Submitted by Brian J. Colombana

In Bernstein, et al. v. The Travelers Insurance Company, et al., (05-01528) 2006 DJDAR 13081 (U.S.D.C. Northern Dist, August 28, 2006), the United States District Court for the Northern District of California grants Plaintiffs’ motion to compel the discovery of Defendants’ "reserves," internal communications regarding those reserves, and criteria and considerations used by Travelers in setting those reserves.

Plaintiffs (hereinafter "Bernstein") are first party insureds and defendants (hereinafter "Travelers") are the insurance companies that issued property damage insurance policies to Bernstein. Bernstein sued Travelers alleging bad faith for delaying payment and making "low-ball" settlement offers. Travelers eventually paid the claims as determined by a panel of arbitrators.

The pending motion to compel raises the issue whether Bernstein is entitled to discover (1) the amounts that Travelers "reserved" at various junctures on Bernstein’s claim, (2) the internal notes and communications by Travelers’ employees related to such reserves, and (3) the criteria or considerations that Travelers instructed its employees to use when determining the size of reserves on claims of the kind Bernstein made to Travelers. Notably, Travelers did not contend that any of the discovery sought is protected by any privilege or the work product doctrine. Instead, Travelers contends that the material is irrelevant.

In deciding this issue, the Court applies both federal procedural law and California substantive law. However, California substantive law was applied in determining the scope of relevance as it is "rooted squarely in the substantive legal norms that the parties claims and defenses bring into play - not in any procedural rule." The Court did express concerns about interpreting California substantive law because the dispute implicates a potentially important question of substantive state law whose answer is not clear.

In addressing the relevance of the discovery, the Court relied heavily on Lipton v. Superior Court (1996) 48 Cal. App. 4^th 1599, which held that in some settings, the carrier’s subjective state of mind, and what motives animated its conduct, could constitute critical areas of inquiry in bad faith cases.

Bernstein argued that Travelers (1) repeatedly and intentionally refused to release payments it knew were owed, (2) self-consciously employed a strategy of making unjustifiable demands for proof of loss to further delay making payments, and then (3) paid less than it knew was owed, all in order to soften Bernstein up to a low-ball settlement offer. Therefore, the Court agreed that discovery of reserves would shed light on Travelers’ internal assessments. Important to the Court’s determination was the fact that the information was unavailable from other sources, it was clearly intended to "illuminate the bad faith claim," and complying would impose little burden on Travelers.

The Court granted the motion on the condition that the information that Travelers produced about the loss reserves and the internal criteria and communications related thereto are subject to a protective order prohibiting Bernstein or his counsel from using the information for any purpose other than the subject litigation.

Important to note is a comment by the Court that they would be making a "circumstance-specific determination in the case at bar." The Court was careful not to cut off Bernstein’s access to evidence that could have considerable probative value if the state law issue is resolved in his favor.

© 2006 Crandall, Wade & Lowe

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