Sharing Privileged Communications: What Insurers and Reinsurers Need to Know
To balance the relative information inequality between an insurance company and its reinsurers, insurance companies often provide claim-related documents to their reinsurers. When some of those claim-related documents are privileged, a ceding company faces a critical question of whether those privileged documents should be produced. In making this decision, among other things, an insurer must consider any contractual obligations and the potential legal ramifications of providing privileged documents. Courts addressing the issue have differed on the application of the privilege under these circumstances.
Unlike direct-level insurers, who are generally responsible for processing, investigating, disputing and/or paying claims submitted by policyholders, reinsurers have little to no involvement in the claims-handling process. As a result, it is typically the direct-level insurer, or “cedent,” who possesses information concerning a claim. After an insurer submits a claim to its reinsurers, the reinsurers may have questions about the underlying loss, and they typically request information about it, either by invoking the “Access to Records” clause, submitting informal document requests or asking their cedent for specific documents. Often, cedents provide at least some of the requested information.
Over the course of the last several decades, policyholders have increasingly sought to exploit their insurers’ disclosure of claims-related documents to reinsurers by pursuing discovery of cedent-reinsurer communications in direct-level coverage litigation. Policyholders have asserted that such communications are relevant because they may contain an insurer’s candid assessment of the policyholder’s claim, including its valuation of underlying loss, the merits of any coverage defenses and the viability of the policyholder’s “bad faith” claims (if alleged). Insurers strongly oppose discovery of reinsurance communications on a variety of grounds, including the inherent confidentiality of the relationship, the lack of relevance of reinsurance communications to the interpretation of unambiguous policy terms or other disputed issues in the litigation and on the grounds that such communications may be privileged. The courts that have allowed discovery of cedent-reinsurer communications typically instruct, without offering further guidance that communications protected by attorney-client privilege are not subject to disclosure. The following discussion addresses how courts may treat the privilege issue in this context.
Attorney-Client Privilege and the “Common Interest” Exception
The attorney-client privilege protects communications between an attorney and client, in confidence, for the purpose of obtaining or providing legal assistance. It exists to protect confidential communications, to assure the client that any statements made in seeking legal advice will be kept strictly confidential. In the context of coverage litigation, documents protected from disclosure by the attorney-client privilege might include coverage opinions, litigation strategy memoranda and settlement evaluations. When a cedent receives a request for privileged information from a reinsurer, it must balance its interest in cooperating with its reinsurer and its interest in preserving privilege protection. That is because a voluntary disclosure by the holder of a privilege may be viewed as inconsistent with the confidential relationship and could be deemed a waiver of the privilege.
One significant exception is found in what is known as the “common interest” doctrine. This exception prevents a waiver of privilege upon the disclosure of protected information as long as the information is shared in order to further a “common legal interest.” In recent years, courts have devoted a great deal of attention to whether the exception applies outside the context of litigation. Some courts apply the exception only in the context of anticipated or pending litigation. See, e.g., Ambac Assurance Corporation v. Countrywide Home Loans. 57 N.E.3d 20 (N.Y. 2016). Others apply the exception in any situation in which two parties share a “common legal interest.” See In re Quest Software, Inc., 2013 Del. Ch. LEXIS 167 (Del. Ch. Ct. 2013); Coan v. Dunne, 2019 U.S. Dist. LEXIS 9838, at *3 (D. Conn. Jan. 22, 2019) (quoting United States v. Schwimmer, 892 F.2d 237, 243 (2d Cir. 1989)); Heartland Consumer Products, LLC v. DineEquity, Inc., 2018 U.S. Dist. LEXIS 124654, at *14-16 (D. Ind. July 25, 2018) (citing United States v. BDO Seidman, LLP, 492 F.3d 806, 815 (7th Cir. 2007), cert. denied, 552 U.S. 1242 (2008)). Presently, courts are divided over whether the “common interest” exception applies to protect cedent-reinsurer communications. Some courts have held that the “common interest” exception applies to cedent-reinsurer communications because of the parties’ “shared interest” in the subject matter of the communications, and the non-adversarial posture of the parties at the time the communications were exchanged. See Ooida Risk Retention Group, Inc. v. Bordeaux, 2016 U.S. Dist. LEXIS 12851 (D. Nev. Feb. 3, 2016). Others have held that the legal and economic interests of the insurer and its reinsurer are “inextricably linked” by virtue of the reinsurance agreement. See, e.g., Hartford Steam Boiler Inspection & Insurance Company v. Stauffer Chemical Company, 1991 Conn. Super. LEXIS 2527, at *2-5 (Conn. Super. Ct. Nov. 4, 1991).
Courts that refuse to apply the common interest exception to cedent-reinsurer communications have held that, while the cedent-reinsurer relationship may foster a “common economic interest,” it is insufficient to establish a “common legal interest.” See, e.g., Progressive Cas. Ins. Co. v. Federal Deposit Ins. Corp., 49 F. Supp. 3d 545, 558 (N.D. Iowa 2014). These courts reason that because the cedent-reinsurer relationship is “antagonistic in some respects and compatible in others,” a common interest simply cannot be assumed by virtue of the existence of a reinsurance agreement. See Fireman’s Fund Insurance Company v. Great American Insurance Company, 284 F.R.D. 132, 140 (S.D.N.Y. 2012); See also North River Insurance Company v. Columbia Casualty Company, 1995 U.S. Dist. LEXIS 53 (S.D.N.Y. Jan. 5, 1995). In order to establish a “common legal interest,” these courts maintain, parties seeking protection must demonstrate that, prior to exchanging information, they reached an agreement “embodying a cooperative and common enterprise toward an identical legal strategy.” Fireman’s Fund Insurance Company, 284 F.R.D. at 139 (citations omitted). Factors indicative of such an arrangement include: (1) representation of the cedent and reinsurer by the same counsel, (2) contribution by the reinsurer to the insurer’s legal expenses; and (3) the reinsurer’s exercise of control over the insurer’s litigation decisions.
Given the often contentious discovery climate in direct-level coverage litigation, privilege waiver concerns and potential uncertainty surrounding the applicability of the “common interest” exception, decisions regarding disclosure are critical. Therefore, insurers and reinsurers should think carefully about the potential impact of decisions concerning if, when, and how to communicate sensitive information concerning underlying losses.
 Courts may treat disclosure of attorney work product (which consists of counsel’s mental impressions and legal theories) to a reinsurer differently than disclosure of attorney-client communications. Work product is generally considered to be immune from discovery by an adversary in almost all instances and the disclosure of work product to a reinsurer likely does not waive the privilege if it is disclosed with the expectation that the material will be kept confidential. See United States v. American Telephone & Telegraph Company, 642 F.2d 1285 (D.C. Cir. 1980); Minnesota School Boards Association Insurance Trust v. Employers Insurance Company of Wausau, 183 F.R.D. 627 (N.D. Ill. 1999).