Zurich American Ins. Co. v. Ace American Reinsurance Company

Issue Discussed: Discovery Issues

Submitted by Rick Rosenblum

Date Promulgated: December 22, 2006

Issue Decided: Under the federal rules of civil procedure, the court found allegations that a reinsurer had a pattern and practice of denying ceded claims in violation of the utmost duty of good faith sufficient to open discovery into other claims and litigation involving claim denials by that reinsurer.

Background

Zurich American Insurance Company (“Zurich”), the cedent, sued its reinsurer Ace American Reinsurance Company (n/k/a R&Q Reinsurance Company), alleging breach of contract for Ace’s alleged failure to pay its full share of a settlement reached by Zurich with its insured. Additionally, Zurich alleged claims for breach of the utmost duty of good faith arising from Ace’s claim denial and its alleged pattern of conduct in denying payment to its reinsured based upon artificial disputes over allocation.

During discovery, Zurich sought production from Ace of categories of documents including:

a) documents relating to two other lawsuits in which Ace was found to have wrongly denied reinsurance claims; and,

b) all documents relating to any claims denied by Ace on the basis of improper allocation.

Ace objected to producing documents under either category, arguing the documents were irrelevant and overly burdensome. In turn, Zurich filed a motion to compel under Federal Rule 37.

Rulings

The magistrate judge sustained Ace’s relevance objection, finding that motive is generally irrelevant in breach of contract claims. The court found that whether Ace breached its contractual obligations depends upon whether it failed to “follow the fortunes” or “follow the settlements” of Zurich as defined under the specific policies at issue in this case.

Nevertheless, the Court went on to order broad document production from Ace. The court found that Ace’s handling of similar claims may shed light on the meaning the parties ascribed to the terms incorporated into the policies at issue.

With respect to Ace’s undue burden objection, the court noted Ace’s affidavit, which averred that Ace’s claim systems were incapable of segregating claim information by amount of claim, type of claim, identity of cedent, or the basis for Ace’s denial of the claim. The court was not persuaded, finding that “[a] sophisticated reinsurer that operates a multimillion dollar business is entitled to little sympathy for utilizing an opaque data storage system, particularly when, by the nature of its business, it can reasonably anticipate frequent litigation.” But, in light of the volume of information requested, the court ultimately ordered the parties to propose a sampling protocol through which a number of examples of Ace’s claim files involving allocation issues could be selected for review and production. The court also granted leave to Ace to re-urge its burdensomeness objection, supported by specific evidence, if Ace objected to the sampling protocol.

*Rick Rosenblum heads the litigation section of Akin Gump’s San Antonio office. Rick has represented insurers and reinsurers across the United States, Bermuda and Europe for the past nineteen years.