Insurer's Reserves Ruled Discoverable in Bad Faith Case
Discovery regarding insurance reserves is a complicated issue. A party in litigation against an insurance company in a bad faith or unfair trade practice case will often make a discovery request for the reserve set by the insurance company for the underlying claim on the theory that the reserve reflects the insurance company’s true valuation of the claim. David Rossmiller at Insurance Coverage Law Blog has written about rulings made by federal courts in California (as described by J. Craig Williams at May It Please The Court) and Missouri in discovery disputes over reserve information.
The issue has been addressed recently by the Supreme Court of Appeals of West Virginia in State ex rel. Erie Ins. Property & Cas. Co. v. Mazzone, 2007 WL 1661461 (W. Va. 2007), in which Erie Insurance Company sought a writ of prohibition to prevent enforcement of the circuit court’s order requiring disclosure of its insurance reserves to the plaintiff in a third-party bad faith case.
Erie claimed that its reserve information constituted opinion work product, which, under West Virginia Rule of Civil Procedure 26(b)(3), may be disclosed “only upon a showing that the party seeking discovery has substantial need of the materials … and that the party is unable to without undue hardship to obtain the substantial equivalent of the materials by other means.” Erie also contended that reserve information is generally treated as opinion work product.
The Circuit Court of Ohio County (Wheeling) had found that the reserve information was discoverable because the reserve amounts and the dates on which they were set were not work product. Thus, the court reasoned, the reserve amounts were not set in anticipation of litigation. Even if the reserves were work product, however, the plaintiff demonstrated a substantial need and inability to obtain the information elsewhere.
Initially, the Supreme Court distinguished between a reserve that was set for an individual case and reserves that were set for several cases on an aggregate basis. The Court held that when an attorney or non-lawyer representative set an individual case reserve with “the primary intent of preparing for litigation,” the individual case reserve information was entitled to protection as opinion work product.
Likewise, when an attorney or non-lawyer representative set aggregate case reserves “for specific litigation,” such reserves are opinion work product. However, aggregate reserves that are set for a general business purpose, such as pursuant to a company’s policy of setting reserves as soon as a claim is received or reviewing them on a regular basis, would not be opinion work product. The Court recognized that “exceptional situations” could exist where aggregate case reserves set for a general business purpose could constitute opinion work product.
Because Erie failed to prove that it set the reserves in anticipation of litigation, the Court concluded that the reserves were set in the ordinary course of Erie’s business and therefore were discoverable.
(Although not discussed in the majority opinion by Justice Joseph Albright, the underlying facts of the case were mentioned in a concurring opinion by Justice Larry Starcher and illustrate the basis for the plaintiff’s request for Erie’s reserve amounts. The plaintiff, Elizabeth Murfitt, was a hotel maid, who suffered a shattered wrist in a car wreck caused by Erie’s insured in October 2000. Murfitt incurred more than $50,000 in medical expenses and could not work at her job, which paid $12,500 per year.
Erie’s first settlement offer was $47,000, which was less than Murfitt's medical expenses. The case went on for two more years, during which Erie’s position didn’t change. Then, a few weeks before trial, Erie increased its offer to $55,000. Three weeks before trial, its offer went up to $275,000. Three days before trial, Erie increased its offer to $500,000. Erie increased its offer again to $600,000 on the first day of trial, and settled for $800,000 on the second day of trial.)
