An Illinois Federal Magistrate Judge recently ruled that communications between an insurer and its reinsurer were discoverable in a coverage dispute between a policyholder and the insurer.   See Machinery Movers, Riggers and Machinery Erectors, et al. v. Fidelity and Deposit Company of Maryland, et al., No. 06 C 2539 (N.D. Ill. Oct. 19, 2007).  The case involved an insurance coverage dispute arising under several Commercial Crime insurance policies (the “Policies”).  The defendant insurer alleged that the plaintiffs failed to submit prompt notice of their claims or to submit a signed proof of loss.  The plaintiffs argued that certain terms and provisions in the Policies were ambiguous and, through discovery, sought extrinsic evidence concerning how the defendant interpreted and underwrote the Policies.  In particular, the plaintiffs requested documents related to the drafting and underwriting of the Policies, material received from any insurance industry associations, any reinsurance agreements regarding the Policies, and any communications between the defendant and any reinsurer.

Applying Illinois state law, under which extrinsic evidence can be used to prove the meaning of contract language that is ambiguous on its face, the court found that the defendant’s communications with its reinsurers regarding the  Policies could be probative of the defendant’s subsequent conduct, and thus could be used to give meaning to the disputed terms.  The broad right to discovery under the Federal Rules of Civil Procedure  (the “Federal Rules”), combined with principles of state law, convinced the court that the reinsurance communications were discoverable.

The court further stated that, while the plaintiffs had not demonstrated that the terms of the policies were ambiguous, that issue was not before the court in determining the motion to compel.   Rather, documents and information are discoverable under the Federal Rules if there is even a “possibility” that the material sought will be relevant. The court noted that if the plaintiffs later succeeded in establishing ambiguity, the extrinsic evidence by way of reinsurance communications would be relevant, thus reaching the low threshold necessary to make the materials discoverable.  The court also compelled production of any reinsurance agreements, under Seventh Circuit authority holding that such agreements are discoverable under F.R.C.P. 26(a)(1)(d), which requires disclosure of any insurance agreements available to satisfy a judgment.

Click here to review a copy of the court’s decision.