Departing from the majority rule, a federal court recently held that an insurer must disclose reserve information. Maiden Creek T.V., Appliance, Inc. v. General Casualty Insurance Company, 2005 U.S. Dist. Lexis 14693 (E.D. Pa. 2005).
Departing from the majority rule, a federal court recently held that an insurer must disclose reserve information. Maiden Creek T.V., Appliance, Inc. v. General Casualty Insurance Company, 2005 U.S. Dist. Lexis 14693 (E.D. Pa. 2005). In this case the insured brought an action against its insurer for breach of contract, bad faith, and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.
The insured filed a claim under its insurance policy for fire damage. It alleged that the insurer acted in bad faith by delaying payment and by failing to make full payment under the terms and conditions of the policy. The insurer paid $260,000.00, but the insured claimed damages amounted to $430,000.00.
The insurer withheld reports and activity log reports concerning reserve information. The insurer argued that reserve information redacted from log reports was not discoverable as it was not reasonably calculated to lead to the discovery of admissible information.
This position was consistent with the majority of reported decisions. The majority rule has been that there is only a tenuous link between reserves and actual liability given that numerous considerations factor into the calculation of reserves in accordance with statutory requirements.
Additionally, insurers have also argued that disclosure of reserve information may inhibit the claims handling process as insurance companies will be reluctant to set realistic reserves for fear of compelled disclosure in litigation. Furthermore, the marginal relevance of reserve information is far outweighed by the harm to the individual insurance companies and the industry in general. See, e.g. Fidelity & Deposit Co. v. McCulloch, 168 F.R.D. 516, 525 (E.D. Pa. 1996) where the court found there was only a tenuous link between reserves and actual liability given that numerous considerations factor into the calculation of reserves in accordance with statutory directions.
Similarly in Robinson v. Hartford Ins. Co., 2004 U.S. Dist. Lexis 8962 (E.D. Pa. 2004), the Court found that statutory reserves are designed so that state regulators could monitor the financial viability of insurance companies to ensure their solvency. The establishment of a reserve has nothing to do with litigation strategy. The Court in American Protection Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448 (E.D. Ca. 1991) held that information concerning reserves and its relation to potential liability was marginally relevant at best and it denied the insured’s request for disclosure. Other federal trial courts have ordered insurers to disclose reserves information. In Champion International Corp. v. Liberty Mut. Ins. Co., 128 F.R.D. 608 (S.D.N.Y. 1989) the Court compelled production of documents relating to reserves. It held that there was sufficient relevance in coverage cases to justify its production.
Now that reserve information may be subject to discovery, steps should be taken to deal with this potentially serious problem. Insurers should try to avoid disclosure of reserves information at the discovery stage as juries could be easily prejudiced and confused by reserve information. The attorney-client and work product privileges are grounds to prevent disclose. If the reserve information must be disclosed, a motion in limine should be made to keep the jury from seeing the evidence.
Ordering disclosure of reserve evidence is not the same as allowing this evidence to be presented to a jury. North River Insurance Co. v. Greater New York Mutual Ins. Co., 872 F.Supp. 1411 (E.D. Pa. 1995). Rule 403 of the Federal Rules of Evidence prohibits the introduction of evidence at trial where unfair prejudice or the possibility of jury confusion outweighs it probative value. In most situations, the possibility of jury confusion and unfair prejudice will outweigh the probative value of reserves information.