Member Article

The access to records clause, sometimes called the inspection or audit clause, is a common fixture in reinsurance agreements and serves an important function.  It enables the reinsurer to track the performance of the agreement and maintain an accurate view of the business ceded.  More specifically, it allows the reinsurer to ensure the cedent is complying with the terms and conditions of the agreement, including timely reporting of losses and calculation of premiums.  In addition, it allows the reinsurer to assess whether the cedent’s reserving practices are adequate and assess the cedent’s competence in underwriting and claims handling.

Traditionally, the access to records clause has assumed a fairly streamlined form.  The standard clause can be as short as a sentence or two.  For example, it is common to find agreements with an access to records clause as follows:

The Reinsurer and its designated representatives shall have free access at all reasonable times to all books and records of the Company that pertain in any way to this reinsurance.

This formulation relies heavily on the parties’ mutual duty of utmost good faith, as many standard reinsurance clauses do.  No details are provided concerning where and when an audit may be conducted (other than at “all reasonable times”).  Nor are there any limitations on what records may be audited.

More recently, the access to records clause has begun to take on the characteristics of a comprehensive audit clause, similar to those found in other types of commercial contracts where, as in reinsurance, the parties’ fortunes are closely tied and compliance by one of the parties with ongoing operational requirements is a central issue.  A more detailed and comprehensive clause can be beneficial to both the cedent and the reinsurer by offering greater protections and certainty for both.  On the other hand, going beyond the standard, terse formulation may require more time to negotiate.

Digging into the details of the clause requires consideration first of the type of records subject to audit.  The reinsurer, of course, will want to define the scope of audit broadly, perhaps with language like the following:

The Reinsurer and its designated representatives shall have free access at all reasonable times to all books and records of the Company that pertain in any way to the policies reinsured under this Agreement or business related to such policies.

The cedent, on the other hand, may want to place reasonable limitations on the scope of records subject to audit with language such as the following:

The Reinsurer and its designated representatives shall have free access at all reasonable times to any of the policy, underwriting, accounting or claims files of the Company relating to the business reinsured under this Agreement.

Defining the types of files subject to audit may help avoid overly broad and onerous audit requests.  The cedent may also wish to limit access to certain locations where records are kept and specify that the right of access applies not only to the reinsurer, but also to the cedent.

In addition, the cedent may want to place limits around the time and manner of access—for example, by limiting access to normal business hours and requiring prior notice.  Specifying additional limitations on time and manner of access also can help avoid misuse of the access to record clause where a dispute has arisen, as is done in the following provision:

Inspection of books and records under this Article shall be made during normal business hours following 15 days prior written notice, which notice shall include the details and initial scope of the inspection.  Inspection shall be conducted without undue interference to the Company’s business activities and in accordance with reasonable industry practices.

An audit request often is the first step in what may become a dispute between the reinsurer and its cedent.  If small but important details are left out of the governing language, these omissions may slow or otherwise impede an audit.  For example, access to records clauses often fail to specify whether the reinsurer may copy records subject to inspection.  Without an express right to copy, the cedent is within its rights to refuse copying absent an arbitration panel or court order.

The need to audit may well arise long after the reinsurance agreement has terminated and the business is in runoff.  Thus it is wise to specify that the right to access survives termination of the agreement.

Another issue to consider is whether the reinsurer will need to inspect records held by third parties, such as managing general agents, underwriting agents, claims adjusters or third-party administrators.  Language such as the following will help ensure free access to such records:

The Company shall cause such third parties as may maintain any records subject to inspection under this Article to allow the Reinsurer and its designated representatives free access to inspect and copy such records under the same terms and conditions as apply to the Company under this Article.

Another issue to consider, this time from the cedent’s perspective, is how to protect the confidentiality of records subject to audit.  Requiring the reinsurer to maintain confidentiality and to require its auditors to do the same is not enough.  A cautious cedent will want the right to require any third-party auditor to enter into a confidentiality agreement with the cedent.  This approach allows the cedent to enforce the right of confidentiality directly against the auditor.

For this reason, cedents sometimes condition access on the execution of a reasonable confidentiality agreement between the cedent and any auditor.  Merely requiring a reasonable confidentiality agreement, however, has the potential drawback that what the auditor considers reasonable might not square with the terms of confidentiality the cedent desires.  To avoid this problem, the cedent may want to attach a copy of the confidentiality agreement it intends to use to the reinsurance agreement and have the access to records clause require execution of the specified agreement before an auditor is granted access.

Access to records clauses sometimes allow the cedent to deny access if the reinsurer is not current on all payments due under the agreement.  For obvious reasons, such a condition is not popular with reinsurers.  If the cedent insists, a compromise may be to allow the cedent to deny access if there are any undisputed balances due.  The reinsurer also may want the right to withhold payment if the cedent fails to grant access when required by the agreement.

In recent years, both cedents and reinsurers have become more concerned with establishing guidelines in the access to records clause to protect the privilege of records relating to claims—for example, coverage opinions—when such records are subject to audit.  These concerns were heightened by a 2010 opinion from the U.S. District Court of the District of Oregon involving TIG Specialty Insurance Company (“TIG”).¹ 

In that case, a group of TIG’s policyholders, Regence Group, initiated litigation against TIG seeking a declaration that TIG was obligated to pay defense and settlement costs arising from certain claims.  While this litigation was pending, TIG became involved in an arbitration proceeding with its reinsurers.  In the course of the arbitration, the reinsurers sought files relating to the litigation with Regence Group, including coverage opinions, litigation reports and communications with TIG’s coverage counsel.

TIG resisted disclosure of these materials but ultimately was ordered by the arbitrators to produce the documents, subject to a statement by the arbitration panel that production did not constitute waiver of any privilege and was subject to a confidentiality agreement governing the arbitration.

Regence Group sought discovery of the items disclosed by TIG to its reinsurers.  TIG resisted, arguing that the documents were privileged and that compelled disclosure in the arbitration proceeding did not waive the privilege.  The court disagreed, holding that even though disclosure of the documents was compelled, TIG had waived the privilege by disclosing them to the reinsurers when the parties’ interests were not aligned.  According to the court, the interests of TIG and its reinsurers were not aligned because they were opposing parties in the arbitration.

The TIG case likely is an outlier, but it highlights the importance of taking steps to preserve the privilege for documents disclosed to a reinsurer.  Courts have long recognized that parties with aligned legal interests may share privileged documents related to their common interests without waiving the privileged status of the documents.  In the TIG litigation, the Oregon District Court failed to recognize that TIG and its reinsurers had a continuing common interest in defeating the underlying action brought by Regence Group, notwithstanding the fact that their interests had diverged with respect to the matters at issue in the arbitration.

Cedents and their reinsurers may wish to specify in the access to records clause procedures that the parties will follow to preserve the privileged status of documents subject to disclosure, whether disclosure is voluntary or compelled.  Such procedures might include disclosure only under a confidentiality agreement specifying the parties’ common interest, disclosure in arbitration only under a protective order and ruling that the parties share a common interest or, in appropriate circumstances, disclosure only after final settlement or adjudication of any underlying claim relating to privileged materials.

The access to records clause is an important element in any reinsurance agreement.  Crafting a clause that is specific about the parties’ mutual intent offers protections for both the cedent and the reinsurer and can help avoid disputes that may arise if the clause is overly general in its terms.

¹ Regence Group v. TIG Specialty Ins. Co., 2010 U.S. Dist. LEXIS 9840 (D. Or. Feb. 4, 2010).