In The Flintkote Co. v. Gen. Acc. Ass. Co. of Canada, 2009 U.S. Dist. LEXIS 44066 (N.D. Cal. May 26, 2009), the court held that reserves were discoverable in connection with a policyholder’s bad faith failure-to-pay claim. The court held that reinsurance information was not relevant to bad faith and therefore was not discoverable. The court further held that the attorney-client privilege applies only where the insurer produces direct evidence that documents reflect communications with counsel.
Insolvent policyholder Flintkote sought coverage from its insurers for liabilities arising from its mining and distribution of asbestos and asbestos-containing products. In support of its bad faith claim against its insurer, Flintkote sought discovery of reserves and reinsurance information. Flintkote also requested an in camera review of purportedly privileged documents.
Reserves: The court held that, generally, reserves information is discoverable “when it may shed light on what an insurer actually thought regarding merits of an insured’s claims where there is a ‘self-conscious disconnect’ between the insurer’s payment of benefits and its evaluation of the scope of loss.” At *8-9. According to the court, the discoverability of reserves information depends upon the nature of the bad faith conduct the policyholder alleges. Here, the policyholder alleged the insurer unreasonably failed to defend despite knowledge that the claims were potentially covered, willfully ignored repeated requests for defense and indemnity, and failed to timely disclose documents relevant to its intentional strategy of failing to cover the claims. The court found these allegations warranted discovery of reserves because the reserves could indicate a disconnect between what the insurer thought it might have to pay and what it communicated to the policyholder.
Reinsurance: With much less analysis, the court held that reinsurance is not discoverable because insurers obtain reinsurance based solely on business considerations.
Privileged Documents: The court held that the attorney-client privilege applies only (1) to direct written communications to and from counsel, and (2) communications where the attorney is named and what was said is clearly indicated. (It is unclear, but a party may be able to comply with point (2) by submitting a log indicating the attorney and subject matter of the communication.) The court also declined to permit the insurer to assert a privilege of “confidential business communication” with respect to the documents reviewed in camera, though the court did not directly preclude the possibility of asserting such a privilege.
The court followed a fairly well established line of California authority allowing discovery of reserves and disallowing discovery of reinsurance. The court noted that not all bad faith claims necessarily render reserves discoverable. Nevertheless, under this court’s holding, reserves will be discoverable with respect to any bad faith claims alleging an insurer withheld payment for claims it thought might be covered. Consequently, most if not all bad faith claims alleging a failure to defend or indemnify will make reserves discoverable.