Privilege in the Cedent-Reinsurer Relationship

Overview of the Common Interest Doctrine

The common interest doctrine ' sometimes referred to as a joint defense privilege or community of interest privilege ' arises when parties with separate attorneys share otherwise privileged information in order to coordinate their legal activities. As a general rule, disclosing an attorney-client privileged communication to a third party waives the privilege, thus rendering the communication discoverable by other persons. Under the common interest doctrine, however, disclosure to a third party with whom a common legal interest exists protects the privilege to facilitate the parties' joint interests. Importantly, the common-interest doctrine “is not an independent basis for privilege, but an exception to the general rule that the attorney-client privilege is waived when privileged information is disclosed to a third party.” Cavallaro v. United States, 284 F.3d 236, 250 (1st Cir. 2002). In other words, the common interest doctrine does not in and of itself render a document privileged. The underlying material being shared must still be of the kind ordinarily viewed as protected from disclosure, such as attorney-client communication and attorney work product.

These overarching principles appear, on their surface, to be in harmony with the principles underlying the reinsurer-reinsured relationship. As noted above, reinsurers rely extensively on their cedents' investigatory and claim-defense activities to assess their own liability on a given claim. It is not uncommon for cedents to share with their reinsurers, for example, coverage counsel opinions that set forth a thorough legal analysis of a particular claim, the defenses to that claim, and the cedent's potential liability.

Because a reinsurer's liability ordinarily follows that of its cedent, it would seem, on its face, that the transmittal of coverage counsel opinions by the cedent to the reinsurer comports with the general purposes of the common interest doctrine, ensuring that the two parties ' who have a shared interest in limiting their liability and a shared interest in defending coverage actions by underlying insureds ' can freely communicate. But recent court decisions have refused to find a de facto rule that cedents and reinsurers automatically share an interest sufficient to meet the requirements of the common interest doctrine.

Establishing the Common Interest Doctrine in the Reinsurance Relationship

Although there is some variation among jurisdictions, application of the common interest doctrine generally requires a two-part showing. First, most courts require that the parties exchanging otherwise privileged information establish a common legal interest, rather than merely a common commercial interest. Second, the parties must establish that any exchange of privileged information was made in the course of formulating a common legal strategy and that the parties understood that the communication was being shared to further the shared legal interest.

Put another way, the test has two components: 1) a test of the nature of the interest between the parties asserting the common interest, and 2) a test of the purpose for which the privileged communication was shared.

Nature of the Interest

The first prong of the test requires a showing that the shared interest between the reinsurer and the reinsured is a legal one rather than a commercial one. The boundaries between these two types of interests are not always easy to define. When a cedent is involved in litigation with its insured where a claim is being defended against, the reinsurer's interest is on one hand clearly commercial: The reinsurer wishes to minimize its liability, an outcome that occurs when the cedent successfully limits its liability in the underlying coverage action. On the other hand, it is not so simple to divorce this commercial interest from the legal one: The cedent and the reinsurer can only limit their liability if the legal outcome of the coverage litigation is favorable. For example, a reinsurer shares in a cedent's desire to succeed on a motion for summary judgment against an underlying insured since the legal benefit of that victory is of equal benefit to the reinsurer. While there is no doubt a commercial benefit in that victory, the root of the benefit is the legal strategy.

1) Fireman's Fund Insurance Company v. Great American Insurance Company of New York

Courts have issued conflicting decisions on how to draw the line between a legal interest and a commercial interest. Fireman's Fund Insurance Company v. Great American Insurance Company of New York, 284 F.R.D. 132 (S.D.N.Y. 2012), a recent decision from the U.S. District Court for the Southern District of New York, highlights the perils faced by cedents and reinsurers who share privileged communications. In this coverage action arising out of the sinking and salvage of a dry dock, the insured sought to compel production documents sent between the insurer and its reinsurer over which the insurer had asserted privilege. The insurer argued that its relationship with its reinsurer gave rise to a common legal interest because “resolution of [the insured's] coverage claims ' directly impacts what funds may be returned to [the reinsurer] or which [the reinsurer] may be additionally obligated to pay.” The insurer argued that because its reinsurers follow the fortunes of its cedent, the two parties bear the same risk under the insurance policy, and thus have a common interest.

The court rejected the insurer's claim of privilege, declining to categorically hold that ceding insurers and their reinsurers share a joint legal interest merely because a reinsurer's obligations of payment are necessarily tied to the ceding insurer's payment obligations. The court noted that “a common interest cannot be assumed merely on the basis of the status of the parties.” Instead, courts have to conduct a fact-intensive inquiry to determine whether “the evidence suggests that the ceding insurer and its reinsurer have forged a cooperative and common enterprise towards an identical legal strategy.”

As indicia of the fact that there were no coordinated legal efforts between the cedent and the reinsured, the court noted that it was the insurer, and not the reinsurer, that objected to the production of the allegedly privileged material; that the reinsurer (whose production had been sought through a subpoena) objected to production not on privilege grounds but rather than on grounds of burdensomeness, and that the reinsurer's counsel had sought to extricate the reinsurer from the discovery dispute by claiming that the privilege dispute was between the insured and the cedent, and did not involve the reinsurer. Taken together, the court found that “these facts do not support a finding that [the cedent and the reinsurer] shared a common legal interest.”

2) American Safety Casualty Insurance Company v. City of Waukegan

Other courts, however, have shown more reluctance to compel production of communications between a cedent and a reinsurer when coverage litigation is pending. In American Safety Casualty Insurance Company v. City of Waukegan, No. 07 C 1990, 2011 U.S. Dist. LEXIS 4854 (N.D. Ill. Jan. 19, 2011), the underlying insured sought certain e-mails between the insurance company and its reinsurer regarding the status of the coverage litigation. The insured argued that by disclosing privileged information to its reinsurer, the insurer had waived its privilege because the insurer and its reinsurer did not have a common interest relating to the coverage litigation. The court rejected the insured's efforts to compel communications between the cedent and reinsurer. Applying Illinois law, the court noted that a privilege will be deemed waived only “when disclosure to a third party is inconsistent with the maintenance of secrecy from the disclosing party's adversary.” Here, the court concluded the cedent's “disclosure of privileged information regarding potential settlement to its reinsurers is not inconsistent with preventing disclosure of this information to [the insured].”

3) Travelers Casualty & Surety Company v. Century Indemnity Company

In both of the foregoing cases, the cedent and the reinsurer were, on the surface, in alignment on their desire for the underlying coverage litigation to resolve in a manner that minimized their liability. While the varying outcomes demonstrate that different courts may view the sharing of information in such circumstances in different ways, what does seem clear is that if the cedent and reinsurer are actually adverse in their own relationship, courts will not find a common interest between them. Travelers Casualty & Surety Company v. Century Indemnity Company, No. 3:10CV400 (WWE), 2011 U.S. Dist. LEXIS 132131 (D. Conn. Nov. 16, 2011), provides perhaps the starkest example of this. In this case, the reinsurer attempted to use the common interest doctrine as a means to secure disclosure of privileged documents from its cedent despite the fact that the parties were in litigation. The reinsurer argued that it was contractually entitled to privileged materials under the access to records clause, and that it was entitled to view privileged claim evaluation documents prepared by the cedent's coverage counsel because it shared a common interest with the cedent.

The court rejected the reinsurer's arguments. The court held that “the common interest doctrine in no way mandates [the cedent] to provide the reinsurer with privileged information merely because at one point they had a common interest.” The court stated that “if this were the intention of the doctrine, the attorney-client privilege would be virtually obliterated, as most parties in lawsuits have had a common interest at some point in time.”

4) Regence Group v. TIG Insurance Company

Although not explicitly stated, the court's decision in Travelers Casualty may have been influenced in part by the fact that the underlying coverage litigation had concluded. As such, there was certainly no remaining common interest between the parties, especially when they were now in active litigation against each other. A more problematic situation arose in Regence Group v. TIG Insurance Company, No. CV-07-1337-HA, 2010 U.S. Dist. LEXIS 9840 (D. Ore. Feb. 4, 2010), where the cedent and the reinsurer were in arbitration over an underlying claim, and the underlying claim was also in litigation. While the coverage litigation was pending, the cedent voluntarily provided information to its reinsurers, including certain coverage opinions that had been provided to it by outside counsel. After disputes arose between them, the cedent and its reinsurers proceeded to arbitration. During the course of the arbitration, the arbitrator directed the cedent to turn over its entire claim file, which included reports and opinions prepared by the cedent's outside counsel. The underlying insured learned of this disclosure in the arbitral proceedings and moved to compel their production in the coverage litigation, arguing that the cedent had waived privilege by producing documents to its reinsurer in the arbitration.

Despite the fact that production had been mandated by the arbitration panel, the court ruled that the cedent had waived its privilege by producing privileged documents to the reinsurers when the parties' interests were not aligned. The court specifically noted that this waiver applied not only to documents exchanged during the arbitration ' i.e., when the cedent and reinsurer were adverse in the pending arbitration ' but also documents produced before the arbitration had even begun. The scope of discovery was not, the court held, “restricted to temporal limitations pertaining to when the disputes arose between [the cedent] and the reinsurers, or when the disputes were settled.”

The Regence Group decision, therefore, goes a step beyond the Travelers Casualty decision. While the Travelers Casualty decision recognized that once litigation began between the cedent and the reinsurer, no common interest existed, the Regence Group opinion takes this principle further in two ways. First, it extended the waiver to documents disclosed before the arbitration had begun, thus concluding ' as the Fireman's Fund ' decision did ' that there was no automatic common interest between a cedent and a reinsurer even where the parties are not in arbitration. Second, the decision did not account for the fact that while the cedent and reinsurer may have been adverse to each other in their arbitration, they still shared a common interest in the outcome of the underlying coverage litigation. After all, regardless of the cedent's and reinsurer's dispute, a favorable outcome in the underlying coverage litigation inured to both their benefits.

Purpose of the Sharing

The second prong of the common interest test focuses on the purpose of communicating privileged information. In the Fireman's Fund decision discussed above, the court noted that in addition to not finding a shared legal strategy between the cedent and the reinsurer, the cedent had failed to argue that the privileged documents were sent “in the course of formulating a common legal strategy or for the purposes of obtaining legal advice from [the reinsurer].” Fireman's Fund Ins. Co., 284 F.R.D. at 141. The court noted the failure of the cedent to identify whether its communication with the reinsurer involved attorneys, or whether there was “a legal necessity of exchanging otherwise protected information.”

This second prong is not discussed in as great a detail by the other recent decisions addressing the applicability of the common interest doctrine to the cedent-reinsurer relationship. Once the first prong is answered in the negative ' i.e., that the parties do not share a common legal interest ' there is little reason to then ask whether disclosure was made in order to further a non-existent interest. But this second prong should not be discounted. Indeed, the Regence Group decision hints at the importance of this second prong. The court there did not differentiate between disclosures made when the cedent and the reinsurer were not in arbitration, and disclosures made after the arbitration arose. But as both cedents and reinsures know well, privileged materials can be disclosed both when there is active underlying coverage litigation and when there is not any. Broad access to records clauses in reinsurance agreements permits the reinsurer to inspect books and records of the business reinsured at any point in the reinsurance relationship. Disclosure of privileged communication may occur before coverage litigation is initiated.

Thus, while cedents and reinsures may be able to demonstrate a shared legal interest once an underlying insured initiates coverage litigation, pre-litigation disclosure may also serve as a basis to find waiver of the privilege if the purpose of disclosure was simply in the ordinary course of the business relationship, rather than to formulate a common legal strategy for active litigation.

Practical Tips and Conclusion

The cases set forth above raise serious concerns for the reinsurance industry. In a relationship governed by the duty of utmost good faith, and where the reinsurer relies on its cedent to take the lead in evaluating claims and formulating legal strategy, the free flow of information between cedents and reinsurers is critical. The recent decisions in Fireman's Fund and Regence Group should give cedents and reinsurers pause about how they fulfill their duties to each other, while still protecting privileged communication from counsel.

While courts have refused to establish a categorical rule that cedents and reinsurers at all times and in all circumstances have a relationship that satisfies the requirements of the common interest doctrine, the reinsurance industry may find some solace in the fact that courts have recognized that the question of whether the privilege has been waived through disclosure is a fact-intensive one. Thus, in preparation for future challenges to the sharing of information between cedents and reinsures, the parties would be well served by ensuring that the indicia of a common legal interest mark the timing and nature of the disclosure of privileged information. Those indicia include:

• Documenting common interest agreements at the inception of underlying coverage litigation;
• Involving attorneys at the respective companies rather than simply business-side personnel;
• Permitting reinsurers to inspect, but not retain, privileged documents;
• Having reinsurers formally associate in the defense of claims; and
• Delaying reinsurance-related disputes until the conclusion of underlying coverage litigation.

Cedents and reinsurers must recognize the difficult landscape created by recent court decisions about the applicability of the common interest doctrine to their relationship and adapt their disclosures to this landscape. While it is possible to continue the flow of information that has marked the reinsurance relationship for so many years, that flow must be tailored to prevent the unwanted intrusion of third parties outside that relationship.

'Suman Chakraborty is a partner in Patton Boggs LLP's New York office, where he is a member of the firm's Insurance and Reinsurance Dispute Resolution Group. He assists clients in the resolution of international commercial disputes, with an emphasis on reinsurance litigation and arbitration, complex insurance coverage and disputes in the financial services industry. The views expressed herein are those of the author and not necessarily those of his firm or his clients.

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The relationship between an insurance carrier and its reinsurer has regularly been described as one based on the principle of uberrima fides, or utmost good faith. Under this doctrine, the reinsurer and the reinsured are “partners” who owe each other candor in the assessment and payment of claims. Courts have recognized that, due to the cedent's front-line role in receiving, analyzing and responding to direct claims from its insureds, reinsurers rely heavily on the cedent's judgment in determining coverage for a given claim, and that the cedent must exercise that judgment in good faith. Utmost good faith also imposes obligations on the reinsurer, requiring the reinsurer “to indemnify its cedent for losses that are even arguably within the scope of the coverage reinsured, and not to refuse to pay merely because there may be another reasonable interpretation of the parties' obligations under which the reinsurer could avoid payment.” Commercial Union Ins. Co. v. Seven Provinces Ins. Co. , 217 F.3d 33, 43 (1st Cir. 2000). It is from this doctrine that the principles of follow-the-fortunes and follow-the-settlements arise, where a reinsurer is ordinarily prevented from second-guessing the claim determinations of its cedent, subject to certain exceptions.

The duty of utmost good faith is essential to the industry inasmuch as reinsurers depend on ceding insurers to provide information concerning potential liability on the underlying policies. Reinsurers generally do not duplicate the functions of the ceding insurers, such as evaluating risks and processing claims. Instead, “they rely on their common interests with the ceding insurers and on an industry custom of utmost good faith, including the sharing of information.” Travelers Indem. Co. v. Scor Reinsurance Co ., 62 F.3d 74, 76 (2d Cir. 1995). The sharing of information is often memorialized in a reinsurance agreement's access to records clause, which permits a reinsurer to examine the books and records of the business it reinsures when it deems it appropriate.

But while several seminal cases have, at least in general terms, noted the existence of a “common interest” between cedents and reinsurers, recent decisions have raised an important question: Is this “common interest” the same as the interest that underlies the “common interest doctrine” recognized by jurisdictions across the country to protect the disclosure of privileged information between parties with aligned interests in the outcome of litigation? While the reinsurer-reinsured relationship is widely understood to require a free flow of information between the parties, recent court decisions have forced both cedents and reinsurers to consider what limitations should be placed on this information exchange.

Overview of the Common Interest Doctrine

The common interest doctrine ' sometimes referred to as a joint defense privilege or community of interest privilege ' arises when parties with separate attorneys share otherwise privileged information in order to coordinate their legal activities. As a general rule, disclosing an attorney-client privileged communication to a third party waives the privilege, thus rendering the communication discoverable by other persons. Under the common interest doctrine, however, disclosure to a third party with whom a common legal interest exists protects the privilege to facilitate the parties' joint interests. Importantly, the common-interest doctrine “is not an independent basis for privilege, but an exception to the general rule that the attorney-client privilege is waived when privileged information is disclosed to a third party.” Cavallaro v. United States , 284 F.3d 236, 250 (1st Cir. 2002). In other words, the common interest doctrine does not in and of itself render a document privileged. The underlying material being shared must still be of the kind ordinarily viewed as protected from disclosure, such as attorney-client communication and attorney work product.

These overarching principles appear, on their surface, to be in harmony with the principles underlying the reinsurer-reinsured relationship. As noted above, reinsurers rely extensively on their cedents' investigatory and claim-defense activities to assess their own liability on a given claim. It is not uncommon for cedents to share with their reinsurers, for example, coverage counsel opinions that set forth a thorough legal analysis of a particular claim, the defenses to that claim, and the cedent's potential liability.

Because a reinsurer's liability ordinarily follows that of its cedent, it would seem, on its face, that the transmittal of coverage counsel opinions by the cedent to the reinsurer comports with the general purposes of the common interest doctrine, ensuring that the two parties ' who have a shared interest in limiting their liability and a shared interest in defending coverage actions by underlying insureds ' can freely communicate. But recent court decisions have refused to find a de facto rule that cedents and reinsurers automatically share an interest sufficient to meet the requirements of the common interest doctrine.

Establishing the Common Interest Doctrine in the Reinsurance Relationship

Although there is some variation among jurisdictions, application of the common interest doctrine generally requires a two-part showing. First, most courts require that the parties exchanging otherwise privileged information establish a common legal interest, rather than merely a common commercial interest. Second, the parties must establish that any exchange of privileged information was made in the course of formulating a common legal strategy and that the parties understood that the communication was being shared to further the shared legal interest.

Put another way, the test has two components: 1) a test of the nature of the interest between the parties asserting the common interest, and 2) a test of the purpose for which the privileged communication was shared.

Nature of the Interest

The first prong of the test requires a showing that the shared interest between the reinsurer and the reinsured is a legal one rather than a commercial one. The boundaries between these two types of interests are not always easy to define. When a cedent is involved in litigation with its insured where a claim is being defended against, the reinsurer's interest is on one hand clearly commercial: The reinsurer wishes to minimize its liability, an outcome that occurs when the cedent successfully limits its liability in the underlying coverage action. On the other hand, it is not so simple to divorce this commercial interest from the legal one: The cedent and the reinsurer can only limit their liability if the legal outcome of the coverage litigation is favorable. For example, a reinsurer shares in a cedent's desire to succeed on a motion for summary judgment against an underlying insured since the legal benefit of that victory is of equal benefit to the reinsurer. While there is no doubt a commercial benefit in that victory, the root of the benefit is the legal strategy.

1) Fireman's Fund Insurance Company v. Great American Insurance Company of New York

Courts have issued conflicting decisions on how to draw the line between a legal interest and a commercial interest. Fireman's Fund Insurance Company v. Great American Insurance Company of New York , 284 F.R.D. 132 (S.D.N.Y. 2012), a recent decision from the U.S. District Court for the Southern District of New York, highlights the perils faced by cedents and reinsurers who share privileged communications. In this coverage action arising out of the sinking and salvage of a dry dock, the insured sought to compel production documents sent between the insurer and its reinsurer over which the insurer had asserted privilege. The insurer argued that its relationship with its reinsurer gave rise to a common legal interest because “resolution of [the insured's] coverage claims ' directly impacts what funds may be returned to [the reinsurer] or which [the reinsurer] may be additionally obligated to pay.” The insurer argued that because its reinsurers follow the fortunes of its cedent, the two parties bear the same risk under the insurance policy, and thus have a common interest.

The court rejected the insurer's claim of privilege, declining to categorically hold that ceding insurers and their reinsurers share a joint legal interest merely because a reinsurer's obligations of payment are necessarily tied to the ceding insurer's payment obligations. The court noted that “a common interest cannot be assumed merely on the basis of the status of the parties.” Instead, courts have to conduct a fact-intensive inquiry to determine whether “the evidence suggests that the ceding insurer and its reinsurer have forged a cooperative and common enterprise towards an identical legal strategy.”

As indicia of the fact that there were no coordinated legal efforts between the cedent and the reinsured, the court noted that it was the insurer, and not the reinsurer, that objected to the production of the allegedly privileged material; that the reinsurer (whose production had been sought through a subpoena) objected to production not on privilege grounds but rather than on grounds of burdensomeness, and that the reinsurer's counsel had sought to extricate the reinsurer from the discovery dispute by claiming that the privilege dispute was between the insured and the cedent, and did not involve the reinsurer. Taken together, the court found that “these facts do not support a finding that [the cedent and the reinsurer] shared a common legal interest.”

2) American Safety Casualty Insurance Company v. City of Waukegan

Other courts, however, have shown more reluctance to compel production of communications between a cedent and a reinsurer when coverage litigation is pending. In American Safety Casualty Insurance Company v. City of Waukegan, No. 07 C 1990, 2011 U.S. Dist. LEXIS 4854 (N.D. Ill. Jan. 19, 2011), the underlying insured sought certain e-mails between the insurance company and its reinsurer regarding the status of the coverage litigation. The insured argued that by disclosing privileged information to its reinsurer, the insurer had waived its privilege because the insurer and its reinsurer did not have a common interest relating to the coverage litigation. The court rejected the insured's efforts to compel communications between the cedent and reinsurer. Applying Illinois law, the court noted that a privilege will be deemed waived only “when disclosure to a third party is inconsistent with the maintenance of secrecy from the disclosing party's adversary.” Here, the court concluded the cedent's “disclosure of privileged information regarding potential settlement to its reinsurers is not inconsistent with preventing disclosure of this information to [the insured].”

3) Travelers Casualty & Surety Company v. Century Indemnity Company

In both of the foregoing cases, the cedent and the reinsurer were, on the surface, in alignment on their desire for the underlying coverage litigation to resolve in a manner that minimized their liability. While the varying outcomes demonstrate that different courts may view the sharing of information in such circumstances in different ways, what does seem clear is that if the cedent and reinsurer are actually adverse in their own relationship, courts will not find a common interest between them. Travelers Casualty & Surety Company v. Century Indemnity Company, No. 3:10CV400 (WWE), 2011 U.S. Dist. LEXIS 132131 (D. Conn. Nov. 16, 2011), provides perhaps the starkest example of this. In this case, the reinsurer attempted to use the common interest doctrine as a means to secure disclosure of privileged documents from its cedent despite the fact that the parties were in litigation. The reinsurer argued that it was contractually entitled to privileged materials under the access to records clause, and that it was entitled to view privileged claim evaluation documents prepared by the cedent's coverage counsel because it shared a common interest with the cedent.

The court rejected the reinsurer's arguments. The court held that “the common interest doctrine in no way mandates [the cedent] to provide the reinsurer with privileged information merely because at one point they had a common interest.” The court stated that “if this were the intention of the doctrine, the attorney-client privilege would be virtually obliterated, as most parties in lawsuits have had a common interest at some point in time.”

4) Regence Group v. TIG Insurance Company

Although not explicitly stated, the court's decision in Travelers Casualty may have been influenced in part by the fact that the underlying coverage litigation had concluded. As such, there was certainly no remaining common interest between the parties, especially when they were now in active litigation against each other. A more problematic situation arose in Regence Group v. TIG Insurance Company, No. CV-07-1337-HA, 2010 U.S. Dist. LEXIS 9840 (D. Ore. Feb. 4, 2010), where the cedent and the reinsurer were in arbitration over an underlying claim, and the underlying claim was also in litigation. While the coverage litigation was pending, the cedent voluntarily provided information to its reinsurers, including certain coverage opinions that had been provided to it by outside counsel. After disputes arose between them, the cedent and its reinsurers proceeded to arbitration. During the course of the arbitration, the arbitrator directed the cedent to turn over its entire claim file, which included reports and opinions prepared by the cedent's outside counsel. The underlying insured learned of this disclosure in the arbitral proceedings and moved to compel their production in the coverage litigation, arguing that the cedent had waived privilege by producing documents to its reinsurer in the arbitration.

Despite the fact that production had been mandated by the arbitration panel, the court ruled that the cedent had waived its privilege by producing privileged documents to the reinsurers when the parties' interests were not aligned. The court specifically noted that this waiver applied not only to documents exchanged during the arbitration ' i.e., when the cedent and reinsurer were adverse in the pending arbitration ' but also documents produced before the arbitration had even begun. The scope of discovery was not, the court held, “restricted to temporal limitations pertaining to when the disputes arose between [the cedent] and the reinsurers, or when the disputes were settled.”

The Regence Group decision, therefore, goes a step beyond the Travelers Casualty decision. While the Travelers Casualty decision recognized that once litigation began between the cedent and the reinsurer, no common interest existed, the Regence Group opinion takes this principle further in two ways. First, it extended the waiver to documents disclosed before the arbitration had begun, thus concluding ' as the Fireman's Fund ' decision did ' that there was no automatic common interest between a cedent and a reinsurer even where the parties are not in arbitration. Second, the decision did not account for the fact that while the cedent and reinsurer may have been adverse to each other in their arbitration, they still shared a common interest in the outcome of the underlying coverage litigation. After all, regardless of the cedent's and reinsurer's dispute, a favorable outcome in the underlying coverage litigation inured to both their benefits.

Purpose of the Sharing

The second prong of the common interest test focuses on the purpose of communicating privileged information. In the Fireman's Fund decision discussed above, the court noted that in addition to not finding a shared legal strategy between the cedent and the reinsurer, the cedent had failed to argue that the privileged documents were sent “in the course of formulating a common legal strategy or for the purposes of obtaining legal advice from [the reinsurer].” Fireman's Fund Ins. Co., 284 F.R.D. at 141. The court noted the failure of the cedent to identify whether its communication with the reinsurer involved attorneys, or whether there was “a legal necessity of exchanging otherwise protected information.”

This second prong is not discussed in as great a detail by the other recent decisions addressing the applicability of the common interest doctrine to the cedent-reinsurer relationship. Once the first prong is answered in the negative ' i.e., that the parties do not share a common legal interest ' there is little reason to then ask whether disclosure was made in order to further a non-existent interest. But this second prong should not be discounted. Indeed, the Regence Group decision hints at the importance of this second prong. The court there did not differentiate between disclosures made when the cedent and the reinsurer were not in arbitration, and disclosures made after the arbitration arose. But as both cedents and reinsures know well, privileged materials can be disclosed both when there is active underlying coverage litigation and when there is not any. Broad access to records clauses in reinsurance agreements permits the reinsurer to inspect books and records of the business reinsured at any point in the reinsurance relationship. Disclosure of privileged communication may occur before coverage litigation is initiated.

Thus, while cedents and reinsures may be able to demonstrate a shared legal interest once an underlying insured initiates coverage litigation, pre-litigation disclosure may also serve as a basis to find waiver of the privilege if the purpose of disclosure was simply in the ordinary course of the business relationship, rather than to formulate a common legal strategy for active litigation.

Practical Tips and Conclusion

The cases set forth above raise serious concerns for the reinsurance industry. In a relationship governed by the duty of utmost good faith, and where the reinsurer relies on its cedent to take the lead in evaluating claims and formulating legal strategy, the free flow of information between cedents and reinsurers is critical. The recent decisions in Fireman's Fund and Regence Group should give cedents and reinsurers pause about how they fulfill their duties to each other, while still protecting privileged communication from counsel.

While courts have refused to establish a categorical rule that cedents and reinsurers at all times and in all circumstances have a relationship that satisfies the requirements of the common interest doctrine, the reinsurance industry may find some solace in the fact that courts have recognized that the question of whether the privilege has been waived through disclosure is a fact-intensive one. Thus, in preparation for future challenges to the sharing of information between cedents and reinsures, the parties would be well served by ensuring that the indicia of a common legal interest mark the timing and nature of the disclosure of privileged information. Those indicia include:

• Documenting common interest agreements at the inception of underlying coverage litigation;
• Involving attorneys at the respective companies rather than simply business-side personnel;
• Permitting reinsurers to inspect, but not retain, privileged documents;
• Having reinsurers formally associate in the defense of claims; and
• Delaying reinsurance-related disputes until the conclusion of underlying coverage litigation.

Cedents and reinsurers must recognize the difficult landscape created by recent court decisions about the applicability of the common interest doctrine to their relationship and adapt their disclosures to this landscape. While it is possible to continue the flow of information that has marked the reinsurance relationship for so many years, that flow must be tailored to prevent the unwanted intrusion of third parties outside that relationship.

'Suman Chakraborty is a partner in Patton Boggs LLP's New York office, where he is a member of the firm's Insurance and Reinsurance Dispute Resolution Group. He assists clients in the resolution of international commercial disputes, with an emphasis on reinsurance litigation and arbitration, complex insurance coverage and disputes in the financial services industry. The views expressed herein are those of the author and not necessarily those of his firm or his clients.

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