In a recent decision from the United States District Court for the Western District of Washington at Seattle, Heights at Issaquah Ridge Owners Association v. Steadfast Ins. Co., Case No. C07-1045RSM (W.D.Wa. Dec. 13, 2007), the court denied the plaintiff’s motion to compel an insurer to produce loss reserve information because the plaintiff did not assert how such information would be relevant to its bad faith claim. The court also found that while Fed. R. Civ. P. 26(1)(1)(1d) mandated the production of reinsurance policies, it did not extend to communications between the cedent and reinsurer regarding those policies.
The case arose from an action in state court in which The Heights at Issaquah Ridge Owners Association (the “Owners Association”) sued a developer for construction defects. Steadfast Insurance Company (“Steadfast”) had issued two commercial general liability policies to the development company. After a settlement in the state court action, Steadfast paid the limit under one of the policies but denied coverage under the other. The developer stipulated to entry of judgment against it and assigned its rights against Steadfast under the disputed policy to the Owners Association. In the District Court action, the Owners Association, as assignee under the settlement, asserted the developer’s claims of bad faith, breach of contract and Consumer Protection Act violations against Steadfast.
The Owners Association argued that the court should follow the ruling in Lexington Insurance Co. v. Swanson, 240 F.R.D. 662 (W.D.Wa. 2007), in which loss reserve information was found to be discoverable on the theory that the nature of bad faith claims makes most, if not all, of an insurer’s claim files relevant. The court, however, found that the relevance of the information sought by the plaintiff was governed by the Federal Rules of Evidence and not Washington law, and that the scope of discovery in federal litigation is narrower than under many state court rules. Moreover, the court noted that setting of reserves is often an accounting decision made in accordance with statutory requirements by personnel with no actual knowledge of the insured’s insurance policies. As such, this portion of the plaintiff's motion to compel was denied, as the court found that the reserve information was unrelated to the specific issues presented. Similarly, the court denied the plaintiff's request for reinsurance information, noting that an insurer's decision to obtain reinsurance was a business decision unrelated to questions of policy interpretation, and thus was irrelevant to the claims at issue.