by ~ Michael F. Aylward (Email) (Web Site)
A recent Oregon case illustrates the tension that insurers face in seeking to comply with their contractual obligation to share information with reinsurers, without thereby forfeiting the confidentiality of privileged communications. The case also illustrates the peril that reinsurers may face in exercising their contractual rights, as well as the need to better educate courts concerning the fundamentals of reinsurance.
The dispute in Regence Group v. TIG Ins. Co., No. 07-1337 (D.Or.), arose out of claims made under a Managed Care Organization Liability Insurance Policy. The underlying claims involved class action suits in which certain medical care providers alleged that the insureds had conspired to systematically underpay them by ďbundlingĀ and ďdown-codingĀ their bills. Although TIG agreed to defend under a reservation of rights, Regence Group brought suit in Oregonís federal district court, seeking a declaration of coverage.
While the coverage litigation was pending, TIG voluntarily provided information to its reinsurers (Munich Re and Swiss Re), including certain coverage opinions that had been provided to it by outside counsel. After disputes arose between TIG and its reinsurers, these claims proceeded to arbitration. At the reinsurersĀ request, the arbitrator directed TIG to turn over its entire claim file, including numerous reports and opinions from outside counsel.
Regence Group somehow learned of these developments and moved to compel TIG and its reinsurers to produce counselís reports, arguing that the attorney-client privilege had been waived by the disclosure of these materials to third parties. TIG resisted disclosure, arguing that the common interest doctrine foreclosed any claim of waiver and pointing out that the disclosure to its reinsurers had been made pursuant to express promises of confidentiality. Relying primarily upon AIU Ins. Co. v. TIG Ins. Co, 2008 WL 5062030 (S.D.N.Y. 2008), on May 1, 2009, Judge Haggerty ruled that TIG had waived its privilege by producing privileged documents to the reinsurers ďwhen the partiesĀ interests are not aligned.Ā According to the court, TIGís and the reinsurersĀ interests were not aligned because they were opposing parties in the TIG arbitrations. He therefore ordered the disclosure of:
1. The reinsurance policies that TIG purchased covering either the Regence policy at issue, or the underlying litigation;
2. Documents exchanged between TIG and its reinsurers about that underlying litigation;
3. Documents relating to coverage for the underlying litigation between TIG and Regence "exchanged with an opposing party or the arbitrators as part of the arbitrations [TIG] had with its reinsurers;" and
4. Documents relating to the payments received by TIG from its reinsurers in connection with settlement of claims for coverage for the underlying litigation.
After the district court denied TIGís motion for reconsideration, Regence Group v. TIG Specialty Ins. Co., 2010 WL 476646 (D.Or. 2010), TIG filed a mandamus petition with the U.S. Court of Appeals for the Ninth Circuit. TIGís motion was denied without an opinion. In re TIG Specialty Ins. Co., No. 10-70530 (9th Cir. May 21, 2010). Following the denial of a motion for rehearing en banc, TIG moved to stay discovery pending an appeal to the U.S. Supreme Court. Meanwhile, Regence asked the trial court to enter contempt sanctions against TIGís reinsurers for failing to comply with the courtís discovery orders.
TIGís cert petition was supported by numerous amici from industry groups, such as the RAA and PCIAA, as well as the defense bar, notably the Federation of Defense Corporate Counsel and the International Association of Defense Counsel, all of whom argued that the district courtís analysis would create numerous practical problems for defense counsel in their ability to represent and communicate with insurance clients.
Shortly after TIG filed its petition, however, Regence sought to enforce its discovery subpoenas to Munich Re and Swiss Re in the district court in Oregon. The district court declined to hold off action pending word from the U.S. Supreme Court, noting that this discovery dispute had already dragged on for nearly two years. With a finding of contempt in the offing, TIG withdrew its cert petition in October 2010 and agreed to turn over the requested documents.
While the likelihood of the U.S. Supreme Court accepting TIGís appeal was remote indeed, particularly in the context of a mandamus petition and not a merits appeal, the abrupt termination of the appeal denied the Court an important opportunity to clarify the role of the common interest doctrine and to establish protections that are essential to arbitrations.
The Common Interest Doctrine Precludes a Finding of Waiver
For decades, courts have recognized that there are situations in which clients may share information without waiving the privileged character of the documents in question. In particular, courts have ruled that parties with an aligned legal interest may candidly exchange legal confidences with respect to their mutual concern, even though the parties may each have separate interests of their own. Courts have not hesitated to apply the common interest doctrine to various different types of insurance relationships.
In particular, courts have recognized the existence of a common interest between ceding insurers and reinsurers in light of the fact that the reinsurer will ultimately be responsible to reimburse the cedent insurer for sums paid to or on behalf of claimants. As the Second Circuit observed in Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1053-1054 (2d Cir. 1993):
Historically, the reinsurance market has relied on a practice of utmost good faith to decrease monitoring costs and ex ante contracting costs. Reinsurance only works if the sums of reinsurance premiums are less than the original insurance premium. Otherwise, the ceding insurers will not reinsure. For the reinsurance premiums to be less, reinsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims. Reinsurers may thus not have actuarial expertise or actively participate in the defending ordinary claims. They are protected, however, by a large area of common interest with ceding insurers and by the tradition of utmost good faith, particularly in the sharing of information.
The linkage of the doctrine of uberrimae fidei to the common interest of insurers and reinsurers in sharing information concerning risks for which reinsurance may apply is long standing. As a result, courts have consistently ruled that an insurerís disclosure of privileged information to its reinsurers does not effect a waiver of the privilege.
The Initiation of Arbitration Does Not Eliminate the PartiesĀ Common and Aligned Interest in Defeating the Underlying Claim
While seemingly conceding that a common interest existed between TIG and its reinsurers, the district court nonetheless found that this common interest ceased to exist by reason of the pending arbitration proceedings between TIG and its reinsurers. Apart from the fact that the court should at least have recognized the existence of a continuing common interest in the documents exchanged prior to the institution of arbitration proceedings, it was error to find that the arbitration proceeding eliminated the partiesĀ common interest in documents which focused on an analysis of the merits of the underlying claim which both the insurer and reinsurer had a ďcommon interestĀ in defeating. In particular, to the extent that their reinsurance contracts applied to these claims, the reinsurers shared TIGís interest in minimizing or defeating to the underlying claims asserted against Regence Group.
The Oregon district courtís opinion creates a Hobsonís choice for businesses seeking indemnification under insurance agreements: they can either risk losing coverage by refusing to supply information and reports to their insurers; or they can carry out their contractual duties under the insurance agreements and lose their ability to defend themselves in the underlying action when their internal litigation strategy, exposure analyses, and reports of defense counsel are laid out for their adversaries.
While this precedent is troubling for all businesses that have contractual duties to share information with third parties in order to gain indemnification, it has particularly troubling implications for the business of reinsurance given the vital role that the doctrine of uberrimae fidei plays in cementing that relationship. Uberrimae fidei is not only a rule of law but ďa tradition honored by ceding insurers and reinsurers in their ongoing commercial relationships.Ā Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1054 (2d Cir. 1993). Ceding insurers cannot honor this obligation, however, if they are forced to choose between providing necessary information to reinsurers and severely compromising their own ability to defend against the contested claims for which they hope to obtain reinsurance.
If other courts around the country follow the lead of the district court, insurers will have little incentive to candidly communicate with reinsurers. Without accurate information, reinsurers will have to guess at their cedentsĀ likely exposures. This will either cause reinsurers to act with greater caution, or impose economic restrictions on insurers that will hinder their ability to do business or will result in reinsurers under-reserving claims and ultimately paying losses in excess of what was anticipated. Either scenario will prompt market disruptions and interfere with the systematic and well-coordinated business of insurance.
The district courtís opinion also creates numerous practical problems for defense counsel seeking to advise insurers and reinsurers in such cases. Defense counsel have assumed, up until now, that a common interest exists between their clients and insurers or reinsurers that must indemnify them for covered losses, such that candid information could be confidentially communicated to give timely and strategic advice with respect to clientís potential legal liabilities. The refusal of the trial court to recognize a common interest in these circumstances imperils the ability of counsel to provide such advice and can only chill the interest of clients in seeking it.
The immediate effect of Regence has been to cause both ceding insurers and reinsurers to reevaluate whether and when confidential documents are produced in reinsurance arbitrations. While cedents are justifiably concerned that even disclosure pursuant to written guarantees of confidentiality may waive the privilege, there remains the problem that efforts to resist disclosure may anger arbitrators and/or prompt reinsurers to disclaim based on a breach of the access to records clause.
Parties may seek to minimize the likelihood of waiver through alternative means of disclosure, as by allowing a reinsurer to inspect the privileged records but not copy them, so that there are no documents in the physical possession of the reinsurer that can be subpoenaed. In these circumstances, although the insured may still discover the facts giving rise to an alleged waiver, it is less likely to do so and it is also less likely to be able to establish the records reviewed.
Alternatively, an insurer may delay instituting arbitration until after the underlying coverage litigation is resolved. This avoids the problem of waiver but may also reduce the value of the reinsurance, since coverage litigation may drag on for many years, during which time the cedent is not receiving the benefit of any assistance or reimbursement from reinsurers.
Reinsurers must also now consider whether they want to ask for sensitive reports of this sort. While reinsurers have traditionally relied on such reports as a meaning of assessing the merits and value of the ceded claim, the risk of waiver may ultimately outweigh the benefit of obtaining this advice.
These concerns were addressed by an industry panel at last Fallís MReBA claims symposium. As reported at the time, Michael OíMalley, Senior Reinsurance Counsel for the Liberty Mutual Group, suggested a practical consequence, noting that the ruling may encourage ďcedents to think long and hard about initiating reinsurance arbitration when still engaged in litigation in the underlying case.Ā Rhonda Rittenberg, Senior Vice President and Senior Associate General Counsel with Lexington Insurance Company, suggested that the decision served as an opportunity for cedents and reinsurers to work together to ensure that the privilege is preserved.
It is submitted that the best strategy in the long term may be an increased effort to educate courts about the processes of reinsurance, the vital role of transparency and shared confidence to the doctrine of uberrimae fidei and the need to adopt a more flexible conception of the common interest doctrine in cases of this sort.burberry bags,replica watches,rolex watches for sale and replica cartier watches can be found here.
Michael F. Aylward can be reached at email@example.com.
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