American Re-insurance Co. v. U.S. Fidelity & Guaranty Co.

Issue Discussed: At Issue Doctrine

Submitted by Michael R. Kuehn

Date Promulgated: May 29, 2007


American Re-insurance Co. v. U.S. Fidelity & Guaranty Co. 837 N.Y.S.2d 616

Court:  N.Y. Appellate Division, First Department

Issues Decided: Whether and under what circumstances a ceding company waives privilege either by placing the reasonableness of an underlying settlement and reinsurance billing allocation “at issue” or through the application of the common interest doctrine.

In an opinion dated May 29, 2007, the New York Supreme Court, Appellate Division, First Department held that United States Fidelity & Guaranty and St. Paul Fire & Marine Insurance Company (collectively “USF&G”) had not waived the attorney-client or work-product privilege for documents related to its $975 million settlement of an underlying asbestos coverage dispute and allocation of the settlement for the purpose of billings its reinsurers, with one exception.  The Court held that USF&G did not place the reasonableness of the settlement “at issue” by bringing an action for breach of contract and alleging that the settlement had been reached in good faith.  The Court also found that the relationship between USF&G and its reinsurers did not rise to the level of  a common interest that would require USF&G to produce protected documents.  The Court did find that a USF&G witnesses had placed privileged communications “at issue” for one category of documents by repeatedly revealing some of the legal advice he had received regarding the allocation of the settlement for reinsurance billing purposes.

USF&G insured the Western Asbestos Company from 1948 to 1960.  American Re-insurance (“AmRe”) and the Excess Casualty Reinsurance Association (“ECRA) were treaty reinsurers of USF&G for the period 1956 to 1962 (collectively the “Reinsurers”).

In June of 2002, USF&G agreed to pay $975 million to settle coverage litigation with the Western McArthur Company, the successor in interest to Western Asbestos.  USF&G allocated the entire $975 million settlement to the final policy year it provided coverage to Western Asbestos – July 1959 to July 1960.

USF&G subsequently billed the Reinsurers for $400 million pursuant to the treaties.  The Reinsurers requested information.  USF&G did not respond but instead sued AmRe for nonpayment in California Federal Court. AmRe subsequently filed suit in New York seeking a declaration of its rights under Treaties, as well as rights of the participating ECRA pool members.

TIG, a member of the ECRA Pool, sought production of documents related to the presentation of the reinsurance claim, including documents related to allocation, number of occurrences, communications with reinsurers, exposure analysis and settlement assessments.  TIG argued that it was entitled to full disclosure of the requested documents without redaction for privilege because the information had been placed “at issue” and TIG had a substantial need for the documents.

The discovery referee ordered USF&G to produce the documents and the trial court upheld that decision finding that the Reinsurers were entitled to pierce the attorney-client and work-product privileges because (1) the reinsurers had a substantial need for the documents; (2) USF&G and the reinsurers shared a common interest; and (3) by asserting a claim against the Reinsurers USF&G had placed privileged matter “at issue.”

The Appellate Court overturned the trial court’s order in a brief opinion.   First, the Court held that the “substantial need” exception only applied to trial preparation materials under New York law and that no such materials had been sought in discovery.

The Court then addressed the Reinsurers’ contention USF&G could assert privilege over the documents because USF&G and the Reinsurers had a “common interest.”  The Court explained that the common interest doctrine is an exception to the waiver of attorney-client privilege that occurs when a party shares privileged communications with a non-party.  A common interest is typically recognized in situations where there is (1) dual representation of parties or (2) a joint defense or strategy, but separate representation.  The Court reasoned that the mere fact that USF&G and the reinsurers had a shared interest in the outcome of the coverage litigation was insufficient to create a common interest to overcome USF&G’s assertion of privilege in the  reinsurance dispute.

Lastly, the Court addressed the Reinsurers’ argument that USF&G had waived privilege by pleading the reasonableness and good faith of the underlying settlement and allocation “at issue.”  Under New York law, a party may be deemed to have waived privilege when the party places legal advice or other privileged facts or communications at issue.  The doctrine applies when a party affirmatively and selectively places privileged material at issue through selective disclosure.

The Court found that that USF&G had not placed communications related to the settlement at issue merely by asserting that the settlement was reasonable and in good faith.  The Court rejected the Reinsurers’ contention that the existence of a dispute over whether any portion of the settlement was paid on account of USF&G’s potential bad faith liability was a waiver of privilege.

The Court did find a limited waiver of privilege over communications related to USF&G’s decision to allocate the entire underlying settlement to a single policy year.  A representative of USF&G had repeatedly testified about legal advice he had received regarding preparation of the reinsurance bill.  The Court reasoned that because the witness had revealed some, but not all, of the advice regarding preparation of the bill those communications had been placed “at issue” and could be obtained by the Reinsurers in discovery.