U.S. District Court States "Genuine Dispute" Doctrine Does Not Restrict Discovery Of Reserves Information Where Insureds Allege...

U.S. District Court States "Genuine Dispute" Doctrine Does Not Restrict Discovery Of Reserves Information Where Insureds Allege...

09.11.2006

In California, loss reserves set by an insurer may be discoverable in an insured's suit for bad faith depending on whether such information is considered relevant to the subject matter of the suit.

In Bernstein v. Travelers Ins. Co., __ F.Supp.2d __, 2006 WL 2474747 (N.D.Cal. 2006), the U.S. District Court stated that California's "genuine dispute" doctrine does not bar discovery of loss reserves information where the insureds allege that the insurer was biased in its investigation and handling of the insured's claim. The "genuine dispute" doctrine holds that an insurer has no bad faith liability when it mistakenly withholds policy benefits that are owed, if the mistake is reasonable or is based on a legitimate dispute as to the insurer's liability under the insurance contract. As stated by one court, if the doctrine applies, the "subjective intent" of the insurer's decision-makers is deemed irrelevant.

In Bernstein, the insureds alleged that Travelers acted in bad faith by making unjustifiable demands for proofs of their losses, disputing coverage for certain losses, delaying payment of their claim and making a lowball offer, when Travelers knew the sums claimed were owed under the insurance policy. The insureds sought to discover the loss reserves set by Travelers on their claim and Travelers' internal criteria and analyses related to the setting of the loss reserves to show that Travelers knew it owed policy benefits on the claim. Travelers objected to disclosing the loss reserves information on the grounds that the information was irrelevant and that any failure to pay policy benefits that might be deemed owed under the policy was a matter of "genuine dispute" under the doctrine.

While noting there was insufficient evidentiary support to sustain the insureds' bad faith claim in that case, the Court stated that the undisputed facts - the disputes over whether certain items were covered or were adequately documented and an arbitration award in the insureds' favor in excess of Travelers' offer - indicated that the insureds' quest for the information was not based entirely on speculation. Separately, the Court added that it must also determine that there was a meaningful prospect that the insureds' theory would be legally viable under California law.

The Court noted that California courts have applied the "genuine dispute" doctrine barring bad faith liability not only where reasonable minds could have differed about the meaning of policy language (i.e., coverage) but also more recently where reasonable minds could have differed on factual matters (e.g., monetary value of property) when the material facts were not disputable. However, the Court read California law to be uncertain as to whether the doctrine would apply to a bad faith allegation that the insurer processed the insured's claim with a systemic bias against the insured.

The Court cited examples, such as disputes over what certain words mean or which items were actually incinerated by a fire, where the "genuine dispute" doctrine could properly be invoked, presumably to preclude discovery as well as obtain summary judgment. However, the Court posited that though the "genuine dispute" doctrine may be a basis after discovery for an insurer's summary judgment motion, the doctrine should not be a basis to block discovery of reserves information where the insureds allege bad faith in the overall handling of their claim. Referring to what it called the "creep" of the "genuine dispute" doctrine, the Court stated that an insurer's bad faith is ordinarily a question of fact. The Court reasoned that if the insured is allowed to conduct discovery and fails to uncover sufficient evidence of such bias to get to a jury, summary judgment would be proper.

In the case before it, the Court concluded the insureds should be entitled to discover whether there was a discrepancy between Travelers' internal communications regarding the reserves it set and its external communications with the insureds. The Court therefore ordered Travelers to disclose the loss reserves information, though subject to a protective order prohibiting disclosure beyond the suit.

In this case, the insureds sought loss reserves information to use as an undisclosed admission of liability. In those cases where insurers have consulted their own attorneys for an evaluation of potential exposure and appropriate loss reserves, the reserves information would be subject to protection from disclosure under the attorney-client privilege.