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INSURER LOSS RESERVES: EVIDENCE OF KNOWLEDGE OF COVERAGE AND OTHER BAD FAITH ISSUES


By Mike Abourezk and Marialee Neighbours

Loss reserves are an insurer's estimate of the amount an insurer may be required to pay on a particular claim. Maryland Casualty Co. v. U.S., 251 U.S. 342, 350 (1920). They represent the amount anticipated to be sufficient to pay all obligations for which the insurer may be responsible under the policy with respect to a particular claim. Lipton v. Superior Court, 48 Cal. App. 4th 1599, 1613, 56 Cal.Rptr. 2d. 341, 343 (Cal. App. 2 Dist. 1996).

Relevancy

Evidence of loss reserves is relevant in a bad faith action because reserves demonstrate knowledge, a requisite element of bad faith. If an insurer alleges a good faith belief that there was no insurance coverage, the amount of loss reserves set on a claim can contradict this defense. Loss reserve information can show that the insurer knew that there was coverage.

However, discovery of loss reserves is not limited to knowledge of coverage. Loss reserves may be discoverable and admissible on any number of issues which commonly are presented in bad faith actions. See, e.g., Lipton, 48 Cal. App. 4th at 1605. For instance, loss reserves information may lead to admissibility of evidence regarding whether an insurance company adjusted a claim in good faith or made a prompt investigation, assessment or settlement of a claim.

Cases

Evidence of loss reserves are admissible in South Dakota bad faith cases. Kirchoff v. American Cas. Co. of Reading, Pennsylvania, 997 F.2d. 401 (8th Cir. 1993). For instance, in Kirchoff, the Eighth Circuit Court of Appeals examined the relevancy and admissibility of loss reserve evidence. In that case, a jury found the insurer liable of bad faith and awarded punitive damages. During the trial, evidence was admitted that the claims representative, Millford, had valued plaintiff's claim at $300,000.00 but offered only $8,000.00.

On appeal, the Eighth Circuit said: "Clearly, if Jane Millford valued Kirchoff's claim at $300,000 but offered only $8,000 to settle Kirchoff's claim, evidence of that valuation was relevant to the issue of whether CNA's settlement offers were made in good faith. The District Court did not abuse its discretion in receiving such evidence." Id. at 405.

In another bad faith action, a California court concluded that at least for discovery purposes that loss reserves related to claims could be relevant in bad faith actions against insurers. Lipton, 48 Cal. App. 4th at 1605. The court observed that in a case where the insurer had denied coverage and refused a defense that "the fact that a reserve had been set by the insurer might well be relevant to show that the insurer must have had some knowledge that a potential for coverage existed." Id. at 1614, citing Samson v. Transamerica Ins. Co., 30 Cal. 3d. 220, 240, 178 Cal. Rptr. 343, 636 P. 2d. 32 (1981); Miller v. Elite Ins. Co., 100 Cal.App. 3d. 739, 753, 161 Cal. Rptr. 322 (1980).

However, the Lipton court did not limit discovery of loss reserve information to coverage issues. In that case, the court explained that evaluation of an insurance claim might be discoverable on any number of issues which are presented in bad faith cases:

The evaluation of a case made by an insurer, whether compelled by law or business prudence, is information which might well lead to discovery of evidence admissible on any number of issues which commonly are presented in bad faith actions.

Id. See also CIGNA ins. Co. v. Cooper Tire & Rubber, Inc., 180 F.Supp.2d 933, 936 (N.D. Ohio 2001)(Reserves discoverable, relevant to issues of mistake and intent); Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 813 (Ky. 2004)(evidence of reserve settling procedures was relevant to bad faith claim; would help show whether insurer followed statutory and regulatory requirements and whether system for setting reserves was aimed at achieving unfairly low values).

In Silva v. Basin Western Inc., 47 P.3d 1184 (Colo. 2002), the Colorado Supreme Court held that the establishment of reserves and settlement authority could be relevant regarding whether an insurance company adjusted a claim in good faith or made a prompt investigation, assessment, or settlement of a claim:

In a first-party claim, the establishment of reserves and settlement authority could be relevant and reasonably calculated to lead to admissible evidence regarding whether the insurance company adjusted a claim in good faith or made a prompt investigation, assessment, or settlement of a claim.

47 P.3d 1184, 1193 (Colo. 2002), citing Weitzman v. Blazing Pedals, Inc., 151 F.R.D. 125, 126 (D. Colo. 1993)(other citations omitted).

In addition, the court noted that the "[t]he scope of discovery has thus been traditionally broader in first-party disputes between an insured party and his or her insurer." Id. It concluded that "[r]eserves have been correspondingly more likely to be discoverable in such actions." Id.

Thus, loss reserves have been held to be relevant and admissible in bad faith actions to show the insurer's knowledge that coverage existed. However, information about loss reserves has been discoverable and admissible on any number of issues which commonly are presented in bad faith actions.

 

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