How To Obtain Two Sets Of Legal Advice For The Price Of One

Imagine this scenario. A cedant takes legal advice on a claim presented to it. The lawyers advise that the claim is not covered because of an exclusion that is contained both in the original policy, and in the reinsurance, and therefore, advise that the cedant will not recover any sums paid from its reinsurers. Notwithstanding this, the cedant pays the claim and seeks indemnity from its reinsurers.

Clearly it will be in the reinsurers’ interests to obtain a copy of this advice in any subsequent dispute with its cedant, so as to establish that the claim falls outside cover.

The cedant will refuse to disclose this advice voluntarily to his reinsurers on the basis that it is protected by legal professional privilege. This is a rule of law that allows clients to obtain full and frank advice from their lawyers in the knowledge that it will not be seen by an opposing party.

However, it is settled law that no privilege attaches to communications between a solicitor and his client against persons having a joint or common interest with that client in the subject matter of the communications; for example, where a solicitor advises a company, its shareholders are also generally entitled to see this by virtue of their community of interest.

Does this principle also apply to the cedant/reinsurer relationship? If it does, then reinsurers in the scenario above will be entitled to see the legal advice that the cedant obtained concerning the coverage of the underlying claim. Furthermore, to the extent that it is inextricably linked to the advice concerning the underlying claim, the reinsurers may also be entitled to see the advice that the cedant obtained regarding the recovery under the reinsurance.

Mr Justice Moore-Bick considered this very issue in Commercial Union v Mander ¹ . In that case, Commercial Union insured the potential purchasers of a ship against the loss of their deposit in the event of the cancellation of the contract. When delivery of the ship was delayed, the insured threatened to cancel the contract and claim on the insurance policy. In order to prevent a greater loss, Commercial Union agreed to provide the funds necessary to enable the ship to be completed, thereby preventing the claim on the policy. Commercial Union then sought to recover this amount from their reinsurers under a "follow the settlements" provision. The reinsurers elected to avoid the reinsurance and in the alternative, argued that they were not bound by the settlement (on the basis that Commercial Union was itself not liable to the original insured). In the course of the ensuing litigation, the reinsurers sought disclosure of the legal advice that Commercial Union had received concerning their liability under the policy. Commercial Union objected to this on grounds including that the documents were protected from disclosure by legal professional privilege.

Mr Justice Moore-Bick found that a contract of reinsurance containing a "follow the settlements clause" creates a community of interest between a cedant and its reinsurers; in such circumstances, the cedant is, for all practical purposes, obtaining legal advice concerning their liability under the policy for both their benefit and for the benefit of their reinsurers. By virtue of the community of interest therefore, reinsurers would generally be entitled to see the cedant’s documents concerning the handling of the original claim, including any legal advice that they have obtained. He found that this common interest exists notwithstanding the potential for disagreements that is inevitable in the relationship between reinsurers and their cedants in the conduct of the underlying claim, and it is not lost just because they subsequently "fall out".

Notwithstanding this, the reinsurers in this particular case did not get the documents. This was because they had elected to avoid the policy ab initio - that is to say, they had elected to treat the reinsurance, and therefore their relationship with the cedant, as if it had never existed. It did not matter that the cedant disputed the reinsurers’ entitlement to avoid. Since the reinsurers had elected to do so, they were unable to rely on the existence of a contract, and so could not prove that they had a common interest in the legal advice. In the absence of common interest, that legal advice was obviously protected by legal professional privilege.

Whether anything less than an avoidance would dispense with common interest was not addressed by Mr Justice Moore-Bick.

Therefore, a crucial tactical decision arises for reinsurers in circumstances where they have grounds to elect to avoid the reinsurance on the one hand, and have alternative grounds to repudiate the claim for falling outside cover on the other. Do they elect to avoid the reinsurance, in which case they will lose their right to see the legal advice obtained by the cedant or, do they insist on seeing that advice, and run the risk of affirming the reinsurance and therefore losing their right to avoid? The solution to this dilemma will depend on the facts of each case but the message to reinsurers is to consider the issue of common interest as soon as possible.

So, it is clear that legal professional privilege is not an adequate shield against a reinsurer given the community of interest, although the reinsurer may face difficult tactical considerations if it wishes to rely upon this.

However, is there anything that a cedant can do to avoid the problem from arising or to minimise its effects? First, it should always seek to involve its reinsurers in the underlying settlement; persuasion is always better than litigation. Secondly, and if this is not possible, it should seek to condition the manner in which the legal advice is provided; in particular the advice regarding the underlying claim and recoveries against reinsurers should be kept separate. Finally, cedants should take care with the preparation of internal memoranda relating to coverage and the handling of the underlying dispute - it may be highly embarrassing if these were obtained by their reinsurers.

1. [1996] 2 Lloyd’s Rep 640