Discoverable or not: whether reinsurance agreements and communications are discoverable in federal courts.
I. The Invariable Discovery Dispute in Reinsurance Litigation
One area where the discoverability of insurance is particularly contentious is in the reinsurance context. Almost invariably in large insurance cases, a disagreement will arise between the parties over whether reinsurance information (e.g., the actual policy and communications between the cedent/insurer and reinsurer) is discoverable. Needless to say, insurers and reinsurers have diametrically opposite views concerning the discoverability of the reinsurance information than the underlying insured. Insureds have sought out this information because it could potentially provide them with crucial insight into the insurer's stance on the lawsuit by revealing the insurer's reflections, apprehensions, and evaluations regarding the underlying lawsuit. Given the potential benefits of procuring such information, insureds claim they are in entitled to such reinsurance information. In contrast, insurers argue that the reinsurance relationship is premised on the free flow of information between the insurer and the reinsurer. Many insurer-reinsurer communications cut directly to the heart of the matter being litigated, and exposes the insurer's innermost apprehensions and concerns regarding the lawsuit. (1)
Given the high probability of discovery disputes based on the competing interests involved, it would be helpful for federal courts to provide a consistent and uniform basis for imposing discovery in the reinsurance context. However, to date, the basis for imposing discovery in a reinsurance dispute is still fragmented by a host of courts taking an array of stances, which has resulted in insureds and insurers having to battle-it-out every time a reinsurance discovery dispute arises.
This article will discuss briefly the federal judiciary's fragmented stance on the imposition of discovery in regards to reinsurance information. As many federal courts have done in rendering their opinions, this article's analysis will individually discuss the discovery of the reinsurance agreement itself, and communications between the insurer and the reinsurer. (2)
II. Whether the Actual Reinsurance Agreement Itself is Discoverable?
Reinsurance agreements themselves are generally discoverable under Rule 26 of the Federal Rules of Civil Procedure when money damages are sought which may expose the reinsurer or insurer to liability. Federal Rule of Civil Procedure 26(a)(1)(A)(iv) provides that, as a part of initial disclosures, a party "must, without awaiting a discovery request, provide to the other parties ... any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment." (3) "As a number of courts have held, reinsurance agreements fit within the plain language of this rule when the primary insurer is named as a party." (4)
In National Union Fire Insurance Co. v. Continental Illinois Corp., a federal district court discussed at length the discoverability of reinsurance agreements in coverage litigation between a policyholder and its insurer. (5) The court stated the following in reaching its conclusion that the reinsurance agreements were discoverable under Rule 26:
Reinsurers ('person[s] carrying on an insurance business') are insurers' own insurers. If insurers are held liable under the policies, they will turn to their reinsurers for partial indemnification, as provided in the reinsurance agreements, for any 'payments made to satisfy the judgment.' Insurers contend their reinsurance agreements are not 'insurance agreements' under Rule 26(b)(2). True enough, reinsurance agreements are a special breed of insurance policy ... But the English language remains the same: Reinsurers 'carry[ ] on an insurance business' and 'may be liable ... to indemnify [insurers] for payments made to satisfy the judgment' that movants hope to obtain. Rule 26(b)(2) does not require that a party's insurer be directly liable to the other party. It is totally irrelevant that the reinsurers would pay insurers and not the defendants and the movants cannot directly sue the reinsurers.... Reinsurance agreements are thus for the direct insurers within the literal coverage of Rule 26(b)(2). (6)
However, in Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co. (Rhone-Poulenc I), a district court found that reinsurance agreements were not per se discoverable under the federal rules. (7) In that case, the court held that disclosure of reinsurance agreements is not required in cases in which the litigation between a policy holder and its insurer is limited to a request for a declaratory judgment and does not involve a claim for damages. (8) The court reasoned that in a declaratory judgment action, no money award is sought, thus, Fed.R.Civ.P. 26(b)(2) is not implicated because any ruling in the case would not require the insurer to be "liable to satisfy part or all of a judgment which may be entered in the action." (9)
III. Whether Communications Between the Insurer and Reinsurer are Discoverable?
The law with respect to communications between insurers and reinsurers--as opposed to the reinsurance agreement itself--is relatively unclear. Based on the type of objection lodged to a request for such communications, as well as the specific reasons asserted by the insured for desiring the information, there are court decisions that have both allowed (10) and denied (11) this discovery. Simply put, whether communications between insurers and their reinsurers are discoverable is dependent on the nature of the issues to which they are alleged to be relevant.
Generally, federal courts have appeared reticent to allow discovery of communications for the purpose of construing and interpreting the underlying insurance policy; however, federal courts have been more inclined to allow the discovery of communications for other purposes, such as defending against an insurer's attempt to deny a claim for late notice or rescind a policy.
For example, in Rhone-Poulenc I, the United States District Court for the Eastern District of Pennsylvania rejected the insured's efforts to discover communications that occurred between the insurer and the reinsurer for the purpose of interpreting the underlying policies. (12) The court held:
[D]iscovery concerning reinsurance agreements to which the plaintiffs were not parties would 'not assist in the determining of the mutual intent of the parties in the primary and excess insurance policies issued to the plaintiffs, which are in litigation in this case. Any information regarding reinsurance would at best be evidence of undisclosed unilateral intention, which would not be material to the interpretation of the insurance contract at issue.' (13)
The court held that communications between the insurer and reinsurer over particular policy provisions would only be discoverable if the policy provision was ambiguous and thus subject to interpretation from extrinsic evidence. (14) Conversely, some courts have determined that reinsurance communications can be relevant and subject to discovery based on the fact that the communications could illuminate why certain decisions were made. However, these cases generally do not involve construction of the underlying policy. In Rhone-Poulenc II, the court reconsidered its prior refusal to allow discovery of communications between the reinsurers and the insurers and granted the discovery. (15) However, the court remained resolute that the discovery was "irrelevant to determining the intent of the contracting parties," but the court held that the discovery was relevant to the insurer's affirmative defenses of misrepresentation and lack of notice. (16) The court stated the following in regards to the insurer's nondisclosure and misrepresentation defenses:
Plaintiffs [insureds] also seek the reinsurance agreements and communications for the purpose of refuting the defenses raised by many of the insurers that plaintiff failed to disclose material facts ... These defenses clearly put at issue the question of what the defendants knew at the time the disputed policies were issued. In my October 1st order, I held that reinsurance information would be tenuously, if at all, relevant to the issue of policy interpretation. However, such information may be extremely relevant to the defenses raised by most of the insurers.... Because reinsurance appears to be always discoverable for purposes of rebutting a defense, particularly of misrepresentation (as well as nondisclosure), lack of or late notice, or lost policy, the communications will be ordered produced as to those companies raising such defenses. (17)
In regards to the lack of notice defense, the court held the following:
By raising a defense, a party opens the door to the discovery concerning that defense ... Since whether or not the insurers gave timely notice to their reinsurers is clearly relevant to the notice defenses raised by many of the insurers, that information should be discoverable as to those insurers. (18)
Similarly, in Sotelo v. Old Republic Life Insurance, the court allowed the discovery of reinsurance communications for purposes other than policy interpretation. (19) There, the claimant sued the insurer after the insurer refused to pay on a life insurance policy and rescinded the policy. (20) The claimant tried to gain access through a subpoena to communications that the claimant contended were in the reinsurer's control, and the insurer moved to quash. (21) The court held that the communications were discoverable because the communications would illuminate the reasons for the policy's rescission as opposed to policy interpretation:
This is not a coverage dispute that turns on interpretation of the policy and the parties' mutual intent; rather the issues here relate to why [the insurer] concluded that there was a basis to rescind the policy and whether that conclusion was justified. Existing discovery has revealed that there were at least some communications and documents exchanged between [the insurer] and [reinsurer] regarding that topic. The materials requested in the subpoena are relevant and are discoverable. (22)
Nonetheless, an insurer may have various arguments to attempt to defeat an insured's attempts to gain reinsurance information. While an in-depth discussion of each of these potential defenses is beyond the scope of this article, an insurer could potentially assert the following defenses: (1) the attorney-client privilege and the attorney work product privilege; (2) overbreadth, ambiguity, and undue burden of the reinsurance request; (3) protection of self critical analysis; and (4) proprietary information privileges.
1. An insurer or reinsurer may attempt to oppose discovery by asserting the attorney client (23) or work product24 privileges. The successfulness of the privileges will often hinge upon whether the privilege is maintained upon disclosure to the reinsurer.
2. An insurer or reinsurer may be able to argue that the reinsurance request is overly broad, ambiguous, or unduly burdensome depending upon the request. A reinsurance discovery request may be overly broad if it uses omnibus terms such as relating to, pertaining to, or concerning. (25) Additionally, a request may be overly broad on its face if it is couched in such broad language as to make arduous the task of deciding which of numerous documents may conceivably fall within its scope. (26)
3. An insurer or reinsurer may attempt to assert a self critical analysis privilege to a reinsurance discovery request. The "self-critical" privilege has been recognized in a variety of actions in which confidentiality is "essential to the free flow of information." (27) When an insurer communicates with its reinsurer, the insurer is often unfiltered in its analysis of the claim and policy because the insurer and reinsurer relationship is based on the free flow of information.
4. An insurer or reinsurer may attempt to prevent the reinsurance request based on a proprietary privilege. The proprietary privilege allows courts to issue protective orders stating that a trade secret or other confidential research, development, or commercial information may not be disclosed or be disclosed but in a designated way. (28)
While there is a clear line of case law that establishes the discoverability of the actual reinsurance agreement, the same cannot be said for the discoverability of reinsurance communications. The federal courts fragmented stances on the discoverability of reinsurance communications have placed insurers in a precarious catch- (22). On one hand, an insurer is contractually obligated to provide the reinsurer with the fullest possible disclosure, including information that may be harmful to the insurer's underlying case with the insured, in order to maintain reinsurance coverage. On the other hand, an insurer who discloses this damaging information may find itself in the exposed position of having this information discovered by the insured in future litigation. As such, in navigating through the murky waters of reinsurance discovery, an insurer should tread with caution in asserting its defenses to the insured's actual claims because the defense may expose the insurer/reinsurer to the discovery of reinsurance communications. Additionally, an insurer/reinsurer should use the aforementioned defenses when applicable.
(1) Thomas M. Bower, Are Policyholders Reading Your Cedent-Reinsurer Communications?, MEALEY'S LITIGATION REPORTS: REINSURANCE 12 (1994).
(2) U.S. Fire Ins. Co. v. Bunge N. Am., Inc., No. 05-2192-JWL-DJW, 2007 WL 1531846, *3 (D. Kan. May 25, 2007) ("The Court's analysis of what reinsurance information is discoverable begins with a necessary distinction between the reinsurance agreements themselves and other communications between the Insurers and their reinsurers."); see also Potomac Elec. Power v. California Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1990) (allowing discovery of actual reinsurance policy but not communications or documents outside of the policy on the basis that such information was not relevant).
(3) FED.R.CIV.P. 26(a)(1)(A)(iv).
(4) Imperial Trading Co., Inc. v. Travelers Prop. Cas. Co., No. 06-4262, 2009 WL 1247122, at *2 (E.D. La. May 5, 2009); Potomac Elec. Power Co., 136 F.R.D. at 2; Nat'l Union Fire Ins. Co. v. Cont'l Illinois Corp., 116 F.R.D. 78, 84 (N.D. Ill. 1987); Heights at Issaquah Ridge Owners Ass'n. v. Steadfast Ins. Co., No. 07-1045, 2007 WL 4410260, at *4 (W.D. Wash. Dec. 13, 2007).
(5) Nat'l Union Fire Ins. Co., 116 F.R.D. at 84.
(6) Id. (citations and footnotes omitted).
(7) 139 F.R.D. 609, 611-613 (E.D. Pa. 1991).
(8) Id. at 613 (holding that insured's demand for production of the reinsurance policy was essentially a demand for declaratory relief and was not a demand for a defined set amount of money under the reinsurance policy).
(9) Id.; see also American Colloid Co. v. Old Republic Ins. Co., No. 93 C 0665, 1993 WL 222678, at *1 (N.D. Ill. June 21, 1993).
(10) See e.g., Employers Comm. Union Ins. Co. of Am. v. Browning-Ferris Industries of Kansas City, Inc., 91-2161-JWL, 1993 WL 210012, *6 (D. Kan. 1993) (stating that documents created in the underwriting of reinsurance may provide evidence of lost or missing policies); Rhone-Poulenc Rorer Inc. v. Home Indem. Co. ("Rhone-Poulenc II"), No. 889752, 1991 WL 237636, *2-3 (E.D. Pa.1991) (holding that ceding insurer's discovery of loss notices to reinsurers are discoverable "since whether or not the insurers gave timely notice to their reinsurers is clearly relevant to the notice defenses raised by many insurers [in the underlying litigation]"); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cont'l Illinois Corp., 116 F.R.D. 78, 84 (N.D. Ill. 1987) (holding that reinsurance information is discoverable in an insurer's rescission action based on the insured's misrepresentations because the insurer's communications with its reinsurers might reveal the information on which the insurer relied in deciding to issue the policy).
(11) See e.g., Great Lakes Dredge and Dock Co. v. Comm. Union, 159 F.R.D. 502, 504 (D. Ill. 1995) (finding actual reinsurance policies were discoverable under Rule 26(a)(1)(D), but a request for discovery of all documents relating to reinsurance communications was too attenuated); Rhone-Poulenc Rorer, Inc. v. Home Indem. Co. ("Rhone-Poulenc I"), 139 F.R.D. 609, 612 (E.D. Pa. 1991); Leksi, Inc. v. Fed. Ins. Co., 129 F.R.D. 99, 106, 115 (D.N.J. 1989); Ind. Petrochemical Corp. v. Aetna Cas. & Surety Co., 117 F.R.D. 283, 286-288 (D.D.C.1986).
(12) Rhone-Poulenc I, 139 F.R.D. 609, 611-612 (E.D. Pa. 1991).
(15) Rhone-Poulenc Rorer Inc. v. Home Indem. Co. ("Rhone-Poulenc II"), No. 889752, 1991 WL 237636, * 2-3 (E.D.Pa.1991).
(16) Id. at * 1.
(17) Id. at * 3.
(18) Id. at * 2.
(19) No. C-05-02238, 2006 WL 2632563, * 3 (N.D. Cal. Sept. 13, 2006).
(23) U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., No. 88 CIV. 6457, 1989 WL 82415 (S.D.N.Y. 1989) (holding that the documents sent between the insurer and reinsurer were privileged under the attorney client/work product privileges and the disclosure of the information was not inconsistent with maintaining secrecy).
(24) Minnesota School Boards Ass'n Ins. Trust v. Employers Ins. Co. of Wausau, 183 F.R.D. 627, 631-632 (N.D. Ill. 1999) (holding that documents sent by insurer to reinsurer were not discoverable because of the work product privilege and insured's argument that the privilege was waived was improper because the documents were intended to remain confidential and protected from adversaries); cf Front Royal Ins. Co. v. Gold Players, Inc., 187 F.R.D. 252 (W.D. Va. 1999) (holding that the work product privilege was not applicable between the communications and information sent between the reinsurer and insurer because the communications and information were not prepared in anticipation of litigation).
(25) U.S. Fire Ins. Co. v. Bunge N. Am., Inc., No. 05-2192-JWL-DJW, 2007 WL 1531846, *7 (D. Kan. May 25, 2007).
(27) Richards v. Maine Cent. R.R., 21 F.R.D. 590 (D.Me.1957); see also The Privilege of Self-Critical Analysis, 96 HARV.L.REV. 1083, 1087 (1983).
(28) FED. R. CIV. P. 26(c).
J. Mitchell Smith is a partner at Germer Gertz, L.L.P. in its Beaumont/Houston, Texas offices. Mr. Smith's practice of law focuses on railroad litigation, toxic tort litigations, commercial litigation, and intellectual property. Mr. Smith has been a member of the IADC since 2008. He is Vice Chair of Programs and Projects for the Legislative, Judicial, and Government Affairs Committee and the Vice Chair of Membership for the Insurance and Reinsurance Committee. Frank T. Messina is an associate at Germer Gertz, L.L.P. in its Beaumont, Texas office. Mr. Messina's practice of law focuses on commercial litigation, employment litigation, governmental entity representation, and general civil litigation.
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|Author:||Smith, J. Mitchell; Messina, Frank T.|
|Publication:||Defense Counsel Journal|
|Date:||Jan 1, 2012|
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