Reinsurance Focus

A New York state court approved a stipulation entered into among the parties in a reinsurance dispute which set forth the terms and conditions upon which the parties agreed produce and exchange confidential and/or proprietary documents and information. The agreement permitted the parties to designate documents and information as confidential and thereby restrict their use and dissemination outside the scope of the litigation. Granite State Insurance Co. v. R&Q Insurance Co., Index No. 654494/2013 (N.Y. Sup. Ct. Aug. 4, 2014).

This post written by Leonor Lagomasino.

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In a discovery dispute between insurer Progressive and the FDIC, as receiver of the insured bank, a federal district court has rejected all claims of attorney-client privilege and work product protection to reinsurance information the court had previously directed Progressive to produce. As reported here, the court had compelled Progressive to produce certain reinsurance information to the FDIC, including communications with its reinsurers regarding potential coverage of the FDIC’s lawsuit against the bank’s directors and officers. Progressive then redacted portions of the communications on the grounds of attorney-client privilege and/or protected work product. The FDIC challenged both grounds. The court first found that the reinsurance information was not protected by work product because the information was created in the ordinary course of business and not “prepared or obtained because of the prospect of litigation.” The court then found that even if the documents contained attorney-client communications, any privilege was waived when Progressive voluntarily disclosed the documents to its reinsurers and broker. Progressive had argued that the common interest doctrine applied to the communications and, therefore, the attorney-client privilege was preserved. The court disagreed, finding the doctrine applied only when the parties shared a common legal interest, not a commercial or financial one. Further, there was no evidence establishing a joint strategy or legal enterprise, which is “central” to the common interest doctrine.

The court did reject the FDIC’s other claims as to alleged deficiencies in Progressive’s production, including Progressive’s failure to produce electronically stored information because Progressive was never previously required to retrieve it. Finally, the court rejected all of the reinsurer’s arguments that it need not comply with the FDIC’s subpoena for documents, including those of privilege, undue burden, and relevance. Progressive Casualty Ins. Co. v. FDIC, Case No. 12-CV-04041 (USDC N.D. Iowa Aug. 22, 2014).

This post written by Renee Schimkat.

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Lincoln Memorial Insurance Company and Hannover Life Reinsurance Company of America became engaged in a long-running reinsurance dispute, arising from an allegedly fraudulent scheme by Lincoln and others in the sale of pre-need funeral service contracts. Hannover reinsured some of those contracts. The matter was arbitrated, and Lincoln claim that Hannover wrongfully accused Lincoln of fraud and intentional misconduct during the court of that arbitration.

Ultimately, Lincoln became insolvent and entered into receivership in Texas. Lincoln asserted that Hannover’s conduct in the arbitration was a factor in driving it to insolvency. The Texas Department of Insurance appointed a receiver and issued a permanent injunction, which, among other things, enjoined further arbitration against Lincoln, before the arbitrator ever issued an award.

The Special Deputy Receiver, Jo Ann Howard & Associates, thereafter brought claims in federal court against several entities alleging, among other things, RICO, breach of fiduciary duty, and gross negligence, which purportedly caused or contributed to Lincoln’s insolvency.

As we previously reported, one of the defendants in the action brought by the receiver, National City Bank, subpoenaed the arbitrator in the Hannover Re arbitration, seeking his un-issued award. National City also asserted several special defenses to the receiver’s suit, including failure to mitigate damages. The receiver moved to quash the subpoena and to strike National City’s failure to mitigate affirmative defense. The court granted both motions.

National City thereafter moved for reconsideration and clarification of the Court’s order. Construing the motion as a Rule 60(b) motion to amend, the Court held that National City was not entitled to the “extraordinary relief” available under that rule, as it had not met the high burden of demonstrating “exceptional circumstances” warranting the correction of any error, even if a substantial error had been made, which, the Court duly noted, was not the case. Jo Ann Howard & Associates, P.C. v. Cassity (USDC E.D. Mo. July 15, 2014).

This post written by John Pitblado.

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A federal court in Minnesota determined that an umbrella insurer’s communications with its reinsurers are discoverable in a coverage dispute. The case is titled National Union v. Donaldson Co., and the focus is on the scope of coverage that National Union is required to provide to its insured under certain umbrella policies in connection with the insured’s liability in two underlying lawsuits. One of the issues in the case is whether a “batch clause” in the primary policy was applicable to the umbrella policies. The “batch clause” affects how many deductibles are applicable, i.e., whether it is possible to “batch claims” under the umbrella policies so that only one deductible should be applied or whether separate deductibles must be satisfied.

The insured filed a motion to compel production of, among other things, National Union’s communications with its reinsurers, arguing that the communications were relevant to its bad faith counterclaim because National Union had taken the position that only a certain amount of policy limits could be available under the primary policy and that it was not possible to “batch claims” under the umbrella policies. The insured contended that what National Union said to its reinsurers on the issue would shed light on the timing of National Union’s view of the batch clause and its application for the primary and the umbrella layers of coverage, as well as National Union’s understanding of the potential indemnity exposure under the various policies. The Magistrate Judge granted the motion without discussion, concluding only that the standard in Rule 26(b)(1) had been met. The District Court overruled National Union’s objections to the Magistrate Judge’s order, noting a split of authority on the discoverability of communications with reinsurers in bad faith cases, and concluding that the ruling was not contrary to law or clearly erroneous.

National Union Fire Ins. Co. of Pittsburgh, Pa. v. Donaldson Co., Inc., No. 10-4948 (USDC D. Minn. June 24, 2014).

This post written by Catherine Acree.

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After striking the affirmative defense of failure to mitigate, a court quashed a subpoena issued to an arbitrator seeking an unissued arbitration award in a dispute between certain defendants and their reinsurer. The case involved a lawsuit by a state-appointed receiver, Jo Ann Howard & Associates, against numerous defendants stemming from a scheme to defraud consumers in connection with pre-need funeral services contracts issued by Lincoln Memorial. After Howard was appointed, the receivership court stayed the arbitration proceedings between Lincoln Memorial and its reinsurer, Hannover Life Reassurance Company of America. One of the issues pending in the arbitration at the time was Lincoln Memorial’s claim for damages against Hannover arising from Lincoln Memorial’s allegations that Hannover’s arbitration-related conduct had brought Lincoln Memorial to the brink of insolvency.

Two of the other defendants, both banks, raised as affirmative defenses Howard’s failure to mitigate damages. The banks alleged Howard’s decision not to pursue Lincoln Memorial’s claims against Hannover caused Howard’s damages. The banks subpoenaed the arbitrator in the Lincoln/Hannover arbitration to obtain a copy of the unissued arbitration award. The court granted Howard’s motion to strike the banks’ failure to mitigate defense, finding the defense legally insufficient. The defense was not causally related to Howard’s damages claim because Howard’s claims against Lincoln Memorial arose from Lincoln Memorial’s handling of pre-need trust accounts, and not from Lincoln Memorial’s insolvency. Further, a receiver’s ability to recover assets or damages for wrongdoing is important to the public, and allowing such an affirmative defense would encumber a receiver’s ability to perform these functions. Jo Ann Howard & Associates, P.C. v. J. Douglas Cassity, Case No. 4:09CV01252 ERW (USDC E.D. Mo. May 9, 2014).

This post written by Leonor Lagomasino.

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Defendant liability insurers sought discovery from Third Party Aon relating to a dispute between defendants and plaintiff regarding an umbrella coverage program. Aon provided some, but not all responsive documents, citing instructions from Plaintiff Black & Veatch, which asserted privilege objections on behalf of Aon, and provided a privilege log for 41 withheld documents. The defendants moved to compel production of all but two of those documents. In response, Black & Veatch claimed that Aon was acting as a representative of Black & Veatch, that they were made in anticipation of litigation, were subject to attorney-client privilege, and that the documents were thus protected from disclosure. The Court held that the privilege log did not adequately disclose the bases for the assertions of privilege or work product, that it was not evident that Aon acted as Black & Veatch’s agent, that the documents listed were prepared in anticipation of litigation, or that they were confidential communications reflecting a primary purpose of providing legal advice. The Court also held that the plaintiff failed to demonstrate a basis for in camera review, and thus ordered it to produce the documents. Black & Veatch v. Aspen Insurance (UK) Ltd., No. 12-2350-SAC (USDC D. Kan. Feb. 28, 2014).

This post written by John Pitblado.

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In a declaratory relief action brought against the FDIC by the liability insurer for the directors and officers of a bank in receivership, the court resolved a discovery dispute that included a contested request for information exchanged between the insurer and its reinsurer. In compelling the production of the reinsurance information, the court adopted a prior case’s articulation of seven reasons why reinsurance information might be relevant to assist with the construction of policy language: to determine (1) how the insurer has interpreted the provisions in the current lawsuit; (2) whether the insurer’s interpretation has been consistent with the positions taken with insureds; (3) whether the insurer and reinsurer discussed whether the type of claims in dispute would be covered; (4) whether the insurer and reinsurer discussed the insureds’ expectations on the scope of coverage; (5) when the insurer received notice of claims; (6) if the insureds’ claims were untimely, whether the insurer claimed it was prejudiced as a result; and (7) whether the reinsurer was involved in the sales and marketing of the policies in dispute, and if so, what those efforts reflect in terms of the reasonable expectations of the insureds concerning the scope of coverage. Progressive Casualty Insurance Co. v. FDIC, Case No. 5:12-cv-04041 (USDC N.D. Iowa Mar. 10, 2014).

This post written by Michael Wolgin.

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Reinsurance communications were held not discoverable in a commercial coverage dispute. By way of background, PBM Products, LLC sued its competitors, Mead Johnson Nutrition Company and Mead Johnson & Company, for allegedly engaging in a false advertising campaign against formulas manufactured by PBM. On November 10, 2009, PBM won a $13.5 million judgment. Mead Johnson had a commercial general liability policy issued by National Union Fire Insurance Company and a commercial umbrella liability policy issued by Lexington Insurance Company. After the verdict, National Union filed a declaratory judgment action based on untimely notice and because the damages imposed by the jury were not covered under the policy. Mead Johnson counterclaimed against National Union and Lexington for breach of contract and seeking a declaration that Mead Johnson was entitled to coverage. The Court entered summary judgment on the issue of late notice in favor of the Insurers. Mead Johnson appealed and the Seventh Circuit reversed summary judgment because there had been no factual development concerning the issue of harm.

On remand, the district court revisited a pending discovery dispute. The magistrate judge had earlier granted Mead Johnson’s request with respect to: (1) the underwriting files; (2) communications between the insurers’ reinsurers; (3) the number of times Paul Hastings was retained by the insurers to defend “personal and advertising injury” claims during the relevant time period; and (4) the insurers’ manuals or marketing materials. Specifically with regard to the reinsurance communications, the court found that because the term “personal and advertising injury” was not ambiguous, communications with reinsurers regarding the meaning of claim terms were irrelevant. National Union Fire Insurance Co. of Pittsburgh, PA. v. Mead Johnson & Co., Case No. 3:11-CV-00015-RLY-WGH (USDC S.D. Ind. Mar. 10, 2014).

The FDIC receiver of a bank served subpoenas on reinsurers, seeking information as to how the cedent insurer interpreted certain ambiguous terms in the underlying liability insurance policy. The insurer and reinsurer objected to the subpoenas, and the receiver filed an action in the reinsurer’s district to compel responses. Rather than ruling on the objections, the court elected to transfer the matter to the court in which the underlying litigation was pending. The transferor court relied on considerations of judicial efficiency and comity, explaining that it was not in a position to resolve arguments over the transferee court’s intentions with respect to the scope of permitted discovery, and that differences in the districts’ respective case law on the relevance of reinsurance information presented a risk of conflicting discovery rulings. The court also noted that recent revisions to the Federal Rule of Civil Procedure governing subpoenas further supported transfer of the action. FDIC v. Everest Reinsurance Holdings, Inc., Case No. 1:13-mc-00381 (USDC S.D.N.Y. January 23, 2014).

This post written by Michael Wolgin.

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In a dispute over coverage under a liability policy for directors and officers of a failed bank, the court compelled certain documents from the insurer covered by a discovery request seeking “documents relating to any communications with any reinsurer about the claim at issue.” While some of the documents were deemed privileged based on submitted declarations, the court found that the basis for withholding other documents was not sufficiently supported or described in the insurer’s privilege log. The court also compelled certain documents shared between the insurer and the reinsurer, notwithstanding the insurer’s assertion of the common interest doctrine. The court explained that although the insurer and reinsurer shared commercial or financial interests, the insurer failed to demonstrate that it shared the requisite “identical legal interest” with the reinsurer. Bancinsurer, Inc. v. McCaffree, Case No. 2:12-cv-02110 (USDC D. Kan. Oct. 24, 2013).

This post written by Michael Wolgin.

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