The United States Court of Appeals for the Third Circuit has upheld the right of insurance carriers to withhold reserve and reinsurance information in first-party bad faith actions. Although an unpublished decision, Mirarchi v. Seneca Specialty Insurance Co., 2014 WL 1673748 (3rd Cir. April 29, 2014) (Ambro, J.), signifies the Third Circuit’s acceptance of district court decisions that have deemed reserve and reinsurance information to be protected from discovery, even in bad faith litigation.
In Mirarchi, following a fire that damaged an insured’s property, the carrier paid the undisputed amount of loss, and the parties proceeded to appraisal on the disputed amounts. During the appraisal, the carrier’s appraiser estimated the damages to be significantly higher than the undisputed payment. Ultimately, the umpire entered an award close to the amount being sought by the policyholder.
After Seneca satisfied the appraisal award, Mirarchi filed a bad faith action in the Eastern District of Pennsylvania. There, the trial court denied the policyholder’s request for reserve and reinsurance information, and granted summary judgment in Seneca’s favor on the bad faith claim. Although the appraisal award was almost double the carrier’s initial valuation, the trial court dismissed the claim for bad faith since the carrier: (1) relied on experts who spent a considerable amount of time calculating the damages; and (2) paid the undisputed amount despite no contractual or legal obligation to do so.
On appeal, the Third Circuit expressly upheld the trial court’s decision to protect the reserve and reinsurance information from discovery. In support, the court explained that “a loss reserve is the insurer’s own estimate of the amount which the insurer could be required to pay on a given claim” (emphasis in original). While recognizing that such information can be relevant in limited circumstances, the court found that the reserves are generally irrelevant because they do not represent an evaluation of coverage – that is, the amount an insurer should be required to pay. For the same reasons, the court held that a carrier’s communications with its reinsurer are not evidence of its evaluation of the claim and thus not discoverable.
This decision supports insurers’ resistance to demands for reserve and reinsurance information simply because a policyholder has included a boilerplate allegation of bad faith in a coverage dispute. The Third Circuit recognized that reserve and reinsurance information is proprietary and, in most cases, irrelevant in coverage and bad faith disputes.
The case is also significant in reinforcing prior decisions holding that, absent policy language to the contrary, insurers are under no obligation to make advance or partial payments on disputed claims in excess of any undisputed payment. The holding also suggests that once an undisputed payment is made and the claim is in appraisal, insurers do not act in bad faith by failing to issue supplemental payments during the appraisal process, even if their appraiser’s estimate is in excess of the prior payments. The obligation to make further payments is solely dictated by the appraisal award.
Through proper utilization of the policy’s appraisal provision and by tendering undisputed amounts prior to appraisal, insurers can expedite claim resolution and defend extra-contractual allegations that may be raised.