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Privilege in the Cedent-Reinsurer Relationship
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.
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