District Court Grants Discovery of Reserve Amount

A federal district court in Michigan has upheld a magistrate judge’s decision requiring an insurance company to disclose the reserve amount to its insured in a coverage action. 

The Case 

After water damaged an apartment building, the building owner submitted a proof of loss to its insurance company for approximately $5.6 million. The insurer made a partial payment, disputing the total amount sought. Pursuant to the policy and Michigan law, the parties submitted their disagreement to an appraisal. 

A partial appraisal award was entered providing for replacement cost value of repairs in the amount of $5.27 million and, as a result, the insurer paid the owner an additional $3.2 million. In addition, because the apartment complex was untenantable, the insurer made payments exceeding $900,000 for business income loss and extra expenses. 

The owner claimed additional amounts were owing for business income loss and extra expenses, which the insurer denied. The owner then filed a declaratory judgment action. 

In the litigation, the owner sent the insurer requests for production of documents.  The insurer responded by producing certain documents along with a four page “redaction log” indicating that it was redacting and withholding 22 documents on the grounds that the information was “proprietary, confidential and irrelevant (reinsurance or reserve) information.” The owner filed a motion to compel production of the redacted documents. 

A magistrate judge ordered the insurer to provide the owner with the amount of the reserve, and the insurer objected. 

The Court’s Decision 

The district court decided that the owner was entitled to learn the amount of the reserve. 

It reasoned that reserve information “may reveal” the insurer’s views about the merits and value of the owner’s claim, which were “critical to the issue not only of first-party benefits but the coverage issue” that was the subject of the owner’s declaratory judgment suit. The district court pointed out that a ruling that reserve information was discoverable was not a ruling that the information was admissible at trial, and it concluded that the magistrate judge’s discovery order was reasonable and was not clearly erroneous or contrary to law. 

The case is UrbCamCom/WSU I, LLC v. Lexington Ins. Co.,No. 12-CV-15686 (D. Mich. Oct. 17, 2013). 

Rivkin Comment 

Federal district courts are divided on the issue of whether reserve information is relevant to an insurance coverage dispute and whether it must be produced during discovery. Some of the cases in which courts have held that insurers need not produce reserve information involved cases where the information sought was subject to attorney-client privilege or the work product doctrine.