Under traditional reinsurance principles,
a reinsurer relies on the ceding company to disclose information concerning
the risks and losses ceded to the reinsurance contract. This means that the
cedent controls the information the reinsurer receives, subject to the requirements
of the reinsurance contract. When the cedent limits the information seen by
its reinsurer, it, in turn, confines the scope of review that can be conducted
by the reinsurer's retrocessionaires, whose sole source of information is the
reinsurer. The ceding company's control, however, is tempered by the notice
and reporting requirements of the reinsurance agreement, as well as by the duty
of utmost good faith.
Squire Patton Boggs
To protect the reinsurer from overly narrow disclosure by the cedent, almost
every reinsurance contract contains an "access to records clause," sometimes
called an "inspection clause" or an "audit clause." Access to records clauses
grant reinsurers the right to inspect, either in the normal course of business
or upon the reinsurer's request, the ceding company's books and records that
pertain to the business reinsured. Disputes between reinsurers and cedents over
the interpretation or operation of the access to records clause may arise where
the interests of the parties have become adverse.
Access to records clauses are customary in most reinsurance agreements, including
quota share, surplus share, and excess-of-loss contracts, and can be found in
some facultative certificates. There even is support for the proposition that
the right of the reinsurer to access its ceding company's records is enforceable
in the absence of a contractual stipulation because the right is so ingrained
in industry practice and custom. See Michigan Mut. Ins.
Co. v Unigard Sec. Ins. Co., 44 F3d 826 (9th Cir 1995) (holding that
even where there is no audit clause in the reinsurance contract, the reinsured
is obligated to furnish information requested by the reinsurer). Though no standard
clause exists, a basic access to records clause in a reinsurance contract may
provide as follows.
The Reinsurer or its designated representatives shall have access at
any reasonable time to all books, records and papers of the ceding company
which pertain in any way to this reinsurance. [See Robert W. Strain, Reinsurance Contract Wording 42 (2d ed. 1996).] The sample clause above reflects a broad access to records
clause, imposing no real constraints on the reinsurer or its representative
seeking to review the cedent's records, other than a reasonability requirement.
A narrower access to records clause could restrict the reinsurer's review
to certain documents, such as premium and loss records. Alternatively, the clause
could define the manner in which an investigation can be conducted. Some access
to records clauses specify a particular timeframe within which inspections must
take place (e.g., during work hours) or specifically require a reinsurer to
notify the cedent prior to an inspection visit in order to allow adequate preparation
time. Other forms of the clause may specifically grant the reinsurer the right
to photocopy all relevant documents. This version of the clause avoids disputes
over whether the reinsurer is only permitted to "view" the documents at the
cedent's office. In addition, these clauses may expressly provide for the survival
of the right to investigate beyond the termination of the treaty. Logically,
where a reinsurer will remain liable to the cedent upon completion of the treaty,
it is important for the reinsurer to preserve the right of inspection until
all the claims have been paid. Finally, some access to records clauses condition
the reinsurer's right of access to the reinsurer's payment of all balances due.
An access to records clause is distinguishable from a claims cooperation
clause, which can bind the cedent to provide the reinsurer with any requested
documents or information in its possession pertaining to underlying claim adjustment
and coverage determinations. SeeOstrager
& Vyskocil § 6.03. An access to records clause, however, is sometimes
incorporated into the claims cooperation clause. See, e.g., North River Ins. Co. v Philadelphia Reins. Corp.,
797 F Supp 363 (D NJ 1992) ("The company … shall make available for inspection
and place at the disposal of the Reinsurer at reasonable times any of its records
relating to this reinsurance or claims in connection therewith.").
The access to records clause enables reinsurers to track the performance
of a reinsurance treaty. More specifically, having access to ceding companies'
records allows reinsurers to make sure that the cedents are complying with the
terms and conditions of the governing reinsurance contracts. See Strain, Reinsurance Contract Wording at
42-43. Records inspection also provides reinsurers with a means of determining
whether reinsureds' loss reserves are adequate. Further, reinsurers can identify
any unreported losses that may exist and decipher the nature or severity of
unreported and reported claims. Similarly, reinsurers may exercise their inspection
rights to assess the skills and experience of the cedent's underwriters and
A reinsurer may choose to examine the cedent's books and records frequently
as a matter of business routine. Some reinsurers audit annually in conjunction
with the annual renewal of reinsurance contracts. Alternatively, a reinsurer
may exercise its right to inspect only when circumstances have changed such
that an inspection would be a prudent endeavor.
Where the reinsurer and the cedent share common interests, the reinsurer's
exercise of its contractual right to inspect the cedent's records causes relatively
little objection from the cedent. See Ostrager
& Vyskocil § 6.04. Where, however, the interests of the reinsurer and
the cedent become adverse (e.g., where there is potential for a coverage dispute
associated with the underlying insurance or reinsurance), the ceding company
may resist disclosing documents to the reinsurer, even though the reinsurance
contract contains an access to records clause.
In a situation where a reinsurer fails to review a statement provided to
it by the ceding company and a dispute later arises between the reinsurer and
the cedent, a court may interpret the reinsurer's failure to examine the statement
as implicit acceptance of its terms. For example, in American Home Assurance Co. v Intituto Nacional de Reaseguros, the court
held that where the reinsurer did not object to the contents of a reinsurance
billing statement, an agreement to pay the amount noted in the statement could
be implied. 1991 U.S. Dist. LEXIS 501 (SD NY 1991). A reinsurer's failure to
investigate the ceding company's documents does not, however, preclude the ceding
company from asserting a statute of limitations defense against the reinsurer
when a dispute arises. See Gerling Global Reins. Corp.
v Safety Mut. Cas. Corp., 1980 U.S. Dist LEXIS 12078 (SD N. 1980). In Gerling, the court found that a reinsurer "cannot
invoke the doctrine of equitable estoppel merely by asserting that it failed
to take advantage of this contractual right of access." See id. at **6-7. Also, where a dispute between
a reinsurer and a cedent would ordinarily be arbitrated under the terms of a
reinsurance contract, the reinsurer's failure to exercise its inspection rights
does not bar arbitration of the dispute unless the contract explicitly requires
the reinsurer to inspect as a prerequisite to the arbitration of disputes. See Philadelphia Reins. Corp. v Universale Ruckversicherungs
A.G., 1994 WL 4437 (SD NY 1994).
As a contract right, the right of inspection is generally enforceable in
litigation and arbitration. In the event of a reinsurance dispute centering
upon a reinsurer's nonpayment of balances due to the cedent, however, a court
may find that the reinsurer is not able to access the ceding company's documents
until it places the balances due in an escrow account or posts a letter of credit.
See American Home Assurance, 1991 U.S. Dist LEXIS
501 (holding that the cedent's refusal of access to its treaty records was commercially
reasonable where the cedent had regularly provided quarterly treaty statements
to the reinsurer and expressed willingness to reinstate the audit right once
the reinsurer paid its claims); Atlas Assurance Co.
of America v American Centennial Ins. Co., 1991 WL 4742 (SD NY 1991)
(finding that an arbitral panel's order calling for the placement of disputed
amounts into an interest-bearing escrow account pending completion of the requested
audit constituted reasonable interim relief). The rationale behind a court's
refusal to enforce an access to records clause where the reinsurer has not yet
paid balances due is that a reinsurer in financial difficulty would otherwise
be able to postpone fulfilling its payment obligations by raising the issue
of inspection. See Staring § 15.8 (discussing
a case decided in Ireland in which the reinsured claimed that the "matter of
inspection was merely a delaying maneuver"). On the other hand, anecdotally,
we know of cases where the failure to pay was held not to be a sufficient basis
to withhold the right to audit.
In several English cases, courts deferred actions brought by cedents to recover
reinsurance until after the reinsurers were able to conduct inspections under
contract clauses. See Ostrager & Vyskocil § 6.04. In Pacific & General Insurance Co. Ltd. (In
Liquidation) v Baltica Insurance Co. (U.K.) Ltd. & Others (Q.B. Comm.
Ct., Nov. 3, 1995), the court considered the following three factors in determining
whether to defer the cedent's claims: (1) whether the cedent complied with the
reinsurer's contractual rights of inspection; (2) whether the reinsurer's inspection
request was timely; and (3) the reason for the inspection request and the nature
of the materials sought. See id. (also discussing Aetna Reins. Co. (U.K.) Ltd. v Central Reins. Corp.
Ltd. (Q.B. Comm. Ct., June 23, 1995) (allowing the inspection in part
because it may result in a defense for the reinsurer)).
In litigation, discovery rules commonly provide for broader disclosure than
a reinsurer would be able to request under an access to records clause. If the
court or an arbitral panel issues an order altering the scope of permissible
inspection by the reinsurer, the reinsurer and the cedent must comply. For example,
where a reinsurer has refused to comply with parts of a reinsurance contract,
a court or an arbitration panel can limit the reinsurer's review of the cedent's
records even if the access to records clause provides for broader review. See International Surplus Lines Ins. Co. v People's Ins.
Co. of China, 1994 U.S. Dist. LEXIS 12929 (ND Ill 1994) (denying motion
to vacate arbitral award where motion was based in part on the arbitrator's
refusal to enforce the access to records clause, and finding that discovery
is within an arbitrator's discretion). The International
Surplus Lines court held that the inspection clause permitted reinsurer
"access to records at 'reasonable times' … not … access to all of its reinsured's
records at any time." See id.
Where litigation has commenced between a policyholder and its insurer or
between a reinsurer and its ceding company, the cedent will often object to
reinsurer inspection on the basis of privilege. In disputes between policyholders
and their insurers, policyholders commonly request documents seen by or turned
over to reinsurers. See Hammesfahr § 6.4.
This gives cedents an incentive to restrict reinsurer review where the potential
exists for a coverage dispute, so as to avoid potentially waiving the attorney-client
privilege by disclosing documents to its reinsurer and having to produce them
for policyholders later on. Some courts have held that the discovery of reinsurance
documents by policyholders is unnecessary because information communicated between
the reinsurer and the reinsured is not relevant to insurance coverage disputes.
Where a dispute arises between the reinsurer and the cedent, it is unclear
whether the cedent may invoke privilege to protect certain documents and materials
from having to be produced for the reinsurer. In U.S.
Fire Insurance Co. v Phoenix Assurance Co. of N.Y., the court found that
the cooperation clause did not constitute a waiver of privilege even though
the reinsurer has seen the privileged documents at issue prior to the dispute.
No. 7712/91 (NY Sup Ct Aug. 7, 1992), 4 Mealey's Reins. Rep. No. 4. The court
also held that the common interest doctrine does not apply where the reinsurer
and the ceding company are not joint clients. See id.; Hammesfahr § 6.4 (suggesting that documents disclosed between parties that share a common
legal interest are not subject to the attorney-client or work-product privilege);
see also North River Ins. Co., 797 F Supp 363
("Although a reinsured may contractually be bound to provide its reinsurer with
all documents or information in its possession that may be relevant to the underlying
claim and its coverage determination, absent more explicit language, it does
not through a cooperation clause give up wholesale its right to preserve the
confidentiality of any consultation it may have had with its attorney concerning
the underlying claim and its coverage determination.").
In contrast, the court in Gulf Insurance Co. v Transatlantic
Reinsurance Co. granted the reinsurer's motion to compel the cedent to
produce documents withheld on the basis of privilege, finding that the cedent
breached the access to records clause because the broad language of the clause
did not provide any exception on the ground of privilege. No. 601602/03 (Sup
Ct NY County June 26, 2004) (discussing access to records clause providing that
"[Reinsurers] will have the right to inspect, at any reasonable time, all records
of [cedent] that pertain in any way to this Agreement."); see also Waste Management Inc. v International Surplus Lines
Ins. Co., 144 Ill 2d 178 (Ill S Ct 1991) (holding that a broadly worded
cooperation clause in an insurance policy required the insured to disclose privileged
documents to insurer even after the parties had become adverse). Confidentiality
agreements between reinsurers and their cedents may serve to minimize the potential
for disputes over privilege in this context.
Access to records clauses serve an important function in granting the reinsurer
the right to monitor the business reinsured and to ensure compliance by the
ceding company with the terms of the reinsurance contract. A narrow access to
records clause, tailored to address issues such as timing, nonpayment, and privilege,
may alleviate some of the common disputes that arise between reinsurers and
ceding companies associated with the reinsurer's right to inspect.
*The author would like to thank Lindsay
Lippman of LeBoeuf's New York office for her extensive research and initial
drafting of this Commentary.
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