In cases where an insurer is a party to an action, numerous discovery disputes have centered on a litigant’s ability to discover the insurer’s loss reserve information and communications with its reinsurers.  The litigant (generally the insured or a co-insurer) may request this information in discovery, hoping to find something in the insurer’s internal communications and information that comports with the litigant’s theory of the case.  There is no clear rule as to the discoverability of reserves and reinsurance communications.  Many courts have noted that this information often has little, if any, relevance, because they reflect the insurer’s compliance with statutory reserving requirements and internal business decisions.  Typically, this information is not relevant to coverage determinations.  A number of courts, however, have held that this information can be relevant and discoverable particularly in bad faith cases, depending on the allegations, as issues related to the insurer’s subjective opinions and knowledge may be implicated.  While the results of similar discovery disputes cannot be predicted with crystal clarity, examining rulings from various jurisdictions and case circumstances provides some guidance.    In the next few posts, we will explore these issues further.

Discovery of Reserves

The unique nature of loss reserves has led to countless discovery disputes in insurance litigation.  Often required under state laws, reserves are funds insurers set aside to cover payment in the event of future liability.   They reflect estimates of potential exposure on a claim; they do not reflect actual settlement authority.   Courts have noted that reserves generally do not represent “an evaluation of coverage based upon a thorough factual and legal consideration.”   Reserves are often impacted by considerations other than a pure factual and legal analysis of the claim, such as state law regulations and business and tax considerations.   In practice, most companies will put some value towards any case, because it is a best practice to generally consider a compromise if it is found fair and reasonable.

In seeking to protect its reserve information from discovery, an insurer may argue that its internal business decisions regarding the amount of funds to set aside for a claim have nothing to do with legal issues such as actual liability.  After all, reserves are only an estimate of potential exposure—often established early at the first notice of an insured’s claim, before any detailed factual analysis—and not a thorough evaluation of the insurer’s actual obligations.  An insurer may cry unfairness at being mandated by regulation to set reserve amounts, only to have those amounts used against it in litigation; regularly requiring production of reserves would only undermine the purpose of setting them, incentivizing underestimation rather than a conservative approach to setting aside sufficient funds.   On the other hand, an insured seeking production of reserve information may argue that, while a reserve may not represent the most in-depth analysis of a claim’s value, it certainly has some tie to the insurer’s evaluation of the claim.  The insurer’s internal assessment may be relevant, particularly in bad faith cases where the insurer’s state of mind is at issue.  The insured may hark back to the generally broad leeway for discovery.

An insurer may object to discovery of its reserves based on relevance grounds.   In deciding whether reserves are sufficiently relevant to compel discovery, courts generally look to the type of claim being brought.  Where parties are seeking a coverage determination, courts typically hold that reserves are not relevant.  Reserves do not constitute an admission of liability or the existence of coverage.   Reserves can only evidence an insurer’s subjective view of the claim, which is not at issue in a coverage action.

Bad faith will be covered in the next post.

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.