§ 16.3 Reserves Set by Insurer in Underlying Litigation
When evaluating claims for liability and potential settlement value, insurance companies set as "reserves" an amount of money representing the top value of the claim. Insurers typically set a reserve amount at the beginning of the claim, and then raise or lower the reserve as more information becomes available.
Counsel representing an insured in a bad-faith claim usually wants to know what the reserves for the claim were, as that gives some indication of the insurer's evaluation of the claim. For example, counsel would of course want to know if the insurer had set reserves at $100,000 but then refused to settle for anything above $50,000.
As noted above, in Howard v. State Farm the Supreme Court held that information generated after the insurer allegedly committed bad faith is inadmissible at trial on the bad-faith claim. What is important is the information available to the insurer when it made its decision about the claim, or, if it had not denied the claim, what information was available when the insured filed the bad-faith action.8
In Imperial Textiles Supplies, Inc. v. Hartford Fire Ins. Co., the District Court held that insurance reserves are potentially relevant and discoverable in a third-party action for bad faith, but not in a first-party action for bad faith.9
The fact that the insurance company established a reserve may be probative on the issue of whether there is a potential for liability in considering a third-party bad-faith claim, and thus reserve information may be relevant to the issue of bad faith. See Spearman Indus., Inc. v. St. Paul Fire and Marine Ins. Co., 128 F. Supp. 2d 1148, 1154 (N.D. Ill. 2001) (citing Am. Prot. Ins. Co. v. Helm Concentrates, Inc., 140 F.R.D. 448, 449-50 (E.D.Cal.1991)). On the other hand, in first-party insurance, the policy either provides coverage or does not. Thus, the potential for liability - and therefore reserve...
