Insurance Lawsuits And Loss Reserves

Insurance lawyers need to know about this 2017 case from the Eastern District, Sherman Division.  It is styled, Hidden Cove Park and Marina et al v. Lexington Insurance Company, et al.  The case concerns the discovery of an insurance company’s loss reserves.

The Court held a telephonic conference regarding a discovery dispute a regarding redacted records.  The Court ordered Lexington to produce the un-redacted clam notes and to allow Hidden Cove to depose Lexington’s 30(b)(6) deponent, limited to the information included in the previously redacted claim notes.

After severe storms caused damage to properties insured under a policy issued by Lexington, Hidden Cove sued Lexington alleging failure to properly conduct an investigation into the cause of the loss, failure to issue timely payments, and wrongfully delaying or denying the claim, all pursuant to Chapter 542 of the Texas Insurance Code, and breach of contract and breach of common law duty of good faith and fair dealing.  The central issue is the parties’ interpretation of the “Flood” exclusion contained in the policy and its effect on the claim.

As part of discovery, Lexington produced a redacted version of the claim notes based on work-product privilege and redacted portions of the notes relating to loss reserves on the basis of relevance.  Hidden Cove objected and this Order followed.

Hidden Cove argued that loss reserve notes were relevant because “the reserve set for the claim would provide insight into when Lexington reached its conclusion regarding the flood sub-limit, and how long it took Lexington to reach that conclusion, evidence of a potential breach of the Prompt Payment of Claims Act.  Hidden Cove further argued loss reserve notes were relevant to whether Lexington denied the claim in bad faith as it would demonstrate that it believed its own liability to be higher than what it paid.

Lexington argued that notes regarding the loss reserves are not relevant because the initial reserves took place before the copy of the policy was in hand and thus, the issue of reserves had no relevance to the interpretation of the policy language.

Hidden cove then argued that the notes regarding loss reserves are discoverable because reserve information in a bad faith suit may be evidence of Lexington’s state of mind in adjusting the claim.  Further, even if Lexington did not have a copy of the policy while adjusting the claim, Lexington could have easily accessed its own insurance policy.  The policy at issue was a renewal of the previous year’s policy, which was in Lexington’s possession.

The Court finds the claim notes regarding loss reserve are relevant to Plaintiffs’ claims.  “In cases involving alleged bad faith on the part of the insurer in denying coverage, the amount of the loss reserve set by the insurer may be relevant because it could well belie a later claim that the insurer thought in good faith that there was no possibility of the claim falling within coverage.”

Further the Court said defendants argue the loss reserve information is irrelevant because they set the reserves before making any interpretation regarding the policy language.  Defendants state they did not yet have the policy when they set the reserves. However, the policy at issue was a renewal of the previous year’s policy.  The loss reserve information is relevant because it could show that Defendant knew or should have known its liability was reasonably clear, yet still denied Plaintiffs’ claim.  The reserve information could

reasonably lead to the discovery of admissible evidence.