Insurers Be Warned, Your Communications Are Discoverable

by Zelle LLP

Insurers and reinsurers regularly communicate regarding matters they view as confidential. These communications often relate to claims, both routine and litigated, by the underlying insureds. Insureds, in turn, seek discovery of these communications when claims become contentious and litigated. Recent federal court decisions in Minnesota and Texas demonstrate the willingness of courts to permit discovery of communications between insurance companies and their reinsurers. Conversely, a federal court in Indiana recently rejected requests for reinsurance communications. These cases illustrate the difficultly faced by insurers and reinsurers in understanding the discoverability of their communications prior to litigation. Although insurers and reinsurers may view their communications as confidential, they must be mindful of the potential discoverability of these communications, particularly when litigated claims are involved.

Historically, the guidance given by courts has been mixed as to the discoverability of communications between insurers and their reinsurers. Two recent federal court opinions allowing discovery of reinsurance information and communications are instructive.

On July 14, 2014, a Texas federal court ordered production of reinsurance information in Klein v. Federal Insurance Co.[1] Klein involved a dispute between a plaintiff class and an excess insurer regarding insurance coverage, after the court approved the settlement of a death and personal injury class action. The class plaintiffs sought to compel Federal to produce 25 documents withheld by Federal on the basis that such documents contained “reinsurance information.” Federal resisted production of the requested documents as confidential reinsurance information. The class plaintiffs argued that the reinsurance information could contain information relating to notice and was therefore relevant.

Chief Judge Sidney A. Fitzwater acknowledged three general arguments made by Federal in support of its position:

  1. “[C]ourts generally refuse a policyholder’s discovery request regarding reinsurance agreements and reinsurance communications for the purpose of interpreting the underlying policy.”
  2. “[C]ourts often protect reinsurance information from discovery because this information is a critical aspect of an insurance company’s financial stability and must, consequently, be maintained in strict confidence and protected from discovery.”
  3. “[A]n insurer’s decision to purchase reinsurance is based on internal business considerations unrelated to the insurer’s evaluation of a particular claim or interpretation of any particular term in the underlying policies.”

Rejecting Federal’s arguments, the court ordered production of the reinsurance information. First, the court held that the plaintiffs had demonstrated the relevance of the information to the question of notice, which was at issue in the coverage litigation. Next, the court noted that Federal made only general arguments and failed to show specifically why the discovery should be precluded. Finally, after observing that the reinsurance information sought was nearly 30 years old and thus the reasons for foreclosing discovery appeared to “lack force” under the circumstances, the court concluded that the information was discoverable. To the extent Federal could demonstrate that the reinsurance information should be protected from public disclosure, Federal could seek an agreement or move for protection against public disclosure under the terms of a protective order.

Similarly, in National Union Fire Insurance Co. of Pittsburgh PA v. Donaldson Co. Inc., a Minnesota federal court ordered production of certain reinsurance communications on June 24, 2014.[2] In this dispute between two insurance companies and their insured and its excess insurer, the magistrate judge previously ordered production of the reinsurance communications and National Union sought review of the magistrate’s order by the district court.

U.S. District Judge John R. Tunheim considered National Union’s argument that it should not be compelled to produce reinsurance communications because “courts generally do not permit discovery of such communications for the purpose of interpreting unambiguous insurance policies.” The insured argued that the reinsurance communications were relevant not to the interpretation of the insurance contract but to the insured’s claim for breach of the duty of good faith and fair dealing.

The court acknowledged a split of authority on the issue of the discoverability of reinsurance communications, but concluded that the insured had persuaded the court that the sought after communications were relevant to the claims for breach of the duty of good faith and fair dealing. Thus, the court held that the magistrate’s order compelling production of the reinsurance communications was not contrary to law or clearly erroneous.

Both the Klein and National Union cases involved requests for production of reinsurance information and communications. The insurers in both instances argued that reinsurance communications should remain confidential and are irrelevant in coverage litigation. However, as both cases illustrate, courts are willing to set aside such arguments, particularly where the party seeking production can articulate the relevance of the communications beyond the interpretation of the underlying policy.

As Federal argued in Klein and as Judge Tunheim observed in National Union, courts have also rejected attempts to obtain reinsurance communications during discovery. Discovery of reinsurance communications may be precluded because the court finds the information sought is irrelevant. For example, on March 10, 2014, the U.S. District Court for the Southern District of Indiana sustained the insurer’s objection to the magistrate judge’s order compelling production of reinsurance communications.[3] In National Union Fire Ins. Co. of Pittsburgh PA v. Mead Johnson & Co., the magistrate had previously ordered production of the reinsurance communications because such communications could “lead to the discovery of admissible evidence about the insurers’ own definition of claims which could fall under its insurance agreements.”

The district court reversed the magistrate’s order and held that the policy term at issue was unambiguous and, therefore, communications regarding the claim terms were irrelevant. This result is consistent with the relevance arguments made, but rejected, in the Klein and National Union cases.

Insurers and reinsurers looking to the courts to guide which communications between insurers and reinsurers may be discoverable and which are not will find that the authority on discoverability remains mixed. Although there is a split of authority regarding the discoverability of communications between insurers and their reinsurers, these recent cases are a reminder that communications treated confidentially in a business setting may not been seen as such in litigation. Therefore, insurers and reinsurers are cautioned that their communications may be discoverable by insureds in litigated coverage disputes.

[1] Klein v. Federal Ins. Co., Nos. 7:03-CV102-D, 7:09-CV-094-D (N.D. Texas July 14, 2014)

[2] National Union Fire Ins. Co. of Pittsburgh PA v. Donaldson Co. Inc., No. 10-4948 (JRT/JJG) (D. Minn. June 24, 2014)

[3] National Union Fire Ins. Co. of Pittsburgh PA v. Mead Johnson & Co., No. 3:11-cv-00015-RLY-WGH (S.D. Ind. March 10, 2014)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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