It is very common in bad faith litigation for the aggrieved insured to seek discovery of the reserve history in order to track the amount reserved by the defendant insurer in the underlying case. This is presumably done in an attempt to establish that the insurer recognized the claim had a high value, but was trying to take advantage of (or “low-ball”) the insured with an offer at a substantial discount to reserves. In upcoming posts, we will discuss why such a use is a misuse, and how such a use misconstrues the statutory and legal bases for the requirement of insurance reserves under Pennsylvania law. We will also take a brief look at why requiring insurers to disclose reserves may create a dangerous disincentive on the part of insurers to adequately reserve claims, defeating the very purpose of setting aside reserves for insurance claims in the first place.
The Reserving Requirement under Pennsylvania Law
Insurers are statutorily required to set reserves upon notice of losses potentially covered by policies. The statute says nothing whatever about reserving only for those claims which are probable, or even likely. One court has written, of reserving: "This requirement guarantees that insurance companies have the funds to pay claims as they become due. This requirement enables the insurance department to monitor the financial condition of insurance companies to protect consumers and hopefully maintain solvency despite unliquidated pending claims." (See Executive Risk Indemnity Inc. v. Cigna Corporation, Philadelphia Court of Common Pleas, 2006). (See also, Oak Lane Printing & Letter Service Inc. v. Atlantic Mutual Insurance Co., District Court for the Eastern District of Pennsylvania, 2007).Thus, we see, even from this brief review, that reserves are required by legislation, regulation and common law as a fiscal and accounting safeguard, not a proxy for measuring the merits of given insurance claims, as bad faith plaintiffs’ discovery sometimes suggests.
Just Ask Claims Representatives, Executives and Experts
Bad faith discovery aimed at unearthing reserve information could bear the cloak of legitimacy if, in the industry, there were testimony from insurance professionals that reserving practices were undertaken with a view toward rendering an opinion toward the merits of a claim. However, their testimony in the writers’ experience is consistent with the purpose of reserving set out in the legislation and case law: Reserving is not a barometer reflecting analysis of the merits of an insurance claim.As an accounting device, reserving is focused on liquidity and thus always views a claim from “worst case scenario” perspective. Claims representatives will often undertake separate analyses and make separate assessments of claims’ “current values,” “actual and factual values,” or “settlement values.” Such other measures provide a far more accurate picture of an underlying claim’s current value based on known facts from the current claims information.
Dickie McCamey & Chilcote
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