Court Offers Mixed Ruling Regarding Privileges As Applied to a Reinsurance Dispute

Issue Discussed: Privileges as applied to a reinsurance dispute

Submitted by Michele Jacobson, Gilana Keller

Date Promulgated: April 16, 2024

In Certain Underwriters at Lloyd’s London v. The North River Insurance Co., the United States District Court for the District of New Jersey granted in part and denied in part plaintiff’s motion to compel documents.

Plaintiffs reinsured defendants for loss payments made under insurance policies issued to Mine Safety Appliances Company (“MSA”), subject to the terms and conditions of the applicable reinsurance agreements.

In the underlying litigation, MSA was the subject of litigation regarding its products. Thereafter, MSA and defendants became involved in lawsuits concerning the scope of coverage for the claims against MSA under the insurance policies issued to MSA by defendants. Defendants and MSA reached a global settlement, which was memorialized in a confidential settlement agreement executed in July 2018 (the “MSA Settlement”). Here, plaintiffs alleged that defendants allocated the MSA Settlement “in a manner intended to increase [defendants’] recovery” by apportioning the MSA Settlement to Higher Layer Joint Underwriting Policies on which defendants have more available reinsurance and avoiding allocating to Lower Layer Joint Underwriting Policies where defendants have less available reinsurance. Plaintiffs asserted claims against defendants for breach of contract and breach of the implied covenant of good faith and fair dealing, and sought a declaratory judgment that plaintiffs were not obligated under the reinsurance agreements for certain billings or to indemnify defendants for losses occurring outside the applicable period of reinsurance. Defendants filed counterclaims against plaintiffs for breach of contract based upon plaintiffs’ purported failure to pay certain outstanding billings and sought a declaratory judgment regarding Plaintiffs’ responsibilities under the reinsurance agreements.

During discovery in the matter, plaintiffs sought to compel the disclosure of documents relating to defendants’ payment and allocation of the MSA Settlement, including a pre-settlement analysis. Defendants objected to the production of the subject documents arguing that they are protected from disclosure by various privileges.

Plaintiffs argued that defendants should produce all documents responsive to plaintiffs’ document requests which were “previously withheld as privileged.” The court found that although plaintiffs are entitled to discovery pertaining to the MSA Settlement and North River’s allocation decisions, “[t]he entry of such an order, without limitation, requiring North River to produce any and all documents responsive to Plaintiffs’ immensely broad discovery requests previously withheld as privileged is neither justified by Plaintiffs’ arguments nor supported by any authority cited by Plaintiffs.” Further, while courts have “affirmed the relevance of discovery related to an insurer’s allocation decisions, insurers are not barred from asserting claims of privilege over otherwise relevant discovery.”

The court addressed the parties’ arguments as to three specific categories of information: First, plaintiffs requested documents relating to the MSA Settlement, including defendants’ pre-settlement analysis, payments to MSA, and defendants’ allocation. Second, plaintiffs sought all documents, including those not in defendants’ possession, relating to work performed by a company, which was identified by defendants as “an economic consultant providing modeling services to defendants’ attorneys.” Third, plaintiffs sought documents relating to various mediations between defendants and MSA, which had been withheld by the defendants on the basis of Pennsylvania’s mediation privilege.

Regarding the first category of documents, defendants argued that “Plaintiffs have asked for untold thousands of documents” and “have not even identified the specific documents they want rulings on, let alone asked for in camera inspection of any individual documents or set of documents.” The Court found that “Plaintiffs’ wholesale approach to the present dispute has left [Defendants] in an unwinnable position and the Court in an untenable one.” The court held that “to the extent that any of the documents withheld ‘explicitly seek or give legal advice,’ they may be properly withheld.” Plaintiffs also challenged privilege as to documents relating to two individuals who were employed as in-house counsel and involved in the representation of defendants in the coverage actions. Denying plaintiffs’ motion without prejudice, the court found that “more precise challenges” could show that defendants improperly withheld communications illustrating that the two individuals “were acting outside their capacity as attorneys or documents reflecting [Defendants’] ‘insurance administrators’ rationale for the billing to [Plaintiffs], which would have been prepared whether there was litigation or not.’”

The court also noted that “courts have made clear that in the reinsurance context, an insurer does not place the advice of his counsel ‘in issue’ simply by seeking coverage.” Thus, “[r]elevance is not the standard for determining whether privileged information should be produced, ‘even if one might conclude the facts to be disclosed are vital, highly probative, directly relevant or even go to the heart of an issue.”’ The court found plaintiffs failed to demonstrate that the defendants waived privilege by placing the advice of its counsel at issue. Further, plaintiffs failed to establish that the information could only be obtained through privileged materials by not yet “explor[ing] the non-privileged evidence available [to] them, including by securing non-privileged deposition testimony from [Defendants’] counsel.”

Ruling on the second category of documents, the court directed defendants to conduct a review of any responsive documents withheld as privileged communications or work product and to provide plaintiffs with a detailed privilege log. The court cautioned defendants that documents reflecting the “rationale for the billing to [plaintiffs], which would have been prepared whether there was litigation or not,” are not privileged and must be produced.

In response to documents in the third category, the court found that while the mediation communications and related documents “may be relevant to the reasonableness of the settlement, that relevancy does not operate as a waiver of the mediation privilege.” The court further held that defendants waived mediation privilege protecting mediation communications or documents it provided to its E&O Insurers, a third-party not involved in the mediations and which appeared to have been in an adversarial relationship with defendants during the time the mediation statement was shared.