Reserve And Reinsurance Information: Is It Discoverable?

Spring 2009

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In almost every large insurance litigation, inevitably a dispute over whether insurance loss reserves and reinsurance information are discoverable will occur. Not surprisingly, insurers and insureds have diametrically opposite views.

With regard to loss reserves, insurers argue that the number merely represents a worse case scenario, which has no bearing on the legal claims, or even that discovery should not be allowed because state law requires reserves to be set. Or they may contend that this information is protected under the attorney-client privilege or work product doctrine.¹ Insureds argue that the amount or change in reserves over time divulges information about how the insurer views the claim and thus meets the very minimum threshold for relevance under the federal and various state codes of evidence.

When agreements and communications with a reinsurer enter the picture, insurers typically argue that such information is irrelevant to determine the intent of the insurer and the insured. Insureds counterargue that the information may shed light on ambiguities in the policy, that claim valuations may belie the insurer's current position on that issue, and that the information may include prior inconsistent statements by the insurer.

This article briefly examines when courts have found reserve and reinsurance information discoverable and when they have not. Generally, with regard to reserve information, courts less frequently allow the discovery with matters involving first-party coverage, but they do allow the discovery more frequently in matters involving third-party coverage where it is alleged that the insurer engaged in bad faith by failing to attempt to settle the claim against its insured within the policy limits. Case law from the perspective of first-party and third-party claims is discussed in the first and second sections of this article, and case law regarding the discoverability of reinsurance information is discussed in the third section. While case law is not well settled on this last subject, courts seem hesitant to grant discovery when the litigation involves interpretation of the policy between the insurer and the insured. Courts nonetheless are more inclined to grant discovery where the reinsurance information may be relevant to prove something other than the intent of the parties, such as to refute an affirmative defense of late notice.

First-Party Claims and Reserves

The majority rule in first-party claims is that reserve information is outside the scope of discovery because the information is not relevant as to what an insurer thought of the merits of a claim or because the information is protected under the attorney-client privilege or the work product doctrine. For example, in American Protection Insurance Co. v. Helm Concentrates, Inc.,² the court held that reserve information was not discoverable, reasoning that "the policy either provides coverage for the loss or does not, the insurer's good faith is determined by the manner and depth of its investigation and the determination of whether there was a good faith factual and/or legal question as to whether the loss was covered."³ Thus "[p]otential liability or the insurer estimation as to its potential liability is marginally relevant at best."⁴ The court also noted that the insured was unable to cite any first-party case where the reserve information was discoverable, nor did it provide a cognizable argument for why it would be relevant or even admissible at trial.

Similarly, in Sundance Cruise Corp. v. American Bureau of Shipping,⁵ the court found reserve information to be an irrelevant and a potentially time-consuming distraction in first-party coverage cases:

[R]eserves are, simply, not relevant. [The insurer's] assessment or its underwriter's assessment or its counsel's assessment of exposure to liability in this or prior cases has nothing to do with whether there is liability. Furthermore, to allow evidence of the amount of reserves set aside for any particular incident would get this trial into mini-litigations over what was in the minds of the persons who set the reserve to uncover why each particular reserve was set (which would likely have depended on various factors besides an assessment of potential liability).⁶

This same decision went on to find that even if the reserve information could he considered relevant, it might nonetheless be protected by the attorney-client privilege:

[T]o the extent reserves are "an indication of potential liability" by insurers, as argued by plaintiffs, they might be based in large part upon the opinions of counsel and would, therefore, be protected from disclosure. Indeed, much of the material concerning reserves in the documents submitted to me indicates specifically counsel's recommendation as to the reserve that should be established and as to whether a reserve should be established at all.⁷

Coltec Industries v. American Motorists Insurance Co.⁸ was a first-party dispute regarding an underlying mandated asbestos cleanup relating to contamination over decades. The court found that the insurer's documents described in a privilege log as bearing on insurance reserves were outside the scope of discovery, not because they were privileged but on the alternate theory that they were irrelevant.⁹ Although the case involved a "lost policy" defense, the court held loss reserve information still only tenuously relevant.¹⁰

First-party claims have led to the discovery of reserve information in some cases, most often when had faith is alleged. One example is Tackett v. State Farm Fire & Casualty,¹¹ which involved an insured suing for coverage under his uninsured motorist policy after an accident in which the other party's insurance did not cover the extent of his damages. The court noted that to establish bad faith, the plaintiff must show that the failure to honor the insurer's contractual obligation was "clearly without any reasonable justification."¹² The court opined that "[t]he reasons the insurer denied the claim or the manner in which it dealt with it are central to [the plaintiff's] claim of bad faith. Thus, the strategy theories, mental impressions and opinions of the [insurer's] agents concerning the claim are directly in issue."¹³ The court reasoned, in allowing the discovery of reserve figures, "it follows a fortiori that reserve figures which are the product of mental impressions, opinions and conclusions of the insurer's agents are likewise discoverable."¹⁴

Tackett does not represent the majority view, and it is important to recognize that the existence of an allegation of had faith against the first-party insurer is not necessarily a dispositive factor. For example, in Safeguard Lighting Systems, Inc. v. North American Specialty Insurance Co., ¹⁵the court denied the insured's motion to compel discovery of the insurer's loss reserve information in a claim arising from water damage to the insured's property despite the fact that bad faith was alleged. The court held that the reserves were simply irrelevant to the issue of policy interpretation and were not "reasonably calculated to lead to the discovery of admissible evidence."¹⁶

In general, courts rarely allow the discovery of reserve information in first-party litigation on the basis that such information is not relevant and may also be protected by the attorney-client privilege and work product doctrine.¹⁷

Third-Party Claims and Reserves

With third-party claims, the decision of whether loss reserve information is discoverable is more complex. When courts do allow discovery concerning reserves in these cases, typically it involves the issue of whether there is a duty to defend or whether the claim against the insured could have-and should have-been settled within the policy limits. In these situations, the reserve information is seen as relevant as to whether the insurer perceived a possibility of coverage triggering a duty to defend or perceived a policy limits exposure. This represents a different set of considerations than in the first-party context. The American Protection Insurance Co. court recognized this distinction and explained:

In considering whether an insurer acted in bad faith in denying its duty to defend under a "third-party" liability policy the fact that it established a reserve, particularly for litigation cost is probative on the issue of whether there is a "potential for liability." Thus, when an insurer, by its actions, acknowledges the potential for liability and fails to attempt to settle the claim against its insured and/or fails to defend, reserve information is relevant to the issue of good faith.¹⁸

In contrast, that court considered reserve information only marginally relevant in first-party bad faith claims, explaining that

in first party policy of property insurance the issues are whether the claimed loss is covered and whether the insurer acted in good faith in investigating the loss and denying coverage. The question of "potential liability" is not relevant because it does not trigger any duty under the first party policy.¹⁹

Accordingly, courts more often allow the discovery of reserve information in third-party claims when there is a question of whether the insurer's failure to settle a claim against its insured and/or the insurer's failure to defend the insured was in bad faith.²⁰ And, like first-party claims, a court may also find the information relevant and still not grant discovery on the basis that such information is protected under the attorney-client privilege or work product doctrine.²¹

Groben v. Travelers Indemnity Co.²² is an early New York Supreme Court example of a third-party, bad faith claim in which the court allowed the discovery of reserves. In Groben, a verdict was entered against the insured for amounts exceeding the policy limits, for which the insured was responsible. The insured then brought suit against her insurer, claiming that before and during the trial of the actions settlement could have been arranged for all claims within the policy limits but that the defendant insurer, acting through bad faith and wanton negligence in violation of its obligations and responsibilities under the contract of insurance, failed to do so. The insured sought discovery of the reserve information, arguing that that information could prove the insurer's knowledge and evaluation of the case, and thus provide evidence that the insureracted in had faith by not settling the claim within the policy limits. The court agreed with the insured and found that reserves were relevant to show any negligent investigation or uninformed evaluation of the insured's claims since both can be indicative of had faith and the insurer's actions would directly illuminate these issues.²³

The Groben rationale has also been carried over to disputes between two insurance carriers. North River Insurance Co. v. Greater New York Mutual Insurance Co.²⁴ was a matter between a primary and excess insurer in which the excess insurer alleged that the primary insurer had, in bad faith, failed to settle, resulting in a jury verdict against the insured that surpassed the primary insurer's coverage limitation, thus leaving the remaining amount to the excess insurer. As in Groben, in North River the insurer's own estimation of the amount of its liability had a direct bearing on the central issue in dispute. The court allowed the discovery of insurance reserves, finding that information was relevant to the question of whether the primary insurer acted in bad faith during settlement negotiations.²⁵

Lipton v. Superior Court of Los Angeles ex rel. Lawyers' Mutual Insurance Co.,²⁶ a third-party liability case, presented the question of discoverability of reserve information in conjunction with statutory requirements that insurers maintain proper reserves. Due to the way the policy was structured, it was important whether multiple claims had been made, and whether they had been made in more than one policy period. That determination meant the difference between policy limits of $250,000 or $1.5 million. If the insurer had set reserves above $250,000, it could well have been argued that it was an admission. The insurer objected to the production of the reserve information, arguing that its compliance with the statutory requirements for setting and adjusting loss reserves should not be allowed to create a situation in which it was forced to make an admission that could be introduced against it in a subsequent dispute with its insured. The court rejected this line of reasoning on the following grounds:

First, the method of establishing an amount of claims reserves is guided by statute... The amount of reserves carried at any specific time cannot be arbitrary... Second, each insurer transacting business in the State of California is required to disclose the amount of its reserves each year in its annual statement which is filed with the Department of Insurance... . Third, the Insurance Commissioner... is empowered to audit claims reserves of any insurer doing business in this state... The power of the Commissioner of Insurance to regulate reserves is a strong disincentive to the establishment of unrealistically low or high reserves.²⁷

Thus, the court "[w]ithout doubt" found the reserve information relevant to evaluate the insured's bad faith claim.²⁸

Where bad faith is not alleged and the insurer's own estimation of the amount of its liability had no direct bearing on the central issue in dispute, courts are less inclined to allow the discovery of reserves. For example, in Hoechst Celanese Corp. v. National Union Fire Insurance Co. of Pittsburgh,²⁹the court found reserve information irrelevant and was not persuaded by the insured's argument that reserves were an acknowledgment by the insurers of their liability for the claims against the insured by third parties:

Rather, the establishment of reserves is an appropriate bus ness decision justified by the necessity of preserving financial stability in the event of liabilities which cannot be predicted with any degree of certainty. Plaintiffs themselves might choose to set aside funds for the purpose of paying for the underlying . . . claims without acknowledging the validity of those claims. Reserves do not represent an admission or evaluation of liability and are irrelevant to the issues between insurer and insured.³⁰

Even if bad faith is alleged, if the central issue against the insurance company is not that it failed to settle the underlying claim within the policy limits but rather the interpretation of the insurance policy at issue, the court typically does not allow discovery of reserve information. In Fidelity & Deposit Co. of Maryland v. McCulloch,³¹ the plaintiff insurer filed a suit for declaratory judgment as to its rights and liability owed to the defendant insureds, who were sued in an underlying action for a breach of fiduciary duty. The defendants counterclaimed, alleging that the insurer had breached its duty of good faith. During the course of discovery, the insureds sought information about reserves, and the insurer objected. In denying the insured's motion to compel, the court found that information "not reasonably calculated to lead to the discovery of admissible evidence" concerning insurance policy interpretation.³² The court also specifically addressed the issue of bad faith, finding that compelling production of reserve information would not bring the insured any closer to proving had faith.³³ The court distinguished North River on the basis that North River involved whether the insurer should have settled within the policy limits, which was not at issue:

In North River, liability was undisputed, and the question was whether the defendant primary insurer's failure to settle the underlying claim within the policy limits before trial was in bad faith. The insurer's estimation of its own liability therefore had a direct bearing on the central issue in dispute. No such connection exists here.³⁴

Likewise, in Leksi, Inc. v. Federal Insurance Co.,³⁵ a declaratory action to enforce a duty to defend but where the insurer's decision to settle a claim within the policy limits was not at issue, the court held loss reserve information not discoverable because of its very tenuous relevance.³⁶ The court also noted that the setting of reserves is performed by claims personnel who are not equipped to know about the individual policies. And in Independent Petrochemical Co. v. Aetna Casualty & Surety Co.,³⁷ another third-party claim where the insurer's claims-settling practices were not in dispute, the court referred to insurance loss reserve information as having "very tenuous relevance, if any relevance at all."³⁸The court also seemed to imply that even if relevant, that information would be protected, stating, "[w]here the reserves have been established based on legal input, the results and the supporting papers most likely will be work product and may also reflect attorney-client privilege communications."³⁹

In summary, while the case law is not completely settled in third-party claims, the trend seems to be that where bad faith against the insurer is alleged for failing to settle a claim against the insured within the policy limits, courts allow for the production of reserve information. For all other third-party litigation, including lawsuits regarding policy interpretation, courts are less inclined to grant discovery of that information.

Agreements and Communications with Reinsurers

Discoverability of reinsurance information is even less settled than with reserve information and usually depends on the underlying dispute. For example, some courts have held that information concerning the defendant insurer's reinsurance on policies that the insurer issued to the plaintiff and communications between the insurer and reinsurer are irrelevant. As explained by the court in Rhone-Poulenc Rorer, Inc. v. Home Indemnity Co.,⁴⁰

[d]iscovery concerning reinsurance agreements to which the plaintiffs were not parties would not assist in the determining of the mutual intent of the parties in the primary and excess insurance policies issued to the plaintiff, which are in litigation in this case. Any information regarding reinsurance would at best be evidence of undisclosed unilateral intention, which would not be material to the interpretation of the insurance contract at issue.⁴¹

Other courts have found reinsurance communications to be relevant and thus discoverable on the basis that the communications between the insurer and the rein-surer could elucidate why certain decisions were made. However, these lawsuits typically do not involve interpretation of the policy at issue. For example, in Sotelo v. Old Republic Life Insurance⁴² the claimant sued the insurer after the insurer failed to pay out on a life insurance policy that had been issued to the insured, and rescinded the policy. The claimant attempted to gain access via subpoena to communications that the claimant asserted were in the control of the reinsurer, and the insurer moved to quash. The court ultimately allowed the discovery of the communications, emphasizing that the issue was not policy interpretation but the reasons for policy rescission:

This is not a coverage dispute that turns on interpretation of the policy and the parties' mutual intent; rather the issues here relate to why [the insurer] concluded that there was a basis to rescind the policy and whether that conclusion was justified. Existing discovery has revealed that there were at least some communications and documents exchanged between [the insurer] and [reinsurer] regarding that topic. The materials requested in the subpoena are relevant and are discoverable....⁴³

Finally, courts sometimes allow discovery regarding reinsurance correspondence when the insurer denies coverage based on lack of notice. In these circumstances, the court typically finds reinsurance information "irrelevant to determining the intent of the contracting parties" but relevant for the purposes of determining when the insurers received notice." One case allowing this discovery reasoned that evidence showing that reinsurers were given early or timely notice might establish that the insurers themselves had notice at a similar time.⁴⁵

In general, however, when the lawsuit involves questions of policy interpretation, reinsurance information is rarely discoverable.

1.         See generally 17A Couch On Insurance 3D § 251:29 (2006).
2.         140 F.R.D. 448 (E.D. Cal. 1991).
3.         Id. at 450.
4.         Id.
5.         No. 87 Civ. 0819(WK), 1992 WL 75097 (S.D.N.Y. Mar. 31, 1992).
6.         Id. at *3.
7.         Id. at *2-3. Sundance is not alone in its reasoning. See also Wabco Trade Co. v. Great Am. Ins. Co., No. 82 Civ. 4924, 1983 U.S. Dist. LEXIS 17731 (S.D.N.Y. Apr. 14, 1983) (denying discovery on particular reserve documents after determining that they were privileged); J.C. Assocs. v. Fid. & Guar. Ins. Co., No. Civ. A. 01-2437, 2003 WL 1889015, at *1 (D.D.C. Apr. 15, 2003) (holding reserve information not discoverable among other reasons because "it would certainly seem that reserve calculations by claims adjusters qualify as work product under Fed. R. Civ. P. 26(b)(3)").
8.         197 F.R.D. 368 (N.D. Ill. 2000).
9.         Id. at 372.
10.       Id.
11.       558 A.2d 1098 (Del. Super. Ct. 1988).
12.       Id. at 1103.
13.       Id.
14.       Id. at 1105 (citing Groben v. Travelers Idem. Co., 266 N.Y.S.2d 616 (N.Y. Sup. Ct. 1965), a third-party case discussed below).
15.       No. Civ. A. 03-4141, 2004 WL 3037947 (E.D. Pa. Dec. 30, 2004).
16.       Id. at *3.
17.       Id.; see Karta Indus., Inc. v. Ins. Co. of Pa., 685 N.Y.S.2d 685 (N.Y. App. Div. 1999) (upholding the trial court's ruling that reserve information was not discoverable on the ground of irrelevancy); Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 139 F.R.D. 609 (E.D. Pa. 1991) (finding the policyholders' motion to compel sought information, namely, reserves, that was "of very tenuous relevance, if any relevance at all").
18.       Am. Prot. Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448, 450 (E.D. Cal. 1991).
19.       Id.
20.       See, e.g., Samson v. Transamerica Ins. Co., 636 P.2d 32, 44 (Cal. 1981) (California Supreme Court third-party liability case that found "the mere fact that an insurance company established a reserve fund for defense of a case, ... has been held to he an indication that the company was aware of its responsibility to defend the insured"); Champion Int'l Corp. v. Liberty Mut. Ins. Co., 128 F.R.D. 608 (S.D.N.Y. 1989) (allowing the discovery in third-party action to determine the insurers' conduct and claim evaluations, including statements about the existence and timing of coverage).
21.       See, e.g., State ex rel. Erie Ins. Prop. & Cas. Co. v. Mazzone, 648 S.E.2d 31 (W. Va. 2007) (in a third-party bad faith action against an insurer, the court held that once reserve documents were determined to be work product, these materials remained generally protected from disclosure).
22.       266 N.Y.S.2d 616 (N.Y. Sup. Ct. 1965).
23.       Id. at 618.
24.       872 E Supp. 1411 (E.D. Pa. 1995).
25. Id. at 1412. But see Union Carbide Corp. v. Travelers Indem. Co., 61 F.R.D. 411 (W.D. Pa. 1973) (involving one insurance carrier seeking reserve information from another insurance carrier in a matter involving exhaustion of policy limits but with the court noting that the internal opinions and conclusions comprising reserves were outside the scope of discovery contemplated by the Federal Rules of Civil Procedure).
26.       48 Cal. App. 4th 1599 (Cal. Ct. App. 1996).
27.       Id.
28.       Id.
29.       623 A.2d 1099 (Del. Super. Ct. 1991).
30.       Id. See also Nat'l Union Fire Ins. Co. of Pittsburgh v. Stauffer Chem. Co., 558 A.2d 1091 (Del. Super. Ct. 1989) (environmental coverage case where several liability insurers brought a declaratory judgment seeking a determination whether they were obligated to provide coverage and indemnity where the court stated that the insurers' decision to set reserves was not interrelated with interpretation of the policies at issue and the requests for the reserves were not calculated to lead to the discovery of admissible evidence); In re Couch, 80 B.R. 512, 517 (S.D. Cal. 1987) (third-party action where had faith was alleged and issue concerned coverage under the policy, not insurer's claims practices; court did not allow the discovery of reserves, stating that "a reserve cannot accurately or fairly be equated with an admission of liability or the value of any particular claim").
31.       168 F.R.D. 516 (ED. Pa. 1996).
32.       Id. at 525.
33.       Id.
34. Id. Other courts have made the same distinction. See, e.g., PECO Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1235 (Pa. Super. 2004) ("The court in North River permitted discovery of insurance reserve information, where liability had already been established, for the limited purpose of determining whether defendant insurance company had acted in bad faith when negotiating a settlement. The instant matter contains no such claim."); Safeguard Lighting Sys., Inc. v. N. Am. Spec. Ins. Co., No. Civ. A. 0.3-4141, 2004 WL 3037947, at *3 (ED. Pa. Dec. 30, 2004) ("The present situation is distinguishable from that in North River Co., because . . . North River involved a situation in which liability was undisputed and the question was whether the primary insurer's failure to settle the claim within policy limits was in had faith.").
35.       129 F.R.D. 99 (D.N.J. 1989).
36.       Id. at 101.
37.       117 F.R.D. 283 (D.D.C. 1986).
38.       Id. at 287.
39.       Id. See also PECO Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1234-35 (Pa. Super. 2004) (reversing trial court's order that reserve information be disclosed and stating that "insurance reserves, by their very nature, ‘are prepared in anticipation of litigation, and consequently, [are] protected from discovery as opinion work product'").
40.       139 F.R.D. 609 (E.D. Pa. 1991).
41.       Id. at 611-12 (internal quotations omitted). See also Bondex Inc. v. Hartford Acc. & Indem. Co., No. 1:03CV1322, 2006 WL 355289 (N.D. Ohio Feb. 15, 2006) ("This Court will not authorize a fishing expedition."); Medmarc Cas. Ins. Co. v. Arrow Int'l, Inc., No. CIV A 01 CV 2394, 2002 WL 1870452 (E.D. Pa. July 29, 2002); Am. Med. Sys., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, No. Civ. A. 98-1788, 1999 WL 781495 (E.D. La. Sept. 29, 1999).
42.       2006 WL 2632563 (N.D. Cal. Sept. 13, 2006).
43.       Id. at *3.
44.       See, e.g., Rhone-Poulenc Rorer, Inc. II v. Home Indem. Co., Civ. A. No. 88-9752, 1991 WL 237636, at *1 (ED. Pa. Nov. 7, 1991); see also PECO, 852 A.2d 1230.
45. Rhone-Poulenc II, 1991 WL 237636, at *3; see also United States Fire Ins. Co. v. Bunge N. Am., Inc., No. 05-2192, 2007 WL 1531846, at *6 (D. Kan. May 25, 2007) (finding reinsurance information relevant and discoverable for "purposes of rebutting the Insurers' defense of late notice, for purposes of establishing [the insured's] claim of bad faith and improper handling, and for the purposes of reconstructing the terms of any lost policies").

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