The National Association of Insurance Commissioners (NAIC) in June adopted an amendment to the Reinsurance Intermediary Model Act (the Model Act) that would require intermediaries to participate in prehearing discovery if ordered to do so.1 If adopted in several key states, the amendment could serve as a tool for gaining access to crucial evidence in reinsurance arbitrations.

Intermediaries are instrumental participants in many reinsurance transactions and relationships. A reinsurance broker (RB), among other functions, typically sets up a reinsurance program and then solicits, negotiates, and places the reinsurance cessions or retrocessions.2 Reinsurance managers (RM), for their part, generally have authority to bind and manage the reinsurer’s assumed reinsurance business.3 Intermediaries also frequently serve premium and claims processing and reporting functions. Intermediaries thus are often important witnesses in reinsurance dispute proceedings, particularly in cases where a reinsurer seeks to rescind a contract of reinsurance based on some alleged misrepresentation by the ceding company through its broker. Intermediaries also frequently maintain documentary evidence of pre-contractual representations and understandings and contractual documentation.

Recent anecdotal evidence suggests that intermediaries are, with increasing frequency, refusing to comply voluntarily with requests for documents and testimony in reinsurance disputes.4 The refusal of intermediaries to participate voluntarily is chiefly a problem in private arbitrations. Whereas courts have broad powers to require third parties to give evidence pursuant to subpoena, arbitration panels have only limited subpoena powers. Under the Federal Arbitration Act (FAA), "[t]he arbitrators … may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case."5 Courts are split on the meaning of this provision. Some hold that it authorizes arbitrators to order discovery from third parties.6 Others have ruled that it affords no pre-hearing discovery from third parties.7 A number of courts have staked out interpretations between the two extremes.8

If an intermediary refuses to cooperate and cannot be compelled to participate in pre-hearing discovery, the result can be a lack of proof to establish or rebut, among other elements, a misrepresentation at placement, an interpretation of a critical contract provision, or a definition of a key term. Several solutions have been suggested to deal with the problem of the non-compliant reinsurance intermediary. These include amending the FAA, 9 seeking to compel intermediaries to participate in discovery based upon an argument that they are third-party beneficiaries of the reinsurance contract, 10 and requiring intermediaries to sign on as a party to the contract.11 These proposed solutions today remain largely untested.

The NAIC recently implemented its own solution by adding the following provision to the Model Act: 12

Section 11: Compliance With Orders

  1. A RB or RM shall comply with any order of a court of competent jurisdiction or a duly constituted arbitration panel requiring the production of non-privileged documents by the RB or RM, or the testimony of an employee or other individual otherwise under the control of the RB or RM with respect to any reinsurance transaction for which it acted as a RB or RM.

  2. Compliance shall be subject to the right of the RB or RM, and the parties to the reinsurance transaction, to object to the court or arbitration panel concerning the nature or scope of the documents or testimony or the time within which it must comply with the order. Failure to comply with the order shall be deemed to be a material non-compliance with this Act. However, in no event shall this section be construed to require more than one appearance by the same witness in a single action or arbitration.

Section 11 concededly is a mere model act; as such, it has no independent force or effect. But most states have laws similar to the Model Act which govern the licensure and discipline of intermediaries.13 Although no state has yet adopted the new Section 11, insurance consultant, arbitrator and mediator Robert Hall, who participated in the negotiations that led to Section 11, notes in a recent report on the amendment of the Model Act, "several prominent states have indicated an interest in adopting the amendments …"14 If Section 11 becomes law in a few key states, it could go a long way toward solving the current rash of problems caused by uncooperative intermediaries.

Footnotes

1. Robert M. Hall, Discovery from Intermediaries: Interim Report on Developments in Regulation and Case Law, ARIAS U.S., Second Quarter 2006, at 3; http://www.naic.org/committees_models.htm.

2. Reinsurance Intermediary Model Act § 790-1(2)(F) (NAIC 2004).

3. Reinsurance Intermediary Model Act § 790-1(2)(G) (NAIC 2004).

4. Hall, supra note 1, at 2; Michele L. Jacobson, Robert Lewin, Royce F. Cohen & Andrew S. Lewner, Commentary, Obtaining Discovery From Reinsurance Intermediaries and Other Non-Parties – Updated Case Law and Commentary, Mealey’s Litigation Report: Reinsurance, Nov. 17, 2005, at 1.

5. 9 U.S.C. § 7.

6. See, e.g., In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000) (holding that arbitration panel had the power to order non-party to produce documents prior to the hearing); Am. Fed’n of Television & Radio Artists, AFL-CIO v. WJBK-TV (New World Commc’ns of Detroit, Inc.), 164 F.3d 1004, 1009 (6th Cir. 1999) (stating that FAA’s provision authorizing an arbitrator to compel production of documents from third parties for an arbitration hearing has been held to implicitly include the authority to compel production of documents prior to the hearing).

7. See, e.g., Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 406-11 (3d Cir. 2004) (holding that the FAA does not authorize an arbitration panel to issue pre-hearing discovery subpoena to a non-party).

8. See, e.g., COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275-76, 278 (4th Cir. 1999) (holding that the FAA does not authorize an arbitrator to subpoena third parties during prehearing discovery, absent a showing of special need or hardship); Integrity Ins. Co., in Liquidation, v. Am. Centennial Ins. Co., 885 F. Supp. 69, 73 (S.D.N.Y. 1995) (allowing prehearing document production but not depositions).

9. Robert M. Hall, Intermediaries and Discovery in Reinsurance Arbitrations, Mealey’s Litigation Report: Reinsurance, Dec. 2, 2002; Jacobson et al., supra note 4, at 12.

10. Jacobson et al., supra note 4, at 10-11.

11. Id. at 12-13; Hall, supra note 9.

12. Reinsurance Intermediary Model Act § 790 (NAIC, Draft Dec. 3, 2005); Hall, supra note 1, at 1.

13. Hall, supra note 1, at 2.

14. Id. at 3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.