In the months ahead, disputes are likely to increase over insurance companies’ requests for an “examination under oath” (EUO) for Superstorm Sandy claims. Policyholders need to know that there are limits to how much information they must supply.
Insurers, Policyholders and EUOs
As companies continue to pursue insurance coverage for property damage and business-interruption losses resulting from Superstorm Sandy, they may be asked by their insurer for an EUO, a deposition-like proceeding where the insurer may question the policyholder on the claim’s details. Policyholders need to know that there are limits to the amount of information that must be provided and the methods by which it must be provided.
Noncompliance Does Not Always Mean Coverage Loss
Some policies require EUOs as a condition of coverage, and insurers typically threaten policyholders who refuse an EUO that they will forfeit coverage. Courts sometimes agree. However, many courts will excuse a policyholder’s noncompliance if the insurer’s request is unreasonable and/or the refusal does not result in any prejudice to the insurer. An explicit denial of coverage will almost certainly excuse the policyholder from submitting to an EUO, and a “constructive” denial may also be sufficient.
Policyholders who have supplied loss documentation and sworn proofs of loss and generally responded to an insurer’s requests for information on a loss should push back on an EUO request. At a minimum, an insurer should explain the reason for the EUO and what issues will be covered so that the policyholder can properly prepare and/or designate the right person within their organization to testify.
Insurers Are Fighting Claims
There have been numerous anecdotal reports since Superstorm Sandy of insurers offering lowball settlements, misrepresenting policy terms and using other chicanery to avoid paying claims and to reduce the amounts that are paid. Policyholders should expect the EUO to be another “weapon” in the insurers’ arsenal.
As a practical matter, policyholders should respond to such tactics by meticulously documenting all interactions with the insurer, promptly acknowledging and complying with all reasonable requests for information, and explicitly stating what they are unwilling to supply and why (e.g., relevance, burden of obtaining, excessive cost or another reason). A strong paper record documenting the policyholder’s good faith efforts to comply with reasonable requests and the insurer’s unending requests for duplicative or irrelevant information go a long way toward justifying a policyholder’s decision not to participate in an EUO and establishing an insurer’s bad faith, if necessary.
The Trend Favors Policyholders
The recent trend has been for courts to limit and condition insurers’ right to demand EUOs by applying general standards of “reasonableness” and requiring a showing of prejudice when claims are denied because the policyholder refused to submit to an EUO. For example, the Washington State Supreme Court recently rejected an insurer’s failure to cooperate defense in a case where the policyholder refused to submit to an EUO. Staples v. Allstate Ins. Co., No. 86413-6 1, 10 (Wash., Jan. 24, 2013).
In Staples, the policyholder submitted a claim for theft of tools. In the police report, Staples said the tools were worth $15,000, but in the insurance claim Staples claimed the tools were worth between $20,000 and $25,000. As a result of this discrepancy, Allstate demanded an EUO along with proof of ownership, a sworn statement in proof of loss, an authorization to release information and three years of tax returns. When the documents were not produced, Allstate cancelled the EUO and eventually denied coverage.
Staples sued, arguing that Allstate’s EUO demand was not material, justifiable or reasonable. Allstate argued that it had an absolute right to an EUO without regard to materiality or reasonableness under the terms of the policy.
The court sided with Staples, holding that “[g]iven the quasifiduciary nature of the insurance relationship, we hold that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it.” Because Allstate never explained what additional information it was seeking from the EUO, and given that Staples had already provided two recorded interviews, produced documents and signed a broad authorization allowing Allstate to obtain records from other sources, the court refused to hold that Allstate’s EUO demand was reasonable or justified.
The court went even further, however, and held that where an insured refuses to submit to an EUO, the insurer must demonstrate that it was prejudiced by the refusal in order to sustain a claim denial on that ground alone. “We have required a showing of prejudice in nearly all other contexts to prevent insurers from receiving windfalls at the expense of the public . . . [and] the same concerns apply equally to the EUO requirement.”
EOU disputes are increasing as Superstorm Sandy claims continue to rise. New York and New Jersey courts undoubtedly will be confronted with these disputes in the coming months and years. These disputes should be evaluated under the rubric of reasonableness, prejudice and materiality.
Policyholders should comply with reasonable requests for EUOs if they have not already provided complete information to document their claims and if the insurer discloses a discrete statement of what will be covered during the EUO. Conversely, insurers must be required to show that their demand for an EUO is reasonable and material to their claim investigation. The EUO should not be a fishing expedition or a mechanism to obtain free discovery for an inevitable insurance coverage lawsuit.
Finally, insurers must be required to demonstrate prejudice in order to sustain a coverage denial based on a policyholder’s refusal to comply with an EUO request.
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We invite you to visit our Superstorm Sandy and Mass Disaster Insurance Coverage webpage for updates.
A version of this article appears on National Underwriter Property & Casualty.