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JUNE 2017


South Carolina Federal Court Compels Cedent to Produce All Communications With Its Reinsurer In Bad Faith Action

Most courts hold that communications and other documents between an insurer (the “cedent”) and its reinsurer are generally not relevant and not discoverable in a coverage action with a policyholder. Courts often note that reinsurance information reflects a business decision by the primary insurer to spread risk or to satisfy statutory reserve requirements, neither of which are typically relevant to coverages issues raised by a specific claim under the policy. However, a bad faith claim can present an exception to the rule.

One recent example is ContraVest Inc. v. Mt. Hawley Ins. Co., No. 9:15-cv-00304-DCN, 2017 U.S. Dist. LEXIS 48638 (D.S.C. Mar. 31, 2017). In that action, a claimant-assignee of a policyholder’s insurance claim brought a lawsuit against the insurer for declaratory judgment, bad faith, breach of contract, and unjust enrichment. The dispute concerned an owners association lawsuit against the policyholder (a developer) for construction defects. The insurer refused to defend and denied coverage for the claim. The policyholder settled the claims and assigned its rights and claims against the insurer to the owners association who filed the coverage action. During discovery the owners association sought production of all of the insurer/cedent’s communications with its reinsurers for all of the insured’s claims made under the pertinent policies. Despite this broad request not limited to the claim at issue, the magistrate judge issued a report and recommendation compelling the insurer/cedent to produce the communications. The district court affirmed the ruling, finding that communications with the reinsurer were relevant and probative of the insurer/cedent’s good faith to the extent the communications provided an explanation for granting or denying portions of the insured’s claims or otherwise described the handling of the insured’s claims. Because the owners association alleged that the insurer/cedent had changed its interpretation of the policies once it was evident that it would have to provide coverage, the insurer/cedent’s prior handling of claims under the same policies was relevant and, consequently, discoverable.

ContraVest is a good example of how carefully crafted bad faith allegations can open doors to the discovery of reinsurance information usually found to be irrelevant. Insurers facing such claims should include in their litigation strategy a plan to limit the scope of their communications with reinsurers and avoid allowing the court to decide the issue. This may entail an agreement with the policyholder for a limited production or a search for communications regarding specific issues raised in the litigation. Developing such a strategy requires an early analysis of reinsurer communications to provide sufficient foundation as to what must be protected.

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