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Vol. 3, Iss. 14
October 6, 2014

Insurer’s Unwillingness To Sign A Protective Order In An Underlying Case Leads To Discovery Of Its Reserves


The discoverability of an insurer’s reserve information is an issue that does not come with a straightforward, yes or no, answer. The cases can involve unique facts; so their outcomes can be necessarily fact driven. That was certainly the situation in National Union Fire Insurance Co. v. H & R Block Inc., No. 12-1505 (S.D.N.Y. Sept. 4, 2014) -- and then some.

In H & R Block, the New York federal court permitted discovery of the insurer’s reserve information. It’s decision had a unique hook -- the insurer’s refusal to sign a protective order and common interest agreement in an underlying action. The question whether an insurer can refuse to sign a protective order and common interest agreement in an underlying action was not before the court. What was, however, were consequences that the insurer probably didn’t see coming when it declined to do so.

At issue in H & R Block was coverage for an action brought against tax preparer H & R Block, and related companies, by Jackson Hewitt, another tax preparer, for Block allegedly falsely representing that its tax preparation services were superior to those provided by Jackson Hewitt. National Union issued a commercial umbrella general liability policy to Block and at issue was coverage under the personal and advertising injury provisions.

Block claimed that it “provided National Union with all the information that it could provide concerning the Underlying Action, but that it was unable to provide additional information due to National Union’s ultimate refusal to sign the protective order that was entered in the Underlying Action and a common interest agreement.”

Block and Jackson Hewitt began to have discussions concerning the settlement of the Underlying Action. Block alleged “that as a result of National Union’s unreasonable and ongoing refusal to be bound by the protective order and the common interest agreement, it was unable to share with National Union all the information concerning the settlement discussions that it otherwise would have been able to share, and that National Union refused to consent to any of the settlement proposals being discussed. According to [Block], National Union instead accused [Block] of failing to cooperate with it.” Block and Jackson Hewitt entered into a confidential settlement and the litigation was dismissed. Coverage litigation ensued.

The issue before the court was Block’s discovery request for National Union’s reserve information on the claim. Block made an interesting argument in support of its entitlement to the reserve information. If National Union asserts that it lacked sufficient information to value the claims, then let’s see National Unions reserves, as this may imply that it in fact had sufficient information to value Jackson Hewitt’s claims. National Union opposed the production, arguing that the information may be subject to the attorney-client privilege and/or the work product doctrine and that it was irrelevant to the issue of coverage. [The court quickly dismissed the attorney-client objection on the basis that National Union made no representation that counsel was actually involved in setting any reserves.]

The court next turned to the more difficult question -- whether the reserve information was relevant. On one hand, the court was dismissive of reserve information being relevant: “The most relevant factors concerning National Union’s potential liability in this action are the terms of the policy and the conduct of National Union and Tax Group [i.e., Block] during the pendency of the Underlying Action. Whatever reserve National Union may have established cannot alter the policy’s definition of advertising injury or personal injury nor can it alter the nature and amount of information Tax Group provided to National Union concerning the Underlying Action. In addition, the probative value of the reserve information as an aid to the interpretation of possibly ambiguous policy language is attenuated by the fact that there are no certainties in litigation. Regardless of the strength or weakness of an insured’s claim for coverage, I suspect that there are very few cases in which the probability that the insured will succeed on its coverage claim can be valued at zero. Thus, the establishment of a reserve may merely reflect a prudent insurer’s recognition of the risks of inherent in litigation rather than an admission of coverage or liability.” But the court also noted that reserve information may be relevant when, as was the case here, a bad faith refusal to pay was alleged.

After examining several cases on the issue, the court held that National Union’s reserve information was sufficiently relevant to be discoverable: “If National Union was able to perform a detailed analysis of Jackson Hewitt’s claims against Tax Group, identifying all the pertinent legal and factual issues, it would tend to disprove National Union’s claim that it lacked sufficient information to evaluate the claims against Tax Group. On the other hand, if National Union’s reserve analysis was sketchy and incomplete, it would tend to support National Union’s position. Although I express no opinion as to the ultimate admissibility of the reserve information, I do conclude that it is sufficiently relevant to be discoverable.”

H & R Block is a very interesting decision. I suspect that when National Union was considering whether to sign the protective order and common interest agreement, it didn’t see as a potential consequence having its reserve information revealed. Maybe National Union’s reserve analysis is sketchy and incomplete and would therefore tend to support its position that it lacked sufficient information to perform a proper analysis. Or maybe it was wasn’t. The court has set the stage for this question to be answered.

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