For the average reader seeking to learn more about insurance coverage and risk mitigation, the topic of reinsurance may not spark the same interest as issues related to coverage for data breaches, global pandemics, and trade sanctions . . . but bear with us. Reinsurance can be a critical component in insurance coverage litigation – and it's not nearly as complex as it may seem.
I. WHAT IS REINSURANCE?
In legalistic terms, the term "reinsurance" refers to a transaction in which one party, the "reinsurer," agrees to indemnify another party, the "reinsured," for part or all of the liability that the reinsured assumed under insurance policies it sold to policyholders. More simply, it is the insurance that insurance companies buy to protect themselves from some or all of the risk they assume when the issue insurance to policyholders. As under traditional insurance policies, the reinsured insurer pays premiums to the reinsurer to assume this risk.
While reinsurance may be an unfamiliar concept to many, according to the Reinsurance Association of America, its roots can be traced to the 14th Century. Like insurance, reinsurance functions to spread risk across the market place so that in the event of a major loss, no single entity is left holding the entire tab. If, for example, a natural disaster implicates coverage under numerous policies sold by a single insurance company, reinsurance then spreads a portion of this loss among the insurer's reinsurers. This helps to ensure that insurance companies remain solvent following an unforeseen loss, and therefore benefits policyholders by ensuring that they will receive the full amount of insurance coverage to which they are entitled.
II. WHAT DOES REINSURANCE MEAN FOR POLICYHOLDERS?
Though often overlooked, reinsurance files may contain critical information to aid a policyholder seeking coverage from its insurance company. Similar to the notification requirements in traditional insurance policies, an insurance company is required to notify and communicate with its reinsurers in the event of a loss that may trigger coverage under the reinsurance policies. These communications may in turn reveal an insurer's true evaluation of the merits of the policyholder's claim, and whether the insurer believes that the claim is covered.
In coverage disputes with policyholders, insurers usually resist producing reinsurance files related to the policyholder's claim, and argue that this information is either irrelevant to the coverage litigation, or protected by the work product doctrine, attorney-client privilege, or common interest protection. Federal courts have recently rejected both arguments.
A. Reinsurance Files Are Relevant
In Leevac Shipbuilders LLC v. Westchester Surplus Lines Insurance Co., a policyholder brought suit against its insurance company and argued that the insurer denied its claim in bad faith. To support its contention that the insurance company denied its claim in bad faith, the policyholder sought the insurer's reinsurance file related to the policyholder's claim and communications between the insurer and its reinsurer. The insurer resisted, and argued that it was not required to produce its reinsurance files because they were irrelevant to the policyholder's claim. A federal district court in Louisiana disagreed, and ordered the insurer to produce "any files or documents in its possession evidencing any re-insurance agreement or communications related thereto provided such documents pertain to [the policyholder's] policy or claim that is the subject of the present lawsuit." Ultimately, these files may contain information regarding the insurer's reasons for granting or denying the policyholder's claim, and may reveal that the insurer told its reinsurer a different story about the merits of the policyholder's claim than it was willing to tell the policyholder itself.
B. Reinsurance Files Are Not Protected or Privileged
In Progressive Casualty Insurance Co. v. F.D.I.C., the policyholder moved to compel the insurer to produce its communications with reinsurers regarding the policies and claims at issue. The insurer resisted, and argued that these communications were protected by the work product protection, the attorney-client privilege, and the common interest doctrine.
An Iowa district court disagreed, and found that the communications were neither privileged nor protected. With regard to the work product doctrine, the court held that the communications were prepared and distributed to the reinsurance companies for business purposes – not because of the prospect of litigation. The court also concluded that the insurer waived any attorney-client privilege when the insurer disclosed the information to the reinsurers. The court found that there was no common interest between the insurer and reinsurer because the nature of their relationship was business related, not legally related.
Ultimately, reinsurance files and communications can be a valuable source of information for policyholders. Their contents can be used to support a policyholder's claim that coverage exists, and that the insurance company denied a claim in bad faith. Although insurers will never voluntarily produce reinsurance documents in discovery, the beneficial information they potentially contain is often worth the cost of bringing a motion to compel.
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