What Is Discoverable? You Be The Judge!

Written by Robert Goodman


The third session of the Education Day was entitled “What is Discoverable? You Be the Judge!”  Don Frechette, Partner at Locke Lord LLP, moderated the panel consisting of: Christopher Bello, Vice-President, Senior Counsel, and Secretary of General Re Life Corporation; Bill Goldsmith, Associate General Counsel, AIG Reinsurance Dispute Resolution; and Jonathan Rosen, an arbitrator, mediator, and expert witness who previously served as Chairman of AIRROC, COO of The Home Insurance Company in Liquidation and, prior to Home’s liquidation, Executive Vice-President and Reinsurance Counsel of Home.


Much of the session involved discussion of four hypothetical fact patterns in which the audience was able to vote as to the discoverability of information set forth in the hypotheticals. The panel also considered whether there is a need for discovery at all. Bill Goldsmith stated that, today, the answer is probably yes. Mr. Goldsmith noted that, in 1978, he (and perhaps most in the industry) would have taken a different position, but there has been a “sea change” in terms of the number of disputes, their size, and their impact. The panel agreed that the extent of discovery has to be tailored according to what is appropriate for each dispute, reflecting the size of the dispute,  impact of the issues, remedies sought, fairness, what the arbitration clause mandates, and what the arbitrators need in order to decide the question presented. The panel also discussed cost-shifting for discovery and whether, if permitted, it should be based on the results of the arbitration or whether the discovery was sought in good faith. The panelists were generally of the view that good faith rather than the results of the arbitration should be determinative, noting that it was unlikely that arbitrators would be inclined to adopt one rule for the cost of discovery and another for the overall cost of the proceeding. Mr. Bello noted that, generally, he writes out the ability to shift costs, but he noted that discovery may be different in the case of true “fishing expeditions.”


The first hypothetical involved a fact pattern in which the cedent admitted that it had engaged in “table cutting,” contending that it needed to do so because of the competitive rate environment; the reinsurer alleged that the cedent had committed fraud and sought discovery going back 10 years. The audience was evenly split on whether the discovery should be permitted. Mr. Bello stated that he would have to know why the discovery was needed. Mr. Goldsmith stated that he would defer ruling until other discovery had been obtained, but that he might ultimately permit it based on the seriousness of the fraud allegations. Mr. Rosen noted that the discovery sought would impose an unreasonable burden and that he would attempt to limit the discovery by time period and other parameters. Mr. Frechette stated that this is what the panel had done in the actual case on which the hypothetical had been based.


In the second fact pattern, the reinsurer sought documentation going back twenty years that would cost $100,000 to retrieve. Although some documentation bearing on the disputed issue was already available, it was inconclusive. The audience again split evenly on whether the cedent should be compelled to provide the requested documentation. On the issue of who should pay for the discovery, 25% said the cedent should pay,  13% said the reinsurer should pay, and 63% said “it depends.”  56% of the audience said that it would not make a difference if the reinsurer no longer had access to its witnesses. Mr. Goldsmith and Mr. Bello favored deferring the issue of the documents until after the witnesses had been examined, observing that it might be a different question if the witnesses were unavailable. Mr. Rosen and Mr. Frechette tended to disagree, noting that one would likely want to use the documents in examining the witnesses and that the issue might come down to proportionality of the cost.


The third hypothetical involved hurricane claims where losses caused by storm surge were not covered, but losses caused by wind-driven rain were covered. A class action was brought on behalf of policyholders. Although drone evidence showed losses caused by storm surge, the cedent settled the claims on an individual basis “on the advice of counsel.” The reinsurer invoked its audit rights and sought information regarding exactly what had been advised by counsel, but the cedent, citing the attorney/client privilege, refused to provide the requested information. The reinsurer sought formal discovery with respect to the same information, which the cedent also resisted. The audience voted, 76% to 24%, to deny the claim of privilege. Only 20% of respondents thought their answer would be different in the absence of an audit right.  However, 58% of respondents thought their answer might be different if the cedent had not asserted that its decision was based on advice of counsel. Mr. Goldsmith stated that the cedent had not waived the privilege and that the legal advice it received was privileged and should not be produced.  However, he noted that if you actually cede a settlement decision to an outside law firm (which did not appear to be the case in this hypothetical), then some courts have held that the law firm file may be discoverable. Both Mr. Bello and Mr. Rosen thought that the cedent could not hide behind a claim of privilege and that the audit right issue was irrelevant.


The last hypothetical concerned allegations of fraud by the cedent and the reinsurer’s attempt to obtain records relating to the cedent’s executives’ text messages. These records were in the possession of the cell phone service provider and the relevant jurisdiction does not provide for third-party discovery. Only 9% of the audience thought that the panel should make the cedent request the data and pay for it; 23% would make the cedent request the data but would have the reinsurer pay for it; 45% would deny the request; and 5% said “it depends.”  A large majority of respondents (79%) said that it would not change their answer if the executives produced affidavits stating that they “virtually never” used text messaging for business, and 75% said that their answer would not change if the phones were not company phones but rather personal phones (with a stipend from the cedent). A consensus of the panelists rejected the discovery, with Mr. Rosen characterizing it as a “wild goose chase,” and Mr. Goldsmith noting that the reinsurer had not met its burden of establishing some basis for its allegation of fraud.