Reinsurance is insurance for insurance companies. Often, insurers will write large policies to condominium and homeowner associations with limits well in excess of the amounts the carrier would be willing to pay if a total loss occurred. Instead of passing on the opportunity to write the policy, insurers typically lay off a portion of the potential liability to reinsurers. By spreading the risk, insurers can limit the amounts payable from their own coffers in the event of a large scale loss.
While many policies with large limits are reinsured, policyholders typically never meet any of the reinsurer’s representatives. In fact, most policyholders have no idea that their insurer has reinsured their policy. During litigation, however, reinsurance information can be a vital tool in rebutting coverage defenses and resolving disputes.
Just as an association has a contract with its insurance carrier, an insurance carrier has a contract with the applicable reinsurers. These agreements generally provide the terms and conditions of the reinsurance relationship and can spell out the rights and obligations of the insurance carrier and the reinsurer. While reinsurers are almost always involved in the claim or litigation filed by a policyholder, often reinsurers have the ability to join in the investigation or defense of the litigation and have the ability to participate in the decisions on coverage and amounts paid.
While many insurers will argue that their reinsurance agreements are not discoverable by a policyholder during coverage litigation, the vast majority of courts have disagreed. Federal Rule of Civil Procedure 26(a)(1)(D) requires the production of:
Any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.
Because reinsurance agreements undoubtedly fall into these categories, Rule 26 requires them to be disclosed. The rule is absolute and does not require any showing of relevance. See, e.g., National Union Fire Ins. Co. of Pittsburgh, Pa. v. Continental Illinois Corp., 116 F.R.D. 78, 83-84 (N.D.Ill.1987).
Aside from the agreements, communications between an insurer and any applicable reinsurer can play an important role in a number of ways. Numerous courts have allowed these communications to be discovered by policyholders in litigation with their insurers for a variety of purposes including as extrinsic evidence of the meaning of an ambiguous policy provision, to defend against allegations of a material misrepresentation in the insurance application, to rebut a late notice or fraud allegation, and to reconstruct a lost policy. Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., 2002 WL 1870452, at *3-4 (E.D.Pa. July 29, 2002).
With the current financial climate, reinsurance is playing a large role in the United States as well as foreign markets. When dealing with large losses, it is important to understand the role reinsurers play and the potential impacts that these entities can have on the claim and any subsequent litigation.