re A Company No. 008725/91 and 008727/91) ex parte Pritchard [1992] No. BCLC 633 (Ch. Oct. 9, 1991)(LEXIS, Enggen Library, Cases file), discussed supra.

38(Q.B. June 23, 1995), reprinted in 7 MEALEY'S LITIG. REP. (REINSURANCE) No. 6 (July 24, 1996) at F-1.

39(Q.B. June 10, 1994), reprinted in 7 MEALEY'S LITIG. REP. (REINSURANCE) No. 6 (July 24, 1996) at E-1.

40No. 93 Civ 7234, 1994 WL 4437 (S.D.N.Y. Jan. 6, 1994). 41 296 F. 39 (2d Cir. 1924).

42The context in which the Second Circuit reached its conclusions as to the materiality of the breaches complained of may be seen from its introductory summation of the case:

Reduced to its lowest terms plaintiff's proposition is this: My contract with Prussian meant that, when I exercised my right of cancellation by giving a month's notice in writing, I could thereafter leave the Prussian as reinsurer on such then existing risks as I did not care to place elsewhere, but as to any risk on which I preferred other reinsurers, or no reinsurance, I could whenever I pleased cease paying premiums. Colloquially put, this interpretation empowered Manhattan to take at pleasure the cream of its business from Prussian, and leave the latter the skim milk.

Id. at 40-41.

43(Q.B. July 31, 1990)(LEXIS, Enggen Library, Cases file). 44'd.

45No. 79 Civ. 4422 (RWS), 1981 US Dist. LEXIS 13864 (S.D.N.Y. Aug. 7, 1981). 46In re Matter of the Liquidation of Union Indem. Ins. Co., 674 N.E.2d 313 (N.Y.1996). But see Compagnie de Reassurance D'Ile de France v. New England Reinsurance Corp., 57 F.3d 56 (Ist Cir. 1995).

47The difficult dilemmas faced as to these matters under U.S. law by cedents, reinsurers, and practitioners do not exist under English law. See discussion at VI.B. infra.

48See, e.g., United States Fire Ins. Co. v. General Reins. Corp., No. 88 Civ 6457 (JFK),1989 WL 82415 (S.D.N.Y. July 20, 1989); Great Am. Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533 (E.D. Cal. 1988); Durham Indus. Inc. v. North River Ins. Co., No. 79 Civ. 1705 (RWS), 1980 WL 112701 (S.D.N.Y. Nov. 21, 1980); cf. Potomac Elec. Power Co. v. California Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1996) (denying motion to compel production of communications between cedents and reinsurers on grounds of irrelevance, and noting that "[i]n addition, the correspondence may well constitute proprietary information or be protected by the attorney-client privilege or the work product doctrine"). But see Am. Protection Ins. Co. v. MGM Grand Hotel-Las Vegas, No. CV LV 82-26 (RDF),1983 US Dist. LEXIS 16423 (D. Nev. June 7, 1983) (ordering production of documents subject to attorney-client privilege and work product protection based on waiver of privileges effected by sharing documents with reinsurer pursuant to access to records and notice clauses in reinsurance certificate); cf. Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 140 (N.D. Ill. 1993) (having initially held no document at issue was entitled to attorney-client privilege or work product protection in any case, court in dicta states that any privilege would have been waived by disclosure to reinsurers).

49Nos. 701223, 701224,1991 WL 230742 (Conn. Super. Ct. Nov. 4, 1991).

50Id. at *2.

51No. 7712/91 (Sup. Ct. N.Y. Cty. Aug. 18,1992), 4 MEALEY'S LITIG. REP. (REINSURANCE) No. 4 (June 23, 1993) at F-2, affd mem., 598 N.Y.S.2d 938 (App. Div. 1993).

52MEALEY'S LMG. REP., supra note 51, at F-4. 531d.

54 797 F. Supp. 363 (D.N.J. 1992).

55Id. at 368.

561d. at 369 (citations omitted). 57Id.

58ld. at 370. While the "in issue" doctrine was thus not applied on the facts of this case, one can envision disputes in which the cedent will be hard-pressed to justify its decisions without express reliance on advice of counsel and will thus deem the enhanced likelihood of reinsurance recovery to be worth the risk of waiver.

59No. 90 Civ. 2518 (MJL), 1995 WL 5792 (S.D.N.Y. Jan. 5, 1995). 60d. at *8. 61ld.

62ROBERT W. HAMMESFAHR & SCOTT W. WRIGHT, THE LAW OF REINSURANCE CLAIMS 6.4(D)(2)(b) at 141-42 (1994).

63No. 95 Civ. 10415, 1996 WL 684209 (S.D.N.Y. Nov. 21, 1996), 7 MEALEY'S LITIG. REP. (REINSURANCE) No. 15 (Dec. 4, 1996) at D-1.

64See Commercial Union Assurance Co. v. Mander, 2 Lloyd's Rep. 640, 647-48 (Q.B. June 12, 1996).

65See Model Rules of Professional Conduct, Rule 1.7(b) (1995) (lawyer may not represent client where representation may be materially limited by responsibilities to another client unless client consents after consultation); Model Code of Professional Responsibility DR 5-105 (1983)(lawyer may not represent differing interests unless it is obvious that lawyer can adequately represent interest of each client and each client consents after full disclosure of possible effect of joint representation).

66See Model Rules of Professional Conduct Rule 1.9 (a)( 1995) (lawyer who formerly represented a client in a matter shall not thereafter represent, in same or substantially related matter, another person whose interests are materially adverse to those of the former client, unless the former client consents after consultation).

67Cedents may still fear that attorney letters generated in the context of one case may be deemed to have general applicability beyond that case and thus be subject to efforts at discovery in subsequent disputes.

68Some cedents employ the device of having coverage counsel prepare two reports, one for the cedent's consumption only, and one for the reinsurers. While this may be useful, it inevitably leads to speculation and mistrust on the part of reinsurers as to what has been omitted from the reinsurer version.

69See, e.g., Independent Petrochemical Corp. v. Aetna Casualty & Sur. Co., 117 F.R.D. 283 (D.D.C. 1986).

70See generally Note, Confidential Insurer-Reinsurer Communications: Are Courts Placing the Reinsurance Relationship in Jeopardy by Ordering Disclosure?, 27 Rutgers L.J. 727, 735-39 (1996).

71Note, however, that even if reinsurer communications are generally off limits to discovery, policyholders may be able to persuade a court that disclosure of privileged documents to reinsurers, like disclosure to any third party, should constitute a waiver that justifies compelling the production of such documents. The objective, which may not always be attainable, is to persuade courts that reinsurance is not even of sufficient relevance to justify inquiry into what documents have been shared with reinsurers.

72See, e.g., Gold Fields Am. Corp. v. Aetna Casualty & Sur. Co., No. 19879/89 (N.Y. Sup. Ct., Feb. 24, 1994) reprinted in 8 MEALEY'S LITIG. REP. (INSURANCE) No. 19 (March 15, 1994) and cases cited therein.

73 8J. WIGMORE ON EVIDENCE 2285, at 527 (J. McNaughton rev. ed. 1961).

Kathryn P. Broderick has practiced with Preston Gates Ellis & Rouvelas Meeds LLP in Washington, D.C., since 1983 and is the senior partner in that firm's reinsurance practice group, regularly representing reinsurers on both ceded and assumed claims, commutations, pools and associations, contract wording, MGA arrangements, regulatory and corporate matters, negotiation, arbitration, and litigation. She received her B.A., summa cum laude, in 1975 from Trinity College, Duke University where she was Phi Beta Kappa and her J.D., with highest honors, in 1978 from the National Law Center, George Washington University where she was Order of the Coif. Ms. Broderick is a member of the District of Columbia Bar, American Bar Associa

tion (Litigation and Tort & Insurance Practice Sections), ARIAS-U.S., the Defense Research Institute, and the Federation of Insurance & Corporate Counsel.

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