Claim Reserve Information Not Discoverable in North Carolina First-Party Coverage Dispute
Discoverability of reserve information is an issue that vexes insurers and insureds alike – and in North Carolina, caselaw regarding discoverability of reserve information is scarce.
Notably, North Carolina appellate courts have not decided whether reserve information is discoverable in a coverage case absent a bad faith claim. The single North Carolina appellate case regarding the discoverability of reserve information included claims for bad faith, breach of fiduciary duty and misrepresentation. The North Carolina Court of Appeals affirmed the trial court’s order to produce reserve information generated prior to the time that the work-product privilege was in place.
Earlier this year, however, the North Carolina Business Court held that claim reserve information was not discoverable in a first-party coverage dispute. In the claim, the insured had moved to compel discovery of claim reserve information that was created prior to the lawsuit. The dispute involved claims for breach of contract and declaratory judgment, but (unlike the appellate case) did not involve a bad faith claim.
Applying Rule 26(b) of the North Carolina Rules of Civil Procedure, the North Carolina Business Court held that the claim reserve information was not discoverable because it was not relevant. The Court did not base its decision on attorney-client privilege or the work-product doctrine, because the insured had limited its discovery request to reserve information that was created prior to the filing of the lawsuit.
In its reasoning that reserve information was not relevant, the Court noted that insurers are required by North Carolina law to establish reserves and that methods to establish, calculate and adjust reserves vary widely among insurance companies. Consequently, the Court stated, “it is folly to generalize about the meaning of a particular reserve[.]”
Because reserves are created after the insurance contract is formed, “reserve information does not assist typical [insurance] contract interpretation.” The Court rejected the insured’s argument that the reserve information was relevant to a “possible” bad faith claim. Further, the Court observed in a footnote that there are public policy reasons against “routinely subjecting reserves to discovery” because of the “obvious tension” between creating sufficient reserves for solvency versus creating “artificially low” reserves to mitigate the risk of liability.
As a procedural matter, the Business Court’s decision has been designated as an Order of Significance that may be cited and relied upon. Therefore, it fills the gap by providing guidance for North Carolina coverage cases that do not involve bad faith or misrepresentation claims.
Please contact Christy Maple or any member of the Phelps Insurance team if you have questions or need advice or guidance.
