REINSURANCE AND OTHER INSURANCE AGREEMENTS: COMMUNICATIONS BETWEEN INSURERS AND THEIR REINSURERS
By Mike Abourezk and Marialee Neighbours
In actions against an insurance company, an insured often requests discovery of other insurance held by the insurer: reinsurance, loss pooling agreements, corporate liability insurance, bonds purchased to provide protection to the insurer or its officers and directors for errors and omissions; and directors' and officers' liability insurance.
Reinsurance is defined as: "[A] special form of insurance obtained by insurance companies to help spread the burden of indemnification. A reinsurance company typically contracts with an insurance company to cover a specified portion of the insurance company's obligation to indemnify a policyholder in the event of a valid claim." Excess & Casualty Reinsurance Association v. Insurance Commissioner of the State of California, 656 F.2d. 491, 492 (9th Cir. 1981). See also CIGNA Ins. Co. v. Cooper Tire & Rubber Inc., 180 F.Supp.2d 933, 936 (N.D. Ohio 2001) ("Reinsurance is a means of spreading risks that would be too great for a single insurance company to allow itself to be exposed to.")
"Because a reinsurer's liability 'follows the fortunes' of the original insurer as to liability of claims, it is generally required by the reinsurance agreement itself that the original insurer notify the reinsurer of claims for which it may become liable, and to keep the reinsurer informed as the claims investigation and/or negotiation process progresses." 17 Couch on Insurance 3d., Agreements and Communications with Reinsurer, § 251:30 (updated 2002).
Discovery of reinsurance materials are relevant and discoverable. National Union Fire Ins. Co. of Pittsburgh, Pa. v. Continental Illinois Corp., 116 F.R.D.78 (N.D. Ill. 1987). In National Union, a district court for Illinois held that: (1.) the pre-and post-issuance communications between insurers and their reinsurers were discoverable; and that (2.) the reinsurance agreement was relevant and discoverable. In that case, the court said:
Insurers attempt to show the irrelevance of their reinsurance agreements by discussing the various types of reinsurance and arguing that, because of the nature of their reinsurance agreements, their reinsurers did not take part in assessing the risk before issuing the Policies or in contesting coverage later. But the things Insurers do not talk about are more telling than what they discuss. There can be no question they communicated (pre-or post-issuance or both) with their reinsurers about the Policies. Regardless of the legal nature of the reinsurance arrangements, those communications are relevant.
Id. at 83.
Continuing, the court found that reinsurance agreements were relevant:
For Movants to understand the significance of these communications, the reinsurance agreements may be needed and are thus relevant. They surely could lead to the discovery of admissible evidence-the low threshold of Rule 26(b)(1).
Finally, the court concluded that reinsurance agreements are discoverable under Federal Rule 26(b)(2):
That literal reading of Rule 26 (b)(2) conforms entirely to the policy considerations underlying the Rule, which was added in 1970 because (Advisory Committee Note): "Disclosure of insurance coverage will enable counsel for both sides to make the same realistic appraisal of the case so that settlement and litigation strategy are based on knowledge and not speculation."
Id. at 84-85. See also CIGNA Ins. Co.,180 F.Supp.2d 933, 936 (N.D. Ohio 2001) (reinsurance documents are relevant and discoverable).
Other courts agree with National Union. For instance, in determining the scope of Federal Rule 26(b)(2), the Eighth Circuit Court of Appeals concluded:
We cannot agree with Searle that Rule 26(b)(2) forecloses discovery of any insurance document beyond the agreement. First the language of the rule itself plainly is not preclusive. Second, the advisory committee expressed concern, at least as to the indemnity agreements, that Rule 26(b)(2) not be interpreted to protect insurance information from discovery when that information is relevant under Rule 26(b)(1). We hold therefore that insurance documents that are not discoverable under Rule 26(b)(2) remain discoverable in accordance with Rule 26(b)(1).
Simon v. G.D. Searle & Co., 816 F.2d. 397, 404 (8th Cir. 1987).
In Stonewall v. National Gysum Co., a New York district court permitted discovery of reinsurance information. 1988 WL 96159, *5-*6 (S.D.N.Y. 1988). In that case, the insured argued that reinsurance information was relevant because it might reflect an insurer's understanding of the risk underwritten; the insurer's notices of claims to their reinsurers; and an understanding of underlying claims and admissions that the claims were covered.
In another case involving reinsurance, Clark v. Interstate National Corp., a bad faith action was brought against an insurer for its refusal to settle within policy limits. 486 F.Supp. 145 (D.C. Pa. 1980). In that case, the court held that reports or other communications by insurers to their reinsurers concerning the insured's claim were relevant and discoverable. In addition, the court held that the reinsurance agreement to which the insurer was a party was relevant on the issue of what the insurer perceived and how it evaluated the case.
In yet another case, Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., the insured and liability insurers filed cross-motions to compel discovery in a coverage dispute over underlying asbestos product-liability claims. 660 N.E.2d. 765 (Ohio Com. Pl. 1993). In Owens-Corning, the court held that the insured was entitled to discovery of reinsurance-related materials. The insured argued that if the insurer had intended to cover asbestos liability, these intentions would be reflected in increased reinsurance coverage. The court found that the reinsurance related materials were relevant to whether the insurer believed that these policies covered asbestos claims against the insured.
South Dakota Law
South Dakota Codified Law § 15-6-26(b)(2) is very similar to its federal counterpart, Federal Rule 26(b)(2). Pursuant to S.D.C.L. § 15-6-26(b)(2), " [a] party may obtain discovery of the existence and contents 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. Information concerning the insurance agreement is not by reason of disclosure admissible in evidence at trial ." Thus, S.D.C.L. § 15-6-26(b)(2) permits discovery of reinsurance and other insurance agreements held by an insurer, at least as to indemnity agreements.
Directors and Officers Liability Insurance
"Directors' and Officers' liability coverage mirrors other professional liability insurance in that it is designed to protect corporate officials from loss in the event a claim is made against them in their official capacities. Coverage may be provided either to the corporation which indemnifies its directors or officers or it may be extended directly to the individuals involved." 9 Couch on Insurance 3d., Directors and Officers, § 131:31 (updated 2003).
The same reasoning that applies to discovery of reinsurance and other insurance agreements applies to discovery of directors' and officers' liability insurance agreements. S.D.C.L. § 15-6-26(b)(2) permits the discovery of directors' and officers' liability insurance agreements as well as other agreements purchased by the insurer to protect and indemnify its company or directors and officers. Since a corporation acts through its officers, employees and agents, provisions in directors' and officers' insurance agreements may prove agency, ownership or control. These agreements may contain provisions requiring adequate notice of potential claims or other provisions that may provide or lead to admissible evidence of an insurer's state of mind or knowledge regarding insurance coverage.