Overview
A recent Ontario Superior Court decision strongly supports the refusal to disclose an insurance company’s reserve information on the basis that it is usually irrelevant and highly prejudicial.
In this case, the Kanani plaintiffs asked the Court to order the defendant Economical to produce its reserve information, including the process of setting and posting the reserve for a claim, arguing that it was relevant to their allegation that Economical had acted in bad faith in respect of how the issue of attendant care was analyzed, adjusted and considered because it would show Economical’s knowledge of the present and future need for attendant care.
Importantly, the Kanani plantiffs’ bad faith action did not allege misconduct in the setting of reserves nor that the setting of reserves influenced Economical’s conduct.
Economical successfully resisted the plaintiffs’ demands for disclosure on two main grounds. First, the insurance company’s reserve information is not relevant to the assessment or adjustment of its claims because those are two separate processes and have very separate considerations. Second, disclosure of reserve information would cause very unfair prejudice to the insurance company.
Although there is a possibility of the rare and exceptional case where reserve information is relevant to an action and subject to the rules of disclosure, the principles outlined in Kanani and discussed below should serve to severely restrict that possibility as it would be highly prejudicial.
How does the Court define reserves?
The Court defines reserves as estimated amounts assigned by an insurer to account for the total possible future payout of a person’s claims arising from an accident, including not only benefits but legal costs, claim expenses and reinsurance conditions. They are legally required mechanisms for an insurance company to estimate the ultimate future cost of resolution and administration of claims and set aside that amount to meet future obligations.
Insurance companies also set aside bulk reserves because at any time there are some claims that have already occurred but have not yet been reported, some claims that required a higher final payout than estimated based on unforeseen developments, and some closed claims that are re-opened due to some new information coming to light.
When are reserves set?
When a claim is opened, an initial reserve is posted and an amount is set aside. Following receipt of notification of the loss, initial reserves are posted when an adjuster is assigned to a claim for lines of payment for which immediate funds may be required, pending receipt of further information. Once further information is received, additional reserves are posted and additional reserve lines are opened as required. In an accident benefit case, evidence disclosed that within 30 days of the preliminary reserves being posted, reserve lines are opened/increased for medical benefits, rehabilitation benefits, attendant care benefits, cost of examinations, and damaged clothing.
While the claim is open, the insurer is required to set aside funds to allow it to make future payments should claims be advance. This allows the insurance company time to determine the full indemnity amount under the policy and related expenses for the claim, then pay out and close the claim.
How is reserve setting different from the adjustment process?
Setting a reserve is an exercise in valuing the gross cost of a claim to meet future obligations, whereas adjusting or assessing a claim is an exercise in determining entitlement to the benefits claimed. The level at which reserves are set by insurers is a function of many factors and several steps removed from the process of dealing with the insured and assessing the claim. The adjustment of a claim is not affected by the presence or quantum of reserves.
Why are reserves generally not relevant to an allegation of breach of the duty of good faith?
The fairness aspect of the duty of good faith relates to the manner in which the insurance company conducts its dealings with the insured in investigating, assessing and responding to the insured’s claim. It does not relate to the insurer’s internal task of setting a reserve following its consideration of the risk as a whole, including not only its assessment of the claim itself but also the other factors the insurer must take into account in estimating its exposure (e.g., legal costs, the cost of experts, the likelihood of success, reinsurance considerations, etc.).
Reserve information may be relevant in the rare and exceptional bad faith action where there exist specific unusual facts sufficient to support the connection between the setting of a reserve and the ongoing assessment of the claim.
What is the prejudice in the disclosure of reserve information?
In Kanani, Economical denied the allegation that it acted in bad faith and stated it was unaware of the need for attendant care benefits. In this case, disclosure of its reserve information would have been highly prejudicial either way – if reserves were set, then it would be argued that Economical was aware of the exposure for attendant care and did not advise the plaintiffs; if reserves were not set, then it would be argued that Economical never intended to pay.
In general, disclosing reserve information is extremely prejudicial to insurers because Ontario’s Rules of Civil Procedure require continuous disclosure and reserves can be changed at any time and are continually updated. If disclosure is required, the defendant would be required to continually disclose the existence of the reserve level as more information is received, and would have a continuing obligation to advise the plaintiff of changes in the reserve level up to the time of trial. In effect, it places a continuing obligation to tell the plaintiff how much the insurer believes the case is worth, which is an unfair and unnecessary advantage to the plaintiff.
The insurer would be further prejudiced by the impairment of its ability to negotiate a settlement because knowledge of the reserve might make the plaintiff feel entitled to settlement in that amount even though the reserve is nothing more than an intelligent estimate of the risk as a whole by the insurer, which risk includes line items beyond those payable to the plaintiff, and is based upon the facts as known at the time.
In this case, Justice Nadeau held that the prejudice to the insurer outweighs any probative value the reserve information could have.
Conclusion
Disclosure of reserve information in the vast majority of cases is not required because reserves do not relate to the process or manner in which the claim is assessed or adjudicated and therefore not relevant to allegations of bad faith conduct. Even in the rare case where reserve information is relevant, disclosure should be opposed as it is highly prejudicial and could compromise trial fairness.
Jonathan Charland is an associate at the firm and author of this blog. If you have a question about this decision, or a similar file, please contact Jonathan at 416-777-5241.
