The Commonwealth became the 23rd state to consider industry-sponsored legislation to create a so-called "self-critical analysis" privilege against disclosure of certain internal documents. Only three states have enacted such laws, including New Jersey this past August.
In 1998, Illinois became the first state to shield the internal audits of insurance companies from disclosure in judicial proceedings. "Self-critical" or "self-evaluative" analysis privileges like the Illinois statute are intended to encourage voluntary internal review by insurers of their compliance with state and federal regulations.
Proponents of such laws often express concern that if internal audits are provided to regulators examining the company's compliance efforts, private litigants will be able to get access to the reports and use them in class action lawsuits against the industry. Critics of this new type of privilege argue that insurers will abuse the self-evaluative process to hide information that would otherwise be discoverable in litigation.
The National Association of Insurance Commissioners ("NAIC") is currently reviewing the Illinois statute and similar laws enacted this year in New Jersey and North Dakota for consideration as a model law. The NAIC's Access to Information Working Group is also examining other more widely recognized privileges, such as the attorney-client and attorney work product privileges. The industry has not been content to wait for the NAIC to complete its review, however. In addition to the three states mentioned above, similar bills have been introduced in at least 20 states, the latest being Pennsylvania. There are significant variations among the bills under consideration across the country.
Pennsylvania Senate Bill 1186 allows insurers to establish a compliance review committee whose purpose is to:
- evaluate and seek to improve compliance with regulations, and
- report to regulatory authorities and accrediting organizations.
Under the Bill, any documents that are prepared solely by or for a compliance review committee are confidential and are not discoverable or admissible in any "civil action." The privilege does not apply to any information required by law to be maintained by or provided to a governmental agency. However, if the privilege applies to a document, it also extends to factual information contained in the document "to the extent that such information is not otherwise obtained from a source independent of the compliance review committee." This provision appears to require that the person seeking factual information contained in a compliance review document must first obtain that information from an independent source before he may pierce the privilege and obtain the same information through a compliance review document.
SB 1186 Issues
Unlike the New Jersey and North Dakota laws, SB 1186 does not provide a process for in camera review by a court or administrative hearing officer in order to determine whether a document or any information it contains should be subject to disclosure. The Bill also does not itemize exceptions to confidentiality typically found in other states, such as for documents created for a fraudulent purpose or where the insurer has failed to take timely action to correct regulatory violations described in the document. Also, while the Bill clearly does not shield documents from the Pennsylvania Insurance Department when it is conducting an examination or an enforcement action, it is unclear whether the privilege would apply to other administrative proceedings in the Insurance Department, such as rate filings, review of applications for change in control, license applications, and appeals of policy and agent terminations. If these administrative proceedings are deemed to be "civil actions," the privilege will apply; otherwise, other parties and intervenors in those proceedings may be able to obtain information that an insurer thought was protected as a "compliance review document."
Some states have also included provisions that shield insurers from civil penalties or allow for reduced penalties if a self-critical analysis is turned over to the regulator. In North Dakota, for example, the commissioner is prohibited from imposing "any type of administrative fine or penalty as to any area addressed or matter covered" in such a report furnished at the commissioner's request unless there is clear and convincing evidence that the insurer failed to take appropriate steps to rectify certain types of problems identified in the report. SB 1186 does not address the issue of penalties.
The Pennsylvania Insurance Department has taken a neutral position on the Bill as currently drafted. SB 1186 is now pending in the Senate Committee on Banking and Insurance where it was referred on November 15, 1999. It is unclear whether the Bill will have sufficient support to be enacted before final adjournment of the 1999-2000 General Assembly.
*article courtesy of Patrick T. Beaty of Saul Ewing, LLP, firstname.lastname@example.org.