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.
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.
Construction of the Access to Records Clause
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.").
Purpose of the Access to Records Clause
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 claims personnel.
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.
The Right to Inspect during Disputes
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.
Failure to Inspect
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).
Enforceability of the Right to Inspect
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)).
Scope of the Right to Inspect
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.