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.
I. 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.
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
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.
II. Discovery of Reinsurance Documents and Communications
Federal Rule of Civil Procedure 26(a)(1)(A)(iv) requires, as part of the parties' initial disclosures, the production of "any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment." Most federal courts have held that reinsurance agreements must be produced under Rule 26(a) where the primary insurer is a named party, because the reinsurer may have a duty to indemnify the primary insurer. Reinsurance agreements, however, need not be produced under Rule 26(a) when the primary insurer is not a party. They also may not need to be produced in state court actions where Rule 26(a) does not apply.
Most courts hold that communications and other documents between an insurer and its reinsurer are generally not relevant and not discoverable. Reinsurance information reflects a business decision by the primary insurer to spread risk or to satisfy statutory reserve requirements, so it is not typically relevant to the claims in a case. As with loss reserves, reinsurance communications are discoverable in certain cases where they may have relevance to the issues raised. Courts have held that they may be relevant (and are thus discoverable) to show the insurer's interpretation of the policies at issue, whether the insurer believed the claims were covered by the policies, the thoroughness of the insurer's claims investigations, or to combat defenses such as lost policy, late notice or misrepresentation. In arguing that reserves are not relevant, an insurer may choose to describe the contents of the communications or request an in camera review to demonstrate lack of relevance.
Insurers may also object to the production of reinsurance communications if they are protected by the attorney-client or work product privileges.
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 and the table of cases, please contact the editor or the author, Tania Rice.