Locke Lord QuickStudy: Insurers/Reinsurers: Between a Rock and a Hard Place

April 10, 2017

A federal court in South Carolina recently adopted a Magistrate’s recommendation that an insurer’s communications with its reinsurers are relevant and discoverable. In ContraVest, Inc. v. Mt. Hawley Insurance Company, No. 9:15-cv-00304-DCN, 2017 WL 1190880 (D.S.C. Mar. 31, 2017), a homeowners association, as an assignee of a construction company, brought suit against the construction company’s insurer. The association alleged that the insurer refused to participate in an underlying construction defect case. During the course of discovery, plaintiff filed a motion to compel production of documents related to the insurer’s reinsurance policies and reserve estimates. 

In December 2016, the Magistrate issued a Report and Recommendation (“R&R”) that the reinsurance information was relevant to the association’s bad faith claim. The Magistrate observed that courts appeared split as to whether reinsurance information is relevant to bad faith claims. Some courts view reinsurance as a business decision that does not reflect interpretation of an insurance policy. Other courts take the position that reinsurance information may reflect “a number of different factors,” such as claims investigations, policy interpretation, and admissions of coverage. The Magistrate was persuaded by the latter position, observing that there is “no reason to simply assume that information exchanged with a reinsurer will not reveal the insurer’s view of the underlying claim.” ContraVest, No. 9:15-cv-00304, at 7 (D.S.C. Dec. 12, 2016). The Magistrate noted that an insurer seeking to avoid production of reinsurance information has the opportunity to clarify with the Court the content of the disputed reinsurance information, but that the insurer did not do so.

The Magistrate then turned to the association’s motion to compel documents related to the insurer’s reserve estimates. The insurer argued that the work product doctrine provided protection against the discovery of the reserve estimates. The Magistrate acknowledged that some courts applied the doctrine where insurers have retained attorneys to evaluate not only the “substance” of the claims, but also the “potential financial consequences” to the insurer. Id. at 9-10 (citing Nicholas v. Bituminous Cas. Corp., 235 F.R.D. 325, 332 (N.D.W.Va. 2006)). The Magistrate determined that there was no indication that the insurer viewed the insured contractor as a potential plaintiff when setting loss reserves, or that the reserves were set in anticipation of the underlying litigation. The Magistrate concluded that, in this case, the reserve information would be relevant to the extent that the reserve set could reveal the insurer’s assessment of the validity of the insured contractor’s excess coverage claim.

On March 31, 2017, the Court adopted the Magistrate’s R&R. In so doing, the Court rejected the insurer’s argument that the Magistrate failed to consider the relevance of the reinsurance information, noting that the Magistrate observed that communications with reinsurers are relevant to an insurer’s good faith to the extent that the insurer has explained its reasoning in determining coverage and handling claims. The Court also observed that reinsurance information related to other claims the contractor had made under the policies was relevant to the extent that information might reveal how the insurer “changed its interpretation of the policies once it became apparent that the insurer would be forced to provide coverage.” 2017 WL 1190880 at *10.

The Court rejected the insurer’s argument that the Court was required to order an in camera review of the reinsurance documents and reserve estimates, observing that the Magistrate’s analysis was based on whether the documents were relevant, not whether they were privileged.

The Court observed that the insurer could have requested an in camera review to establish why the reinsurance documents and reserve estimates should not be produced.

There is no question that reinsurers expect, and that insurers have a duty to provide, claims information to permit reinsurers to assess their exposure. Having said that, the savvier of the plaintiff’s bar know that communications between insurer/reinsurer can provide a treasure trove of information. Thus, the dilemma.

This case suggests a potential road map to minimize the risk of discovery disputes regarding reinsurance and reserves. Communications with reinsurers may be discoverable if those communications are not made by counsel in anticipation of litigation. Insurers should also keep in mind the lesson that it may be better to explain to the court why production of the documents is not warranted, rather than merely relying on an objection that the documents are not relevant. And one final thought to avoid getting ‘squished’ between a ‘rock and a hard place’ … when communicating with reinsurers, always assume that a potential plaintiff may be looking over your shoulder.

A copy of the Magistrate’s R&R can be found here. A copy of the Court’s adoption of the R&R can be found here.