Discoverable or not: whether reinsurance agreements and communications are discoverable in federal courts.

• Author: Smith, J. Mitchell

This article originally appeared in the November 2011 Insurance and Reinsurance Committee Newsletter.

1. The Invariable Discovery Dispute in Reinsurance Litigation

   One area where the discoverability of insurance is particularly contentious is in the reinsurance context. Almost invariably in large insurance cases, a disagreement will arise between the parties over whether reinsurance information (e.g., the actual policy and communications between the cedent/insurer and reinsurer) is discoverable. Needless to say, insurers and reinsurers have diametrically opposite views concerning the discoverability of the reinsurance information than the underlying insured. Insureds have sought out this information because it could potentially provide them with crucial insight into the insurer's stance on the lawsuit by revealing the insurer's reflections, apprehensions, and evaluations regarding the underlying lawsuit. Given the potential benefits of procuring such information, insureds claim they are in entitled to such reinsurance information. In contrast, insurers argue that the reinsurance relationship is premised on the free flow of information between the insurer and the reinsurer. Many insurer-reinsurer communications cut directly to the heart of the matter being litigated, and exposes the insurer's innermost apprehensions and concerns regarding the lawsuit. (1)

   Given the high probability of discovery disputes based on the competing interests involved, it would be helpful for federal courts to provide a consistent and uniform basis for imposing discovery in the reinsurance context. However, to date, the basis for imposing discovery in a reinsurance dispute is still fragmented by a host of courts taking an array of stances, which has resulted in insureds and insurers having to battle-it-out every time a reinsurance discovery dispute arises.

   This article will discuss briefly the federal judiciary's fragmented stance on the imposition of discovery in regards to reinsurance information. As many federal courts have done in rendering their opinions, this article's analysis will individually discuss the discovery of the reinsurance agreement itself, and communications between the insurer and the reinsurer. (2)

2. Whether the Actual Reinsurance Agreement Itself is Discoverable?

   Reinsurance agreements themselves are generally discoverable under Rule 26 of the Federal Rules of Civil Procedure when money damages are sought which may expose the reinsurer or insurer to liability. Federal Rule of Civil Procedure 26(a)(1)(A)(iv) provides that, as a part of initial disclosures, a party "must, without awaiting a discovery request, provide to the other parties ... any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment." (3) "As a number of courts have held, reinsurance agreements fit within the plain language of this rule when the primary insurer is named as a party." (4)

   In National Union Fire Insurance Co. v. Continental Illinois Corp., a federal district court discussed at length the discoverability of reinsurance agreements in coverage litigation between a policyholder and its insurer. (5) The court stated the following in reaching its conclusion that the reinsurance agreements were discoverable under Rule 26:

   Reinsurers ('person[s] carrying on an insurance business') are insurers' own insurers. If insurers are held liable under the policies, they will turn to their reinsurers for partial indemnification, as provided in the reinsurance agreements, for any 'payments made to satisfy the judgment.' Insurers contend their reinsurance agreements are not 'insurance agreements' under Rule 26(b)(2). True enough, reinsurance agreements are a special breed of insurance policy ... But the English language remains the same: Reinsurers 'carry[ ] on an insurance business' and 'may be liable ... to indemnify [insurers] for payments made to satisfy the judgment' that movants hope to obtain. Rule 26(b)(2) does not require that a party's insurer be directly liable to the other party. It is totally irrelevant that the reinsurers would pay insurers and not the...