*1 On March 29, 2022, Plaintiff C.J. Segerstrom & Sons (“Segerstrom”) filed suit against Defendants Lexington Insurance Company (“Lexington”) and Starr Surplus Lines Insurance Company for breach of contract, tortious breach of implied covenant of good faith and fair dealing, and for declaratory relief. Dkt. 1 (“Complaint”). Plaintiff, which owns and operates a shopping mall, alleges that Defendants breached their obligations under commercial insurance policies by relying on inapplicable exclusions to deny claims made by Plaintiff on the policies for financial losses of over $5,000,000 caused by the closure of the mall due to the COVID-19 pandemic. Id., ¶¶ 1-3, 6-7.

On September 28, 2023, Segerstrom filed the instant Motion to Compel the Production of Documents from Lexington (Dkt. 62, “Motion”) with a Local Rule (“L.R.”) 37-2 Joint Stipulation (Dkt. 64, “Jt. Stip.”), and a supporting declaration with exhibits (Dkt. 63), set for hearing on October 19, 2023. In the Motion, Segerstrom asks the Court to order Lexington to produce documents responsive to Request for Production (“RFP”) Nos. 33 and 34, which seek documents relating to reserves maintained by Lexington on Segerstrom's claim. Segerstrom filed a supplemental memorandum under L.R. 37-2.3 on October 5, 2023. Dkt. 65.

The Motion was heard on October 19, 2023, with Lexington ordered to file a declaration the following day regarding Lexington's loss reserves for Segerstrom's claim, after which the matter would be taken under submission. Dkt. 72. On October 20, 2023, Lexington filed the Declaration of Thomas J. Cryan (Dkt. 69 at 4, “Cryan Declaration”), attesting that a “nominal, placeholder” reserve was set for Segerstrom's claim when the file was opened and the reserve “was never changed to reflect anything other than a nominal, placeholder reserve.”

The Motion has now been fully briefed and argued and is ready for decision. For the reasons set forth below, the Motion (Dkt. 62) is DENIED.

“Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Fed. R. Civ. P. (“Rule”) 26(b)(1). Relevance under Rule 26(b)(1) is defined broadly. See Snipes v. United States, 334 F.R.D. 548, 550 (N.D. Cal. 2020); V5 Techs. v. Switch, Ltd., 334 F.R.D. 306, 309 (D. Nev. 2019) (noting that relevance for discovery purposes remains broad even after the 2015 amendments of the Federal Rules of Civil Procedure). Moreover, “[i]nformation within this scope of discovery need not be admissible in evidence to be discoverable.” Rule 26(b)(1). “Generally, the purpose of discovery is to remove surprise from trial preparation so the parties can obtain evidence necessary to evaluate and resolve their dispute.” Duran v. Cisco Sys., Inc., 258 F.R.D. 375, 378 (C.D. Cal. 2009) (citations omitted).

*2 Although relevance for discovery purposes is defined very broadly, it is not without boundaries. See, e.g., Rivera v. NIBCO, Inc., 364 F.3d 1057, 1072 (9th Cir. 2004) (“District courts need not condone the use of discovery to engage in ‘fishing expedition[s].’ ” (alteration in original)); Gonzales v. Google, Inc., 234 F.R.D. 674, 679-80 (N.D. Cal. 2006) (citing Hickman v. Taylor, 329 U.S. 495, 507 (1947)); Rule 26(b)(2). District courts have broad discretion in determining relevancy for discovery purposes. Mfg. Automation & Software Sys., Inc. v. Hughes, 2017 WL 5641120, at *3 (C.D. Cal. Sept. 21, 2017) (citing Surfvivor Media, Inc. v. Survivor Prods., 406 F.3d 625, 635 (9th Cir. 2005) (superseded by statute on other grounds)).

Under Rule 34(a)(1), a party may serve on any other party requests, within the scope of Rule 26(b), to produce or permit inspection of, among other things, “any designated documents or electronically stored information.” Such requests “must describe with reasonable particularity each item or category of items to be inspected ... [and] must specify a reasonable time, place, and manner for the inspection ....” Rule 34(b)(1)(A), (B).

“Upon a motion to compel discovery, the movant has the initial burden of demonstrating relevance. In turn, the party opposing discovery has the burden of showing that discovery should not be allowed, and also has the burden of clarifying, explaining and supporting its objections with competent evidence.” United States v. McGraw-Hill Companies, Inc., 2014 WL 1647385, at *8 (C.D. Cal. Apr. 15, 2014) (citations and internal quotation marks omitted); see also DIRECTV, Inc. v. Trone, 209 F.R.D. 455, 458 (C.D. Cal. 2002) (“The party who resists discovery has the burden to show that discovery should not be allowed, and has the burden of clarifying, explaining, and supporting its objections.”).

As noted, in this action, Segerstrom contends Lexington improperly denied coverage under its commercial property insurance policy for financial losses arising from the mandated closure of Segerstrom's shopping mall during the early months of the COVID-19 pandemic. Segerstrom alleges its losses are covered under the “Special Time Element – Cancellation Coverage,” in the main body of Lexington's policy and Lexington argues these losses are barred by an environmental pollution or contamination exclusion. Complaint, ¶¶ 1-6, 15, 17, 33. Segerstrom seeks to compel Lexington to produce of the following categories of documents relating to its reserve for the underlying claim (Jt. Stip. at 6-7):

Lexington argues the documents sought by these RFPs are not relevant. Jt. Stip. at 5, 11. The parties agree (see Jt. Stip. at 3, 5) that in California, insurers must maintain loss reserves in “an amount estimated in the aggregate to provide for the payment of all losses and claims for which the insurer may be liable[.]” Cal. Ins. Code § 923.5. Segerstrom contends information about Lexington's reserve for the instant claim is relevant to Segerstrom's claim for breach of the covenant of good faith and fair dealing, as, Segerstrom argues, Lexington's setting or changing of a reserve could show a lack of good faith in disputing coverage on grounds it knew were unmerited. Id. at 3, 8. Lexington argues reserves are set as a standard business practice, required by California law, and do not reflect a coverage decision. Id. at 5.

*3 California law recognizes loss reserves are not an admission of liability or the value of any particular claim. See Lipton v. Superior Ct., 48 Cal. App. 4th 1599, 1613–14 (1996); Bernstein v. Travelers Ins. Co., 447 F. Supp. 2d 1100, 1104 (N.D. Cal. 2006); Flintkote Co. v. Gen. Acc. Assur. Co. of Canada, 2009 WL 1457974, at *3 (N.D. Cal. May 26, 2009) (“[r]eserves are arguably an educated guess of what the insurer might be required to pay, may be incomplete and unreliable if set early in the claims process, and are adjusted frequently”) (citation omitted).

In applying California law regarding the discoverability of an insurer's reserves, “courts are split as to whether reserves are discoverable in bad faith suits against insurers.” Flintkote Co., 2009 WL 1457974, at *3. Courts acknowledge “there is a closer apparent proximity between the amount of a reserve and the coverage issue in a third-party action (alleging bad faith in declining to fund an insured's defense) than in a first party case.” Bernstein, 447 F. Supp. 2d at 1105; see, e.g., Lipton, 48 Cal.App.4th at 1606 (reserves relevant in third party action where plaintiff claimed the insurer negligently and intentionally deprived him of evidence demonstrating greater coverage, knowledge of which would have permitted a settlement of the underlying malpractice action within policy limits); see also Flintkote Co., 2009 WL 1457974, at *4 (reserves relevant in third party claim to whether “communications with plaintiff regarding its evaluation of the scope of the loss” were consistent with its assessment of potential liability).

When courts order reserve information produced in discovery in first-party bad faith cases, they typically explain why the reserve information is relevant to a particular issue in the case. See, e.g., Bernstein, 447 F. Supp. 2d at 1108 (reserves relevant to plaintiff's theory there were “big, inexplicable differences between what [the insurer] communicated to and demanded of plaintiffs and what [the insurer] really understood about both coverage and valuation issues.”); see also Beattie v. Provident Life & Accident Ins. Co., 2005 WL 8166041, at *5 (S.D. Cal. Sept. 23, 2005) (reserves relevant to a claim the insurer “intentionally targeted large loss claims for denial/termination tactics.”); Fay Ave. Properties, LLC v. Travelers Prop. & Cas. Co of Am., 2014 WL 1333669, at *3 (S.D. Cal. Apr. 2, 2014) (reserves relevant to claim insurer targeted claim for delays because it “knew from the outset that Plaintiff's claim was likely to be for a large sum of money”); Spahr v. Amco Ins. Co., 2010 WL 11459909, at *2 (C.D. Cal. Sept. 29, 2010) (reserves relevant as both parties raised issues regarding insurer's internal assessment of the claim at “various points in time”); Mauna Kea Resort, LLC v. Affiliated FM Ins. Co., 2009 WL 10677143, at *5 (D. Haw. Mar. 3, 2009) (reserves relevant where insurer contended plaintiff suffered less than a quarter of the damages sought, as a discrepancy between this valuation and the reserve amount would be circumstantial evidence of bad faith and a lack of thoroughness of the insurer's investigation).

Here, Plaintiff agreed at the hearing that under the applicable authorities, loss reserve information is not automatically discoverable in every first-party bad faith case; rather, such information must be relevant to some specific issue in the action. Here, Plaintiff argues that “documents relating to [Lexington's] loss reserves that have been set for Segerstrom's claim” are relevant because they “may contain admissions that coverage exists and may expose discrepancies between Lexington's internal assessments and its external communications and conduct.” Dkt. 65 at 5 (italics in original, bold added).

*4 However, as stated in the Cryan Declaration, Lexington set “nominal, placeholder” loss reserves when the claim file was opened, and those reserves have not changed. With the Cryan Declaration in mind, there is nothing to compel, and no relevance, with respect to RFP No. 34, which seeks only documents relating to “changes [Lexington] made to any reserve” set for the claim, as the reserves never changed. As to RFP No. 33, which seeks documents relating the any reserve contemplated, set, maintained, or changed, Plaintiff's proffer of relevance that such documents may contain “admissions” that coverage exists or may show “discrepancies” between Lexington's internal assessment of the claim and its denial of coverage, is not support by the facts, as the reserves were merely “nominal, placeholder reserves” that did not change – consistent with Lexington's denial of coverage and compliance with California Insurance Code Section 923.5. The documents sought by RFP Nos. 33 and 34 are not relevant to any issue in the case under the applicable authorities.

For the reasons set forth above, the Motion (Dkt. 62) is DENIED.