United Specialty Insurance Company v. Dorn Homes Incorporated

• Court: District Court, D. Arizona
• Decided: January 27, 2020
• Docket: 3:18-cv-08092
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 United Specialty Insurance Company, No. CV-18-08092-PCT-MTL

10 Plaintiff, ORDER

11 v.

12 Dorn Homes Incorporated,

13 Defendant. 14 15 Before the Court is the parties’ Joint Statement of Discovery Dispute Regarding 16 Insurance Reserves. (Doc. 131.) For the reasons stated herein, Plaintiff United Specialty 17 Insurance Company (“Plaintiff” or “USIC”) must produce unredacted versions of 18 documents containing information related to the reserves for Defendant Dorn Homes Inc.’s 19 (“Defendant” or “Dorn”) claims, including any previously withheld documents.1 20 I. BACKGROUND 21 Dorn argues that USIC should be required to produce “redacted and withheld 22 documents containing information related to reserves for Dorn’s claims.” (Doc. 131 at 2.) 23 Dorn argues that reserve information is relevant and that USIC has waived any privilege 24 or protection through “disclosure, testimony, and failure to assert privilege.” (Id.) USIC, 25 however, argues that the reserve information is “wholly irrelevant to the instant action, as 26 well as being confidential and proprietary business information.” (Id. at 3.) USIC notes that 27 1 The parties did not request oral argument. After full review of the parties’ positions, the 28 Court believes that oral argument would not significantly aid the decisional process. See Fed.R.Civ.P. 78(b) (court may decide motions without oral hearing); LRCiv 7.2(f) (same). 1 it has redacted only the “specific dollar amount attributable to its thought process behind 2 setting the claim’s reserves.” (Id.) 3 The term “reserve” means “something retained or stored for future use; esp., a fund 4 of money set aside by a bank or an insurance company to cover future liabilities.” Black’s 5 Law Dictionary (11th ed. 2019). “The discoverability of reserve information usually arises 6 in insurance bad faith cases.” RKF Retail Holdings, LLC v. Tropicana Las Vegas, Inc., No. 7 214CV01232APGGWF, 2017 WL 2292818, at *7 (D. Nev. May 25, 2017). 8 II. ANALYSIS 9 “District courts have come out both ways” on the issue of whether reserve 10 information is permitted discovery under Federal Rule of Civil Procedure 26. Metro. Life 11 Ins. Co. v. Ogandzhanova, No. CV-12-372-PHX-GMS, 2013 WL 1442581, at *2 (D. Ariz. 12 Apr. 9, 2013).2 See also Dogra v. Liberty Mut. Fire Ins. Co., No. 2:14-CV-01841-GMN, 13 2015 WL 5086434, at *2 (D. Nev. Aug. 25, 2015) (“Court decisions in this district and 14 elsewhere are divided on whether reserves set by an insurer on a claim are relevant and 15 discoverable.”) 16 This Court has noted that “[c]entral to the relevance (or lack thereof) of reserve 17 information in a given case is the method of calculation.” Ogandzhanova at *2. That is, 18 “[i]f the insurers can show their calculations do not include analysis of the factual or legal 19 merits of the insured’s specific claim, but instead rely on automatic factors, then the 20 relevance of reserve information diminishes significantly. On the other hand, courts have 21 granted motions to compel production of reserve information when the insurers have failed 22 to produce evidence that the reserve arithmetic does not include analysis of the claim’s 23 merit.” Id. (citation omitted). 24 In Ogandzhanov, the Court declined to compel production of the insurer’s reserve 25 information based on the following analysis: 26 2 See, e.g., U.S. Fire Ins. Co. v. Bunge N. Am., Inc., 244 F.R.D. 638, 644 (D.Kan.2007) 27 (relevant); Bernstein v. Travelers Ins. Co., 447 F.Supp.2d 1100, 1105 (N.D.Cal.2006) (same). But see, e.g., Imperial Textiles Supplies Inc. v. Hartford Fire Ins. Co., 6:09–CV– 28 03103–JMC, 2011 WL 1743751 at *4 (D.S.C. May 5, 2011) (irrelevant); Leksi, Inc. v. Fed. Ins. Co., 129 F.R.D. 99, 106 (D.N.J.1989) (same). 1 MetLife has shown that it does not analyze the factual and legal 2 merit of a claim when it sets and adjusts the reserve amount, 3 and did not do so with Ogandzhanova. Enid Reichert, a Vice President and Actuary at MetLife, stated that the reserve 4 calculation is a factor of assumed average claim termination 5 rates determined by MetLife actuaries from multi-year studies and limited claim profile information, such as the date of 6 disability, monthly benefit amount, policy terms, and the age 7 of the claimant. (Doc. 168–1, Ex. 1 ¶¶ 2–4.) The reserves “do not take into account any facts specific to the claim.... 8 Specifically, the reserve does not take into account the merits 9 of the claim, that is whether the claim for benefits is strong or weak.” (Id. ¶ 5.) Claims personnel are not involved in the 10 calculation of claim reserves. (Id. ¶ 6; Doc. 168–2, Ex. 2 ¶¶ 2– 11 4.) It is an automatic calculation divorced from the merits of a specific claim. This is a case where the method of MetLife's 12 reserve calculation takes reserve information out of the realm 13 of relevancy.

14 Id. See also Paul Johnson Drywall, Inc. v. Phoenix Ins. Co., No. CIV. 13-8124-PCT-PGR, 15 2014 WL 1764126, at *3 (D. Ariz. May 5, 2014) (compelling production of reserve 16 information because “The record shows that the reserve was adjusted based on Traveler’s 17 assessment of the merits of Plaintiffs’ claims, in contrast to the automatic factors used by 18 the insurer in Ogandzhanova.”) 19 In this case, however, according to the record before the Court, the reserve amount 20 does account for facts and analysis specific to the relevant claims. The following are 21 excerpts from the deposition of Thomas Brown, Plaintiff’s Rule 30(b)(6) corporate 22 representative: 23 Q. All right. Well, so basically you are telling me internally it took you a long 24 time to figure out how you were going to put homes with respect to which 25 policy? A. No, it didn't take us that long. It was more about the money, figuring out 26 the -- how we were going to -- the proper amount of money to reserve on 27 each file. That was the complexity. (Doc. 131-1 at 11) 28 … 1 Q. All right. So you can put that aside. So having gone through your claim 2 notes, does it refresh your recollection in any way further about 3 conversations you had directly with Mr. Fisher? A. Well, I know when we were completing the large loss report we talked 4 about this, the case, the Desert Mountain case, because a big issue on this is 5 if we were in any other state, virtually any other state, faulty workmanship is not covered. And so we had to explain why there is potential coverage here 6 to our reinsurers, why we are putting up that large of a reserve. 7 (Doc. 131-1 at 17–18.)

8 … 9 Q. Have you, in your work on the case, on a home-by-home basis, applied Desert Mountain and made a determination as to what's covered and what's 10 not covered? 11 MR. GRAIF: Form. THE WITNESS: No. 12 Q. In terms of setting reserves, you have done that in a sense, haven't you? 13 A. We would have to look to the reserve section. Q. You told me you set the reserves at 2.3 million. 14 A. Right. Q. Which is, I believe, the repair damages asked for by Dorn Home? 15 A. Right. 16 MR. GRAIF: Objection; form. Q. So in terms of setting reserve, you accepted that, correct? 17 A. Correct. 18 Q. Because you want the reinsurers to know the exposure. True? A. The potential exposure, yeah. 19 (Doc. 131-1 at 21–22.) 20 21 Taken together, this testimony indicates that the reserve amount incorporates the 22 damages requested by Dorn, as well as consideration of Desert Mountain Properties Ltd. 23 Partnership v. Liberty Mutual Fire Insurance Co., 225 Ariz. 194 (App. 2010), aff’d, 226 24 Ariz. 419 (2011). Plaintiff has therefore not demonstrated that the “calculations do not 25 include analysis of the factual or legal merits of the insured’s specific claim.” 26 Ogandzhanova at *2. 27 III. CONCLUSION 28 Accordingly, 1 IT IS ORDERED that Defendant Dorn Homes, Inc.’s request for unredacted 2 || versions of documents containing information related to the reserves in this matter (part of || Doc. 131) is granted. 4 IT IS FURTHER ORDERED that Plaintiff United Specialty Insurance Company || must produce, no later than February 7, 2020 (see Doc. 118 at 2), any unredacted versions 6|| of documents, including any previously withheld documents, containing information 7\| related to the reserves for Dorn’s claims in the pending matter. 8 Dated this 27th day of January, 2020.

Michael T. Liburdi 11 United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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