Insurance coverage litigation is a grueling race and winners are usually measured by their stamina and endurance through the discovery process. Courts are reluctant to get involved in discovery disputes, but they are intolerant to parties who try to smokescreen the truth. Reinsurance and underwriting documents are typical battlefields in the fight for information. Insurers closely guard this information, but courts do not protect reinsurance and underwriting information if fraud and misrepresentation defenses are at issue in the coverage litigation.
In Fireman’s Fund Insurance Company v. Great American Insurance Company of New York,1 a district court found that reinsurance and reserve documents are relevant and discoverable in a breach of contract action where an insurer alleges fraud and concealment in the application process.
The case arises out of the sinking of a massive dry dock – an ex-Navy vintage battleship – that was used in offshore construction projects and ship repairs. The former battleship experienced mechanical problems and sank to the bottom of its 65-foot-deep pit costing millions of dollars in business income losses. The claim, of course, found its way to court.
In the litigation, the excess commercial property carrier, Max Specialty Insurance Company (Max), claimed the owner concealed and intentionally misrepresented the condition and value of the former battleship. Max, however, refused to produce reinsurance and reserves information in discovery, but the court found this information to be relevant and did not allow Max to hide it in the closet.
The court found that Max’s reinsurance documents and communications reflecting a rating or pricing formula in evaluating the age and condition of the 60-year old dry dock, as well as any claim reserve information was highly relevant and discoverable in a case where the policyholder is accused of misrepresenting information to the underwriters.
“[r]einsurance documents could “reflect an insurer’s understanding of the risk it underwrote and thereby rebut the defense, raised by several insurers, that [plaintiff] failed to disclose information sufficient to apprise the insurer of that risk” and that the insurer’s notice of claim to its reinsurer “may evidence the insurer’s understanding of the underlying claims and may contain admissions that these claims are covered.”
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“[i]nformation concerning the reserve information may also reflect Max or [its reinsurer’s] “own beliefs about coverage and their liability” and thus provide some insight into what [the carriers] did or did not know about the risks of insuring the dry dock, which is relevant to the allegations that [the owner] engaged in fraud.”