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Motion Denied: Insurer Not Required to Disclose Reserves

On Friday, the court released a decision that will be of interest to insurers and counsel handling first party claims.

In Kanani v. Economical Insurance, 2019 ONSC 7201, the plaintiffs brought a motion to compel an insurer to produce reserve information in an accident benefits claim. Justice Nadeau denied this request.

His Honour explained the reserve process as follows:

[16]         An insurance company is required to maintain reserves for all claims which have an open status. This is because it takes some time for the company to determine the full indemnity amount under the policy and related expense amounts for the claim, then pay out and close the claim. While the claim is open, the company is required to set aside funds to allow them to make future payments should claims be advanced. Besides reserves for each claim, the company also carries a ‘bulk provision’ for reserves for the following reasons;

(a)   at any point in time, there are some claims which have already occurred but have not been reported and therefore do not have any reserves on them;

(b)   there will be some claims where the final payments will be greater than the reserves created for them, based on additional information on these claims as well as unforeseen developments, like health complications from an injury; or

(c)   some closed claims will also re-open based on new information that comes to light.

[17]         Reserves are maintained to allow for payment should claims be advanced. Each adjuster reserves an active case because they are required to under the Insurance Act. This applies to all claims. Both the individual claim reserve and the ‘bulk provision’ are required to be included within the ‘liability’ section of the insurer’s balance sheet to provide an accurate reflection of the financial condition of the company, as required by the aforementioned legislation. Reserves are estimated amounts assigned by an insurer to account for the total possible future payout of a person’s claims arising from an accident. Reserves include not only benefits but legal costs, claim expenses and reinsurance conditions. Reserve amounts are a required prudential mechanism to set aside funds to meet future obligations. Claim reserves are an estimate of the ultimate future cost of resolution and administration of claims.

Justice Nadeau stated that “reserves do not relate to the process or manner in which the claim is assessed or adjudicated; these are a separate process and have very separate considerations”. The setting of reserves is several steps removed from the process of dealing with an insured and assessing a claim in a balanced and reasonable manner.

Absent specific unusual facts, reserve information is not relevant to adjusting a claim. In order for reserve information to be potentially relevant, evidence is required that the setting of reserves influenced or dictated the ongoing assessment of the claim or influenced bad faith conduct. The plaintiffs did not provide any such evidence.

Moreover, Justice Nadeau indicated that the prejudicial effect of requiring an insurer to produce reserve information would outweigh its minimal, if any, probative value.

Disclosure of the insurer’s reserves, with a continuing obligation to disclose up to the time for trial, would confuse the trial process and also affect any potential settlement discussions and prospects for resolution. The ability of an insurer to negotiate a settlement could be impaired because knowledge of the reserve might well create a feeling of entitlement in the claimant to a settlement in that amount, whereas the reserve is nothing more than an intelligent estimate of the risk as a whole by the insurer, based upon the facts as known at the time.

Ordering disclosure of reserve information would be equivalent to imposing on a defendant a continuing obligation to tell a plaintiff how much it estimates the claim is worth.

Justice Nadeau stated that “allowing such a litigation tactical position in these circumstances does not properly reflect the separate spheres in which claims adjusting and the obligation to set reserves operate, and would also provide the Plaintiffs with an unfair, and unnecessary on these facts, advantage in this action”.

In summary, the setting of reserves is separate from how a claim is adjusted. As a result, unless there are rare and exceptional circumstances, an insurer does not have provide a claimant with information on reserves.