UrbCamCom/WSU I, LLC v. Lexington Insurance Company

Filing 30

ORDER affirming Magistrate Judge Randon's Order on Motion to Compel 23 and overruling defendant's objections 26 (MOTION for Order Overruling Magistate Judge Randon's August 13, 2013 Order Regarding Reserve Information filed by Lexington Insurance Company) Signed by District Judge George Caram Steeh. (MBea)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

URBCAM/WSU I, LLC,
Plaintiff,
Case No. 12-CV-15686
HON. GEORGE CARAM STEEH

vs.
LEXINGTON INSURANCE CO.,
Defendant.
_____________________________/

ORDER AFFIRMING MAGISTRATE JUDGE RANDON’S ORDER (Doc. 23)
AND OVERRULING DEFENDANT’S OBJECTIONS (Doc. 26)
This breach of contract action, based on diversity jurisdiction, arises out of water
damage to an apartment building in the City of Detroit which was insured by defendant
Lexington Insurance Company (“Lexington”). Plaintiff UrbCamCom/WSU I, LLC
(“UCC”) filed a motion to compel certain discovery which Magistrate Judge Randon
granted. Lexington timely filed objections to that order, solely to appeal that portion of
the order compelling Lexington to produce documents containing reserve information,
arguing that the evidence sought is irrelevant, and thus not discoverable. For the
reasons stated below, this court shall affirm Magistrate Judge Randon’s order.
A.

The lawsuit
On March 14, 2012, UCC submitted to Lexington a proof of loss for damages to

its apartment building in the amount of approximately $5.6 million. Lexington made a
partial payment, disputing the total amount sought, and pursuant to the policy and
Michigan law, the parties submitted their disagreement to an Appraisal. A partial
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appraisal award was entered providing for replacement cost value of repairs in the
amount of $5.27 million, and as a result, Lexington paid UCC an additional $3.2 million.
In addition, because the apartment complex was untenantable, Lexington made
payments exceeding $900,000 for business income loss and extra expenses. UCC
claimed additional amounts were owing for business income loss and extra expenses
which Lexington denied. UCC sought to submit the dispute to an Appraisal but
Lexington claimed that the disagreement was a coverage issue, which could not be
resolved through the Appraisal process. UCC then filed this lawsuit seeking a
declaratory judgment as to the coverage issue and a breach of contract claim which
seeks to recover the amount of the appraisal award, penalty interest and consequential
damages including attorney fees.
B.

The discovery dispute
On February 1, 2013, UCC sent Lexington requests for production of documents.

(Doc. 18 at 3). Lexington responded by producing certain documents along with a four
page “redaction log” indicating that it was redacting and withholding 22 documents on
the grounds that the information was “proprietary, confidential and irrelevant
(reinsurance or reserve) information.” Id. at 6-7.1 UCC filed a motion to compel
production of the redacted documents which Magistrate Judge Randon granted by
written order (Doc. 23) and compelled Lexington to provide UCC with unredacted copies
of (1) the executive claim summary to which the information on “damage/injury
assessment” had been blacked out (Doc. 22, Ex. 3), (2) the estimate of loss (Doc. 22,
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Magistrate Judge Randon did not compel production of reinsurance information
and that matter is not presently before the court.
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Ex. 4), and (3) e-mails from April and May, 2012 (Doc. 22, Ex. 5). UCC contends that
the executive claim summary and estimate of loss which Magistrate Judge Randon
ordered Lexington to produce, does not merely set forth a reserve amount but sets forth
Lexington’s evaluation of the claim and valuation of the loss. Lexington objects to the
order granting UCC’s motion to compel on the grounds that “reserve” information is
irrelevant. Lexington contends that the only issue before the court is whether coverage
exists for business loss beyond the period of restoration, and how the period of
restoration should be calculated.2 As the redacted information relates to damages,
Lexington alleges the information is irrelevant. UCC, on the other hand, argues that the
amount of the claim is relevant to its first-party suit for benefits from Lexington, and as
to its claim for declaratory judgment action. At oral argument before Magistrate Judge
Randon, UCC argued that information as to how Lexington made internal value
calculations is highly relevant to the issue of calculating losses. (Doc. 29 at 10).
C.

Standard of Law
A district court shall consider objections to a magistrate judge's non-dispositive

orders, and shall modify or set aside any portion of the orders found to be clearly
erroneous or contrary to law. Fed. R. Civ. P. 72(a); 28 U.S.C. § 636(b)(1)(A). A ruling
is clearly erroneous if, upon review of the record, the district court is left with a definite
and firm conviction that a mistake has been made. Heights Comm. Congress v. Hilltop
Realty, Inc., 774 F.2d 135, 140 (6th Cir. 1985), cert. denied, 485 U.S. 1019 (1986). The

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UCC argues that Lexington did not preserve this issue by raising it before
Magistrate Judge Randon but this court’s review of oral argument before Judge Randon
reveals that Lexington did preserve this claim.
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scope of discovery lies in the broad discretion of the district court. Lewis v. ACB
Business Services, Inc., 135 F.3d 389, 402 (6th Cir. 1998). An abuse of discretion
exists if a decision is based on an erroneous conclusion of law, the findings are clearly
erroneous, or the decision is clearly unreasonable or arbitrary. Youn v. Track, Inc., 324
F.3d 409, 420 (6th Cir. 2003). A magistrate judge's determinations are, thus, afforded
considerable deference, and will only be reversed when the reviewing court is “left with
a definite and firm conviction that a mistake has been committed.” In re Search
Warrants Issued Aug. 29, 1994, 889 F. Supp. 296, 298 (S.D.Ohio 1995).
D.

Analysis
A federal court sitting in diversity applies federal procedural law. Erie R.R. Co. v.

Tompkins, 304 U.S. 64, 78 (1938). If an issue is covered by the Federal Rules of Civil
Procedure, a federal court sitting in diversity must apply the federal rule. Hanna v.
Plumer, 380 U.S. 460, 471 (1965). Because the production of documents is covered by
Federal Rule of Civil Procedure 34, and the issue of relevance is determined by Federal
Rule of Civil Procedure 26, this court will apply federal law in reaching its decision here.
Rule 26 provides for broad discovery such that “[p]arties may obtain discovery regarding
any matter, not privileged, which is relevant to the subject matter involved in the
pending action. . . [so long as] the information sought appears reasonably calculated to
lead to the discovery of admissible evidence.”
“Reserves” are sums set aside by an insurer when a claim is made to ensure
that the claim can be properly investigated, and if valid, the insurer will be able to
indemnify the policy holder under the insurance contract. Leski, Inc. v. Federal Ins. Co.,
129 F.R.D. 99, 106 (D.N.J. 1989). Both sides have cited extensively to case law from
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federal district courts across the country and also to state court decisions on the subject
of whether reserve information is discoverable. Given the breadth of federal authority
on the issue, the court has not deemed it necessary to consider state court decisions.
Numerous federal district courts have ruled that reserve information is discoverable on
the issue of coverage and insurer’s position on liability.3 District judges sitting within
the Sixth Circuit have found that insurance reserve information is discoverable.4
Lexington relies on several cases to the contrary. Some of the cases Lexington relies
upon, wherein courts held that insurers need not produce reserve information, involved
holdings where the information sought was subject to attorney-client privilege or the
work product doctrine. See Independent Petrochemical Corp. v. Aetna Casualty &
Surety Co., 117 F.R.D. 283, 288 (D.D.C. 1986) (reserve information based on legal
input and may be protected by attorney-client privilege or work product doctrine);
Rhone-Poulenc Rover Inc. v. Home Indemnity Co., 139 F.R.D. 609, 613-14 (E.D. Pa.
1991) (reserves constituted work product material). In this case, Lexington does not
assert that the documents at issue are protected by the attorney-client privilege or the
work product doctrine, but objects solely on the basis of relevancy. Another case
Lexington relied upon held that reserves were not admissible at trial and did not discuss
relevancy with respect to discovery. Federal Realty Inv. Trust v. Pacific Life Ins., 760 F.

3

See, e.g., Woodruff v. Am. Family Mut., __ F.R.D. __, No. 1:12-CV-00859, 2013
WL 1729403, at *12 (S.D. Ind. Apr. 22, 2013); Madison v. Nationwide Mut. Ins. Co.,
No.1:11-CV-157-R, 2012 WL 4592135, at *4 (W.D. Ky. Oct. 1, 2012).
4

See, e.g., First Tenn. Bank Nat’l Ass’n v. Republic Mort. Ins. Co., 276 F.R.D.
215, 222 (W.D. Tenn. 2011); Retail Ventures, Inc. v. National Union Fire Ins. Co., No.
2:06-CV-443, 2007 WL 3376831, at *5 (S.D. Ohio Nov. 8, 2007).
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Supp. 533, 540 (D. Md. 1991). While it is true that Lexington has cited a number of
cases holding that reserve information is too tenuously connected to liability to be
discoverable, see e.g. Fidelity & Deposit Co. of Maryland v. McColloch, 168 F.R.D. 516,
525 (E.D. Pa. 1996); Leski, 129 F.R.D. at 106; Safeguard Lighting Sys. v. North Amer.
Spec. Ins. Co., No. Civ. A 03-4145, 2004 WL 3037947, *3 (E.D. Pa. Dec. 30, 2004),
Magistrate Judge Randon was not bound by those decisions, not only because the
decisions are not binding precedent, but because a plethora of decisions, as cited by
UCC, have been decided to the contrary. UCC seeks not only information as to the
reserve amount, but all damage and claim evaluation information. Reserve information
may reveal Lexington’s views about the merits and value of UCC’s claim which are
critical to the issue not only of first-party benefits but the coverage issue that is the
subject of the declaratory judgment suit as well.
Where the federal district courts are divided on the issue of whether reserve
information is relevant to an insurance coverage dispute and thus, must be produced
during discovery, Magistrate Judge Randon did not err in siding with those courts
holding in favor of production. Under Federal Rule of Civil Procedure 26, “[r]elevant
information need not be admissible at trial if the discovery appears reasonably
calculated to lead to the discovery of admissible evidence.” The court’s ruling here that
reserve information is discoverable is not a ruling that the information is admissible at
trial, which requires analysis under Federal Rule of Evidence 403. Given the breadth of
Rule 26 and the body of case law supporting the discovery of reserve information, this
court finds that Magistrate Judge Randon’s discovery order was reasonable and was
not clearly erroneous or contrary to law.
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For the reasons stated above, Lexington’s objections (Doc. 26) hereby are
OVERRULED and Magistrate Judge Randon’s Order Granting Plaintiff’s Motion to
Compel (Doc. 23) hereby is AFFIRMED. Lexington shall produce the documents
identified in Paragraph three of Magistrate Judge Randon’s order (Doc. 23) on or before
October 28, 2013. UCC’s request for sanctions hereby is DENIED.
IT IS SO ORDERED.
Dated: October 17, 2013
s/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
October 17, 2013, by electronic and/or ordinary mail.
s/Barbara Radke
Deputy Clerk

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