For decades, many reinsurance treaties were simple agreements between international professionals who knew and trusted each other. Deals were closed on a handshake, and the actual reinsurance contracts were simple because these were long-term relationships and everything could be worked out. Reinsurance contracts were not codified on paper but on the strength of a person’s word. The community of reinsurance buyers and sellers was small, and one’s professional reputation allowed you to buy or sell reinsurance; a bad reputation ruined you.
Treaty reinsurance underwriters and buyers expected their relationships to last for decades. Most treaties, for example, were continuous contracts that lasted unchanged for years. Reinsurance underwriting was a business of trust and reputation.
Contracts often included an Access to Records clause. This clause often read very simply: “The Reinsurers will have the right to inspect records of the Company that pertain to this Agreement.” Both parties felt that it was only reasonable for the underwriter to have the right to make sure things were okay by directly viewing relevant documents. It was a contractual right that was only infrequently exercised.
This changed after the big-money asbestos liability crisis completely transformed the relationship between reinsurers and insurers and clauses like the simple Access to Records clause were transformed by adversarial lawyers from simple professional courtesies to shattering potential attack on attorney-client privilege.
Today’s reinsurance clauses don’t look much like yesterday’s clauses. Many insurers have learned their history lessons. They invest the time necessary to make sure that their reinsurance clauses reflect their intent and are drafted with the necessary skill to anticipate future threats. Some, however, do not.
Access to Records clause
The Broker Reinsurer Market Association (BRMA), as a service to the industry, publishes a compendium of reinsurance clauses. In that book, there are several versions of the Access to Records Clause (ATRC). Consider, for example, BRMA’s 1A ACCESS TO RECORDS – a commonly used clause that reads as follows:
“The Reinsurer or its designated representatives shall have free access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.”
The clause above is very similar to the earlier version. It has become clear, however, in the category of “unexpected uses of an old clause,” the plaintiff’s bar has found a winner in the Access to Records clause.
The plaintiff’s counsel or the estranged reinsurer often puts more energy into creative reading and developing clever interpretations of traditional clauses than the original drafters put into writing those same clauses.
A close reading of this sample ATRC, for example, reveals some potential exposures to the insurer that the original drafters may not have envisioned or imagined.
Today’s questions for this category are:
- What is a “designated representative?”
- What is “free access?”
- What is a “reasonable time?”
- What does the phrase, “to all records of the Company which pertain in any way to this reinsurance” really mean?
- Another way the ATRC might jeopardize privilege?
- Can you name three clauses that might have hidden “Access to Records’” provisions?
- When is a copy a potentially bigger threat than the original?
- When is time up?
What is a “designated representative?”
Insurers, for example, may want veto power over who can be a reinsurer’s “designated representative.” Auditing firms, for example, with whom the insurer has had an unfortunate experience may not be welcome.
The insurer may also object to certain law firms and “expert” consultants with whom they have an adversarial relationship or whom they suspect of using ATRC access as pre-discovery “fishing trips,” an opportunity for on-the-job learning, or a chance to discover reasons to deny claims.
What is “free access?”
The term “free access” is very broad and ambiguous (open to more than one reasonable interpretation) and an insurer might prefer the simple expression “access.” In addition, insurers occasionally allege that some inactive reinsurers use the ATRC to deny or delay claim payment.
The audit process, including question and answer correspondence, takes a lot of time. Some insurers are of the opinion that only reinsurers without any outstanding balances and in compliance with the contract terms should be allowed access to their records.
What is a “reasonable time?”
The phrase “at any reasonable time” is somewhat subjective, and an insurer might prefer it to read “at any reasonable time during normal business hours” coupled with an advanced warning provision. An alternative approach is to negotiate a mutually agreed provision.
What does the phrase, “to all records of the Company which pertain in any way to this reinsurance” really mean?
Some insurers feel the phrase “to all records of the Company which pertain in any way to this reinsurance” is too broad and may negatively impact the “Company” in several important ways: (see Strook & Strook & Lavan, “The Access to Records and Claims Cooperation Clauses: Their Impact on Discovery in Arbitration Proceedings, August 15, 2006)
- In some litigation, it has been argued that the simple and broad form of the ATRC constitutes a waiver of privilege. While this argument has met with mixed success, it does highlight an ambiguity that companies and their attorneys may wish to clarify. The conservative suggestion is to consider excluding a reinsurer’s access to all privileged communications and any attorney work product. This may make it harder for third-party plaintiff attorneys to argue the insurer has waived privilege.
- In those instances, such as a disputed claim, where the insurer’s and the reinsurer’s relationship is adversarial, the ATRC, on occasion, has been used as a vehicle to supplement or replace formal discovery. In adversarial situations opposing counsel often find privileged documents a fruitful venue for research. Once again, the most conservative suggestion is to consider excluding all privileged communication and any attorney work product.
- In subscription reinsurance placements, each reinsurer’s liability is several and not joint. In certain adversarial situations, a reinsurer may attempt via the ATRC to obtain documents or records relating to other reinsurers’ views or positions on, for example, claim disputes. The most conservative suggestion is to consider exclusionary wording in the ATRC to attempt to limit this legal maneuver.
- The relationship between reinsurers and insurers can change over time. From an underwriting perspective, it seems that sharing privileged documents with a reinsurer depends, in part, on whether or not the parties share a legally recognizable “common interest.” The “common interest doctrine” may allow a party to share privileged material with another party with whom it shares a common legal interest, not just a business interest. If there is no common legal interest, the insurer is at much greater risk of being deemed to have waived privilege when sharing documents with its reinsurer. At times, reinsurers and insurers share a common legal interest and, at other times, the contracting parties may be adversarial. With this in mind, for some clients, the most conservative approach is to consider excluding from the scope of the ATRC all privileged documents, including documents protected by the attorney-client privilege and the attorney-work-product privilege. Parties to litigation, however, whose legal interests are sufficiently intertwined under applicable law to bring them within the reach of the Common Interest Doctrine in the relevant jurisdiction, might consider entering into a written document known as a Joint Defense Agreement (JDA). An additional option may be to consider use of the conservative approach outlined above, with the added feature of using the existence of a JDA as a trigger for disclosure. In the event there is a JDA between the insurer and the reinsurer, asserting the Common Interest Doctrine, the ATRC would permit inspection of relevant, privileged documents, i.e., those that fall within the ambit of the JDA and the common interest being asserted. It is important that only those documents that are subject to the JDA be considered for disclosure. The privilege that attaches to the company’s documents may more likely be preserved, despite disclosure to the reinsurer, if disclosure is made under the Common Interest Doctrine, the existence of which can be evidenced by a JDA. (See Strook.)
- The phrase “all records” is very broad. One suggestion (among potentially many) is to limit the inspection right to premium files and non-privileged claims files.
- Each insurer should also consider if they want to negotiate an exception to proprietary business processes, products or communications.
- Another potential area of exposure is the records of the reinsurance broker in its role as agent of the company. It could be argued that such records are records of the insurer and are subject to the ATRC. The insurer and its attorney will have to decide if these records should be subject to the ATRC.
- Insurers may also wish to negotiate a provision that requires the reinsurer to share its written audit reports with the company within a specified number of days. (Historically, one of the benefits of reinsurers’ audits is that it afforded company management with a third party window into its own operations.) An alternative position might be to negotiate a provision that requires a copy of the written audit report if the audit results in a claim being denied, contested or disputed.
- How long should an insurer be required to keep the records subject to the ATRC? Each company will have its own view but it is one suggestion that the ATRC should mirror the company’s document retention policy or the applicable statutory retention policy whichever is longer.
Another way the ATRC might jeopardize privilege?
The Claims Cooperation clause, Claims Control clause or Accounts and Remittance clause may have expansive record-access provisions. It is important to consider that these provisions might constitute a waiver of privilege and they should be reviewed carefully.
Insurers are increasingly looking to obtain confidentiality agreements from their reinsurers to protect their trade secrets, business processes and claims information. These insurers may wish to include such restrictions/ covenants in their ATRCs. Others may decide on a separate clause.
Can you name three clauses that might have hidden “Access to Records’” provisions?
Claims Cooperation clause, Claims Control clauses, and Accounts and Remittance clause.
When is a copy a potentially bigger threat than the original?
Reinsurers, during the inspection / audit process, may need to make photocopies or electronic copies of documents. This has been a topic of discussion between some companies and reinsurers. It is very important that the insurer and the reinsurer have a very clear understanding as to what electronic files may be copied. It is also important that the reinsurer know and abide by the insurer’s IT security policy, e.g., forbidding memory stick or jump drives.
It is also important that Federal and State privacy laws be strictly followed. Some conservative insurers prefer to eliminate the permission to make copies as a contractual provision. Under this approach, the insurer has the option to allow, at its discretion, the making of copies at the time audits / file reviews are performed. If photocopies or electronic copies are permitted, it is strongly suggested to consider if the clause should describe the scope of this permission including an agreement as to costs, both of material and personnel.
When is time up?
Time is another consideration. Should the ATRC expire at the termination of the contract? Or should it survive termination and continue until all claims are exhausted? One suggestion is to specify a date when the right to audit or inspect expires.
The ATRC is a good example of a traditional reinsurance clause that was initially a professional courtesy but which morphed into a multi-layered risk that requires careful consideration by insurers and their lawyers as they negotiate coverage. Reinsurers will quite understandably seek to expand their rights under ATRC. It is the expansion of these rights that exposes the insurer to unexpected and unacceptable risks. The implications of an expanded ATRC are significant and merit careful consideration.
Disclaimer: This information is provided as a consulting service only. It is not intended to be and may not be relied upon as legal advice or opinion. Persons needing specific legal advice should retain the services of legal counsel.