In reviewing the decisions rendered in the past year concerning reinsurance, a trial court decision caught my eye as highlighting an issue that frequently arises between reinsurers and cedents.
Travelers Casualty and Surety Co. v. Constitution Reinsurance Corp., No. 01-71057, (E.D. Mich. 2003) reprinted in Mealey’s Litigation Report: Reinsurance, Vol. 14, No. 6 (7/17/03). The issue is whether a cedent can provide documents generated by counsel to its reinsurer without risking waiver of the attorney-client privilege. Correspondingly, the question is also whether the reinsurer can compel production of documents that a cedent claims are protected.
Travelers instituted suit against its reinsurer, Constitution Reinsurance Corp. (“Constitution”), when Constitution refused to pay $7.5 million related to underlying settlements of breast implant and chemical product claims. Travelers previously settled the underlying claims filed against its insured, Dow, for $137 million. Constitution reinsured two of the 22 excess insurance policies issued by Travelers to Dow. Constitution refused to remit the $7.5 million requested by Travelers, contending that the Travelers’ allocation methodology for the underlying settlements was improper.
During the litigation, Constitution sought production of Travelers’ files including certain materials that were generated by Travelers’ counsel. In response, Travelers refused to produce approximately thirty thousand pages of documents maintaining that they were protected by the attorney-client privilege.
This type of dispute between a cedent and reinsurer is not uncommon. There is usually little doubt that the documents are, in fact, privileged. However, reinsurers usually maintain that one (or several) exceptions apply so that the materials can be produced. Should a valid exception not exist to the attorney-client privilege and the cedent produces the requested information, the cedent runs the risk of waiving its privilege. One exception to the attorney-client privilege frequently relied upon in this context is the application of the “common interest” doctrine.
At its essence, the “common interest” doctrine involves a situation where multiple parties are represented by the same attorney. Since communications to that attorney involve a joint prosecution or defense of a claim, they remain privileged to any third-parties. Reinsurers often contend that they share a “common interest” with the cedent as to resolution of the underlying actions, allowing the cedent to share its privileged materials without fear of waiving the privilege.
Some courts have been troubled by this assertion finding that it is difficult to find a “common interest” where a reinsurer has not worked with the cedent to retain counsel, contribute to the insurer’s defense costs on an on-going basis, or where the reinsurer has failed to demonstrate that it coordinated a litigation or settlement strategy with the insurer. Thus, courts and reinsurance arbitration panels have been, and will be, confronted with the question of whether the “common interest” doctrine applies to communications between entities that have parallel interests, but are not necessarily pursuing a common legal strategy.
Reinsurers also maintain that the existence of a fiduciary relationship between the parties, the “at issue’ doctrine, and the criminal fraud exception all apply and allow for the review of the cedent’s documents. Briefly, while the existence of a fiduciary relationship would create a valid exception to the attorney-client privilege, some courts have been hesitant to characterize the cedent’s duty of good faith in the reinsurance context as a fiduciary relationship. With respect to the application of the “at issue” doctrine, the final determination of its applicability is dependent on how narrowly the doctrine is interpreted. The “at issue” doctrine concerns a party’s attempt to assert a claim or defense that it intends to prove by the use of privileged materials.
Thus, the question involves whether a court or arbitration panel views the cedent’s actions as simply placing the broad question of coverage in issue or whether the matter to be litigated is more narrow and dependent on attorney-client protected materials.
Finally, many courts have found the crime/fraud exception inapplicable to this kind of dispute. While courts have espoused different characterizations of this exception, it is generally only applicable when there is probable cause to believe that the communications with counsel were intended to facilitate or conceal criminal or fraudulent activity. Given that standard, most reinsurers fail when they rely upon it to require production of privileged documents.
The judge in the Travelers case determined that the privilege log submitted by Travelers was inadequate. In addition, the judge concluded that by failing to produce the documents, Travelers had not provided Constitution with an adequate explanation of how it arrived at its allocation methodology.
With cedents concerned about waiver of the attorney-client privilege and reinsures relying on the language of the reinsurance contract which typically include an “Access To Records” clause, additional disputes concerning this topic are sure to arise in the future. Since decisions rendered by courts and arbitration panels have been inconsistent, the Travelers decision highlights how the particular facts of each case will dictate the outcome of the case.
Efforts can be made to protect the attorney-client nature of documents within the cedent’s control. Confidentiality agreements can be drafted so that all recipients of privileged documents are aware that the documents are particularly “special” and their confidentiality must be protected. Other options include having outside counsel directly forward materials to the reinsurer (rather than having the cedent’s personnel analyze and re-state counsel’s opinions) and agreeing that privileged information will be withheld until the underlying coverage action is terminated before being forwarded to the reinsurer for analysis.
Since there is some legal support for a cedent’s fear that a production of documents could equate to a waiver of the attorney-client privilege and a need for a reinsurer to have access to documents in order to evaluate the submission, this is an area ripe for agreement rather than litigation.
Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, directors and officers liability, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at email@example.com The Tip of the Month runs each month on claimsguides.com
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