Morris Manning & Martin, LLP

Federal Court Requires Liability Insurer To Disclose Reserve Information

01.05.2016

A federal magistrate judge in North Carolina recently ordered an environmental liability insurer to disclose information relating to the setting and changing of its reserves.  See PCS Phosphate Co., Inc. v. Am. Home Assurance Co., No. 5:14-CV-99-D (E.D. N.C. Dec. 10, 2015).  The insurer had agreed to defend its insured in an environmental liability case under a reservation of rights.  The insured then filed a declaratory judgment action, asking the court to declare that the insurer had a duty to defend and indemnify.  The insured also alleged bad faith.

One of the insured's discovery requests sought "[a]ll documents relating to Your evaluation, valuation, or analysis of claims concerning the Underlying Claim, including but not limited to all documents relating to Your reserve for claims concerning the Underlying Claim, the amount of the reserve, the date on which it was set, and the date(s) on which it was changed."  The insurer objected, arguing that reserve information can be misleading and prejudicial and is not an admission of liability.  Substantial authority supported the insurer's position.  See, e.g., Am. Protection Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448, 449 (E.D. Cal. 1991) ("[T]he amount of a reserve is, at least in part, determined by statute and not by the insurer's estimate of the likelihood of the claimant's success."); Fidelity & Deposit Co. v. McCulloch, 168 F.R.D. 516, 525 (E.D. Pa. 1996) (a reserve requirement ensures that an insurer is able to pay claims, if and when liability is established or a settlement is reached, and enables a state insurance department to monitor an insurer's financial condition to protect insureds).

The insured argued that the insurer's late notice defense, coupled with the insured's bad faith claim, rendered reserves information discoverable.  See, e.g., Savoy v. Richard A. Carrier Trucking, 176 F.R.D. 10, 12 (D. Mass. 1997) (holding that an insured was entitled to the insurer’s reserves information where the requested information would “to some degree demonstrate the thoroughness with which [the insurer] investigated and considered [the policyholder's] claim and thus is relevant to the question of the good or bad faith of [the insurer] in denying the claim") (quoting Atlanta Coca–Cola Bottling Co. v. Transamerica Ins. Co., 61 F.R.D. 115, 117 (N.D. Ga. 1972); see also, United States Fire Ins. Co. v. Bunge N. Am., Inc., 244 F.R.D. 638, 644-45 (D. Kan. 2007) (holding reserve information subject to production because the measure of reserves and the timing of their establishment could be relevant to the insurers' positions on liability, their investigations and coverage determinations); Nicholas v. Bituminous Cas. Corp., 235 F.R.D. 325, 331 (N.D. W. Va. 2006) (holding loss reserve information was relevant to bad faith claim).

The court agreed with the insured, holding that the bad faith claim rendered the reserve history discoverable.  The future may show that the insurer was unlucky.  The Court applied the pre-December 2015 version of Rule 26 of the Federal Rules of Civil Procedure, which allowed discovery "reasonably calculated to lead to the discovery of admissible evidence."  The current rule limits discovery to relevant evidence.

For more information, please contact the authors, Lew Hassett and Fred Schutt, via the contact information listed below.