Discovering Claim Reserves and Reinsurance Arrangements in Insurance Litigation

Every insurance claim has a number that the policyholder never sees: the reserve. This is the amount the carrier has set aside internally to cover the anticipated cost of the claim. It is the carrier’s own assessment — prepared by its own adjusters, reviewed by its own supervisors, audited by its own actuaries — of what the claim is actually worth. When the carrier offers a policyholder $85,000 to settle a claim on which it has internally reserved $220,000, the reserve tells a story that the settlement offer does not.

Behind the reserve sits another layer of information that carriers guard even more closely: the reinsurance arrangement. Reinsurance is insurance that the carrier purchases to protect itself against large losses. The structure of the carrier’s reinsurance treaties can reveal how the carrier’s economic incentives are shaped — at what point the carrier stops paying out of its own pocket and starts collecting from its reinsurer, and how that threshold may influence the carrier’s willingness to settle.

In litigation, both reserves and reinsurance information can be obtained through the discovery process. But carriers fight disclosure of both categories of information aggressively, invoking privilege, work product, and relevance objections. Understanding why this information matters and how to overcome the objections is a critical skill for any attorney litigating against an insurer.

What Claim Reserves Are and Why They Matter

A claim reserve is an accounting entry that represents the carrier’s estimate of the total amount it expects to pay on a particular claim. When a loss is reported, the adjuster establishes an initial reserve based on preliminary information. As the claim develops — as damage assessments are completed, as additional coverages are triggered, as the full scope of the loss becomes apparent — the reserve is adjusted upward or downward to reflect the current expected payout.

Reserves serve a regulatory purpose: state insurance departments require carriers to maintain adequate reserves so they have sufficient funds to pay claims. But reserves also serve an evidentiary purpose in litigation that carriers would prefer to keep hidden: the reserve is the carrier’s own contemporaneous valuation of the claim. It is established and updated by the same adjusters and supervisors who handle the claim, and it reflects the carrier’s internal judgment about what the claim is actually worth.

The Reserve as Evidence of Claim Value

The evidentiary significance of a reserve cannot be overstated. When a carrier sets a reserve of $300,000 on a claim but offers the policyholder $120,000 to settle, the gap between the reserve and the offer is powerful evidence that the carrier knows the claim is worth more than it is willing to pay voluntarily. This gap is directly relevant to both the underlying coverage dispute (what is the claim actually worth?) and to any bad faith claim (did the carrier fail to offer a fair settlement when the value of the claim was reasonably clear?).

Reserve history is equally important. Tracking how the reserve changed over time reveals the carrier’s evolving assessment of the claim. A reserve that was initially set at $250,000, then reduced to $100,000 after the policyholder hired a Public Adjuster or attorney, suggests that the reduction was retaliatory rather than based on new information about the claim’s value. Conversely, a reserve that was always low despite documentation supporting a higher value suggests the carrier was managing the reserve to keep settlement authority artificially constrained.

The Reserve as Evidence of Bad Faith

In a bad faith lawsuit, the reserve history is often the single most damaging piece of evidence against the carrier. California bad faith law, rooted in the implied covenant of good faith and fair dealing, requires the insurer to make a good faith effort to settle a claim when the value becomes reasonably clear. If the carrier’s own reserve indicates that it valued the claim at a figure substantially higher than what it offered, this creates a compelling inference that the carrier was not making a good faith settlement effort.

Additionally, reserve manipulation — artificially lowering the reserve to constrain settlement authority or to make the claims file look better during internal audits — is itself evidence of bad faith claims handling. When reserve reductions coincide with events unrelated to claim value (the policyholder hiring representation, the claim approaching a litigation deadline, a change in adjuster personnel), the manipulation becomes transparent.

Reinsurance: The Hidden Economic Layer

Reinsurance is the mechanism by which insurance companies transfer portions of their own risk to other insurers (reinsurers). The primary carrier pays a premium to the reinsurer, and in exchange, the reinsurer agrees to cover a portion of the carrier’s losses above specified thresholds. Reinsurance arrangements are complex, varied, and highly confidential — carriers treat their reinsurance treaties as proprietary business information.

How Reinsurance Structures Affect Claim Handling

Reinsurance arrangements can create perverse incentives in claim handling. The most common reinsurance structure is “excess of loss” reinsurance, where the reinsurer covers losses above a specified retention level (sometimes called the “attachment point”). For example, a carrier might retain the first $500,000 of any single claim and have reinsurance covering amounts above that threshold.

This structure creates a powerful economic incentive for the carrier to keep individual claim payments below the reinsurance attachment point. Every dollar the carrier pays below the retention comes directly from its own reserves. Every dollar above the retention is partially or fully covered by the reinsurer. A carrier with a $500,000 retention has a strong financial incentive to settle a $700,000 claim for $450,000 — the $250,000 savings comes entirely out of the reinsurer’s pocket, not the carrier’s.

In catastrophe situations, reinsurance dynamics become even more significant. Carriers typically have catastrophe reinsurance that covers aggregate losses above a threshold for a single event (such as a wildfire or hurricane). The carrier has an incentive to minimize individual claim payments to reduce its aggregate exposure and potentially stay below the catastrophe reinsurance attachment point — or, alternatively, to push aggregate losses above the attachment point so the reinsurer bears the cost. Either way, the reinsurance structure influences how claims are handled, and policyholders are entitled to understand that influence.

Reinsurance Reporting and the Claims File

Many reinsurance treaties require the primary carrier to notify the reinsurer of claims above certain thresholds and to provide periodic reports on claim status, reserves, and settlement negotiations. These communications between the carrier and its reinsurer can contain valuable information for the policyholder: the carrier’s candid assessment of claim value, the reinsurer’s views on coverage and settlement, and evidence of the reinsurer’s involvement in claim handling decisions. If the reinsurer has been directing the carrier to deny or reduce a claim, that fact is highly relevant to a bad faith analysis.

California Discovery Rules for Reserves

California has a liberal discovery standard. Code of Civil Procedure section 2017.010 permits discovery of any matter “not privileged, that is relevant to the subject matter involved in the pending action,” including information that “appears reasonably calculated to lead to the discovery of admissible evidence.” Under this standard, claim reserves are clearly discoverable in insurance litigation — they are relevant to both claim value and bad faith, and they are not privileged.

The Privilege Arguments Carriers Make

Despite the clear relevance of reserves, carriers routinely object to reserve discovery on multiple grounds. Understanding these objections — and why they generally fail — is essential for practitioners.

• Attorney-client privilege. Carriers argue that reserves were set or adjusted based on legal advice and therefore reflect privileged communications. This argument fails because the reserve itself is a business record, not a legal communication. The fact that an attorney may have been consulted in setting the reserve does not transform the reserve amount into a privileged communication. The reserve is an accounting entry required by regulators, and it exists independently of any legal advice.
• Work product protection.Carriers argue that the reserve reflects the carrier’s mental impressions, conclusions, and litigation strategy. This argument has more traction than the privilege argument but still generally fails in California insurance litigation. The reserve is set in the ordinary course of claims handling, typically before litigation commences. Even when the reserve is adjusted after litigation begins, California courts have held that the reserve amount — as distinct from the analysis underlying it — is discoverable.
• Irrelevance. Carriers argue that the reserve is merely an internal accounting figure that does not reflect the actual value of the claim. This argument is circular: the carrier maintains that its own internal valuation of the claim is irrelevant to determining what the claim is worth. Courts routinely reject this position.
• Undue prejudice. Carriers argue that disclosing the reserve will prejudice them because the jury will treat the reserve as an admission of value. This argument goes to admissibility at trial, not discoverability. Even if a court ultimately limits the use of reserve evidence at trial, the information is discoverable in the pretrial phase.

Key California Authority on Reserve Discovery

California courts have consistently upheld the discoverability of claim reserves in insurance bad faith litigation. The rationale is straightforward: the reserve reflects the carrier’s contemporaneous evaluation of the claim, and that evaluation is directly relevant to whether the carrier acted in good faith in its handling and settlement of the claim. Practitioners seeking reserve discovery should emphasize the connection between the reserve and the bad faith claim — the reserve is not sought to determine policy coverage in the abstract, but to demonstrate whether the carrier’s settlement conduct was consistent with its own internal assessment of claim value.

Discovering Reinsurance Information

Reinsurance discovery is more contested than reserve discovery, but it is obtainable in California under the right circumstances. The key is demonstrating relevance to the claims at issue.

When Reinsurance Is Relevant

Reinsurance information is most clearly relevant when the policyholder can articulate a specific theory about how the reinsurance arrangement influenced the carrier’s claim handling. Examples include:

• The reinsurer participated in or directed claim handling decisions, such as approving or rejecting settlement offers, directing additional investigation, or requiring specific coverage positions
• The carrier’s settlement behavior appears designed to keep claim payments below the reinsurance attachment point, suggesting that the carrier is managing its reinsurance exposure at the policyholder’s expense
• Communications between the carrier and the reinsurer contain candid assessments of claim value or coverage that differ from the positions taken with the policyholder
• The reinsurance treaty contains provisions that penalize the carrier for exceeding loss ratios, creating a structural incentive to suppress claim payments

Overcoming Confidentiality Objections

Carriers typically object to reinsurance discovery on grounds of commercial confidentiality, arguing that reinsurance treaties contain proprietary business terms that could harm the carrier competitively if disclosed. This objection can be addressed through a protective order that limits the use and dissemination of the reinsurance information to the pending litigation. California courts regularly enter such orders to balance discovery rights against legitimate confidentiality concerns. The existence of confidentiality concerns does not eliminate the right to discovery — it simply shapes the terms under which discovery is produced.

Practical Litigation Strategies

Obtaining reserve and reinsurance discovery requires a proactive and strategic approach. Carriers will not produce this information voluntarily. The following strategies can increase the likelihood of successful disclosure.

Tailored, Specific Discovery Requests

Overly broad requests for “all documents relating to reserves” invite objections and provide the carrier with ammunition to argue that the request is unduly burdensome. Instead, target specific information: the initial reserve amount, every subsequent change to the reserve with the date and stated reason for the change, the identity of the person who authorized each change, and any correspondence or internal memoranda discussing the reserve. For reinsurance, request the specific treaty or treaties applicable to the claim, any notices sent to the reinsurer regarding the claim, and any communications between the carrier and reinsurer regarding claim handling, coverage, or settlement.

Deposition Testimony on Reserves

Deposing the adjuster and the adjuster’s supervisor about the reserve-setting process can yield critical evidence even before the reserve documents themselves are produced. Questions about how reserves are established, who approves reserve changes, what factors are considered, and whether the reserve was ever reduced — and if so, why — can reveal the carrier’s internal processes and set up the document demands that follow.

Motion Practice When the Carrier Refuses

When the carrier refuses to produce reserve or reinsurance information, a motion to compel is necessary. The motion should articulate the specific relevance of the information to the claims at issue, address the carrier’s privilege and work product objections with applicable authority, and propose a protective order to address any legitimate confidentiality concerns. California courts have broad discretion to compel discovery, and the standard favors disclosure.

Using Reserve Evidence Effectively

Once obtained, reserve evidence must be deployed strategically. The most effective use is typically in the bad faith phase of litigation, where the gap between the reserve and the settlement offer demonstrates that the carrier knew the claim was worth more than it was willing to pay. Reserve evidence is also valuable in settlement negotiations — presenting the carrier with its own internal valuation can prompt a more realistic settlement discussion, particularly when the carrier realizes that a jury will see the reserve at trial.

The Intersection with Pattern and Practice Discovery

Reserve and reinsurance discovery becomes even more powerful when combined with pattern and practice discovery — discovery into the carrier’s handling of similar claims. If the carrier systematically under-reserves claims of a particular type, or if its reinsurance structure creates consistent incentives to underpay, that pattern is relevant to proving that the carrier’s conduct on the policyholder’s claim was not an isolated error but part of a systemic practice. California courts, following the reasoning of Colonial Life & Accident Insurance Co. v. Superior Court(1982) 31 Cal.3d 785, have permitted broad discovery into an insurer’s claims-handling practices in bad faith litigation.

For Policyholders Not Yet in Litigation

The discovery tools discussed in this article are available only to policyholders who have filed a lawsuit. During the pre-litigation claims process, the policyholder has no legal right to demand the carrier’s reserves or reinsurance information. However, understanding that these tools exist — and that the carrier knows they exist — can inform the policyholder’s claims strategy.

A carrier that is underpaying a claim knows that if the policyholder litigates, the reserve will be discoverable. The gap between the reserve and the offer will be laid bare. A policyholder or Public Adjuster who communicates, directly or implicitly, that they are prepared to litigate and obtain this information is sending a powerful message: the carrier’s internal numbers will eventually become evidence. This awareness can, in some cases, produce a more reasonable settlement without the need for formal litigation.

Sources & Further Reading

• Shernoff Bidart Echeverria LLP— Attorneys at Shernoff Bidart Echeverria and at other plaintiff-side insurance litigation firms have published extensively on discovery strategies in insurance bad faith cases, including the discoverability of claim reserves and the evidentiary significance of reserve manipulation. Search for their publications on insurance bad faith discovery and reserve evidence.
• Pillsbury Winthrop Shaw Pittman LLP— Pillsbury’s insurance recovery practice has analyzed the discoverability of reinsurance information in coverage and bad faith disputes, including the circumstances under which courts have compelled production of reinsurance treaties and carrier-reinsurer communications.
• Policyholder-side coverage commentary— The policyholder-side coverage bar has written extensively on the use of reserve evidence in bad-faith litigation. The argument frequently advanced is that the claims reserve is the insurer’s own contemporaneous assessment of what the claim is worth, prepared by its own people for its own purposes — so when that number vastly exceeds the settlement offer, the inference of bad faith is difficult to escape.
• Colonial Life & Accident Insurance Co. v. Superior Court (1982) 31 Cal.3d 785 — This California Supreme Court decision established the right to pattern and practice discovery in insurance bad faith litigation, which forms the foundation for broader reserve and claims-handling discovery.
• California Code of Civil Procedure section 2017.010— The statutory basis for California’s liberal discovery standard, which permits discovery of any nonprivileged matter relevant to the subject matter of the pending action.