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Discovery of Reinsurance: Information Remains Unresolved in Most Jurisdictions

With increasing frequency, insurers involved in coverage disputes and bad faith litigation have been faced with discovery requests seeking disclosure of information regarding reserves and reinsurance arrangements. A reserve is the amount an insurer expects to pay for the reported claim. Reinsurance is where an insurance company agrees to indemnify another insurance company for a loss.

Insurers have had some success in opposing such discovery requests in coverage disputes. In Leksi v. Federal Ins. Co., 129 F.R.D. 99 (D.N.J. 1989), the court rejected the relevancy argument concerning reinsurance and reserve information by explaining that:

Reinsurance involves a company's attempt to spread the burden of indemnification. It is a decision based on business considerations and not questions of policy interpretation. I conclude, therefore, that its relevance is very tenuous and its production is not compelled at this juncture except insofar as an insurer has "lost" [the insured's] policy. In that case, information concerning reinsurance should be discoverable in order to attempt to reassemble the terms of the original contract which is now unavailable. 106 (citation omitted).

Citing Independent Petrochemical v. Aetna Cas. and Sur. Co., 117 F.R.D. 283 (D.D.C. 1986), the Leksi court also found reserve information only tenuously relevant to whether insurance coverage exists and that such information is not discoverable. Id.

With respect to an insured's bad faith action, however, the decision in Lipton v. Superior Court, 48 Cal. App. 4th 1599, 56 Cal Rptr. 2d 341, 1996 Cal. App. LEXIS 821 (Ct. App. 1996) (hereinafter "Lipton v. Superior Court") is an example of the increasing success plaintiffs have had convincing courts that documents regarding a liability insurer's reserves and agreements of reinsurance may have some relevance to a insured's bad faith claim, and are, therefore, discoverable.

Discovery or Reinsurance

Lipton, an attorney, filed a bad faith claim against his malpractice carrier Lawyer's Mutual Insurance Company ("LMIC") alleging that its handling of his defense to a legal malpractice claim by a former client amounted to a breach of an implied covenant of good faith. Lipton represented the Pachecos who were injured when they were hit by a truck while riding a motorcycle.

The Pachecos were unhappy with Lipton's settlement of their claims with the truck driver and because Lipton failed to bring a product liability action against the motorcycle manufacturer. The Pachecos also claimed that Lipton made certain misrepresentations of fact that induced them to retain his services.

The Pachecos' legal malpractice action sought recovery of damages in excess of $7,000,000. Lipton turned over his defense to his malpractice carrier, LMIC. His policy limits were $250,000 for "each claim" and $750,000 "aggregate" during any policy period. Lipton's policy also contained a "burning limits" provision.

In other words, the payment of defense costs would reduce available limits for each claim after exhaustion of the $50,000 claim expense allowance applicable to all claims submitted during the policy period.

The Pachecos' claims were eventually tried and the jury entered a verdict in favor of the Pachecos in the amount of $14,000,000. Prior to the jury's verdict, LMIC notified Lipton that $278,427 had been paid out as claim expenses and thus the applicable policy limit had been reached. Lipton disputed LMIC's interpretation of his policy claiming that the Pacheco case involved a number of claims which occurred over the two-year policy period and therefore, Lipton's total policy limit exposure was $1,500,000, not merely $250,000. Lipton also claimed that LMIC could have settled the case for $250,000 but failed to do so.

Bad Faith Claim

Lipton filed a bad faith claim against LMIC complaining that its handling of his defense to the Pacheco case amounted to a breach of an implied covenant of good faith. Lipton also alleged causes of action for intentional and negligent spoliation of evidence based on LMIC's failure to recognize that the multiple claims of the Pacheco action entitled Lipton to "aggregate" rather than single claim coverage and that LMIC intentionally and negligently kept evidence of such additional coverage, including reserves and related reinsurance documentation, from Lipton, thereby depriving him of evidence demonstrating greater coverage, the knowledge of which would have permitted the settlement of the Pacheco action within policy limits.

Court's Conclusion

The court in Lipton v. Superior Court concluded that documents regarding a liability insurer's reserves, agreements of reinsurance and related correspondence are not precluded from discovery, as a matter of law, in an insured's bad faith action. The court also concluded, however, that such discovery should be made subject to the court's in camera inspection to determine whether the requested documents have any relevance to the requesting party's case and/or whether privileged material exist which should be excised before disclosure or made subject to a protective order. 1996 Cal. App. LEXIS 821, *33-38.

Lipton requested that Lawyer's Mutual Insurance Company, ("LMIC") produce its claim file in the underlying malpractice action against Lipton for which LMIC handled the defense. LMIC eventually produced certain file materials and delivered to Lipton a privilege log of 24 documents.

LMIC withheld those documents on the grounds that they contained reserve information which LMIC claimed was not relevant to Lipton's bad faith action and reinsurance information which included sensitive proprietary material and/or reflected attorney-client communications.

Lipton moved to compel the production of the loss reserve and related reinsurance documents described in LMIC's privilege log. LMIC objected to the production on the grounds that the information was neither relevant nor admissible and thus, not discoverable.

The referee appointed by the trial court to hear the motion sustained LMIC's objections to production finding that the disclosure of loss reserve information and what percentage of its risk LMIC assigned to reinsurers was not likely to lead to admissible evidence. The trial court adopted the referee's report. Lipton appealed.

In vacating the trial court's decision, the California Court of Appeals rejected LMIC's claim that loss reserve information has no discovery relevance and explained that whether such information is relevant depends upon the issues presented. Id at *27.

The California Court of Appeals considered "[t]he evaluation of a case by an insurer, whether compelled by law or business prudence . . . information which might well lead to discovery of evidence admissible on any number of issues which commonly are presented in bad faith actions." 1996 Cal. App. LEXIS *824.

Reserve Information

LMIC argued that the candid establishment of reserves would be severely impacted if discovery is permitted. Id. LMIC also argued that compliance with statutory requirements for setting and adjusting reserves may well force insurance companies into the making of an admission which might be introduced against it later in a dispute with its insured. Id. In rejecting these arguments, the California Court of Appeals offered the following observations:

First, the method of establishing reserves is guided by statute.... The amount of reserves carried at any specific time cannot be arbitrary. The insurer must reasonably estimate the amount necessary to provide for the payment of all losses and claims for which the insurer may be liable.... Second, each insurer transacting business in the State of California is required to disclose the amount of reserves each year in its annual statement which is filed with the Department of Insurance. Third, the Insurance Commissioner, by regulations promulgated by the Department of Insurance, requires each company to: (a) establish an effective method for testing the adequacy of. . . reserves and (b) comply with the prescribed methodology of computing reserves. . . The power of the Commissioner of Insurance to regulate reserves is a strong disincentive to the establishment of unrealistically high or low reserves. Id.

The California Court of Appeals found LMIC's concerns were directed to the limitation or exclusion of loss reserve information at trial and not its discovery relevance. Id at *827.

The court's decision appears to be driven by this distinction. In addition to concluding that the evaluation of a case made by an insurer is information which might well lead to discovery of evidence admissible in bad faith actions, the California Court of Appeals also found that, at the very least, such information would assist Lipton in evaluating his bad faith claim and preparing for trial. Id.

Reinsurance Information

With regard to LMIC's reinsurance agreements, Lipton argued that such agreements would not have been contemplated but for LMIC's recognition that aggregate benefits were owed. Id at *828.

The California Court of Appeals rejected Lipton's argument finding that it demonstrated very little understanding about the nature of reinsurance. Id at *828-829. The court explained that reinsurance is arranged for the benefit of the insurer and that the original insured has no interest in it. Id at *829.

While the court considered reinsurance documents unrelated to the question regarding whether there was single or aggregate coverage, it refused to find that all documents containing reinsurance information are irrelevant to the subject matter of the lawsuit and are not calculated to lead to the discovery of admissible evidence. Id. at *831. See, however, Fireman's Fund Insurance Company v. Paine Webber Real Estates Security, 233 Cal. App. 3d 1138, 286 Cal. Rptr. 50, 1991 Cal. App. LEXIS 1062 in which the appellate court found that the trial court had committed error in requiring the production of reinsurance agreements based upon plaintiff's desire to review them for "context" which the appellate court deemed "patently insufficient".

In that regard, the California Court of Appeals found that "correspondence between an insurer and re-insurer . . . that discusses liability, exposure, the likelihood of a verdict in excess of policy limits or coverage issues may well be relevant in discovery. . . ." Id. at 831. In so ruling, the court also recognized that communications to a reinsurer could, however, include attorney-client or protected work product communications and believed that in all likelihood, such information would be protected by the attorney-client privilege. Id. at 831-32.

Confidentiality Concerns

The California Court of Appeals constructed a framework within which to evaluate such claims of privilege which included an in-camera review of documents that contain reserve and/or reinsurance information. The review should first dispose of claims of privilege. If the privilege is qualified and not absolute, the court must articulate its reasons for not permitting discovery.

In other words, the Court explained "if discovery is to be denied based upon relevance, then the court must make specific findings as to why the documents are not relevant to the subject matter and not calculated to lead to the discovery of admissible evidence." Id. at 834. The California Court of Appeals emphasized that its decision was limited to evaluating the discovery relevance of the loss reserves and reinsurance.

Other jurisdictions, however, have also found that such information is discoverable and not protected by claims of privilege. See, e.g., McClean v. Continental Cas. Co., No. 95 Civ. 10415 (S.D.N.Y. Nov. 21, 1996) and Raclaur, Inc. v. Allianz Ins. Group, No. L-12078-95 (N.J. Super. Ct. Law Div. Oct. 4, 1996), as reported in TIPS Committee News, Spring/Summer 1997, Vol. 6, No. 2.

The Lipton Decision; an Alternative Analysis

Prior to Lipton v. Superior Court, however, the United States District Court for the Southern District of California decided the discovery relevance of reserves issue differently. In re Couch, 80 B.R. 512 (S.D. Cal. 1987). There, the district court considered whether an insurance company, Equity General, was obligated to respond to interrogatories that asked very specific questions regarding its reserving practices with respect to the underlying claim.

Couch obtained a default judgment against Equity General's insured and sought a declaration regarding Equity General's liability for the default judgment. Couch also asserted a bad faith claim against Equity General.

Equity General objected to the discovery on grounds of relevance and that such information was confidential proprietary information. 80 B.R. at 513. Equity General argued that the reserves were not the equivalent of the insurance company's estimation of probable or potential liability and that discovery of such information would undermine important public policies underlying state reserve regulations. Id. at 516.

The district court agreed with Equity General that reserves are only partially within an insurer's control and reversed the Bankruptcy Court's order compelling discovery. Id. at 517. Referring to the United States District Court for the Western District of Pennsylvania's decision in Union Carbide Corp. v. Travelers Indem. Co., 61 F.R.D. 411 (W.D. Pa. 1973), the district court concluded by observing that "[t]he legislature and Insurance Commissioner establish reserve policy. For this reason alone, a reserve cannot accurately or fairly be equated with an admission of liability or the value of any particular claim." Id.

Subsequent to Couch, but before Lipton v. Superior Court, the United States District Court for the Eastern District of California examined the discovery relevance of reserve information in a first-party bad faith claim. American Protection Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448 (E.D. Cal. 1991). American Protection Insurance Company ("APICO") filed a declaratory judgment action against Helm Concentrates ("Helm") seeking a determination that its commercial "all-risk" policy did not provide coverage for losses claimed by Helm owing to failure of machinery in its tomato processing plant.

Helm filed a counterclaim against APICO alleging that APICO breached its contract of insurance, as well as the covenant of good faith and fair dealing and that it acted in bad faith in denying Helm's claims. The specific issue decided by the United States District Court for the Eastern District of California was whether information regarding reserves established by APICO was discoverable. 140 F.R.D. at 449.

APICO objected to discovery of reserve information on the grounds that it was not relevant to any of the claims asserted in the lawsuit and was not likely to lead to the discovery of admissible evidence. Id. With respect to the issue of bad faith, APICO argued that California Courts distinguish between first-party insurance and liability insurance. Id.

APICO explained that in third-party liability insurance cases, the issue is whether there is a possibility of coverage which gives rise to the duty to defend, whereas in first-party insurance bad faith claims the only issue is whether the loss is covered and whether the investigation of the claim was reasonable and in good faith. Id at 449-50.

The APICO court considered the question of relevance and admissibility of reserve information governed by the Federal Rules of Evidence and not California substantive law. Id at 449. The district court, however, agreed with APICO's differentiation between first-party and third-party (liability) policies with respect to the relevancy of reserve information in bad faith claims. In finding reserve information more likely to be relevant in third-party bad faith claims, the district court explained:

In considering whether an insurer acted in bad faith in denying its duty to defend under a "third-party" liability policy the fact that it established a reserve, particularly for litigation cost, is probative on the issue of whether there is a "potential for liability". Thus when an insurer, by its actions, acknowledges the potential for liability and fails to attempt to settle the claim against its insured and/or fails to defend, reserve information is relevant to the issue of good faith. Id at 449-50.

By contrast, the district court considered reserve information only marginally relevant in first-party bad faith claims:

[I]n first-party policy of property insurance the issues are whether the claimed loss is covered and whether the insurer acted in good faith in investigating the loss and denying coverage, the question of "potential liability" is not relevant because it does not trigger any duty under the first-party policy. In other words, the policy either provides coverage for the loss or it does not, the insurer's good faith is determined by the manner and depth of its investigation and the determination of whether there was a good faith factual and/or legal question as to whether the loss was covered. Potential liability or the insured [sic] estimation as to its potential liability is marginally relevant at best. Id at 450.

Based upon this distinction and the fact that Helm could not direct the court to any first-party bad faith cases where reserve information was discoverable and admissible, the district court denied Helm's Motion to Compel APICO's reserve information.

In considering the discovery relevance of reserve and reinsurance information, the court in Lipton v. Superior Court did not examine the distinction between third-party liability insurance and first-party insurance. Rather, the court in Lipton v. Superior Court ordered discovery of LMIC's reserve and reinsurance information by finding that LMIC's concerns were directed to the limitation or exclusion of loss reserve and reinsurance information at trial and not its discovery relevance.

However, the earlier California decisions demonstrated that the discovery of reserve and/or reinsurance information was more likely to be relevant and to engender more disputes in third-party claims for insurer bad faith than in first-party claims for insurer bad faith. Third-party insurance is liability insurance which is intended to protect the insured from the expense of defending and paying the claims of a third-party within the policy limits while first-party insurance applies to the insured's own claimed losses.At least one commentator has explained the distinction as follows:

Liability policies provide for absolute control by the insurer over the defense and settlement of all covered claims. By virtue of the insurer's absolute control of defense and settlement, the insurer owes the insured a duty of good faith and fair dealing in the exercise of that control. Breach of that duty may result in liability to the insurer for extra contractual damages, which are sums beyond the costs, fees and limits for which the insured contracted.
* * *
[a] third-party [bad faith] insurance case involves a contention the insurer failed to settle a third-party's claim against the insured within the policy limits. A first-party [bad faith insurance] case, on the other hand, involves a contention the insurer failed to pay benefits directly to the insured. Wall, Litigation and Prevention of Insurer Bad Faith, 2d ed. §3.01, §9.01 (1994).

Both Lipton v. Superior Court and Couch involved third-party bad faith claims. Notwithstanding, these courts reached different decisions with respect to the discovery relevance issue of reserves. By contrast, APICO involved a first-party bad faith claim which considered the likelihood of an insurance company's reserves leading to discovery of admissible evidence in a first-party bad faith claim more remote than in a third-party bad faith claim.

What impact Lipton v. Superior Court will have on the insurance industry remains to be seen. However, Lipton v. Superior Court appears to be one of a growing number of cases where plaintiffs have convinced courts that documents regarding a liability insurer's reserves and agreements of reinsurance and related correspondence may have some relevance to a insured's bad faith claim.

The Lipton v. Superior Court decision was in fact recently cited by a referee as authority in the case of Golden Eagle Refinery Co., Inc., et al. v. Associated International Ins. Co., et al., BC 128622 Calif. Super. Los Angeles Co., 1997 Mealey Lit. Rep.: Reinsurance, Vol. 8, Iss. 7 (8/6/97) at p. 3, Section C., in ruling that the defendant must provide for in camera inspection of documents relating to its reinsurance of two other insurer defendants.

Historic Treatment of Relevancy Issues in Bad Faith Litigation


One of the earliest decisions addressing the discovery relevance issue of reserves involved third-party liability insurance where the plaintiff sought discovery of interoffice correspondence regarding the establishment of reserves by his insurance company on two underlying claims against him. Groben v. Travelers Indemnity Co., 266 N.Y.S.2d 616 (N.Y. Sup. Ct. 1965). The trial court observed that reserve information was "material and necessary to the action as an admission against interest as to [Travelers Indemnity's] knowledge and evaluation of the case." 266 N.Y.S.2d at 619.

The trial court also recognized that reserve information was an internal matter of the insurer and not related to the preparation of the legal defense of the actions. Id. Therefore, the trial court ordered discovery by concluding that ". . . examination with respect to the reserve may develop evidence on the issue of defendant's bad faith" and that defendant's actions with respect to establishing reserves are relevant. Id.

Indeed, an insurance company's claim files typically contain information regarding reserves. Claim files have been found discoverable in bad faith actions since they most likely will contain the only record of those actions taken by the insurer in connection with the underlying action. See, e.g, Hodges v. Southern Farm Bureau Cas. Ins. Co., et al., 433 So. 2d 125 (L.A. 1983).

"Since the setting of reserves throughout the progress of a claim is somewhat indicative of a liability insurer's estimate of reasonable settlement value, progressive reserves are discoverable or otherwise admissible in evidence in an excess liability case based on the insurer's claimed breach of fiduciary settlement duties." Wall, Litigation and Prevention of Insurer Bad Faith, 2d ed. §8.06 (1994); citing, Bohemia, Inc. v. The Home Ins. Co., 725 F.2d 506 (9th Cir. 1983).

Courts have also considered evidence of an insurance company's reserves in evaluating the legal sufficiency of "bad faith" actions against insurers. See, e.g., Bell v. Kansas City Fire & Marine Ins. Co., 616 F. Supp. 1305 (D.C. Ark. 1985).

While courts, generally speaking, consider reserve information marginally relevant in first-party claims, there are some exceptions. For example, in Tackett v. State Farm Fire and Cas., 558 A.2d 1098 (Del. Super. Ct. 1988), the Superior Court of Delaware considered the propriety of certain redactions made to a claim file by State Farm in responding to Plaintiff's discovery request in a first-party bad faith claim.

The Delaware Superior Court relied upon the Groben decision for the proposition that reserve figures are the product of mental impressions, opinions and conclusions of an insurer's agents and therefore discoverable in a bad faith claim. 558 A.2d at 1105.

The Delaware Superior Court rejected the Union Carbide Corp. v. Travelers Indem. Co., 61 F.R.D. 411 (W.D. Pa. 1973), decision since it did not involve a first-party bad faith claim. Interpreting the Federal Rules of Civil Procedure regarding discovery of expert opinions, the Union Carbide court considered discovery of opinions regarding factual issues proper, but not internal opinions and conclusions reached by the insurer in valuating the reserves.

Tackett, unlike the Eastern District of California's decision in American Protection Ins. Co. v. Helm Concentrates ("APCIO"), did not recognize the marginal discovery relevance of reserve information in first-party bad faith cases. Since the Tackett decision predated the APICO decision, a carrier is more likely to have some success opposing discovery requests concerning its reserve information and/or practices by arguing the distinction articulated in APICO -- that such information is of marginal discovery relevance in first-party bad faith cases as compared to third-party bad faith cases.


Unlike reserves, the discovery relevance of reinsurance information in third-party bad faith claims appears to be more settled. As early as 1948, courts considered evidence of reinsurance in evaluating an insurance company's bad faith conduct. See Royal Transit, Inc. v. Central Surety & Ins. Co., 168 F.2d 345 (7th Cir. 1948). In Royal Transit, the United States Court of Appeals for the Seventh Circuit determined whether the findings in the trial court that the defendant exercised bad faith in refusing to make a settlement of the underlying suit were substantially supported by the record.

Central Surety argued that the trial court erred in admitting testimony from its reinsurer that Central Surety's risks amounting to $45,000.00 were reinsured in the amount of $40,000.00, so that its real liability was only $5,000.00. The Seventh Circuit disagreed with Central Surety and found the testimony to be relevant in evaluating Royal Transit's bad faith claim. The Seventh Circuit explained that:

[T]his testimony was competent as bearing upon the defendant's good faith. As already noted, the [plaintiff's] claim could have been settled for $40,000.00 of which World Transit agreed to pay $5,000.00. It follows that the defendant would have been required to pay $35,000.00 ($10,000.00 less than the face of its policy) in order to have consummated a settlement, but of this amount the defendant would have been reimbursed by its insurer in the amount of $30,000.00. In other words, it would actually have cost the defendant $5,000.00. Notwithstanding this comparatively small amount which it would have been required to pay, it refused to permit a settlement in face of the fact that it was urged to do so by its reinsurer. 168 F.2d at 350.

The United States Court of Appeals for the Fifth Circuit reached a similar conclusion regarding the relevance of reinsurance in evaluating an insurance company's bad faith. American Fidelity & Cas. Co. v. The Greyhound Corp., 258 F.2d 709 (5th Cir. 1958). The Greyhound Corporation ("Greyhound") was insured by American Fidelity & Casualty Company, Inc. ("American") against liability in the operation of motor vehicles.

Excess Insurance Company ("Excess") carried for Greyhound motor vehicle liability insurance coverage exceeding the primary liability of American. Certain plaintiffs prevailed in an action against the Greyhound Corporation in the amount of $67,500.00.

Excess brought a declaratory judgment suit against Greyhound for a determination that because timely notice of claims was not given as its policy required, it had no liability to discharge that portion of the judgment which exceeded the limits of the American policy. Greyhound brought a third-party action against American alleging that American breached the duty it owed Greyhound in failing to give timely notices and information, and that it exercised bad faith in the settlement negotiations with the plaintiffs below. Judgment was entered in favor of Greyhound.

The Fifth Circuit reversed and remanded for a new trial. During the second trial, the court struck from the third-party complaint all claims for relief except the one alleging that American exercised bad faith in the settlement negotiations. Like the first trial, the second trial resulted in a verdict and judgment for Greyhound.

On appeal, American argued that the trial court erred by admitting evidence that American was reinsured by Employers Reinsurance Corporation and that under this reinsurance agreement American recouped $30,000.00 of its ultimate payment of $40,000.00. The Fifth Circuit disagreed with American and offered certain reasoning employed by the Supreme Court of Missouri in support of its decision:

We think the jury could conclude that the reason defendant did not settle . . . was because, under no circumstances, would it ever be liable for more than $5,000.00, and it would prefer to take a gamble on getting a favorable verdict rather than to make a settlement within the limits of the policy. If this was its reason for not accepting [plaintiff's] offers, then it was an intentional disregard of the duty it owed the [insured] and of course defendant did not act in good faith. The policyholder was not interested in what the reinsurer would do. It had a right to look to the defendant who had issued the policy to protect its interest. 258 F.2d at 712 (citation omitted).

While American argued that reinsurance had no place among the facts of the case because its claims adjuster and its local attorney had no knowledge of the reinsurance, the Fifth Circuit was persuaded by the fact American's home office knew that there was reinsurance as well as American's claims department. 258 F.2d at 712.

This case, of course, demonstrates the inherent tension in which a cedant is placed in responding to the interests of its policyholder and in its obligation of utmost good faith owed to its reinsurers. Obviously, the Fifth Circuit, in reaching its decision in American Fidelity, did not ascribe any importance to the obligation which American owed its reinsurers when it stated: "The policyholder was not interested in what the reinsurer would do. It had a right to look to the defendant who had issued the policy to protect its interest."

Coverage Disputes

The United States District Court for the Southern District of New York evaluated when reserves might be discoverable in coverage disputes. Champion International Corp. v. Liberty Mutual Ins. Co., 128 F.R.D. 608 (S.D. N.Y. 1989).

There, the Southern District of New York adopted the Magistrate-Judge's recommendation that discovery should be permitted of documents relating to reserves established by the defendants for claims arising out of certain underlying actions for the purposes of determining defendants' conduct of claim evaluations, including statements about coverage or the timing of coverage. 128 F.R.D. at 612.

Significantly, Champion conceded that establishing a reserve is not tantamount to an admission of liability by an insurer and sought discovery merely to investigate what statements, if any, were made about coverage. 128 F.R.D. at 612 n. 8.

The Southern District of New York rejected the defendant insurance companies' claims of attorney-client privilege and work product exemption. The defendants made the following arguments opposing production:

  1. reserve information was totally irrelevant to the issue of coverage and its disclosure could only unfairly prejudice defendants;
  2. disclosure may inhibit the claims handling process in that insurance companies would be reluctant to set realistic reserves for the fear of compelled disclosure in litigation; and
  3. the marginal relevance of reserve information is outweighed by the harm to the individual insurance companies and the industry in general. 128 F.R.D. at 612.

In rejecting these arguments, the Southern District of New York recognized the sufficient relevance of reserves in coverage cases to justify its production absent the existence of attorney-client privilege, the applicability of the work-product exemption, or the greater burden posed by production. 128 F.R.D. at 612.

In Rhone-Poulenc Rorer Inc. v. The Home Indemnity Co., 1991 U.S. Dist. LEXIS 16336 (E.D. Pa. November 7, 1991), the court granted discovery of reinsurance information in connection with rebutting defendant insurance company defenses of misrepresentation, non-disclosure, lack of or late notice, or lost policy. The court also found that Federal Rule of Civil Procedure 26(b)(2) requires the disclosure of reinsurance agreements from insurers who are being sued for money damages under the policy but not extra contractual money damages.

However, the Eastern District of Pennsylvania denied plaintiff's request for discovery of reserve information in connection with the issue of when notice took place and offered the following explanation:

Because reserves do not amount to an admission of liability, and because there may have been reasons for setting reserves unrelated to the instant claims, such information is of little relevance and is potentially misleading. Indeed, . . . "there are so many factors involved in the establishment of a reserve that are unrelated to the issue of coverage that it can hardly be said that [Reserve information] could constitute admissions binding on the insurer, in litigation over coverage." *** The possibility of such information tending to be misconstrued is great.
Id., 1991 U.S. Dist. LEXIS 16336 at *12-13 (citations omitted).

In Independent Petrochemical v. Aetna Cas. and Sur. Co., 117 F.R.D. 283 (D.D.C. 1986), the United States District Court for the District of Columbia considered the refusal by defendant insurance companies to answer interrogatories regarding policyholder information and information on reserves and reinsurance.

This action involved a dispute between the insured, Independent Petrochemical and 18 defendant insurance carriers. Plaintiff's Motion to Compel answers was denied as the court regarded the interrogatories as seeking information of very tenuous relevance, if any relevance at all. 117 F.R.D. at 288.

The court was persuaded by the argument that "a reserve essentially reflects an assessment of the value of a claim taking into consideration the likelihood of an adverse judgment and that such estimates of potential liability do not normally entail an evaluation of coverage based upon a thorough factual and legal considerations when routinely made as a claim analysis." Id.

The court likewise found that discovery of reinsurance information was not more relevant than reserve information. Id.

Finally, in Bird v. Penn Central Co., 61 F.R.D. 43, 47, (E.D. Pa. 1973), the court found that information regarding reserves was not only irrelevant to an insurer's rescission claim against its insured, but could be highly prejudicial in coverage litigation.

These decisions demonstrate that statements made about coverage in connection with establishing reserves may be discoverable. Further, reserve information may also be discoverable if it may lead to evidence rebutting a defendant insurance company's defenses of misrepresentation, non-disclosure, lack of or late notice, or lost policy to a claim for indemnification. On the other hand, discovery of reserve and/or reinsurance information is denied where its simply sought as an admission of liability.

Indeed, the majority of courts have found reinsurance agreements to be irrelevant to coverage disputes between an insurer and its policyholder and have denied requests for discovery of reinsurance documents and information. Ostrager and Vyskocil, Modern Reinsurance Law and Practice, §15.01[a] (1996); see also Leski, Inc. v. Federal Insurance Co., 129 F.R.D. 99, 106 (D. N.J. 1989) and Independent Petrochemical Corp. v. Aetna Cas. & Sur. Co., supra.

Issues of Privilege

Even if a court finds reinsurance and/or reserve information is otherwise discoverable in a bad faith claim, such information may be subject to claims of privilege. The Supreme Court of Alaska considered a discovery dispute involving a claim of bad faith inaction by a surety in the context of a commercial construction claim. Loyal Order of Moose, Lodge 1392 v. International Fidelity Ins. Co., 797 P.2d 622 (Ak. 1990).

In finding that the lower court erred in entering summary judgment against the plaintiff, the Supreme Court of Alaska also found that the trial court erred in denying discovery of the existence and amount of any loss reserves IFI may have established regarding the plaintiff's claims.

The Supreme Court considered "[d]iscovery of the existence and character of such reserves appears reasonably calculated to lead to the discovery of admissible evidence." 797 P.2d at 628. The Supreme Court rejected IFI's assertion of attorney-client privilege and work product immunity doctrine by observing that loss reserves are not prepared in anticipation of litigation but rather reserves are established in the ordinary course of business. 797 P.2d at 628; Baker v. CNA Ins. Co., 123 F.R.D. 322, 328 (D. Mont. 1988) and Langdon v. Champion, 752 P.2d 999, 1006-07 (Ak. 1988).

In Independent Petrochemicals, supra., the court referred to the Union Carbide (61 F.R.D. 411 (W.D. Pa. 1973) decision as recognizing the basic characteristics of reserve information and observed that where reserves are established by legal input, the results and supporting papers would most likely constitute work product and may also reflect attorney-client privileged communications.

The Eighth Circuit considered whether corporate risk management documents prepared by non-lawyer corporate officials, but revealing aggregate information compiled from individual case reserves figures determined by lawyers are protected from discovery by the work product doctrine or attorney client privilege. Simon v. Searle & Co., 816 F.2d 397 (8th Cir. 1987).

The Eighth Circuit affirmed the trial court's decision that such documents would be protected to the extent that they reveal specific litigation strategy or mental impressions of attorneys in calculating cases or setting a reserve for a specific case. 816 F.2d at 401-02. Based upon this reasoning, the Eighth Circuit found that those documents containing aggregate reserve information were not identified with particular cases and were therefore discoverable. Id.

The Simon Court was persuaded by the fact that the individual case reserves were aggregated by the Risk Management Department for business planning purposes and were not prepared in anticipation for litigation. 816 F.2d at 401. However, the court acknowledged that individual case reserve figures reveal mental impressions thoughts and conclusions of attorneys in evaluating a legal claim. Id.

When aggregated by the Risk Management Department, the individual reserves lose their identity. 816 F.2d at 402. In response to claims of attorney client privilege, the court explained that while the communication of the individual reserves by the legal department to the risk management department may be privileged, the privilege does not necessarily attach to those documents created by the risk management department. 816 F.2d at 402-03.

While claims of privilege in connection with reinsurance agreements themselves will not likely prevail, there is authority to sustain claims that communications between reinsurers and their cedents are subject to privilege and therefore, not discoverable.

In National Union Fire Ins. Co. v. Stauffer Chemical Co., 558 A.2d 1091 (Del. Super. 1989), the court held that communications between a cedent and its reinsurer are protected by the attorney/client privilege if the insurance company's counsel participated in the communications. 558 A.2d at 1097; citing Maryland Cas. Co. v. W.R. Grace & Co., No. 83 Civ. 7451 (S.D.N.Y. Mar. 4, 1986).

These decisions demonstrate that an insurance company is more likely to prevail in its claim for attorney-client privilege and work product protection in connection with those case reserves established by attorneys for separate cases as they are more likely to reveal specific litigation strategy or mental impressions of attorneys than reserves calculated by insurance company non-lawyer staff in the ordinary course of business.

Nevertheless, a court should conduct an in camera inspection as the court in Lipton v. Superior Court recommended prior to the production of reserves and/or reinsurance information when dealing with privilege claims in opposition to discovery of such information.

At least one court in California has considered the discovery relevance of reinsurance agreements in an environmental coverage action. Golden Eagle Refinery Co., Inc. v. Associated International Insurance Co., et al, No. BC 128622, Calif. Super., Los Angeles Co.; See Mealey's Litigation Report-Reinsurance Vol. 8, Issue #8, August 27, 1997. There, the Court conducted a review in camera and determined that "any claim of privilege would be outweighed by the interests of justice if the material met the test of relevance in a discovery context, but that test [was] not [ ] met".


In compelling discovery of reserve and reinsurance information, the court in Lipton v. Superior Court held that evaluation of a case made by an insurer is information which might well lead to discovery of evidence admissible on any number of issues which commonly are presented in bad faith actions. Although the court in Lipton v. Superior Court attempted to provide structure to the analysis of the discovery relevance issue in California, it remains to be seen whether the standard adopted by the court will be widely followed by other courts.

If the trends observed in California are any indication, it appears that in the future, insurers faced with this issue will have a more difficult time protecting access to reserve and reinsurance information that at one time was easily shielded in disputes between the insured and its insurer.

Article courtesy of Joseph M. Donley and Patricia Powers

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