Patton Boggs Reinsurance Newsletter - March 2013: A Brief Review of Reinsurance Trends in 2012: Discovery

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In three cases in 2012, federal courts required the disclosure of reinsurance materials in discovery, emphasizing the broad scope of discovery and the need to produce relevant materials. First, in Granite State Ins. Co. v. Clearwater Ins. Co., No. 09 Civ. 10607 (RKE), 2012 WL 1520851 (S.D.N.Y. Apr. 30, 2012), a reinsurance dispute over the cession of asbestos losses, the reinsurer sought production of reserve information as evidence that the cedent failed to implement reasonable and adequate practices and procedures in reporting claims information to the reinsurer. A New York federal court affirmed the magistrate judge's order requiring the cedent to produce the requested information. In affirming the order, the district court rejected the cedent's contention that the law in the Second Circuit on late notice and bad faith precluded this discovery once it was undisputed that the cedent had a practice or policy in place. The court noted the broad scope of discovery permitted under the Federal Rules of Civil Procedure and determined that the reserve information was directly relevant to the reinsurer's defense. The court also stated that the evidence was not only relevant to whether the cedent acted in good faith, but whether notice was actually sent to the reinsurer. The court, however, did allow for a protective order to secure proprietary information.

Similarly, in Isilon Sys. Inc. v. Twin City Fire Ins. Co., No. C10-1392MJP, 2012 WL 503852 (W. D. Wash. Feb. 15, 2012), a Washington federal court partially granted an insured's motion to compel discovery of reinsurance information withheld by its insurer. In this insurance coverage action, the insured sought, among other things, the insurer's reinsurance contracts and its communications concerning the reinsurance contract. The insurer argued that reinsurance information was not discoverable because there is no bad faith claim being made. The court found that while reinsurance contracts are discoverable and do not require a showing of relevancy, the insurer does not have to produce other reinsurance information unless the insured established its relevancy. The court further ordered the insurer to provide a more complete description of redacted information and documents withheld related to reinsurance. The court held that the justifications for withholding information were insufficient to "address the validity of the claimed privilege," and ordered the insurer to provide a more complete description of redactions and withholdings related to reinsurance.

Finally, in Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 284 F.R.D. 132 (S.D.N.Y. 2012), an insurance coverage suit involving a dispute over the production of reinsurance documents arising out of the sinking and salvage of a dry dock, the court granted the insured's motion to compel the cedent to produce the file of its reinsurer, as well as other communications or documents maintained on the reinsurance contracts, including communications related to the cedent's procurement of, and claims made on, its reinsurance contract for the dry dock loss. The insured initially subpoenaed the reinsurer directly, but after the cedent objected on the ground that the information was protected by the common-interest doctrine, the reinsurer turned the file over to the cedent to handle the dispute. The cedent objected to the insured's reinsurance information requests on the grounds of relevance and the common-interest doctrine.

As to relevancy, the court noted the federal rules provide that a party is entitled to discovery on "any non-privileged matter that is relevant to any party's claim or defense." In finding that the information was relevant, the court noted that although "case law is sparse within the Second Circuit" concerning the discoverability of reinsurance information, "the few cases to consider the issue have determined that reinsurance information is indeed discoverable." Based upon these cases, the broad scope of the federal discovery rule, and that the cedent's cross-claim asserting fraud put what the cedent told its reinsurer about the age and condition of the dry dock in issue, the court held that the cedent's position that reinsurance documents are generally irrelevant was insufficient to withhold the documents, including information on loss reserves. Moreover, the court held that more recent cases on reserve information have held that document requests seeking reserve information should be evaluated on a case-by-case basis because both, the reserve amounts and changes to reserves, could possibly lead to admissible evidence relating to the insurer's own beliefs about coverage, liability, and the good faith handling of the claim.

The court also addressed the common-interest privilege, stating that the doctrine is an exception to the general rule that voluntary disclosure of confidential privileged material to a third-party waives any applicable privilege. While the doctrine protects the free flow of information from client to attorney whenever multiple clients share a common interest about a legal matter, the court cautioned that the doctrine was not an independent source of privilege or confidentiality and will not apply if a communication is not protected by the attorney-client privilege or the attorney work-product doctrine.

The court emphasized that the parties must establish a "common legal, rather than commercial interest," and it is key that the nature of the interest be identical, not similar. Here, the court noted, the evidence showed that the cedent and its reinsurer did not share an identical legal interest that would entitle the cedent to withhold documents that it produced to its reinsurer. Moreover, the court found that the cedent had not proven or even argued that it disclosed otherwise privileged materials to its reinsurer in the course of formulating a common legal strategy, or for the purpose of obtaining legal advice from the reinsurer. Nor had it presented evidence about the legal necessity of exchanging otherwise protected information. Therefore, to the extent that the cedent shared otherwise privileged information with its reinsurer, the court ruled any privilege applying to the documents has been waived because the cedent failed to establish that it shared a common legal interest with its reinsurer.