NEW YORK--A state appeals court has limited reinsurers' discovery rights in a dispute with United States Fidelity & Guaranty Co. over $400 million in reinsurance claims for USF&G asbestos losses.

A New York appellate panel late last month modified a lower court's broad discovery ruling, finding that USF&G's attorney-client and work product privileges limit discovery to testimony and documents related to the insurer's preparation of its reinsurance claim. Reinsurers had sought similar information on USF&G's underlying settlement of asbestos claims with policyholder Western MacArthur Co.

Robert Lewin, a lawyer representing TIG Insurance Co., one of the reinsurers, said TIG will not seek permission to appeal the panel's ruling. Mr. Lewin, who is a partner at Stroock & Stroock & Lavan L.L.P. in New York, also said that information regarding the underlying settlement may still be discoverable within the limits laid down by the appeals court.

Lawyers for USF&G and the Excess Casualty Reinsurance Assn., a pool that assumed part of USF&G's risk, could not be reached.

USF&G wrote liability coverage for asbestos producer Western MacArthur from 1948 to 1960, according to the ruling. From 1956 to 1962, USF&G reinsured the Western MacArthur business with American Re-Insurance Co. and the ECRA pool, each of which assumed 50% of the ceded risk.

As Western MacArthur became mired in asbestos litigation, though, USF&G denied coverage. The company sued for bad faith, and in June 2002 USF&G agreed to pay $975 million to settle asbestos claims in a Western MacArthur bankruptcy reorganization, the ruling says.

USF&G informed its reinsurers of the settlement in November 2002 and billed them $400 million for their part of the total. The insurer allocated all of the underlying asbestos losses to the last treaty year, rather than over all years the treaties were in force.

A month later, American Re sued USF&G for a court declaration of its obligations and those of the ECRA pool members under the treaties.

The two sides previously have fought over discovery issues in the case, with USF&G losing a challenge to an initial round of reinsurer discovery demands.

Subsequently, TIG, an ECRA pool member, demanded all USF&G communications regarding the preparation of its reinsurance claim--including its allocation decision--and loss assessments related to the underlying Western MacArthur settlement.

This time, though, in a May 29 ruling, a five-judge panel of the New York Appellate Division, First Department, narrowed a lower court's broad discovery ruling against USF&G.

The appeals court rejected the lower court's findings that the reinsurers have a "substantial need" for the information and that USF&G's claimed privileges are negated by the "common interest" it has with reinsurers in the case.

The panel also found, though, that earlier deposition testimony by a USF&G official touched on advice the insurer got in preparing its reinsurance claim and therefore opens the preparation of the claim to discovery, despite claims of attorney-client and work product privilege.

American Re-Insurance Co. vs. United States Fidelity & Guaranty Co. et al; New York State Supreme Court Appellate Division, First Department; 2007 NY Slip Opinion 04523.