Papered to Death. The Use and Abuse of Written Discovery. Matthew S. Foy. Gordon & Rees LLP

Transcription

1 Papered to Death The Use and Abuse of Written Discovery Matthew S. Foy Gordon & Rees LLP 275 Battery Street San Francisco, California (415) (415) [fax]

2 Matthew Foy is a partner in the insurance practice group of Gordon & Rees LLP. His practice focuses on insurance coverage litigation and advice involving primary and excess general liability policies with an emphasis on environmental, mass tort, construction defect, and advertising and personal injury claims. Mr. Foy has a broadbased insurance background ranging from drafting policy language and claims manuals to dealing with property and casualty based coverage litigation, to life, health and disability matters. He is a frequent lecturer on issues confronting the insurance industry and is senior editor of DRI s monthly e-magazine, Covered Events. In addition to his legal practice, Mr. Foy serves as the hiring partner for Gordon & Rees summer associate program for the San Francisco office.

3 Papered to Death The Use and Abuse of Written Discovery Table of Contents I. Introduction II. The Parade of Horribles A. Reserves Relevance Attorney work product and the attorney-client privilege When all else fails in camera reviews, protective orders, and in limine motions B. Reinsurance Information Relevance Attorney work product and the attorney-client privilege Practical strategies for managing reinsurance discovery C. Other Insureds Claim Files Relevance Undue burden and oppression Privacy Practical considerations D. Electronic Discovery The new amendments to the federal rules Creating an e-discovery plan The litigation hold Data destruction policies Adverse inference instructions Shifting e-discovery costs to the policyholder E. Drafting History Drafting history is irrelevant in construing unambiguous policy language Drafting history is irrelevant in construing the mutual intent of the parties F. Underwriting Manuals G. Claims Manuals H. And the List Goes on Colossus Personnel files of insurer employees Seminars, conferences, and presentations Papered to Death: The Use and Abuse of Written Discovery v Foy v 295

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5 Papered to Death The Use and Abuse of Written Discovery I. Introduction With increasing frequency, policyholders are seeking discovery beyond the claim and underwriting file. Causes of action are asserted more for the access they can provide to the insurer s storage rooms and computer systems than for their merits. This article discusses the major battlegrounds surrounding information frequently targeted by policyholders and strategies insurers can employ to resist that discovery. Insureds have the upper hand in discovering reserve and reinsurance information, other claim files, drafting history, claims and underwriting manuals, and other discovery targets because the test for whether to allow discovery is broad. Policyholders need show only that the requested information may lead to the discovery of admissible evidence, not that the information will ultimately be admissible at trial. Outside counsel needs to understand what the courts have said about whether the requested information is discoverable. Context needs to be considered as what might be discoverable in a bad faith case may not be discoverable in a policy interpretation case. Issues involving attorney work product and the attorney-client privilege arise in almost every discovery dispute. The insurer should always consider objections based on the burden and oppression that can result from allowing the discovery or that the discovery seeks information protected as trade secret or under privacy laws. It is critical for outside counsel to get the client involved in the process early on. A greater level of discussion is required for more intrusive and burdensome discovery. Counsel should advise the client of what the chances are of resisting the discovery based on the law of the particular jurisdiction so that expectations are managed from the start. Counsel should also find out whether the client has responded to similar discovery in other cases for the sake of consistency and so that the wheel is not reinvented. If the client is going to have difficulty responding to the discovery or can do so only at great effort and expense, outside counsel needs to know so that manageable compromises can be reached during the meet and confer process. Insurers have had success employing a variety of strategies to bar or limit policyholder discovery. Early motion practice can be used to eliminate fringe claims and the discovery they would eventually entail. Some courts have severed and stayed bad faith or other claims and their related discovery. Where discovery has been allowed, or appears imminent, the insurer can ask the court to review information in camera or to order its production subject to protective order. Good defense strategy always involves exploring the possibility of less intrusive discovery with opposing counsel; for example, ordering production only of that portion of the claims manual dealing with subject matter at issue or the first and last ten similar claim files, as opposed to all similar claim files. But, more often than not, it comes down to the case law. Is the discovery allowed or is it not? Will the court consider less intrusive discovery or other protections? What follows is a survey of what courts from around the country have said concerning whether to allow discovery of information frequently targeted by policyholders. Knowing what the courts have said is the first and most important function in creating a discovery strategy that maximizes the insurer s ability to avoid being papered to death. Papered to Death: The Use and Abuse of Written Discovery v Foy v 297

6 II. The Parade of Horribles A. Reserves A reserve is an insurer s estimate of the amount it may be required to pay under a policy as a result of a particular claim. While the method used to set reserves can vary from insurer to insurer, they are typically required by statute or regulation. See, e.g., California Insurance Code ( [e]ach insurer transacting business in this state shall at all times maintain reserves in an amount estimated in the aggregate to provide for the payment of all losses and claims for which the insurer may be liable, and to provide the expense of adjustment of settlement of losses and claims ). With increasing frequency, policyholders seek reserve information in litigation with their insurers. While the justifications cited by policyholders vary from case to case and are limited only by the ingenuity of policyholder s counsel, the primary reason for seeking reserve information is almost always the same to use the information as an admission of liability on the part of the insurer. Arguments typically asserted by policyholders include that the mere fact a reserve was set means the insurer was aware of a potential for coverage or that the amount of a reserve is evidence the insurer refused to settle a case in bad faith. Of course, these arguments ignore the reality that reserves are typically statutorily required and do not reflect whether there is coverage, or a even a potential for coverage, in connection with a particular claim. Those coverage determinations are controlled by the application of policy language to the facts of the claim. Indeed, there are so many factors involved in the establishment of reserves unrelated to the issue of coverage that it can hardly be said that reserve information amounts to an admission binding on the insurer. It is difficult to discern continuity on the issue of discoverability of reserves from jurisdiction to jurisdiction. What is clear from the case law is that the insurers most effective weapons in resisting efforts to discover reserve information are objections based on relevance, attorney work product, and the attorney-client privilege. Where all else fails and discovery has been allowed, or appears imminent, insurers should consider seeking protective orders, requesting in camera reviews, or filing in limine motions asking that reserve information be precluded from introduction at trial. 1. Relevance An insurer s first line of defense in resisting discovery of reserve information is to argue the information is neither relevant nor likely to lead to the discovery of admissible evidence. What might be discoverable in a third party bad faith case may have no discovery relevance in a pure policy interpretation case. It is critical for insurer counsel to take a careful look at the facts surrounding a policyholder s claim as case law almost unanimously recognizes that those unique facts will be determinative of the issue of reserve discoverability. As noted in West Virginia ex rel. Erie Insurance Property and Casualty Co. v. Mazzone, 625 S.E.2d 355, 360 (W. Va. 2005): In making a determination in the context of discovery about the relevancy of insurance reserves information, the trial court should take into account the nature of the case, the methods used by the insurer to set the reserves and the purpose for which the information is sought, and only grant requests for disclosure when its findings of fact and conclusions of law support a determination that the specific facts of the claim in the case before it directly and primarily influenced the setting of the reserves in question. The trend across the country is to allow discovery of reserve information in third party bad faith cases. Courts have generally been willing to allow discovery of reserve information where the amount of the reserve or the date it was set can be deemed to run counter to an insurer s claim that, for example, it promptly investigated 298 v Insurance Coverage and Claims Institute v April 2007

7 coverage or thought there was no potential for coverage. The oft-cited decision in Lipton v. Superior Court, 48 Cal. App. 4th 1599 (Cal. App. 1996), is illustrative. There, Lipton was sued for legal malpractice by former clients and his insurer, Lawyer s Mutual Insurance Company ( LMIC ), provided a defense. After a jury verdict against Lipton for $14 million, a dispute arose concerning the limits available under the LMIC policy. Lipton sued LMIC for bad faith and requested LMIC s claim file. LMIC withheld 24 documents on the ground they contained reserve information that was irrelevant to Lipton s bad faith claim. Lipton moved to compel and, after an in camera review, the trial court sustained LMIC s objection. Lipton appealed and the appellate court reversed. The Lipton court found that [t]he evaluation of a case made by an insurer, whether compelled by law or business prudence, is information which might well lead to discovery of evidence admissible on any number of issues which commonly are presented in bad faith actions. Lipton, supra, 48 Cal. App. 4th at The court held that on the record before it, the reserve information could reasonably lead to the discovery of admissible evidence on any of the following issues: (1) LMIC s state of mind regarding its claim-handling practices, (2) LMIC s knowledge that aggregate coverage versus singular coverage applied but was concealed, and (3) the degree to which LMIC ignored its own counsel s advice regarding Lipton s probably liability for exposure beyond limits. Id. at The court concluded that [w]ithout a doubt such information would assist Lipton in evaluating his bad faith case and in preparing it for trial. That is enough to justify discovery. Id. [emphasis in original]. LMIC argued that [i]f reserve information is construed as some form of admission regarding liability [or the value of the underlying claim], and thus discoverable for any purpose by the policyholder, the candid establishment of reserves would be severely and detrimentally impacted. Lipton, supra, 48 Cal. App. 4th at The court rejected this argument reasoning that the setting of reserves cannot be arbitrary and is governed by statute. Id. The court also noted that LMIC s concerns were directed to the limitation or exclusion of loss reserve information at trial and not its discovery relevance. Id. While Lipton found reserve information discoverable on the record before it, the court acknowledged that [w]hether such information is sufficiently relevant to the precise issues which will be presented at trial to be admissible in evidence is another matter. That is not a question before us. Lipton, supra, 48 Cal. App. 4th at In a potentially helpful comment, the court acknowledged that a reserve cannot accurately or fairly be equated with an admission of liability or the value of any particular claim. Id. at And even were reserve information to be admitted at trial, the court noted the insurer would not be foreclosed from fully explaining, the reason the reserve was established, the reasonableness of the amount of the reserve, the allocation between indemnity and loss adjustment expense and other evidence relevant to the issue from the insurer s standpoint. Id. at 1615 n.17. In Groben v. Travelers Indemnity Co., 266 N.Y.S.2d 616 (N.Y. Sup. Ct. 1965), one of the earliest decisions to consider the issue, Groben sued Travelers for bad faith following a jury verdict in excess of limits. In allowing discovery of reserve information, the court found Groben, supra, 266 N.Y.S.2d at 619. [b]ad faith is a state of mind which must be established by circumstantial evidence. The actions of the defendant in respect to the reserve are relevant. Negligent investigation and uninformed evaluation of the worth of the [underlying] claims go to the heart of the case since serious and recurring negligence can be indicative of bad faith. A number of cases from around the country have similarly found reserve information discoverable in the context of third party bad faith claims. See, e.g., CIGNA Ins. Co. v. Cooper Tire & Rubber, Inc., 180 F. Supp. 2d Papered to Death: The Use and Abuse of Written Discovery v Foy v 299

8 933, 936 (N.D. Ohio 2001) (reserves discoverable, relevant to issues of mistake and intent); Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 813 (Ky. 2004) (evidence of reserve setting procedures was relevant to bad faith claim; would help show whether insurer followed statutory and regulatory requirements and whether system for setting reserves was aimed at achieving unfairly low values); Loyal Order of Moose v. International Fidelity Ins. Co., 797 P.2d 622, (Alaska 1990) (discovery of the existence and character of reserves is reasonably calculated to lead to the discovery of admissible evidence); Tackett v. State Farm & Cas., 588 A.2d 1098, (Del. Sup. Ct. 1988) (reserves relevant and discoverable based on need despite finding they were prepared in anticipation of litigation). While discovery relating to reserves has generally been permitted in bad faith litigation, courts have come to different conclusions concerning the discoverability of collateral information relating to reserves. In Cantor v. Equitable Life Assurance Society of the United States, 1998 U.S. Dist. Lexis 8435 (E.D. Pa. 1998), the court found that the procedure for setting reserves or the interest earned on them have no discovery relevance in a bad faith case. But the court in Fretz v. Mut. Benefit Insurance Co., 37 Pa. D & C. 4th 173 (Allegheny County, 1998), determined that the procedures or manner used to calculate reserves may be pertinent to the issue of whether the insurer neglected to make a reasonable settlement offer. Insurers have had far better success resisting discovery of reserve information outside the third party bad faith context. Courts have generally been more reluctant to order discovery of reserve information when the question is not one of the insurer s good or bad faith, but one of actual coverage or policy interpretation. The rationale of these decisions is typically that reserves do not represent an admission of liability and therefore should not be discoverable. For instance, in Independent Petrochemical v. Aetna Casualty and Surety Co., 117 F.R.D. 283, 288 (D.D.C. 1986), the court rejected the policyholder s attempt to discover reserve information concluding that the information sought was of very tenuous relevance, if any relevance at all. The court reasoned that a reserve essentially reflects an assessment of the value of a claim taking into consideration the likelihood of an adverse judgment and that such estimates of potential liability do not normally entail an evaluation of coverage based upon a thorough factual and legal consideration when routinely made as a claim analysis. Id. The tenuous connection between reserve information and the existence of coverage was also recognized in National Union Fire Insurance Co. v. Stauffer Chemical Co., 558 A.2d 1091 (Del. Super. Ct. 1989). There, the court rejected the policyholder s attempt to discover reserve information on the ground that the decision to set reserves is not helpful in interpreting policies because reserves are only estimates. Id. at The fact reserves were established does not necessarily mean the insurers believed the claims would be covered. Id. Similarly, in Union Carbide Corp. v. Travelers Indemnity Co., 61 F.R.D. 411 (W.D. Pa. 1993), the court held that discovery of the amount of reserves would not lead to admissible evidence. The court observed that the contingent and uncertain nature of reserves could render questions about reserves tantamount to hypothetical questions, and that questions calling for an opinion based on hypothetical facts have been held improper. Id. at 413. In Rhone-Poulenc Rorer Inc. v. Home Indemnity Co., 139 F.R.D. 609 (E.D. Pa. 1991), the court denied discovery of reserve information on relevance grounds. The court reasoned reserves essentially reflect an assessment of the value of the claim and that such estimates of potential liability do not normally entail an evaluation of coverage based upon thorough factual and legal considerations. Id. at 613; but see Champion Int l Corp. v. Liberty Mut. Ins. Co., 128 F.R.D. 608, 612 (S.D.N.Y. 1989) (allowing discovery in coverage case of documents relating to reserves for the purposes of determining defendants conduct of claim evaluations, including statements about coverage or the timing of coverage). 300 v Insurance Coverage and Claims Institute v April 2007

9 Some courts have relied on the fact that reserves are required and set pursuant to statute or regulation in declining to allow discovery. The court in In re Couch, 80 B.R. 512, 516 (S.D. Cal. 1987), did not allow discovery under California law because [t]he legislature and Insurance Commissioner establish reserve policy. For this reason alone, a reserve cannot accurately or fairly be equated with an admission of liability or the value of particular claim. And in Hoechst Calanese Corp. v. National Union Fire Ins. Co., 623 A.2d 1099, (Del. Super. Ct. 1991), the court denied discovery of reserve information concluding that: Reserves are accounting entries which an insurance company regularly uses to set aside sufficient funds in the event of policyholder liability. The Court finds unpersuasive Hoechst s claim that the establishment of reserves evidences an acknowledgment by the insurers of their liability[.] Rather, the establishment of reserves is an appropriate business decision justified by the necessity of preserving financial stability in the event of liabilities which cannot be predicted with any degree of certainty. Reserves do not represent an admission or evaluation of liability and are irrelevant to the issues between insurer and insured. Discovery of reserve information should not be allowed in first party cases where the issue tends to be whether a loss is covered or not covered. Such was the holding in American Protection Insurance Co. v. Helm Concentrate, Inc., 140 F.R.D. 448 (E.D. Cal. 1991) ( APICO ). In holding that reserve information was not discoverable, the APICO court found that distinct issues presented by first and third party bad faith cases can dictate different results regarding the scope of discovery: APICO, supra, 140 F.R.D. at In considering whether an insurer acted in bad faith in denying its duty to defend under a third party liability policy the fact that it established a reserve, particularly for litigation costs, is probative on the issue of whether there is a potential for liability. Thus, when an insurer, by its actions, acknowledges the potential for liability and fails to attempt to settle a claim against its insured and/or fails to defend, reserve information is relevant to the issue of good faith. On the other hand, in first party [cases,] the issues are whether the claimed loss is covered and whether the insurer acted in good faith in investigating the loss and in denying coverage, the question of potential liability is not relevant because it does not trigger any duty under the first party policy. The APICO court concluded that in the first party context the policy either provides coverage for the loss or it does not; the insurer s good faith is determined by the manner and depth of its investigation and the determination of whether there was a good faith factual or legal question as to whether the loss was covered. Id. at 450; see also Exchange Nat l. Bank of Chicago v. U.S. Fid. & Guar. Co., 1985 WL 1505 (N.D. Ill. 1985) (setting of reserve is not a concession that insurer acted in bad faith in denying first party a claim and may be nothing more than good accounting practices); but see Silva v. Basin Western Inc., 47 P.3d 1184 (Colo. 2002) (reserves may be discoverable in a first party case because the scope of discovery in such cases is traditionally broader). 2. Attorney work product and the attorney-client privilege Even if a court finds reserve information otherwise discoverable, an insurer may still be able to resist its discovery based on the attorney work-product doctrine and attorney-client privilege. That is because insurers often establish or modify reserves with the assistance of counsel in some form or another. When evaluating the availability of work-product and attorney-client privilege objections, it is critical for outside counsel to understand how the client sets and modifies reserves. In order to advocate a workproduct objection, most jurisdictions require that an attorney be involved in the reserve-setting process and Papered to Death: The Use and Abuse of Written Discovery v Foy v 301

10 that the reserves were set in anticipation of litigation. To claim attorney-client privilege, reserves will need to be based on communications from counsel in the form of status reports or otherwise. In Rhone-Poulenc, supra, 139 F.R.D. 609, policyholders sought information concerning reserves set in connection with individual claims as well as aggregate reserve information. The court initially noted that [w]here the reserves have been established based on legal input, the results and supporting papers most likely will be work-product and may also reflect attorney-client privilege communication. As for the individual reserve figures, the court found that they were protected work product because they revealed the mental impressions of an attorney in evaluating a claim and by there very nature prepared in anticipation of litigation. Id. at 614. The court then went on to afford protection for the aggregate reserves as well. [T]he aggregate reserve figures may give some insight into the mental impressions of the lawyers in setting specific case reserves. This is inevitable, considering that these aggregates and averages are based upon the attorney s evaluations of the value of specific claims. [T]he aggregate and average figures are derived from and necessarily embody the protected material. They could not be formulated without the attorney s initial evaluations of specific legal claims. Thus it is impossible to protect the mental impressions underlying the specific case reserves without also protecting the aggregate figures. Id. at ; see also Independent Petrochemical, supra, 117 F.R.D. at 288 (D.D.C. 1986) (where reserves are established by legal input, the results and supporting papers likely constitute work product and may also reflect attorney-client privileged communications). The decision in Simon v. Searle & Co., 816 F.2d 397 (8th Cir. 1987), also evaluated whether individual and aggregate reserve information was protected. Searle was essentially self insured and, like an insurance company, set reserves with the assistance of counsel in connection with individual claims. The individual reserve information was transmitted to Searle s risk management department and used for a variety of reserve analysis functions. Like Rhone-Poulenc, the Simon court concluded that the individual case reserves were protected work product. Id. at 410. However, unlike Rhone-Poulenc, the Simon court found that the aggregate reserve information was not protected as work product or under the attorney-client privilege. The court reasoned that the aggregate information was not prepared in anticipation of litigation, but for business planning purposes. Id. at 401. It also noted: Simon, supra, 816 F.2d at [w]e do not believe that the aggregate reserve information reveals the individual case reserve figures to a degree that brings the aggregates within the protection of the work product doctrine [or under the attorney-client privilege]. The individual figures lose their identity when combined to create aggregate information. In Loyal Order of Moose, supra, 797 P.2d 622 (Alaska 1990), the Alaska Supreme Court rejected an insurer s efforts to protect reserve information on work-product and attorney-client privilege grounds. The court determined that reserves are established in the ordinary course of business, not in anticipation of litigation. Id. at 628. It also found that reserves do not amount to confidential communications made to facilitate the rendition of legal services. Id. Policyholders have argued that even if reserve information is protected as work product or by the attorney-client privilege, the protections are waived when a cedant insurer discloses the information to its reinsurer. This argument has been largely unsuccessful as courts recognize that waiver does not apply where the recipient of protected information has a common interest with the divulging party. For example, in Durham 302 v Insurance Coverage and Claims Institute v April 2007

11 Industries, Inc. v. North River Insurance Co, 1980 U.S. Dist. Lexis 15154, *6 (S.D.N.Y. 1980), the court agreed that a cedant and its reinsurer had a common interest preventing waiver because they share liability for the same risk. See also Great Am. Surplus Lines Ins. Co. v. Ace Oil, 120 F.R.D. 533 (E.D. Cal. 1988) (common interest exception prevented waiver); but see Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D. 132 (N.D. Ill. 1993) (common interest exception inapplicable because cedant and reinsurer did not join forces to defend against common adversary). 3. When all else fails in camera reviews, protective orders, and in limine motions If the court has ordered, or is inclined to order, production of reserve information, all may not be lost. Outside counsel can ask the court to conduct an in camera review of reserve information prior to issuing a final order requiring production. In Lipton, supra, 48 Cal. App. 4th 1599, the court concluded reserve information should be reviewed in camera to determine whether the requested materials have discovery relevance or whether privileged material exists that should be excised prior to disclosure. Outside counsel can also request that reserves be produced subject to a protective order on the ground that they constitute confidential, propriety, or privileged information. See Lipton, supra, 48 Cal. App. 4th at 1620 ( The requested documents, if found to be relevant, can be ordered produced subject to any appropriate protective order[.] ) A protective order can be effective in limiting dissemination of reserve information to specified individuals and use of the material to the case at hand. And where reserve information has already been produced, the insurer can still seek to exclude its introduction at trial on the ground that its probative value is outweighed by prejudice. The case law is almost unanimous in holding that the setting of a reserve is not the equivalent of an admission of coverage. Despite this, the risk that a jury will view a reserve as an admission of coverage is a reality. This was recognized in Federal Realty Investment Co. v. Pacific Insurance Co., 760 F. Supp. 533, 540 (D. Md. 1991), which found that reserves amount to mere guesses at the outcome of litigation based on conservative accounting principles [and that] the probative value of [the reserves], if any, is substantially outweighed by its prejudicial aspects. B. Reinsurance Information Liability insurers frequently reinsure a portion of an underwritten risk to diversify the risk of loss. The reinsured, or cedant, cedes all or part of the risk to another insurer known as the reinsurer. The reinsurer agrees to indemnify the ceding insurer on the risk transferred pursuant to the terms of the reinsurance contract. A reinsurance contract is a contract of indemnity for the benefit of the original insurer; the original insured has no interest in it. Ascherman v. General Reinsurance Corp., 183 Cal. App. 3d 307, 311 (Cal. App. 1986). Reinsurance agreements generally require the ceding insurer to notify the reinsurer of claims for which it may become liable and to keep the reinsurer apprised of case status and issues impacting coverage. As a result, a great deal of claims related information, much of it privileged in the first instance, passes from insurer to reinsurer over the life of a claim. Reports to the reinsurer may include counsel s thoughts regarding strategy, candid evaluations of exposure and coverage, and information concerning settlement. Not surprisingly, policyholders have recognized reinsurance as a fertile area for discovery. Policyholders have been emboldened by occasional bad precedent allowing them access to protected information they would otherwise never be entitled to on the misguided basis that the protection was waived through disclosure to the reinsurer. As with policyholders efforts to obtain reserve information, the battlegrounds over reinsurance involve questions of relevance, work product, and attorney-client privilege. While relevance is often the starting Papered to Death: The Use and Abuse of Written Discovery v Foy v 303

12 place for objecting to reinsurance discovery, outside counsel should be diligent in efforts to resist production of information passed from insurer to reinsurer when the information is protected in the first instance as work product or pursuant to the attorney-client privilege. 1. Relevance Arguments articulated by policyholders on the issue of why reinsurance information is discoverable include that it may shed light on ambiguities in the insurance contract or contain admissions that belie the coverage position asserted by the ceding insurer to the insured. Given the varied factual situations, claims, and defenses that arise in insurance litigation, bright line rules on discoverability of reinsurance information are difficult to come by. Outside counsel is best served by evaluating reinsurance discovery on a case-by-case basis with a firm understanding of the facts and applicable law. Insurers have had some success resisting reinsurance discovery in policy interpretation cases. For instance, in Leski, Inc. v. Federal Insurance Co., 129 F.R.D. 99 (D.N.J 1989), the court denied the policyholder s request for reinsurance information reasoning that [r]einsurance involves a company s attempt to spread the burden of indemnification. It is a decision based on business considerations and not questions of policy interpretation. I conclude, therefore, that its relevance is very tenuous and its production is not compelled at this juncture[.] Id. at 106; see also Independent Petrochemical, supra, 117 F.R.D. at 288 (D.D.C. 1986) (reinsurance information is of very tenuous relevance, if any relevance at all ). In American Medical Systems v. National Union Fire Insurance Co., 1999 U.S. Dist Lexis (E.D. La. 1999), the insurer denied a duty to defend on the ground the insured did not provide timely notice of the claim. Under the circumstances, the court concluded that reinsurance information was not relevant because the method of providing notice was set forth in the insurance policy that was the subject of the litigation. It found that the presence of reinsurance would not necessarily tend to prove that plaintiffs provided notice as required by the terms of the policy. Id. at *7. The court in Rhone-Poulenc Rorer Inc. v. Home Indemnity Co., 1991 U.S. Dist. Lexis 16336, *3 (E.D. Pa. 1991), reaffirmed an earlier ruling that reinsurance information would at best be evidence of undisclosed unilateral intent, which is not material in a policy interpretation case where mutual intent is what matters. The court concluded that reinsurance information was not discoverable even where a finding of ambiguity has been made. Id. at *4. Not all courts have refused reinsurance discovery in policy interpretation cases. In contrast to the decision in Rhone-Poulenc, supra, the court in Hoechst Celanese, supra, 623 A.2d 1099, 1108 (Del. Super. Ct. 1991), found that a ceding insurer s communication with its reinsurer could lead to discovery of evidence there was a meeting of the minds between insurer and insured on the subject policy language. See also Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 765 (Ohio Misc. 1989) (reinsurance information relevant to whether insurers believed policies covered underlying claims); National Union v. Stauffer Chem., supra, 558 A.2d 1091 (Del. Super. Ct. 1989) (same). Courts have generally been willing to allow discovery of reinsurance information in bad faith cases. In Lipton, supra, 48 Cal. App. 4th at 1618 (Cal. App. 1996), the court found that correspondence between the insurer and reinsurer, not otherwise privileged, which discuses liability, exposure, the likelihood of a verdict in excess of policy limits or coverage issues may well be relevant in discovery. Some courts have allowed discovery of the amount of reinsurance in bad faith failure to settle cases to determine if the insurer reinsured a large portion of a loss providing possible incentive to reject reasonable settlement offers. See Royal Transit, Inc. v. Central Sur. & Ins. Co., 168 F.2d 345 (7th Cir. 1948); American Fid. & Cas. Co. v. Greyhound Corp., 258 F.2d 709 (5th Cir. 1958). 304 v Insurance Coverage and Claims Institute v April 2007

13 Courts have allowed discovery of reinsurance information in a variety of other factual settings. See PECO Energy Co., v. Insurance Co. of N. Am., 852 A.2d 1230 (Pa. Super. 2004) (reinsurance information discoverable to rebut insurer s affirmative defenses including late notice); Leski, Inc. v. Federal Ins. Co., 129 F.R.D. 99 (D. N.J. 1989) (reinsurance information discoverable on ground it might aid insured in reconstructing terms of lost policy); National Union Fire Ins. v. Continental Ill. Corp., 116 F.R.D. 78 (N.D. Ill. 1987) (communications between insurer and reinsurer discoverable where insurer brought action to rescind policy for misrepresentation to determine what insurer relied on to issue policy); Rhone-Poulenc, supra, 1991 U.S. Dist. Lexis (discovery of reinsurance information allowed to rebut defendant insurer s defenses of misrepresentation, nondisclosure, lack of or late notice, or lost policy). Another issue is whether reinsurance agreements themselves are discoverable. Federal courts have justified discovery of reinsurance agreements under Federal Rule 26, which mandates production of any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment[.] See, e.g., National Union v. Continental Ill., supra, 116 F.R.D. 78 (N.D. Ill. 1987); Great Lakes Dredge 7 Dock Co. v. Commercial Union Assur. Co., 159 F.R.D. 502 (N.D. Ill 1995). The same ruling has been made under corresponding state statute. Stauffer Chem., supra, 558 A.2d 1091 (Del. Super. Ct. 1989). However, the court in Rhone-Poulenc, supra, 1991 U.S. Dist. Lexis 16336, *5-6 (E.D. Pa. Nov. 7, 1991), held that Rule 26 s production mandate applied only in actions for damages and hence did not require production of a reinsurance agreement in a case where the insured sued the insurer for declaratory relief. 2. Attorney work product and the attorney-client privilege Information provided by a ceding insurer to its reinsurer can contain protected work product and attorney-client privileged communications. Whether the information be in the form of coverage counsel reports forwarded by the cedant to the reinsurer or a report prepared by the cedant that is based on or summarizes coverage counsel reports, the information should be protected. As the court recognized in Lipton, supra, 48 Cal. App. 4th 1599, 1618, where the reinsurance documents include attorney-client or protected work-product communications they would be entitled to the same privilege protection as would similar communications between the ceding insurer and its attorneys handling the insureds claim. The first step in protecting information provided by the ceding insurer to the reinsurer is to simply identify what constitutes work product or attorney-client privileged communications. The law on what is protected can vary from jurisdiction to jurisdiction. While the finer points concerning these differences are beyond the scope of this article, at a minimum, confidential communications between lawyer and client and material prepared in anticipation of litigation are protected. See, e.g., Great Am. v. Ace Oil, supra, 120 F.R.D. 533, 539 (E.D. Cal. 1989) (document created in anticipation of litigation and communicated to reinsurer is protected work product); Stauffer Chem., supra, 558 A.2d 1091 (Del. Super. 1989) (communications between cedent and reinsurer are protected by the attorney-client privilege if the insurance company s counsel participated in the communications); but see Front Royal Ins. Co. v. Gold Players, Inc., 187 F.R.D. 252, 258 (W.D. Va. 1999) (documents were created in the ordinary course of business under contractual obligations between insurer and reinsurer [and] were not prepared in anticipation of litigation ). Just as with reserves, policyholders have argued that a ceding insurer s disclosure of attorney work product or attorney-client privileged communications to reinsurers waives the applicable privilege. But just as with the case law on reserves, most courts have properly applied the common interest doctrine to allow the ceding insurer to maintain the privilege and protect the information despite its disclosure to the reinsurer. Papered to Death: The Use and Abuse of Written Discovery v Foy v 305

14 The common interest doctrine permits parties who possess common legal interests to share protected information without the information losing its protected status. In jurisdictions that have not ruled on the issue, it is critical for counsel to make sure the court understands the insurer-reinsurer relationship. Properly viewed, insurers and their reinsurers have a common legal interest they each share risk of exposure for an underlying loss. Hence, the common interest doctrine should apply to preserve the protected nature of otherwise objectionable documents shared between insurer and reinsurer. The court in Minnesota School Boards Association v. Employers Insurance Co., 183 F.R.D. 627 (N.D. Ill 1999), held that the common interest doctrine applies to communications between insurer and reinsurer. The court noted that the documents at issue were provided pursuant to a request by interested and concerned reinsurers due to their common interest in evaluating and minimizing the exposure arising from the underlying coverage litigation. Id. at 631. In Hartford Steam Boiler Inspection and Insurance Co. v. Stauffer Chemical Co., 1991 Conn.Super.Lexis 2527, *4 (Conn. Super. Ct. 1991), the court rejected the policyholder s waiver argument reasoning that: The legal and economic interests of [the insurer and reinsurer] are inextricably linked by the reinsurance treaty. The fact that [the reinsurer] is not a party defendant is of little significance because [the reinsurer] will automatically share in any liability suffered by [the insurer.] [The reinsurance] treaty provides that [the insurer] must cooperate with [the reinsurer] so that the latter can determine whether and to what extent it should provide defense efforts. Such cooperation would naturally include communications between the insurer s attorneys and [the reinsurer]. The Court holds, under all of these circumstances, that the privilege is not waived but rather continues to protect the confidentiality of the communications. See also Durham Indus., supra, 1980 U.S. Dist. Lexis 15154, *6 (S.D.N.Y. 1980) ( where the reinsurers bear a percentage of liability on the bond, their interest is clearly identical to that of the [ceding insurer] ); Great Am. Surplus Lines, supra, 120 F.R.D. 533 (E.D. Cal. 1988) (common interest exception prevented waiver). But insurers have been unsuccessful across the board in resisting policyholder waiver arguments. The case most often cited by policyholders is Allendale Mutual Insurance Co. v. Bull Data Systems, Inc., 152 F.R.D. 132 (N.D. Ill. 1993), which held that the common interest doctrine only applies where there is an identical legal interest. Allendale found that the legal interest between insurer and reinsurer is not identical because a contract of reinsurance is not one of insurance but simply one of indemnity. Id. at 141. The court determined that communications between insurer and reinsurer were in the ordinary course of business such that neither party could have a legal interest in the information. Id. The Allendale decision has been questioned as binding precedent and roundly criticized because its insistence on an identical legal interest ignores the policy reasons behind the common interest doctrine, the attorney-client privilege and work-product doctrine, and the relationship between insurer and reinsurer as well. See, e.g., Ellen K. Burrows & John H. O Leary, Discovery and Privilege: Protecting Reinsurance Communication in an Uncertain Legal Landscape, 10(12) Mealey s Litig. Rep.: Reinsurance (Oct. 28, 1999). 3. Practical strategies for managing reinsurance discovery Just as with reserve information, where production of reinsurance documents has been ordered or appears imminent, counsel should ask the court to conduct an in camera review. This will give the court the opportunity to see first hand that the production may reveal traditional work product or privileged communi- 306 v Insurance Coverage and Claims Institute v April 2007

15 cations, or at least to evaluate whether the information has discovery relevance in connection with the subject claims. Courts have recognized that it is error to order production of reinsurance information without first conducting an in camera review. See Fireman s Fund Ins. Co. v. Superior Court, 233 Cal. App. 3d 1138, 1141 (Cal. App. 1991) (lower court abused discretion in ordering disclosure of reinsurance documents without first reviewing them in camera). To the extent reinsurance information contains confidential material, it may also be appropriate to seek a protective order. See Rhone-Poulenc, supra, 139 F.R.D. 609, 612 (reinsurance materials may contain confidential information regarding the pricing and coverage of reinsured policies that, if revealed to competitors, could damage the insurer s ability to compete in the reinsurance market and harm present business relationships). Other strategies to consider include (1) entering into a confidentiality agreement with the reinsurer setting forth the common interest that exists between insurer and reinsurer and the need to share information between them, (2) forwarding protected materials to the reinsurer as a separate document, as opposed to being summarized in a letter, so that the protected nature of the material is easier to identify, or (3) appropriately labeling documents as being protected work product or attorney-client privileged communications. C. Other Insureds Claim Files It is standard in insurance litigation for the policyholders to request production of their own claim file. However, with increasing frequency, policyholders are seeking access to insurer storage rooms and computer files to rummage through the claim files of other insureds. Other-insured claim information is being pursued in all manner of insurance litigation from traditional bad faith actions, to class actions based on discriminatory claim handling, and pursuant to unfair competition statutes prohibiting unlawful, unfair, or fraudulent business practices. In many instances, policyholders counsel will assert a particular cause of action not because of its merit, but because of the access it can provide to the claim files of other insureds. Policyholders are keenly aware that the value of a weak case can increase significantly if intrusive and burdensome discovery of other claim files is permitted. Unfortunately, policyholders have had success around the country in securing access to other claims information. When confronted with other claims discovery, it is imperative for outside counsel to advise the client early concerning what is being sought and what is at stake. Counsel needs to have a detailed understanding of each step the client will have to go through to comply with the discovery in order to have the best chance of resisting it on burdensome grounds. Counsel should also discuss with the client ways in which the discovery might be narrowed to an acceptable level for purposes of negotiating possible compromises during the meet and confer and to offer reasonable alternatives should a motion to compel become necessary. As with all discovery disputes, counsel will need to know what courts have said about the discoverability of other claims information in the particular jurisdiction. The three most common objections to other claims discovery are (1) there are sufficient differences between the various claims to render an insurer s handling of one claim irrelevant to the treatment of others, (2) the burden and expense required by searching for, compiling, and reviewing the requested information is disproportionate to the value of the information being sought, and (3) claim files relating to other insureds are entitled to privacy protection and contain privileged materials. Case law discussing these objections, along with some practical strategies for managing other claims discovery, are discussed below. Papered to Death: The Use and Abuse of Written Discovery v Foy v 307

16 1. Relevance Arguments asserted by policyholders at to why other claims information is discoverable include to clarify ambiguities in the policy, to establish insurer bad faith, and to support punitive damage awards. In resisting other claims discovery, the insurer will need to highlight the differences between the instant claim and the other claims information being pursued. a. To clarify ambiguities Some courts have barred other claims discovery in policy interpretation cases recognizing that such extrinsic evidence has no relevance where the subject policy language is plain and clear. In Plastic Research and Development Corp. v. Houston Casualty Co., 2006 WL (W.D. Ark. 2006), the policyholder filed a declaratory relief action seeking a ruling that the insurer s reliance on a breach of contract exclusion to deny coverage was improper. The policyholder sought information concerning the insurer s reliance on the exclusion in other claims and the court disallowed the discovery finding that Id. at *2. Rule 26(b)(1) provides that parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party. In resolving this case, determinations will be made as to whether, taking the contract as a whole, [the breach of contract exclusion] is expressed in clear and unambiguous language, as required, and whether and/or to what extent the facts of [the subject] lawsuit fall under this exclusion. Plaintiffs have not shown that [defendant s] past coverage decisions regarding the application of [the exclusion] to other claims is relevant to a claim or defense in this action. In Reynolds v. Personal Service Insurance Co., 1993 Ohio App. Lexis 3096, *8 (Ct. App. Oh 1992), the court barred other claims discovery in a policy interpretation case where the policyholder sought to construe an arbitration provision. In the instant action, appellants sought to discover, among other things, all claims files and correspondence regarding uninsured motorist claims filed with appellee after the issuance of the policy in question, which resulted in claims being arbitrated. This discovery request was not relevant to their cause of action regarding the arbitration clause. The trial court had before it a question of law. No issue of material fact existed. The arbitration clause was not ambiguous and clearly indicated that arbitration was optional and either party could decline to arbitrate a dispute. The trial court did not have a duty to allow appellants to complete irrelevant discovery when the dispute about whether arbitration was optional or mandatory was clearly answered by the language of the policy itself. However, an apparent majority of courts have allowed other claims discovery in policy interpretation cases on the ground that such information may assist in construing the at-issue language. For instance, in J.C. Associates v. Fidelity & Guarantee Insurance Co., 2006 U.S. Dist. Lexis 32919, *2 (D.D.C. May 25, 2006), the court ordered production of other claims information in the context of a dispute over application of the absolute pollution exclusion. In addressing the relevance of other claims information, the court ruled [T]he information plaintiff seeks is clearly relevant. For example, information as to how defendant interpreted the absolute pollution exclusion would qualify as an admission under Rule 801 of the Federal Rules of Evidence and relevant to the claim presented by plaintiff if that interpretation is different from the interpretation that the defendant is asserting in this case. 308 v Insurance Coverage and Claims Institute v April 2007