Bad Faith – Discovery:

Minnesota Federal Judge Forces AIG To Produce Communications With Reinsurers, Loss Reserves, And Underwriting Files

A Minnesota federal judge has ordered AIG to produce loss reserve information, underwriting files, and communications with its reinsurers in a bad faith insurance dispute with its policyholder, Donaldson Co., on whose behalf AIG had settled two underlying lawsuits arising out of defects in air-intake ducts for trucks manufactured by Donaldson.

After settling the underlying suits, AIG sought a declaration that Donaldson must reimburse AIG for settlement amounts AIG paid that were within Donaldson’s $500,000 deductible.  AIG sought to apply a separate deductible to each underlying claim, rather than a single deductible for the entire set of claims.  The number of applicable deductibles would depend on the district court’s interpretation of the policies’ “batch clauses.” Donaldson countersued for bad faith, alleging AIG had assured Donaldson for eight years that only a single $500,000 deductible would apply to all of the claims.  It was not until the eve of mediation, Donaldson asserts, that AIG notified Donaldson that other policies may be implicated, potentially requiring Donaldson to satisfy numerous deductibles.

Donaldson served discovery on AIG requesting, among other things, AIG’s underwriting files, loss reserve information, and communications with reinsurers.  AIG refused to produce the materials, arguing that the information is not relevant to Donaldson’s claims or defenses and that reserve information is protected work product.  Donaldson filed a motion to compel, which the magistrate judge granted.  AIG appealed the ruling to the district court.

The district court rejected AIG’s claim that underwriting communications were not relevant to Donaldson’s bad faith claim:  “Documents regarding Plaintiff’s internal assessment of the claims, particularly with regard to whether the claims would be batched, are … relevant to this counterclaim because they could indicate that Plaintiff’s planned to not apply the batch clause long before revealing that to Donaldson.”

Next, AIG argued that its internal reserve information was not relevant because many factors are involved in setting reserves and, as such, reserves do not fairly represent the value of any particular claim.  The district court disagreed, holding that reserve information is relevant, because it reflects AIG’s “estimation of how it would apply coverage under the policies at any given point in time, which could bear on Donaldson’s claim for breach of the duty of good faith and fair dealing.”  The district court also rejected AIG’s argument that reserves constitute work product, because AIG failed to demonstrate that the reserves were prepared in anticipation of litigation.

Finally, the district court rejected AIG’s argument that communications with reinsurers were not discoverable.  After noting that there was a split among courts on this issue, the district court determined the communications were relevant:  “Plaintiffs’ statements to their reinsurers might shed light on what Plaintiffs knew and when with regard to their plans for handling the … litigation, which is sufficiently relevant to Donaldson’s claims for breach of the duty of good faith and fair dealing to be discoverable.”  National Union Fire Insurance Co. of Pittsburgh, PA v. Donaldson Co., Inc., No. 10-CV-4948 (D. Minn. June 24, 2014).

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