Guarding Privileged Documents Pose Challenge To Utmost Good Faith Doctrine

However, if a cedent denies a reinsurers request for information, that decision may damage the insurers relationship with the entity from which it ultimately needs to collect reinsurance.

The relationship between the cedent and its reinsurer is one based on a reciprocal duty of utmost good faith, which in and of itself, arguably obligates the cedent to produce all material information to its reinsurer. This duty is derived from principles of equity and is independent of any contractual obligation that may be expressed in the reinsurance agreement.

In addition to the cedents equitable duty of disclosure, reinsurance contracts also typically grant the reinsurer the express right to inspect the cedents books and records, making reinsurance audits a routine part of the cedent-reinsurer relationship.

Despite the common law duty of utmost good faith and contractual access-to-records provisions, in many instances, there may be occasions where a cedent will want to withhold privileged information from its reinsurer. This usually occurs where the cedent is concerned that production of privileged documents to the reinsurer will be deemed to be a waiver of the attorney-client or other privilege, thus potentially obligating the cedent to provide the documents to the policyholder.

Policyholders suing for bad faith often conduct aggressive discovery, seeking information such as communications between the cedent and any reinsurer that may bear on the underlying coverage dispute. This effort is motivated by a desire to locate the proverbial "smoking gun," in which the insurer acknowledges to the reinsurer that coverage exists or that the insurer mishandled the claim.

Can a cedent withhold privileged information from its reinsurers?

In 1992, North River Ins. Co. v. Philadelphia Reinsurance Corp. and CIGNA Reinsurance Company, the United States District Court for the District of New Jersey decided the seminal case on the issue of a cedents right to withhold privileged materials from its reinsurer. The North River court held that a cedent is not obligated to produce privileged materials to its reinsurer so long as the cedent can demonstrate an "expectation of confidentiality" as to the documents it seeks to withhold.

The court reached its holding after examining the reinsurers arguments that it was entitled to discover the cedents privileged documents under the following legal theories:

The Cooperation Clause.

The court denied Cigna Res motion for production of privileged materials from North Rivers underlying coverage dispute with its policyholder, stating that a "reinsurer is not entitled under a cooperation clause [contained in a reinsurance agreement] to learn of any and all legal advice obtained by a reinsured with a reasonable expectation of confidentiality." The "expectation of confidentiality" requirement was satisfied where privileged documents were segregated from the general claims files and maintained at a different location in separately marked files.

Reinsurance Custom and Practice.

The North River court further stated that the "expectation of confidentiality" was in no way diminished by the custom and practice in the reinsurance industry.

The court reasoned that "[w]hether reinsureds typically produce similar documents is irrelevant to the issue of whether North River, at the time it created or received the documents in question, intended to withhold those documents from Cigna Re and expected that their secrecy would be preserved."

The "Common Interest" Doctrine.

The North River court also rejected the reinsurers attempt to discover the documents under the "common interest" doctrine, which typically applies where multiple parties are represented by the same counsel.

The court concluded that North River and Cigna Re did not share a "common interest" because they maintained separate counsel and Cigna Re had no input in or control over any aspect of the relationship between North River and its counsel.

Fiduciary Duty.

Similarly, the North River court held that North River did not have a fiduciary obligation to disclose privileged documents.

The court reasoned that the parties were equally sophisticated and aware of the risks inherent in the reinsurance relationship and, accordingly, North River did not owe Cigna Re any fiduciary duty to disclose the contents of its attorney-client communications.

The "In Issue" Doctrine.

Finally, the court concluded that since North River did not intend to prove its case against Cigna Re by reliance on any attorney-client communication, the "in issue" doctrine did not create a waiver of the privilege.

Although there is no guarantee how any court or arbitration panel will rule on a privilege assertion, based on the North River analysis, a cedent that takes the steps outlined below may be able to protect against the disclosure of its privileged documents to its reinsurers, and ultimately its policyholders.

First, a cedent that wishes to claim a privilege should document early signs of legal disputes and follow regimented procedures evidencing that documents were prepared in anticipation of litigation, as opposed to having the documents prepared by claims handlers in the normal course of business. (For example, the cedent should assign a file to a lawyer at the earliest point at which it appears that a dispute is likely.)

In determining whether a cedent is required to produce privileged documents to reinsurers, courts have focused on the cedents intention at the time the documents were prepared. Courts decisions to accept or to reject a privilege defense turn on whether the communications were made "in the normal course of business" or, alternatively, whether they involve "legal advice" or were made "in anticipation of litigation."

A cedent would be wise to mark clearly privileged documents as "privileged and confidential litigation documents"–and to file the documents separate from the general claims files in a designated filing area. These specially designated and filed documents should include: legal communications to or from in-house counsel or outside counsel; documents prepared at the direction of in-house or outside counsel; and documents prepared with the expectation that an attorney will review them.

A cedent who maintains these safeguards has a credible argument that privileged documents can be withheld from its reinsurersfor their mutual benefit.

In any event, the prudent cedent will refrain from placing analyses of claims in their files that contain bald admissionssuch as "our defenses are not strong"without first consulting counsel and working under his or her supervision.

On occasion, business concerns will mean that it is in a cedents interest to volunteer to produce privileged documents to its reinsurers. Foremost among them may be obtaining the cooperation of the cedents reinsurers and facilitating payment of reinsurance claims.

Once a cedent has voluntarily produced privileged documents to one reinsurer, the cedent may be compelled to produce the same or similar documents to other reinsurers. In North River Ins. Co. v. Columbia Casualty Co., in 1995, the United States District Court for the Southern District of New York held that the production of attorney-client privileged documents to one third partya reinsurerconstituted a waiver of the privilege with respect to those documents for another third party, a second reinsurer.

Any disclosure of privileged documents or information carries with it a certain risk of waiver with respect to those documents or even worse, with respect to all privileged material relating to the same subject matter. However, there are ways in which the cedent can, to some extent, limit the risk of waiver and protect its privileges for its benefit and for the benefit of its reinsurers.

Confidentiality agreements with reinsurers.

A cedent and its reinsurer can execute a confidentiality agreement before privileged information is disclosed to the reinsurer. Although such an agreement might sway a court presiding over a policyholder dispute to uphold the privilege, the policyholder is not a party to the confidentiality agreement and is, therefore, free to pursue a waiver claim against the cedent who shared the information with its reinsurer.

Indemnity agreements with reinsurers.

In addition to requiring a confidentiality agreement, a cedent also can request that a reinsurer, which is insisting on access to privileged material before it will pay the reinsurance claims, indemnify the cedent against any negative consequences.

A promise from the reinsurer to finance a potential legal battle would diminish some of the risks associated with disclosure.

The common interest doctrine.

The common interest doctrine operates to allow two parties who share common legal interests to exchange privileged information and maintain such privilege against third parties. In order to establish a common interest in most jurisdictions, a reinsurer and cedent must share more than a common commercial interest; they must show a common legal interest (e.g., some courts have held that the reinsurance claims process is not a common legal enterprise).

In addition, some courts have reasoned that common legal interests simply do not exist between an insurer and its reinsurer because they do not share the same counsel.

In any event, a cedent that chooses to invoke the doctrine should be prepared to give all of its privileged documents to each of the reinsurers with whom it may have a common interest.

Where courts have found such a common interest, as a first cut, this rubric seems to achieve precisely what the cedent and its reinsurer seek: disclosure of privileged documents without the risk of waiver of the privilege with respect to the policyholder. However, the doctrine carries with it significant risks for a cedent in that the parties holding a common interest may not assert the privilege against each other after their interests become adverse.

Thus, if a common interest is deemed to exist between a cedent and its reinsurer, the cedent could not subsequently withhold documents from its reinsurer on the basis of the attorney-client privilege, even if those documents would be damaging to the cedent in its claim against the reinsurer.

Whether to allow a reinsurer access to privileged documents is ultimately a business, as well as a legal decision. A cedent and its reinsurer are best advised to work together to ensure that the reinsurer can obtain the information it needs without risking the disclosure of potentially damaging information to the policyholder.

Sally Agel is a partner, and Felton Newell an associate in Milbanks Los Angeles office Group. They specialize in litigation on behalf of insurers and reinsurers.

Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.