D&O Insurer With No Duty To Defend Ordered To Produce Loss Reserve Information But Not To Answer Interrogatories Asking For Its Interpretation Of Policy Terms In The Abstract

Originally published in California Insurance Newsletter - Vol. 11, 2017

01.23.17

Everest Nat’l Ins. Co. v. Santa Cruz County Bank, 2016 U.S. Dist. LEXIS 149975 (N.D. Cal. Oct. 28, 2016)

Categories: Discovery Disputes – Loss Reserves – Interpretation of Policy Terms in the Abstract

Where an insurer has no duty to defend but, at most, a duty to advance fees, is loss reserve information necessarily irrelevant to whether the insurer properly handled a request for defense benefits in connection with underlying litigation? And is it proper to object to interrogatories requesting an interpretation of certain policy terms in the abstract? In Everest National Insurance Company v. Santa Cruz County Bank, the court considers these issues in resolving discovery disputes between a directors and officers liability insurer and its insured.

A directors and officers liability insurer filed this action for declaratory relief seeking a judgment stating that its policies do not cover the insured bank’s defense costs or losses in connection with four underlying lawsuits involving a ponzi scheme in which one of the insured bank’s vice presidents allegedly took part. The insured bank counterclaimed against the insurer and alleged that the insurer had initially mishandled the first of the four underlying suits, as to which the insurer had initially denied coverage but then reversed and agreed to advance defense costs subject to a reservation of rights. This decision addresses two discovery disputes.

The first discovery dispute concerns loss reserve information. The insurer refused to produce such information, arguing that it is irrelevant when the policy at issue is not a duty to defend policy. The court rejected that argument, however, reasoning that, regardless of whether the policy provides for a duty to defend or a duty to advance defense costs, loss reserve information is relevant concerning the insurer’s assessment of potential liability and its conclusions regarding the policy’s coverage. Having concluded that the information is relevant with respect to whether the insurer acted in good faith in initially denying coverage, the court ordered the insurer to produce all responsive documents containing loss reserve information.

The second discovery dispute involved several interrogatories asking the insurer to state its interpretation of certain words and phrases in the policy. The insurer objected that the interrogatories seek irrelevant information “given the legal requirement that all policy language be considered in the context of the policy as a whole and with reference to a specific claim,” and that the interrogatories seek pure legal conclusions; without waiving its objections, the insurer responded “that the terms in question are to be understood in their ordinary and popular sense of said terms as read within the relevant policy in its entirety and with reference to a given specific claim that could potentially fall within coverage under a policy.” The insured moved to compel further responses. However, the court agreed that these particular interrogatories present questions of pure law, “invit[ing] answers involving abstract legal definitions or discussions entirely divorced from the factual context of this case.” Finding the insurer’s objections and response appropriate, it declined to compel any further response.

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