Discovery of Insurer Reserve Information: Implied Admission of Coverage or Attorney Work Product ? Or Both?

One common area of discovery disputes in insurance-coverage cases concerns reserve information from carriers. The policyholder-side thinking goes that it is inconsistent with the insurer’s flat denial of coverage for it to accrue a reserve on the claim, especially a reserve at close to full value. There is some logical and emotional appeal to this “putting your money where your mouth is” discovery, that is, requiring that what the carrier says to the jury be consistent with where it is putting its money.


Of course, a reserve accrued on the claim doesn’t prove conclusively there is coverage: carriers argue that reserves simply reflect litigation risk or that statutory requirements re solvency compel the accrual of reserves – points that go to the weight of the evidence. Carriers are concerned that reserve evidence is prejudicial to their coverage denial in the eyes of jurors (because a reserve seems to be an implied admission of coverage or at least the reasonable possibility of coverage), and so carriers tend to fight assiduously to prevent reserve information from coming to light.
The Supreme Court of West Virginia recently weighed in on the issue, West Virginia ex rel Erie Ins. Prop. & Cas. Co. v. Mazzone (W. Va. Nov. 30, 2005). In Erie, the carrier resisted discovery on the grounds that reserves reflected opinion work product. The court did not reach the question but instead ruled on the more preliminary issue of the relevance of reserves. The court’s discussion of the reserve-setting process in general seems to cast substantial doubt that a viable work-product objection will lie, though the court did not rule this out; more important, the court implies that reserves are of dubious relevance.
While ruling that reserves potentially were discoverable and rejecting the no-discovery rule urged by the insurer, the West Virginia high court directed trial courts to analyze concretely the pertinence of reserve information for the particular case, but with a thumb on the scale against discoverability. As the case syllabus states:

In making a determination in the context of discovery about the relevancy of insurance reserves information, the trial court should take into account the nature of the case, the methods used by the insurer to set the reserves and the purpose for which the information is sought, and only grant requests for disclosure when its findings of fact and conclusions of law support a determination that the specific facts of the claim in the case before it directly and primarily influenced the setting of the reserves in question.

The court did not reject the policyholder position about “implied admission of coverage,” so a policyholder still will be able to argue that reserves indicate the carrier actually believes there is coverage (thus showing the relevance of this discovery); but the court was skeptical that reserves in fact shed light on the question whether coverage is owed.
Ironically, the closer to an implied admission of coverage that a reserve determination becomes the more substantial an insurer’s claim of work product would seem to be. The further reserve setting moves away from the merits of the case, the less probative the reserve would seem to be (and concomitantly the less compelling the work-product claim). (Some of these points are developed in the lengthy concurring opinion of Justice Davis filed a week after the majority opinion in Erie was issued.) In other words, the Erie case shows that the claims both of relevance (by the policyholder) and of work product (by the insurer) are directly correlated.

12 comments on “Discovery of Insurer Reserve Information: Implied Admission of Coverage or Attorney Work Product ? Or Both?

  1. To what would reserves be relevant? For accounting purposes, the insurer has to reserve something on almost every case, for the possibility that they’ll have to pay.
    Maybe I’m wrong on this, but I did take some CPCU courses (and even passed some of the exams :-) ). The reserves would generally be significantly higher than what the insurer thinks is the likely result.
    I think that’s how it works in personal injury cases. Maybe it would mean more in a bad faith case, but even then I don’t think so.

  2. The commenter’s point is consistent with the thinking of West Virginia’s high court in the Erie case, which is why the court in effect presumed that reserves would not be relevant. Usually the burden of proving irrelevance is on the responding parties if the discovery request is made in good faith; Erie reverses that burden and requires the requesting party affirmatively to prove the relevance of reserve information in his or her case. Because seeking reserve information invariably leads to the expense of a discovery fight, policyholder counsel needs to consider whether the economics of pursuing the information is worth it, bearing in mind also that one only has a limited number of times to burden courts with discovery disputes.

  3. Discovery of reserves will become highly relevant in any case where the insurer is seeking reimbursement from the policyholder for settlement monies paid on the policyholder’s behalf where coverage of the underlying claim is in dispute. (See the recent Frank’s Casing case in Texas, May, 2005) [http://www.insurancescrawl.com/archives/2005/07/mess_in_texas_-.html].
    Any reserve on a claim that the insurer is representing to its policyholder (and a court of law) is not covered would seem to be contrary to a claim of non-coverage.
    If I were representing the policyholder, discovery of reserves would be the first order of business at the first sign of a ROR letter or a dec action to determine coverage.

  4. In Pennsylvania, discoverable information in an insurer’s file cannot generally be shielded with a claim of attorney work product. Reserves are calculated by insurance folk, in whatever method they customarily use, not by litigators whether they are in-house or outside counsel. Using a litigator to do insurance work doesn’t turn it into attorney work product. After it has been produced in discovery, if introduced in trial the judge could make it clear that such a reserve did not constitute an admission.

  5. I have to note that if this information becomes discoverable, three things will happen:
    1. Insurance companies will assert that they are entitled to show this information to the jury.
    2. In contested cases, all reserves will be set at zero.
    3. The net value of the information will drop to zero once plaintiffs have managed to obtain access to it and all that they will have done is to make the files less useful to those who actually use them.

  6. Perhaps anonymous insurer attorney is trying to induce me into making the following response (which ostensibly is contra policyholder interests): insurance regulators won’t allow insurers to put the reserves to zero in all contested cases. (This then tends to show that reserves are untethered from the merits and thus irrelevant.) On the other hand, if insurers really did adopt the zero reserve strategy and given that regulators would not allow them to set zero reserves wholesale, then that would mean that insurers would have to start paying a greater percentage of claims!

  7. Anon insurer attorney has a more fundamental problem with the rules and underlying theory of discovery in civil litigation. Because something is potentially damaging to a litigant’s case, that is not a reason to fail to produce it in discovery under the federal rules or under the state rules with which I am familiar. There really is no end to the approach that, because something might be prejudicial, an attorney doesn’t have to produce it in the first instance, or can have the evidence deliberately contrived to be something it otherwise would not be (like a zero value). Isn’t that what motions in limine are for?

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