In Part II, we will discuss discovery of reserve information in the context of a bad faith case.
In bad faith cases, the relevance of reserves becomes a more difficult question. Some courts have made blanket holdings that reserves are relevant in bad faith cases, where the insurer’s subjective beliefs and actions are at issue. Many courts look to the bad faith allegations to make an individualized determination as to whether issues are raised that render the reserves relevant. Issues for which courts have found that reserves may be relevant include:
- Whether the insurer thoroughly investigated the claim (making the thoroughness of the reserve evaluation relevant);
- Whether the insurer acted in bad faith by making a settlement offer to the insured for less than the insurer’s understanding as to the value of the claim;
- Whether there was a difference between what the insurer believed it owed on a claim and what it communicated to its insured; and
- Whether the insurer was unreasonable in refusing to accept a settlement offer in an underlying case, where it had assigned a higher value to the claim.
Some courts have differentiated bad faith claims where the insurer issued a “first party” policy (where the insurer compensates the insured directly for its losses) versus a “third party” liability policy (where the insurer defends and indemnifies the insured against third party claims). In a “first party” case the issues are usually limited to the existence of coverage and whether the insurer’s actions were in good faith, rendering reserves largely irrelevant. In a “third party” case reserves may be more relevant, because the insurer has a duty to defend as long as there is potential coverage; evidence that an insurer believed there was potential liability (such as may be found in reserve information) may be probative where the insurer denied a defense of the claim.
Discovery disputes over reserves may also raise privilege issues. There is a split in authority as to whether reserves may be privileged under the work product doctrine. Courts that held reserves privileged found that they were prepared in anticipation of litigation—a party’s evaluation of the amount it may pay in litigation seems anathema to discovery. Other courts, however, have held that reserves were not privileged, recognizing that insurance companies may establish reserves as a matter of course at the first notice of an insured’s loss claim, as part of regular claims adjusting and before the start of any litigation.
The result of a discovery dispute over reserve information is often fact- and jurisdictional-dependent. The chart linked here provides a survey of cases addressing discovery of reserve information.
In Part III, we will discuss discovery of reinsurance information.
A version of this article, along with a table of cases and footnoted citations, was presented at the FDCC Annual Meeting on July 27, 2017. If you would like a copy of the full paper with all citations, please contact the editor or the author, Tania Rice.