We help people when insurance companies don't keep their promises.


By Mike Abourezk and Marialee Neighbours

Before discussing the law governing discovery of personnel files, it is helpful to understand why non-party personnel files are important in a bad faith case. Insurance company personnel files contain employee performance evaluations. Compiled prior to litigation, performance evaluations often reveal information about an insurer's pay for performance goals that influence claims handlers.

Relevancy of Pay for Performance Goals

An insurance company frequently sets financial goals for denying or underpaying claims. In these instances, the insurer will institute a variety of corporate programs that reward claims personnel for minimizing claims and, conversely, will punish them when they fail to minimize claims payments. In other words, the job performance of claims personnel is linked to their pay.

Moreover, it is not just the personnel files of lower level claims handlers that are important. Sometimes the lower level claims handlers receive no direct cash incentives, but the supervisory personnel do, which causes supervisors to persistently ride their subordinates to low-ball policyholders. In turn, a claims adjustor, wanting to keep his or her job or advance in the company, will look for ways to earn cash bonuses for the boss.

Legitimate experts in the insurance business agree that it is an illicit practice to link the job performance of claim personnel to their pay. For instance, a primary trade journal for the claims industry is "Claims Magazine." In its October, 2004 edition, the magazine printed an article about the January, 2004 South Dakota Federal District Court verdict in Torres v. Travelers Insurance Co.. The article discussed the jury's award of $12 million dollars in punitive damages in response to Travelers' employee incentive programs.

This is what Claims Magazine said:

The adjuster's job is not to turn a profit for the company, to advance a company's A.M. Best Rating, or to max out on the incentive compensation plan. Once these factors seep into the adjuster's consciousness at the file handling level, mischief creeps in.

* * *

Doubtlessly, when they launch such plans, insurer's top management teams applaud themselves for their result oriented thinking in linking adjuster pay to the corporation's financial goals.

Right on. About time we held those claim people accountable for financial results.

Right on indeed. Right on ... into the bad faith cesspool.

In Torres, Travelers Insurance Company repeatedly denied that it had any employee incentive programs. Travelers denied the existence of targets for claim payments. It denied the existence of a bonus program. It concealed documents showing the amount of bonuses paid to claims handlers or managers. However, discovery revealed an entire network of cash bonuses based directly on reducing the amount paid on claims. At trial, evidence of Traveler's employee incentive programs showed that Travelers paid bonuses based on reductions in claim payments. This evidence led to a jury award of punitive damages, which the district court approved based in part on the employee incentive plans.

Torres illustrates that it is often the supervisors who receive the most explicit instructions about limiting claims payments, and receive instructions on how to motivate their subordinates to accomplish that purpose. For instance, in Torres, the incentive plan was not discovered until review of a fourth level supervisor's personnel file, which congratulated him for his bonus. That discovery led to a further discovery which uncovered an entire network of bonuses based on reductions in claim payments.

Actual Pay For Performance Program

Pay for performance conduct is also shown in the company policy of one insurer, Farmers' Group, Inc. In 1993, Farmers implemented a new program to make certain that claims personnel understood this pay for performance policy. The program is called "Partners in Progress."

This is how the "Partners in Progress" program operates. Under the program, all employees, including claims handlers, meet with their supervisors at regular intervals to agree on company goals for the upcoming time period. At the end of the period, the employee again meets with his or her supervisor to review whether these goals were met. If the goals are met, the employee receives a favorable rating, such as "Exceeds Expectations," or "Meets Expectations." When goals are not satisfied, then the employee receives a rating of "Below Expectations." The ratings assigned to an employee have a direct correlation with the level of compensation provided to that employee. As the Partners in Progress manual states:


You should be compensated according to how well you perform in critical performance areas. By rewarding achievers, we put ourselves in a position to develop future leadership and to accomplish our critical company business goals. On the other hand, if performance fails to match expectations, your compensation will reflect that.

This performance management program is designed to link to our pay system. You can expect that your individual performance ratings will play a key role in determining your pay level for the year.

Good performance and Minimizing Aggregate Claims Payments

Good performance is equated directly with minimizing aggregate claims payments. This fact is best understood by reviewing excerpts from actual performance evaluations of Farmers' claims handlers or their supervisors:

As you enter your second year as BCM [Branch Claims Manager], your enthusiasm for the job continues unabated ....Overall costs are down in liability, collision, UM and med. pay. In 1994, Tucson B7 came in second in the BCO [Branch Claims Office] contest....you will continue to have many challenges for 1995 and 1996. We need to get a handle on costs and you must communicate that need to your people....I am very happy with your performance, keep up the good work. (emphasis added).

You have not only maintained indemnity costs at inflationary levels, but you have made a significant reduction in your costs. This is a very good result....Exceeds expectations.

While overall indemnity costs fell in 2001 compared to 2000, individual line results varied greatly, exceeding several targets. Your rating in this area is guided by these mixed results. (emphasis added).

Your costs have increased 41 % while BCO [Branch Claims Office] costs increased 23 % ...below expectations.

As demonstrated by these excerpts from Farmers' performance evaluations, an insurance company devises ways to track the actual achievement of its financial goals to minimize claims payments. These goals are discussed in the personnel records of its employees, including claims personnel.

Personnel Files Ordered Produced When Legitimate Need for Discovery

Although production of non-party employee files is not a step that courts undertake lightly, personnel files are routinely required to be produced when there is a legitimate need for discovery. For instance, in a Kentucky bad faith case, the plaintiff alleged that compensation of the insurer's employees could be tied to obtaining low settlements which might encourage bad faith practices by adjusters and other employees. Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 815 (Ken. 2004). In Grange Mutual, the Kentucky Supreme Court held that information in an insurer's personnel files such as job performance, bonuses, wage and salary data, disciplinary matters were relevant to the plaintiff's bad faith claim. In that case, the court said:

Job performance and disciplinary information could help show that the adjusters and their supervisors engaged in bad faith practices in adjusting Wilder's initial claim or that they had engaged in bad faith practices at other times. This information could also show Grange's knowledge or even approval of such practices. This makes those portions of the personnel records related to job performance and disciplinary matters discoverable.


In a case alleging employment discrimination, Judge Tunheim upheld the magistrate's order compelling discovery of thirteen individual personnel files in a case alleging employment discrimination. See Cardenas v. Prudential Insurance Company of America, 2003 WL 244640 (D. Minn. 2003). The court thoroughly discussed this issue, and found that "courts have customarily allowed a wide discovery of personnel files."

Redacting Identifying Information Is Adequate To Protect Privacy Concerns Of Third Parties

In pre-trial discovery, an insurance company will often assert that disclosure of personnel files will violate individual employee privacy rights. An effective way to address this issue is for the plaintiff to agree not to disclose any information from personnel files that would reveal the identity of any third-parties outside the pending litigation. This procedure protects the privacy rights of the employees while still allowing important discovery to go forward.

In addressing the argument that personnel files contain confidential information about employees, the Ninth Circuit adopted a similar solution:

Simply redacting the identifying information of third parties (e.g., their names, addresses, telephone numbers, and social security numbers) from these records and disclosing the remaining information would not injure the third parties but would reveal only State Farm's actions in processing personal injury claims. This disclosure might harm State Farm by exposing it to additional liability and litigation, as noted above, but a litigant is not entitled to the court's protection from this type of harm.

Foltz v. State Farm Mutual Automobile Insurance Company, 331 F.3d. 1122,1137(9th Cir. 2003), citing Nestle Foods Corp. v. Aetna Cas. and Sur. Co., 129 F.R.D. 483, 486 (D.N.J. 1990).


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