An integral part of the relationship between the reinsurer and cedant is that the reinsurer be permitted access to the ceding company’s books and records. A cedant, however, may face the dilemma of risking waiver of privilege1 if the reinsurer is provided access to privileged documents or records while, on the other hand, being accused of breaching the access to records provision by failing to permit the reinsurer unencumbered access. The interplay between the access to records clause and the common interest doctrine is at the heart of such disputes. This article discusses the issues that can arise.
- The “Access To Records” Clause
Whether by contract or by industry custom, it is generally accepted that reinsurers are allowed access to all of the ceding company’s files and records. As an example, a typical “access to records” clause in a reinsurance contract generally provides: “The Reinsurer or its designated representatives shall have access at any reasonable time to all books, records and papers of the ceding company which pertain in any way to this reinsurance.” Reinsurers may also argue that access is supported by the “claims clause” to the extent the provision includes language that the reinsurers’ obligation to pay is conditioned on “receipt of satisfactory evidence of payment of a loss for which reinsurance is provided.”
Access to records is of such significance that there is authority that a breach of an inspection clause constitutes a material breach of contract, entitling the reinsurer to terminate its future obligations. See, Manhattan Life Ins. Co. v. Prussian Life Ins. Co., 296 F.39 (2nd Cir. 1924). On the other hand, some courts have found that the provision does not condition payment of a claim on the production of particular records. See First State Ins. Co. v. Nat’l Cas. Co., 781 F.3d 7 (1st Cir. 2015) (confirming arbitration ruling that reinsurer’s payment obligation was not conditioned on the exercise of the reinsurer’s right to audit).
Reinsurers and cedants have disputed whether the access to records clause obligates the cedant to provide access to “all” records, including privileged documents. Although it may depend on the specific language, facts or venue involved in the dispute, in general, courts have declined to find that the access to records provision entitles the reinsurer to privileged materials. In Liberty Mut. Ins. Co. v. Nationwide Mut. Ins. Co., 87 Mass.App.Ct. 1127 (2015), the court affirmed the confirmation of an arbitration award denying a reinsurer access to documents the cedant claimed were privileged. Liberty Mutual refused to produce documents it claimed were protected by the attorney-client privilege or work product doctrine, which Nationwide argued it was entitled to under the access to records provision in the treaty. In accordance with the arbitration provision of the treaty, the parties submitted the dispute to arbitration. The arbitration panel determined that the access to records clause did not grant access to privileged documents. The appellate court affirmed the trial court’s confirmation of the arbitration award noting the court’s “severely limited review of arbitration awards.”
Other courts have similarly rejected the argument finding that the access to records clause in reinsurance agreements did not operate as a “per se” waiver of the attorney-client privilege or work product protection. See, Gulf Ins. Co. v. Travelers Reins. Co., 788 N.Y.S.2d 44, 45-46 (N.Y.App.Div. 2004) (“Access to records provisions in standard reinsurance agreements, no matter how broadly phrased, are not intended to act as a per se waiver of the attorney-client or attorney work product privileges.”); Travelers Cas. & Surety Co. v. Century Indemn. Co., 2011 WL 5570784 (D.Conn. Nov. 16, 2011) (“The reinsurer is not entitled under a cooperation clause to learn of any and all legal advice obtained by a reinsured with a reasonable expectation of confidentiality.”)
- Common Interest Doctrine
In general, the common interest doctrine permits the sharing of privileged materials with another party with whom it shares a “common interest” as against a common adversary without waiving the ability to assert privilege as to third parties.2 In this regard, “[t]he common interest doctrine is an exception to the general rule that [privilege] is waived following disclosure of privileged materials to a third party.”3 Reinsurers may assert that the common interest doctrine supports access to privileged materials in the cedant’s records, arguing that access is permitted because it does not result in waiver of privilege since both the reinsurer and cedant share a stake in the outcome of the underlying claim.
Courts, however, have been reluctant to permit the use of the doctrine “offensively” as a mechanism to obtain documents rather than the more traditional “defensive” use of the doctrine as a shield against production. For example, in Granite State Ins. Co. v. R&Q Reins. Co., 2015 WL 4467756 (N.Y.Sup.Ct. July 21, 2015), the court determined that certain records were protected by the attorney-client privilege and not subject to disclosure to the reinsurer. The court held that the documents sought were protected by the attorney-client privilege and neither the common interest exception nor the “at issue” exception to the privilege applied to the dispute. As between the insurer and reinsurer, the court held that the common interest doctrine does not apply to the issue of waiver of privilege. Additionally, the court held that a cedant does not place the bona fides of a settlement at issue merely by alleging in a pleading that the settlement was reasonable and in good faith. The reinsurer sought reconsideration of this ruling, which the court denied.
A similar argument for access based on the common interest doctrine was rejected in American Re-Insurance Co. v. United States Fidelity & Guaranty Co., 40 A.D.3d 486 (NY 2007). In American Re, certain reinsurers sought production of the cedant’s communications with its attorney, contending that the common interest doctrine required disclosure. The court declined to order production of privileged materials finding the interest were “indisputably adverse” and the mere fact that they shared an interest in the eventual outcome of the underlying coverage litigation was insufficient. In the alternative, the reinsurer argued that disclosure of certain documents to reinsurers resulted in the waiver as to other documents on the same subjects. The court also rejected this argument, finding that there was a shared interest in the outcome of the underling litigation at the time the privileged information was disclosed.
Other cases demonstrate that the business relationship between a cedant and reinsurer is insufficient to establish a common interest such that disclosure to the reinsurer results in waiver of privilege. For example, one court found that disclosure to the reinsurer was a waiver of privilege since there was no common interest between the cedant and reinsurer. In Progressive Cas. Ins. Co. v. Federal Deposit Ins. Corp., 2014 WL 4947721 (N.D. Ia Oct. 3, 2014), FDIC sought certain communications between Progressive and its reinsurers. The magistrate judge overseeing discovery ordered the production of the communications but permitted Progressive to produce redacted versions of the communications. FDIC appealed that determination to the district court. The court rejected Progressive’s assertion that case updates, strategy reports, and similar documents provided to its reinsurers in connection with underlying litigation were privileged, either as attorney-client communications or attorney work product. As to the attorney-client privilege, the court held that disclosure of the communications to its reinsurers was a waiver of the privilege since there was no common interest between the insurer and its reinsurer. The court noted that the business relationship between those parties, without more, does not trigger the common interest doctrine. The assertions of work product failed because, according to the court, the communications were created in the ordinary course of business and not in anticipation of litigation.
A court also found a lack of common interest between cedant and reinsurer in Bancinsure, Inc v. McCaffree, 2013 WL 5769918 (D.Kan. Oct. 24, 2013). The cedant asserted attorney-client privilege and work product protection and asserted that the common interest doctrine warranted application of the privilege to its communications with its reinsurer. The court rejected the assertion of a common interest between the cedant and reinsurer because they share only a “common commercial and financial interest”. The court found that this was insufficient to meet the burden of proof to establish the privilege. The court noted that the cedant provided the court “nothing but the bare suggestion of any common legal interest between it and its reinsurer” and “offered no evidence of any agreement with its reinsurer to pursue a common legal defense or strategy.” Thus, the cedant failed to establish the common interest and the privilege was waived with respect to documents shared with the reinsurer.
On the other hand, certain jurisdictions have found a common interest in the cedant/reinsurer relationship. For example, in Hawker v. Bankinsurance, Inc., 2013 WL 6843088 (E.D.Cal. Dec.27, 2013), the court found that reinsurance reports were subject to the common interest doctrine and privileged and the court declined to grant the insured access to such communications. Applying California law, the court found that to the extent the communication with the reinsurer reflects attorney-client communication, the documents were not discoverable and the cedant did not waive the privilege by communicating with reinsurers. Accordingly, the communications were not discoverable.
A similar finding upholding privilege was reached in Artra 524(g) Asbestos Trust, v. Transport, 2011 WL 4501375 (N.D.Ill. Sept. 28, 2011). The asbestos trust sought documents the cedant shared with a variety of reinsurers. The court upheld the common interest privilege finding that the shared interests between the cedant and reinsurer are not so “materially different from the shared interests of a direct insurer and its insured as to conclude that the common interest does not apply.” The court also took into account the fact that a finding of no common interest would leave the cedant with no ability to provide its reinsurers with its attorneys’ candid views of the merits of the disputed issues in the coverage litigation or to make recommendations for settlement or otherwise discuss litigation strategy.
- Preservation of Privilege
As the foregoing demonstrates, privilege rulings can be inconsistent and dependent on contract language, particular facts and the venue or forum of the dispute. Given the potential risk of waiver in sharing privileged documents, cedants likely want to try to impose limitations on the reinsurer’s access to records. A cedant may want to assert the privilege and document that the reinsurer was denied access to privileged documents. Doing so reduces the risk of waiver and the resulting harm caused by disclosing legal strategies.
Business considerations and an ongoing relationship with the reinsurer are likely also a factor. To the extent access to privileged material is contemplated, the execution of a confidentiality agreement prior to permitting or obtaining access that specifies that access is provided pursuant to a joint defense or common interest may help accomplish the preservation of privilege. A prudently drafted agreement documenting the common interest can help demonstrate the intent to protect against disclosure but also satisfy the reinsurer’s desired access to records.