New Texas Case Says Insurer’s Reserves Relevant and Discoverable for Insurance Bad Faith Claim

The Insurance Company May Not Want You to Know What Reserves it Set on This Claim

A Texas federal court recently followed the majority rule in the Fifth Circuit and held that policyholders could discover an insurer’s reserves and that these reserves are relevant to a claim of insurance bad faith under Texas law. Insurers are required to set reserves in order to estimate claims payouts to make sure that they have enough money to pay claims. As a result, in each claim, the insurer records an amount of potential liability called a reserve that constitutes its internal assessment of the potential liability associated with that claim.

LEV Investments, Inc. v. Princeton Surplus and Excess Lines involved a hail claim. LEV Investments sued claiming that the insurer, Princeton, committed bad faith and violated the Texas Prompt Payment of Claims Act. As part of its discovery, it asked for information relating to the insurers reserves for the hail claim. They argued that the reserves could provide evidence that the insurers investigation was a “pretextual” investigation and that the insurer knew that it was underpaying the claim. The court agreed, noting that the majority of courts in the Fifth Circuit Court of Appeals allowed discovery of reserves in bad faith cases and stating that “the information could tend to show that Defendants knew or should have known that their liability was reasonably clear, yet still denied full payment of the award.”

Bad faith cases can be difficult to prove because the policyholder must show that the insurer intentionally denied or underpaid the claim with a wrongful purpose. This case reminds us that one way of proving an insurer’s wrongful intent is by asking for and reviewing the reserves in discovery.

If you have any questions or need help against an insurance company with an insurance claim in Alabama, Georgia, Texas, or Washington, contact us.