Preserving Privilege In Reinsurance Audits

Virtually every reinsurance treaty includes an audit clause, granting the reinsurer access to the ceding company's records. Reinsurers routinely invoke the clause to conduct periodic audits and to monitor claims that are likely to cause significant losses to the reinsurer.

Allowing access to claims files, in particular, raises important issues of attorney client privilege and work product. A ceding company's claims file will almost always contain privileged materials. The application of the age-old rules of privilege to a reinsurer's audit rights is not always considered. But privilege issues warrant caution. This article discusses the applicability of privilege to reinsurer audits, the danger of waiving privilege, and a potential solution to satisfy both reinsurer and ceding company.

1. A reinsurer generally does not have the right to access privileged documents.

   In an audit, the reinsurer typically will want to review claims files to assess the cedent's claims handling, evaluate its exposure, and decide whether to invoke its right to associate in the defense of particular claims. The claims file will almost always contain correspondence between the insurer and defense counsel. The attorney client privilege and work product doctrine ordinarily protect this correspondence and similar documents from disclosure to third parties.

   These standard privilege principles apply equally to documents reviewed in a reinsurance audit. Courts have expressly held that a basic audit clause does not trump the longstanding rules of privilege. Accordingly, ceding companies can (and perhaps should) deny reinsurers access to privileged materials. See Gulf Ins. Co. v. Transatlantic Reinsurance Co., 788 N.Y.S.2d 44 (N.Y. App. Div. 2004); North River Insurance Co. v. Philadelphia Reinsurance Corp., 797 F. Supp. 363 (D.N.J. 1992); see also Modern Reinsurance Law and Practice 6.04 (citing North River Insurance Co. v. Philadelphia Reinsurance Corp., 797 F. Supp. 363 (D.N.J. 1992); United States Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. N.Y. County Aug. 18, 1992), aff'd, 598 N.Y.S.2d 938 (App. Div. 1st Dep't 1993).

   In Gulf Ins. Co. v. Transatlantic Reinsurance Co., 788 N.Y.S.2d 44, 45 (N.Y. App. Div. 2004), the New York appellate division confirmed that a standard access-torecords clause does not affect the cedent's privilege rights. There, the ceding company, Gulf Insurance Company (Gulf), had purchased quota share coverage from Transatlantic Reinsurance Company (Transatlantic) and other reinsurers. Id. The treaties contained a boilerplate, and seemingly broad, access-to-records clause. Id. ("the Reinsurers ... will have the right to inspect ... all records of the [cedent] that pertain in any way to this...