Insurers’ Secret Reserve Estimates May Not Be So Secret After All

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Dec 17, 2019

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When you’ve been in an accident, your insurance company will review the claim and place a tentative dollar amount on the loss. That dollar amount is known in the industry as a reserve and is generally kept a secret. However, some courts are ordering that those reserve amounts to be revealed in order to prove bad faith insurance practices.

Reserves are guesstimates

Insurance company claims handlers generally set a reserve on claims. In fact, many state insurance laws require them to. This reserve figure lets the insurer know the approximate dollar amount for which the claims handler believes the insurer may be liable. Reserve dollar amounts are, at best, an estimated guess on the part of the claim handler as additional information needs to be collected and researched before a payment can be made.

Traditionally, an insurance company’s reserve estimates were not discoverable, or made known, to policyholders or their lawyers. Many have claimed that to do so would provide policyholders with an unfair advantage over insurers (i.e.; if the amount that a plaintiff requested was less than what the insurer was willing to pay, the plaintiff would surely ask for more). While that may be true to a certain extent, some courts have allowed these figures to be disclosed.

Not-so-secret reserves

A Louisiana court recently ordered an insurance company to disclose its reserves. In that situation, a policyholder submitted an insurance claim for damages related to Hurricane Katrina. The claim turned into a bad faith insurance lawsuit, Brothers Petroleum, LLC v. Underwriters at Lloyd’s London, and the policyholder’s attorney requested the insurer’s reserve information. The insurer objected, but the court allowed it and reasoned:

A bad faith claim requires an analysis of whether the failure to pay the amount of a claim within 60 days after receipt of a satisfactory proof of loss was arbitrary, capricious or without probable cause, as determined by the facts and circumstances held by the insurer at the time of refusal. (La. Rev. Stat. 22:1220). The setting of reserves bears some relationship to the insurer’s calculation of potential liability, and have [sic] been found to be discoverable when bad faith is asserted.

Some courts in other states (California, Pennsylvania and West Virginia to name three) have followed suit. In most cases, the theory is that if an insurer took the time to place reserves on a case and then refused to pay the claim or offered to pay far less than the actual damages, the reserve amount may be telling on whether the insurer acted in bad faith.

If your insurance company has treated you in bad faith), contact an attorney whose practice focuses in this area of the law. Consultations are free, without obligation and are strictly confidential.

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