Insured May “Substantially Comply” with Insurer’s Request for Examination under Oath without Showing Up

April 10, 2013

Insurance LawProperty insurers have long viewed their contractual right to require policyholders to submit to examinations under oath (EUO) as a valuable tool in combating insurance fraud. The Washington Supreme Court’s recent decision in Staples v. Allstate Insurance Co., 295 P.3d 201(Wash. 2013), weakens the effectiveness of EUOs by imposing new hurdles for insurers seeking to deny coverage based the refusal of an insured to submit to EUOs .

The insured, John Staples, submitted a claim to his homeowners insurer for the value of tools and equipment that were stored in his van when the van was stolen from a parking lot.       Due to inconsistencies in the insured’s statements about the value of the tools and equipment, Allstate transferred the claim to its “special investigations” unit, and requested a variety of documents from Staples, including proof of ownership, a sworn proof of loss, an authorization to release information, and three years of tax returns. Allstate also took two recorded statements from Staples, neither of which was under oath.

Staples sent Allstate a sworn proof of loss and an authorization to release information approximately three months after the accident, but did not provide a proof of ownership or any of the financial information requested by Allstate. Allstate responded by demanding that Staples produce the remaining documents the following day and that he appear for an EUO in approximately two weeks. Shortly before the scheduled EUO, Allstate sent Staples a letter cancelling the EUO because Staples had yet to produce the requested. Only after Allstate denied the claim did Staples agree to submit to an EUO, and then only if the insurer would waive the contractual time limit for filing suit, which Allstate refused to do.

Staples sued Allstate for breach of contract and bad faith. The trial court granted summary judgment for Allstate based on the insured’s failure to comply with the policy’s requirement that the insured submit to a EUO upon the insurer’s request.

The Washington Supreme Court reversed, finding triable issues of fact. In so doing, the supreme court made three significant rulings regarding the scope of an insurer’s right to request an EUO and the circumstances when an insurer may deny coverage based on its insured’s failure to submit to an EUO.

Insurer Must Prove EUO’s Materiality

First, the court held “if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it,” noting its disagreement with the statement in  Downie v. State Farm Fire & Casualty Co., 929 P.2d 484 (1997), that an insurer has an absolute right to at least one EUO. Agreeing with Staples that there must be some outside limit on an insurer’s ability to demand an EUO, the court noted, for example, that “it would surely violate an insurer’s good faith duty to demand an EUO from every single claimant simply to burden insureds and set up pretexts for denying claims.”

Insurer Must Prove Actual Prejudice

Second, the court held an insurer must establish actual prejudice in order to deny an insured’s claim for noncompliance with a requested EUO. The court could have based its holding solely on language in Allstate’s policy providing that if an insured does not comply with its duties under the cooperation clause, including the duty to submit to an EUO, then Allstate has no duty to the insured if the failure to comply “is prejudicial to us.”(emphasis added). But the court went further and extended the “actual prejudice” rule already applicable to the general duty to cooperate to the duty to submit to an EUO.

Substantial Compliance Does Not Require Attendance

Finally, the court held that factual issues remained as to whether the insured “substantially complied” with Allstate’s EUO request, even though the insured never submitted to an EUO. Evidence supporting a finding of substantial compliance, in the court’s view, included the fact that Staples had previously appeared for two interviews, authorized broad access to a range of financial documents, and finally offered to appear for an EUO if Allstate would extend his time to file suit.

Implications

The Staples decision underscores the need for insurers to create a record explaining why they need an EUO, at least in Washington. The problem in doing so is that an explanation of the materiality and relevance of the information the insurer is seeking may undermine the insured’s fraud investigation. That is why other jurisdictions have allowed insurers to demand an EUO without proving materiality or prejudice. See, e.g., Brizuela v. CalFarm Insurance Co., 10 Cal.Rptr.3d 661 (2d Dist. 2004). See also California Code of Regulations § 2695.7(c)(2), which exempts insurers from disclosing “any information that could reasonably be expected to alert a claimant to the fact that the claim is being investigated as a possible suspected fraudulent claim.”