The Zurich v. Ace Case: Are Reinsurers Obligated to Provide Cedents With Discovery of "Other Reinsurance Claims"?

Copyright ©2007 

In coverage litigation by insureds against their insurers, it is not unusual for insureds to request the insurer’s files on claims involving similar issues made by other insureds.  The arguments are usually made that the requested discovery is relevant to issues of intent or bad faith because it will show how the insurer has interpreted an insurance policy clause at issue in the context of other claims that the insurer may have paid.  Sometimes, courts have responded that the discovery is impermissible because it involves irrelevant extrinsic evidence.  On other occasions, courts have responded by weighing the relevance of a particular request against the significant burdens of producing the discovery on the insurer and on the other insureds whose claim information would be disclosed.

A recent Southern District of New York case presents an interesting twist on this old story.  In this reinsurance case, plaintiff cedent sought an order compelling the defendant reinsurer to search its electronic files and produce “other claim” information involving certain cedents and types of losses.   The cedent cited the newly amended Federal Rules of Civil Procedure addressing electronic discovery in support of its motion.  The reinsurer opposed the motion on grounds of irrelevance and undue burden, representing to the Court that the requested discovery would be extremely burdensome because the reinsurer’s computer system was incapable of segregating claims by the amount of the claim, the type of claim, the identity of the cedent, or the reason the claim may have been denied. 

In Zurich American Insurance Co. v. Ace American Reinsurance Co., 2006 U.S. Dist. Lexis 92958 (S.D.N.Y. Dec. 22, 2006), the Court generally agreed that in breach of contract cases “similar acts evidence is largely immaterial,” but weighing the issues including a dispute as to policy intent and interpretation as to allocation of limits the Court found the requested discovery relevant and discoverable.  The Court flatly rejected the reinsurer’s argument that the requested discovery was unduly burdensome:

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.

Zurich American Insurance Co. v. Ace American Reinsurance Co., 2006 U.S. Dist. Lexis 92958 (S.D.N.Y. Dec. 22, 2006).

Acknowledging that the volume of data in the reinsurer’s database rendered a search of the reinsurer’s entire database infeasible, the Court ordered the parties to propose a sampling protocol to obtain examples of claims files in which policy limit allocation issues like those raised in the case were involved.  The Court also ordered that the insurer could take the depositions of persons familiar with the reinsurer’s data storage system.  

While the Court did not cite to the newly amended provisions of the Federal Rules of Civil Procedure addressing electronic discovery,  the influence of the new rules can be seen in the opinion.  Rule 34 now expressly allows for discovery by sampling of computerized data.  The Commentary to Rule 26 now says that in cases of computer data that is not reasonably accessible the Court may allow focused discovery to learn more about the burden and costs of assessing the information, what (or where) the information is, and how valuable it is.  See also Managing Discovery of Electronic Information: A Pocket Guide for Judges, Federal Judicial Center, 2007. 

Zurich v. Ace raises several interesting questions:  Will the new federal rules on electronic discovery expand discovery of computer data and further increase the cost of litigation?  Absent searchable databases, will orders allowing sampling of claim files and depositions of IT witnesses become more commonplace?  Will arbitration panels allow this type of discovery and, if so, what will be the effect on the process?  As the case law of discovery in reinsurance cases and electronic discovery under the new federal rules continue to develop, practitioners will  watch with interest.

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