Carriers all too often request income tax returns from policyholders without any explanation as to how such information is relevant to the disposition of the claim. Such unsubstantiated requests do not fly, at least according to the United States District Court of South Dakota.1

In denying the carrier’s motion to compel, the Garry court held as follows:

Garrys’ tax returns from 1995 to 2002 are not relevant to any issues in this case nor will they likely lead to any admissible evidence. First, Garrys’ financial ability to buy new furniture is not relevant to whether defendant breached its contract. Garrys are seeking damages under their insurance contract for furniture they claimed was damaged by exposure to mold. Their ability to pay for replacement furniture has no bearing on any issues in this case and therefore their tax returns are not discoverable under this rationale. See Wacker v. Gehl Co., 157 F.R.D. 58, 59 (W.D. Mo. 1994) (party seeking motion to compel regarding issues not clearly relevant to the case must make threshold showing of relevance).

Second, there is no articulable correlation between Garrys’ income and their ability to initially acquire the personal property at issue. The property could have been acquired through cash, credit, savings, inheritance, or liquidation of assets. Garrys’ income between 1995 and 2002 as reported on their income tax returns does not directly correspond to the value of the alleged damaged personal property.

Finally, even if the tax returns have some relevance to the valuation of Garrys’ personal and real property, such information can be obtained through other documents. See Minnesota Min. & Mfg. v. North American Science Assoc. Inc., 189 F.R.D. 406, 408 (D. Minn. 1999) (information was not discoverable and could be obtained through other sources).

Courts, moreover, generally hesitate to order disclosure of tax returns even though they are not privileged. See Heathman v. United States Dist. Court for Central Dist. California, 503 F.2d 1032, 1035 (9th Cir. 1974) (although not privileged, courts have recognized a public policy against disclosure of tax returns); Wiesenberger v. W.R. Hutton & Co., 35 F.R.D. 556, 557 (S.D.N.Y. 1964) (courts are reluctant to order production of tax returns, so unless it is “clearly required in the interests of justice, litigants ought not to be required to submit such returns as the price for bringing or defending a lawsuit”). …

Furthermore, Garrys’ tax returns are neither relevant nor discoverable to prove lost income, lost time, or medical expenses. Garrys did not claim damages for these items and, therefore, none of these matters are at issue in this case. Because they are not at issue, Garrys’ tax returns are not relevant, will not lead to admissible information, and are not discoverable. Even if Homeland could demonstrate that these matters were in fact issues in this case, Garrys have waived any claim for damages related to lost income, lost time, or medical expenses.

In sum, unless the carrier can articulate the relevance of its tax return request,2 such request is legally untenable. And as the Garry court makes clear, even if the insurer articulates some semblance of relevance, the analysis is not over – if the “relevant” information the carrier claims it can glean from tax records is available through a less invasive source, the carrier should not get its hands on tax records.

To read previous posts in my series on dynamite discover decisions, click here.

1 Garry v. Homeland Central Ins., No. 03-cv-04019, D.E. 140 (D. S.D. Aug. 2, 2004).
2 In Florida, an insurance company is statutorily required to do so. See Fla. Stat. § 626.9541(1)(i)3.h (requiring carriers to “clearly explain the nature of the requested information and the reasons why such information is necessary”).