Property Claim Adjusting

A Basic Manual for First-Party Property Insurance Claims Adjusters

© 2017, Barry Zalma, Esq., CFE

The insurance adjuster is not mentioned in a policy of insurance. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions requiring the insured to, within sixty days of the loss, submit a sworn proof of loss. The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer can then either accept or reject the proof submitted by the insured.

Technically, if the wording of the policy was followed literally the insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insured could reject the claim. If the insured submits a timely proof of loss the insurer could accept or reject the proof of loss. If the insurer rejected the proof of loss the insured could either send a new one or give up and gain nothing from the claim. Insureds and insurers were not happy with that system since it seemed to run counter to the covenant of good faith and fair dealing. Most insurers understood that their insurers were mostly incapable of complying with the strict enforcement of the policy conditions. As a result, the insurance adjuster was created by the insurance industry.

“An ‘adjuster’ or ‘insurance adjuster’ is a person, co-partnership or corporation who undertakes to ascertain and report the actual loss to the subject-matter of insurance due to the hazard insured against.” As a result of its policy, an insurance company has a contractual obligation to pay its insured’s valid claim and, therefore, often dispatches one with special knowledge – the adjuster – to separate fact from fiction regarding a claim and obtain information to enable the insurance company to distinguish the valid claim from a claim for which the insurance company is not liable under its policy.

Some policies specifically state that the claimant must use his own judgment in estimating the amount of loss and that the assistance of an insurance adjuster is a “courtesy only” — the claimant must still send “a proof of loss within 60 days after the loss even if the adjuster does not furnish the form or help you complete it.”  As a general rule, “[w]hen an insurer gives its insured written notice of its desire that proof of loss under a policy of fire insurance be furnished and provides a suitable form for such proof, failure of the insured to file proof of loss within 60 days after receipt of such notice, or within any longer period specified in the notice, is an absolute defense to an action on the policy” [Stopani v. Allegany Co–op Ins. Co., 83 A.D.3d 1446, 920 N.Y.S.2d 559, 2011 N.Y. Slip Op. 2588 (N.Y. App. Div., 2011)]

Since the invention of the adjuster more than a century ago, the first person from the insurer that the insured meets when he or she suffers a first party property loss is the adjuster. The claim adjuster was invented to smooth the claims process and be certain that the insured receives the indemnity promised and performs a complete and thorough investigation to avoid fraudulent claims. As a result, every modern claims adjuster should know that it is his or her duty to aid the insurer in its obligation to fulfill the promises made by the policy of insurance and assist the insured in presenting his or her claim to the insurer.

An insurance adjuster is a person engaged in the business of insurance. Statutes define an adjuster as one who investigates losses on behalf of an insurer as an independent contractor or an employee of an independent contractor. An insurance adjuster is a special agent for the company and his powers and authority are prima facie coextensive with the business entrusted to his care, which is ascertaining and determining the amount of any claim, loss or damage payable under an insurance contract, and/or effecting settlement of such claim, loss or damage. The acts of an adjuster within the apparent scope of his authority are binding on the company without notice to the insured of limitations on his powers. [Old Republic Ins. Co. v. Von Onweller Const. Co., 239 So.2d 503 (Fla.App. 2 Dist., 1970)]

Although a special relationship exists between an insurer and insured because they are in privity of contract as an individual, the individual insurance adjuster is not in privity with the insureds based on their insurance policy wording. Thus, the employee adjuster does not owe a special duty to the insureds on which the bad faith tort could be based against the adjuster although actions of the adjuster can support a claim of bad faith against the insurer for whom the adjuster works. [Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032] In the absence of privity of contract, an insurance adjuster is not liable to an insured for a failure to settle a claim against an insured. [Dumas v. ACCC Ins. Co., 349 Fed.Appx. 489, 2009 WL 3358479 (C.A.11 (Ga.), 2009)]

An independent insurance adjuster is not liable to an insured for malfeasance when the insurer delegates to the adjuster the responsibility to handle the insured’s claim because the adjuster is not in contractual privity with the insured. (See Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032 (Gruenberg) that held that an insurance adjuster and law firm hired to adjust claim were not liable for bad faith; Sanchez v. Lindsey Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 253, 84 Cal.Rptr.2d 799 (Sanchez) where an independent adjuster hired to adjust claim was found to owe no duty to insured.

However, in Texas, the Texas Supreme Court has determined that the “adjustment of claims and losses” qualifies as “the business of insurance,” thus making an adjuster a “person” under the Insurance Code. Vail v. Texas Farm Bureau Mut. Ins. Co., 754 S.W.2d 129, 132 (Tex.1988); Gasch v. Hartford Indem. Co., 491 F.3d 278, 282 (5th Cir.2007) that held that an insurance adjuster who services a policy engages in the business of insurance and therefore could be held individually liable under the Texas Insurance Code). [Esteban v. State Farm Lloyds & Aaron A. Galvan, 23 F.Supp.3d 723 (N.D. Tex., 2014)]

Imposed on the adjuster is an obligation to investigate the loss, interpret the policy wording, and apply the policy wording to the facts discovered in the investigation. A first party property adjuster must be educated, trained, experienced and ready to help an insured obtain the benefits promised by the insurance policy. The adjuster does not act as an attorney for the insurer. As a result, any effort to expand the work-product doctrine to include the work of the insurance adjuster prior to retention of counsel requires a deliberative and participative process to assure a careful balance between advocacy and truthfulness. The routine taking of statements by an insurance adjuster is work in the ordinary course of business which fails to qualify as work product. [Sorrells v. Cole, 141 S.E.2d 193, 111 Ga.App. 136 (Ga. App., 1965); Popina v. Rice–Steward, Not Reported in S.E.2d, 86 Va. Cir. 402, 2013 WL 8118663 (Va.Cir.Ct., 2013)]

The Idaho Supreme Court has indicated that statements made to an insurance adjuster are work product and protected from discovery. In Dabestani v. Bellus, 131 Idaho 542, 961 P.2d 633, 636 (1998), the Idaho Supreme Court agreed that a statement made to an insurance adjuster was protected as work product and free from discovery. The work product objection is the type that could be made during the deposition itself as questions are presented and do not prevent the deposition of an adjuster. [Boswell v. Steele, 348 P.3d 497, 158 Idaho 554 (Idaho App., 2015)]

To make certain that the adjuster’s work is protected by the work product doctrine it is necessary that he or she be instructed by counsel that the work is in anticipation of litigation with an explanation from counsel why it needs to be protected.

If litigation is not anticipated the adjuster, after being assigned a first notice of loss caused by fire, lightning, windstorm, hail, or any other peril not excluded by a direct risk of loss policy, must begin work to complete a thorough investigation. The adjuster must understand that it is his or her obligation to determine if the loss is one for which the insurer promised to provide indemnity; determine if the conditions of the policy have been complied with by the insured; and reach agreement with the insured as to the amount of loss and the amount of claim compensable by the policy.

To fulfill this duty the adjuster must:

Read the Policy

To understand a first party property policy of insurance the adjuster must read and analyze the policy in a logical and thorough manner. The facts of each individual claim will clarify and color the interpretation of the policy contract and bring different nuances to the policy wording.  The adjuster must know what coverage is available to the insured, the limits of liability, the territory limitations, and the exclusions, conditions, and endorsements attached.

Reading the policy, and complying with the adjuster’s first duty, to confirm coverage, is essential. The adjuster must confirm – either by searching the underwriting files of the insurer (either directly in the underwriting department or by search of the insurer’s computer data base of policies in force) to establish that the insured is, in fact, insured by the insurer and had a policy effective on the reported date of loss. It is not unusual, considering that many insurers have similar names, for an insurer to receive a claim notice on a policy issued by a different insurer with a similar name. Failure to confirm coverage before beginning any part of a claims investigation may lead to a claim being paid that was owed by a different insurer.

To effectively read and analyze the policy of insurance the adjuster must get a complete copy of the insurance policy. The company’s copy (often called the “daily” when insurers maintain a paper underwriting file) usually has only a “declarations page” and partial copies of standard forms either on paper. When the insurer is paperless the policy is kept in digital format on the insurer’s underwriting database that can be accessed by the adjuster. Many, if not most, insurers are now paperless and each policy daily is kept on line.

It is necessary to properly review the policy file to first review the declarations page to identify each policy form attached to the declarations page and each endorsement attached. Most insurers use forms created by or adapted from policies created by the Insurance Services Office (ISO). If the endorsements are not standard forms it is necessary to obtain, either from the underwriting file, on line, from the insured or the producing broker, the actual policy as issued.  Regardless, the insured’s copy of the policy should be reviewed to confirm that the policy delivered to the insured matches exactly what the insurer’s records show it should be.

The adjuster, when interpreting a policy of insurance, must, like a court, analyze it like other contracts and construe the contract to give effect to the intention of the parties as manifested by the reasonable meaning of policy terms. [Amidano v. Donnelly, 260 N.J.Super. 148, 154, 615 A.2d 654 (App.Div.1992), certif. denied, 133 N.J. 435, 627 A.2d 1141 (1993). Because of the unequal bargaining power between an insurance company and its insured, and insurance companies’ expertise in this field, insurance policies are viewed as adhesion contracts. Although a court will not write a better policy for the insured than he or she purchased, an adjuster is obliged (as is a court) to strictly construe any exceptions to coverage against the insurer. Courts will enforce only the restrictions and the terms in an insurance contract that are consistent with the objectively reasonable expectations of the average insured.

The adjuster, or the insurer’s underwriting department, can recreate the policy from the declarations page, the partial forms in the “daily file,” and standard forms from the underwriting department by including each form listed on the declarations page.  By viewing a current copy of the policy in the possession of the insured, or automated information on the insurer’s computer database, the policy coverage can be confirmed.  The most reliable copy of the policy is the copy delivered to the insured. In many cases policies are delivered to the insured electronically in Adobe pdf format that, if not printed by the insured, may only exist electronically. Since most insureds do not read their policy the best secondary source for the policy wording is the agent or broker.

The adjuster must be familiar with each of the conditions, limitations, exclusions or exceptions from coverage before he begins the detailed part of its investigation. The so-called “concurrent cause doctrine” does not exist with regard to first party property insurance in California and many other states and has been eliminated by the wording of many modern policy wordings.

Before the policy wording was changed the “concurrent cause doctrine” held that if more than one cause concurs with others to bring about a loss and one cause is excluded and the other is not excluded, coverage will apply regardless of the proportion with which the non-excluded cause was related to the loss. Now, in California, as a result of Garvey v. State Farm Fire & Casualty Co., 257 Cal.Rptr. 292, 48 Cal.3d 395, 770 P.2d 704 (Cal., 1989), and many other states, the determination of what is a covered loss, requires the adjuster to determine the efficient proximate cause of the loss, and then apply the conditions, limitations and exclusions to the efficient proximate cause to determine if coverage applies. This is still the law in California for third party losses but not for first party losses.

Before other states could adopt the concurrent cause doctrine for first party losses the insurers changed the policy wording to avoid insuring against something they thought they had excluded. The newer policy wordings now require that coverage be determined, on first party policies, by the cause that is the primary, moving, or efficient proximate cause of the loss.

In some states concurrent cause still applies to first party losses. In South Carolina Farm Bureau Mutual Insurance Co. v. Durham, 380 S.C. 506, 671 S.E.2d 610, 612–14 (2010), the court found that the insureds’ damages—which were sustained when rain increased hydrostatic pressure around their pool, forcing the pool out of the ground and damaging their deck—were excluded from coverage because the policy contained an anti-concurrent cause provision that applied to water damage. Because water pressure was one of the causes that forced the pool out of the ground, the court concluded that the water damage exclusion applied.

When the policy expressly excluded the Martinezes’ loss as it specifically excluded losses that occurred directly or indirectly from subsurface water pressure the damage to the deck, rock garden, and waterfall resulted, directly or indirectly, from subsurface water pressure and the anti-concurrent cause language prohibited coverage. [Liberty Mut. Fire Ins. Co. v. Martinez, 157 So.3d 486 (Fla. App., 2015).

Read the Loss Notice

The purpose of a provision for notice of loss is to afford the insurer an adequate opportunity to investigate, to prevent fraud and imposition upon it, and to form an intelligent estimate of its rights and liabilities before it is obliged to pay. [13 Couch on Insurance § 186:14 (3d. ed.2005). See also Reliance Ins. Co. v. County Line Place, Inc., 692 F.Supp. 694, 696 (S.D.Miss.1988) that observed that “the purpose of the notice clause … is ‘to enable [the insurer] to investigate a claim ….; to itself decide whether the claim should be settled without litigation, and, if not, to prepare its defense thereto ….‘ ”)

It is a fact of life in the insurance field that a timely notice of loss is important. It is a notice of loss that starts the investigation by the insurance company while the evidence is fresh and gatherable. Insurers are entitled to contract for this protection. [State Bank of Viroqua v. Capitol Indem. Corp., 61 Wis.2d 699, 214 N.W.2d 42, 1974]

The insurer is entitled to all reasonable notice and failure to give it would release defendant from liability. Exo v. Detroit Automobile Inter-Insurance Exchange (1932), 259 Mich. 578, 244 N.W. 241. The question is whether there was sufficient knowledge of the loss to require notice, for if there was sufficient knowledge notice was not timely. If there was not sufficient knowledge until August of 1964, then the notice was timely given. Such a question is for the jury to determine. Finding it reversible error for the trial court to instruct the jury that notice was timely as a matter of law the court sent the case back for retrial in Grand Rapids Auctions, Inc. v. Hartford Acc. & Indem. Co., 178 N.W.2d 812, 23 Mich.App. 389 (Mich. App., 1970)

Therefore, the loss notice is one of the important documents the adjuster will see.  It is the starting point of all claims.  It tells the adjuster:

  • when the loss occurred;
  • the type of coverage the insured has;
  • the type of loss the insured reported;
  • the insured’s name, address, and telephone number;
  • the agent’s or broker’s name and address;
  • the location of the loss;
  • who to contact and how to contact him or her; and
  • whether there is anything to which the adjuster should give special attention.

Where the giving of notice of loss is a condition precedent of liability under the insurance contract noncompliance with that provision is fatal to recovery in many states. [Sterling State Bank v. Va. Sur. Co., 173 N.W.2d 342, 354–55 (Minn.1969)].

The fact that the insurer, Capitol Indemnity, was not prejudiced was irrelevant in Wisconsin. The contract language requiring timely notice of loss is designed to prevent prejudice or harm to the insurer. It is a fact of life in the insurance field that a timely notice of loss is important. It is a notice of loss that starts the investigation by the insurance company while the evidence is fresh and gatherable. Insurers are entitled to contract for this protection. State Bank of Viroqua v. Capitol Indem. Corp., 214 N.W.2d 42, 61 Wis.2d 699 (Wis., 1974).

In Shukh v. Seagate Tech., LLC, 803 F.3d 659, 116 U.S.P.Q.2d 1248 (Fed. Cir., 2015) — the Federal Circuit analyzed whether conditions precedent to an employment agreement had been satisfied. Given the arguments presented, the Court declined to resolve a motion on the ground that the notice provision constitutes a condition precedent. However, in most states, a late report must prejudice the rights of the insured before the condition can be enforced.

“As a general rule, Kansas courts apply the notice-prejudice rule to notice of loss provisions in both insurance contracts and fidelity bonds. See, e.g., School Dist. No. 1 v. McCurley, 92 Kan. 53, 142 P. 1077 (1914) (late notice under contractor’s surety bond did not defeat recovery absent showing of prejudice). [National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. F.D.I.C., 957 P.2d 357, 264 Kan. 733 (Kan., 1998)]

Meet with the Insured and Witnesses

Once the adjuster has completed this basic preparation, reviewed the notice of loss and verified that the coverage exists, he or she should arrange to meet with the insured and any witnesses.

When the adjuster first meets with the insured he or she should explain to the insured that the policy requires the insured to prove his or her loss to the insurer.  Then, the adjuster puts the insured at ease by advising the insured that the insurer, in order to provide the best service possible and to act in good faith to its insureds, hired the adjuster to help the insured prove his or her loss. The adjuster cannot prove the loss for the insured, he or she is only present to help the insured, do what is required to obtain the benefits promised by the policy.

To act in good faith the adjuster must do everything possible to allow the insured to receive every benefit promised by the policy. The adjuster must not do, or fail to do, anything that will deprive the insured of the benefits of the policy of insurance.

Obtain a Recorded Statement

The adjuster must take a complete recorded statement from the insured and all witnesses to the incident that caused the loss. Some insureds are uncomfortable with regard to giving a recorded statement, whether taken in person or over the telephone, so the adjuster must take the time with the insured to make the insured comfortable with the procedure. When faced with recalcitrance from the insured the statement can be taken in person, without a recorder, with the adjuster taking notes. The notes should then be converted into a statement, sent to the insured, to be read, corrected, signed and dated. In taking the recorded statement, the adjuster must get answers to the most important of all questions relating to the policy and the loss: who, what, where, why, when and how? If a tape recorder is used the insured should be asked to sign or initial and date the cassette and watch as you punch out the tab to prevent changes in the recording. If recorded digitally the statement should be transcribed, sent to the insured to read, correct, sign and date.

Recorded statements of neighbors, relatives and vendors of the insured may also be useful in obtaining a complete picture of the loss and should be obtained as soon as possible after completing the first meeting with the insured and the insured’s recorded statement.

Demand a Proof of Loss

The chief purpose of a proof of loss “is to acquaint the insurance company with certain facts and circumstances relative to the loss, forming a basis for further steps to be taken by the company, ranging from full settlement to absolute repudiation of liability.” [United States Fire Ins. Co. v. Merrick, 171 Md. 476, 489, 190 A. 335, 341 (1937); Sutton v. Fire Ins. Exchange, 265 Or. 322, 509 P.2d 418 (Or., 1973).] “A person seeking to recover on an insurance policy has the burden of proving a loss from causes within the terms of the policy and if such proof of loss is made within the contract of insurance, the burden is on the insurer to establish that the loss arose from a cause that is excepted from the policy.” [U.S. Liab. Ins. Co. v. Bove, 347 So.2d 678, 680 (Fla. 3d DCA 1977)]

In Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884) the Court stated that the insured had an affirmative obligation under the policy to answer accurately every question relevant to the insurer’s investigation. That is the purpose of the proof of loss and honestly presenting the proof and testifying at examination under oath that is a part of the required proof of loss.

An insured’s failure to provide timely written proof of loss is generally an absolute defense to an action to recover on the policy (see, Igbara Realty Corp. v. New York Prop. Ins. Underwriting Assn ., 63 N.Y.2d 201). However, this absolute defense may be waived (see, Igbara Realty Corp. v. New York Prop. Ins. Underwriting Assn ., supra; Treptow v. Exchange Mut. Ins. Co., 106 A.D.2d 767). Therefore, the adjuster must advise the insured of his or her obligations under the policy, including the obligation to submit a sworn proof of loss within 60 days of the date of the loss or, applying modern policies, within 60 to 90 days after the insurer requests a proof of loss. In so doing the adjuster should also make it clear to the insured that if there is difficulty in preparing the proof of loss within the time required the adjuster will obtain, on the insured’s behalf, an extension of time to submit a proof of loss.

When left undefined, the generally accepted meaning of proof of loss is “‘[a]n insured’s formal statement of loss required by an insurance company before it will determine whether the policy covers the loss.’” Painter Family Invs., Ltd. v. Underwriters at Lloyds, 836 F.Supp.2d 484, 493 n. 8 (S.D.Tex.2011) (quoting Black’s Law Dictionary 1251 (8th ed.2004)). The chief purpose of a proof of loss “is to acquaint the insurance company with certain facts and circumstances relative to the loss, forming a basis for further steps to be taken by the company, ranging from full settlement to absolute repudiation of liability.” [United States Fire Ins. Co. v. Merrick, 171 Md. 476, 489, 190 A. 335, 341 (1937)].

Since the requirement that the insured submit a proof of loss has nothing to do with the condition requiring prompt notice of loss, the insurer need not show actual prejudice to deny the claim. The notice prejudice rule is inapplicable because a “proof of loss” is not equivalent to a failure to notify. [Woznicki v. GEICO Gen. Ins. Co., 443 Md. 93, 115 A.3d 152 (Md. App., 2015)].

If the adjuster and the insured cannot agree on the amount loss, the adjuster should provide the insured with a blank proof of loss and advise the insured, in writing, of the duty to produce a sworn statement in proof of loss within 60 or 90 days of the demand for the proof of loss. Usually it is appropriate to give the insured, once there is a stalemate, notice that the proof must be submitted within 60 or 90 days after the impasse was reached.

The proof of loss is a key document that should be obtained and executed under oath by all insureds on every loss.  A proof of loss is the sworn statement of the insured required by the conditions of the policy of insurance.  It sets forth the insured’s knowledge and belief as to the date, time, and cause of the loss; the encumbrances on the property; the persons with an interest in the property; the value of the property; the amount of loss; and the amount of claim. When the insured and insurer agree on the fact that the loss was one due to a peril insured against, the actual cash value of the loss, and the replacement value of the loss, the preparation of a proof of loss is created jointly by the insured and the adjuster as a memorialization of the agreement. If they can’t agree the proof of loss is the means by which the insured presents his, her or its claim.

The oath carries with it the penalties of perjury: up to five years in prison in most states.  More important than the seldom-prosecuted criminal penalties, if the proof of loss is falsely sworn, the insured loses any right he or she might have to any of the benefits of the policy.  False swearing might also violate the penal provisions of one of the insurance fraud statutes enacted in many states.  These statutes usually make insurance fraud a felony punishable by up to five years in prison. A felony that is being prosecuted with more vigor and more frequency than perjury.

Since it is the insured who swears to the truth of the statements on the proof of loss the adjuster should not attempt to dictate the contents of the form. The adjuster will help the insured but cannot execute a sworn proof of loss for him or her because the insured alone has the personal knowledge that the statements in it are true. In most cases, the insured is required to sign the proof of loss and have his or her signature notarized with the notary affirming that he or she gave the oath to the insured and the insured swore that the statements of fact on the proof of loss were his or her statements and were true, thereby swearing to the accuracy of the information provided. In many jurisdictions the insured can perform the same function by signing the document under penalty of perjury.

Some insurers instruct their adjuster to waive the proof of loss requirement except under special circumstances. Such a policy is improper and emasculates the policy condition requiring a proof of loss. It could be construed to weaken other conditions of the policy.  If such a waiver of this important policy condition is needed, it must be applied uniformly for all insureds. The policy to waive the proof of loss condition should be limited and capable of being applied to all claims with language such as: “no proof of loss is required if the claim is less than $5,000.00.”

The rule is well settled in South Dakota and other states that, if the insurer, within the time for presenting proofs of loss, refuses or fails to pay the loss, it thereby waives the necessity of proofs. [Orr v. National Fire Insurance Co., 210 N.W. 744; Id., 219 N.W. 119; 26 CJ 406].

If the adjuster and the insured are in agreement on the amount of the loss, the proof of loss is one of the last documents prepared along with the statement of loss, the subrogation agreement, and the settlement draft or check. The check or draft should be issued immediately but in no event more than 30 calendar days from the agreement on the amount of loss.

For example, California Insurance Code section 2057 provides:

Under a contract of fire insurance, payment to the insured shall be made within 30 days after the amount of the loss and the liability of the company have been agreed upon or settled by the insured and the company in writing.

If the company fails to pay within the 30 days, the payment shall bear interest, beginning the 31st day, at the prevailing legal rate. The company also shall be liable for all costs of collection, including reasonable attorneys’ fees, if legal action is necessary to obtain payment after the company has willfully failed to pay within the 30 days.

Similar statutes, regulations, or case authority can be found in other states.

The California Insurance Code Section quoted here is an expression of California’s desire to protect insureds from insurers. The adjuster must determine if the statutory or contractual sixty-day period has been shortened by statute or court decision in the particular jurisdiction in which he or she practices.

Many adjusters have misinterpreted this section of the California Insurance Code to require a response to a proof of loss within 30 days of its receipt by the company.  The section does not impose such a requirement. The section merely changes the Standard Fire Policy’s promise to pay after there is an agreement between the insured and insurer to pay within 60 days to require payment within 30 days after the agreement to the amounts stated in the proof of loss. The statute now sets out methods for enforcing failure to pay promptly. It also codifies a simple fact of business life: it is business suicide to delay payment of a claim once an agreement on the amount has been reached.

If the adjuster representing the insurer and the insured are not in agreement on the compensability, or the extent of the loss, a blank form of proof of loss should be provided to the insured.  The insured should be advised that when the proof of loss is presented to the insurer, the insurer will respond to the document accordingly.  Providing a blank proof of loss to the insured is one of the only ways an insurer can compel the insured to reveal his, her, or its opinion of the amount of loss and force the insured to comply with the proof of loss condition.

When fraud is suspected, the adjuster should demand a sworn proof of loss.  By so doing the adjuster gives the insurer help in defeating a potentially fraudulent claim by compelling the insured to present the fraudulent claim under oath.

The insurer has a reasonable time to respond to a proof of loss. Some personal and commercial lines policies now put in the wording a requirement that the company respond to the proof of loss within 30 days. The adjuster must verify the wording of the particular policy that is involved in the adjustment. Responding to a proof of loss does not require acceptance. Regardless of the time limit set by the policy or local statutes or regulations it is best to respond to the proof of loss immediately or as soon as possible. The adjuster may accept the proof of loss and pay the loss. The adjuster may reject the proof of loss as incomplete, excessive or not in compliance with the policy conditions. If incomplete or excessive the adjuster should give the insured a limited time to present a complete proof of loss.

The adjuster should be careful not to waive the 60-day proof of loss requirement inadvertently.  It should be waived, only in appropriate cases, for a specified period of time, but should never be an open extension.

If the adjuster has waived the 60-day time limit expressly, or by actions, the adjuster must demand that the proof of loss be presented to him or her on a certain date.  I recommend not less than 30, nor more than 60, days after the demand.  The extended time should not be extended further than 60 days without an exceptionally good cause.

When the proof of loss is received, the adjuster must recognize that most policies have no language defining what a reasonable time is to respond to a proof of loss.  Depending on the facts, a “reasonable time” can be as short as 30 days and as long as one year.  I would recommend that the adjuster attempt to respond in some way to any proof of loss no later than 30 to 40 days after its receipt.

The Fair Claims Practices Regulations, enacted in many states, following a National Association of Insurance Commissioners (NAIC) model set of regulations, requires response to the proof of loss or proof of claim immediately, but no later than 40 calendar days after receipt of the proof of loss. That is more than sufficient time to respond. If there is a problem meeting the time limit a written agreement to an extension should be obtained.

If investigation reveals to the adjuster that it will take longer than 30 days to respond to a proof of loss, the adjuster should so advise the insured. The adjuster may, as appropriate, state that investigation is incomplete, that experts have been retained who require at least 90 days to complete their work, that counsel has been retained to advise the company and it is expected to take 30 to 60 days to complete counsel’s research, or any other honest and reasonable excuse available. If the adjuster does not have an honest or reasonable excuse, the insurer should either accept or reject the proof of loss without delay. There is no reasonable excuse for lying to an insured.

Dealing with the Public Insurance Adjuster

The adjuster should be aware of local statutes relating to public insurance adjusters. For example, in Pennsylvania, a provision in the insurance adjuster statute, prohibiting public insurance adjusters or solicitors from soliciting employment from victim of fire loss until 24 hours after fire has been “extinguished,” was not unconstitutionally vague.

The twenty-four-hour rule does not violate any substantive due process rights of the Petitioner. In Cott Beverage Corp. v. Horst, 380 Pa. 113, 110 A.2d 405 (1955), the Pennsylvania Supreme Court held that the General Assembly may not, under the guise of protecting the public interest, arbitrarily interfere with private business or impose unusual and unnecessary restrictions upon lawful occupations. The restriction on solicitation embodied in the twenty-four-hour rule is reasonable and narrowly drawn. As such, the court held that it does not arbitrarily and unnecessarily impinge upon Petitioner’s right to do business and is a lawful exercise of the Commonwealth’s police power. [Insurance Adjustment Bureau v. Insurance Com’r for Com. of Pa., 530 A.2d 132, 108 Pa.Cmwlth. 418 (Pa. Cmwlth., 1987)] The court noted that fire department in charge was given a statutory duty of determining when the fire was in fact extinguished and the adjuster or solicitor could easily determine when the fire was extinguished by inquiring of fire department.

Similarly, in Ohio, the appellate court concluded, with regard to a regulation from the Department of Insurance, that it is not in the public interest for PAs to arrive at the scene of the loss before the fire engines have left, and while the insured may still be emotionally upset to waive a contract, with a pen, under his nose. Nor is it in the public interest for these adjusters to move in on the insured before the State Fire Marshall or other public official has completed his work. Nor is it in the public interest for the adjuster-contractor to fit the cost (less all deductions including at times the adjuster’s fee) and amount of work to the amount recoverable from the insurer payable all too frequently jointly to the insured and the adjuster or contractor. It is not in the public interest for the adjuster to get to the scene of loss so quickly as to eliminate competitive bids to the insured. Nor is it in the public interest for a contractor to refuse to repair unless it also adjusts. [In Re Superintendent of Insurance, Adoption Of Rule, 187 N.E.2d 639, 90 Ohio Law Abs. 15 (1961)]

The insured may retain the services of a public insurance adjuster (PA) to help him or her prepare a proof of loss.  A PA, for compensation, acts on behalf of, or helps, an insured in negotiating or effecting the settlement of a claim for loss or damage under any policy of insurance covering real or personal property.

When a PA is retained by the insured the PA should be treated as if he or she is the insured who is also an insurance expert. That means the adjuster can tell the PA to submit a proof of loss well documented and do nothing. Doing nothing is inappropriate, however, because it is essential that the adjuster develop the accurate estimation of the damages and work with the PA to achieve an agreed proof of loss.

In that regard, the National Association of Public Insurance Adjusters, provides the following code of conduct:

Code of Conduct

Rules of Professional Conduct and Ethics

The following Rules of Professional Conduct and Ethics are applicable to all members of the Association:

  1. The members shall conduct themselves in a spirit of fairness and justice to their clients, the Insurance Companies, and the public.
  2. Members shall refrain from improper solicitation.
  3. No misrepresentation of any kind shall be made to an assured or to the Insurance Companies.
  4. Commission rates shall be fair and equitable, and strictly in accordance with the prevailing custom in the locality, and must, where laws or regulations of insurance departments exist, comply fully with such laws or regulations.
  5. Members shall conduct themselves so as to command respect and confidence. They shall work in harmony with one another, with their clients, and the Insurance Companies’ representatives, so as to foster a cordial and harmonious relationship with all branches of the insurance business, and with the general public.
  6. Members must be fitted, by knowledge and experience, for the work they undertake. They must not endanger the interests of the public adjusting profession, or risk injustice to assureds or to the Insurance Companies, by attempting to handle losses or claims for which they are not qualified, and for which they cannot find competent technical assistance.
  7. Members shall not engage in the unauthorized practice of law.
  8. Public adjuster members shall not act as a contractor in the mitigation, repair, restoration of, or act as a salvor of damaged property (as related to First Party Property Insurance Losses).
  9. Members shall be cooperative and assist one another in every possible way.
  10. Members shall not disseminate or use any form of agreement, advertising, or any printed matter that is harmful to the profession of public adjusting, or which does not comply with the rules and regulations of the Insurance Department of the state in which such member is professionally engaged, or which might subject public adjusting and public adjusters to criticism or disrespect.

Working with a PA that follows the code of conduct established by the NAPIA should be easier than working with an insured. Those that do not follow the code of conduct may require the adjuster to be extra vigilant when communicating with the PA.

Remember, NAPIA describes a PA as:

Public Adjusters are experts on property loss adjustment who are retained by policyholders to assist in preparing, filing and adjusting insurance claims. Employed exclusively by a policyholder who has sustained an insured loss, these professionals manage every detail of the claim, working closely with the insured to provide the most equitable and prompt settlement possible. A public adjuster inspects the loss site immediately, analyzes the damages, assembles claim support data, reviews the insured’s coverage, determines current replacement costs and exclusively serves the client, not the insurance company. []

Of course, if the public adjuster is not a professional or attempts to cause the insured to commit a fraud, the PA and the insured will have a serious problem with the insurer and the law. A public insurance adjuster’s allegedly fraudulent actions taken while attempting to adjust an insureds’ personal property damage claim under a homeowners’ insurance policy were imputed to the insureds and, therefore, public adjuster could not be personally liable to insurer on claims of fraud, breach of contract, or breach of duty of good faith, even if those actions violated terms of policy. [Meridian Sec. Ins. Co. v. Hoffman Adjustment Co., 933 N.E.2d 7 (2010)

Obtain Relevant Documents

The adjuster must obtain copies of all relevant and material records from the insured.  These may include and may not be limited to:

  • leases;
  • documents establishing title to real property (deeds and trust deeds);
  • the last physical inventory;
  • receipts, invoices, purchase orders, and other evidence of purchase and ownership;
  • the general ledger of the business;
  • the banking records of the business for at least the six months before the loss; and
  • any other document that might be relevant or material to the investigation.

Most insurance policies contain provisions requiring the insured or claimant to cooperate in the investigation of a claim and to produce certain documents and information in support of the claim. Documenting the claim is important because it commits the insured or claimant to a position with respect to the claim. After committing to a position, the veracity and legitimacy of the claim can more easily be tested.

Claims Inventories or Other Documents

Many insurers, when faced with a property claim, require the insured to present an itemized list of contents included in the claim. Frequently, forms are sent to the insured that request information concerning claimed items such as a description of the item, date of purchase, place of purchase, and purchase price.

When the loss is extensive it is appropriate to retain the services of a salvor or inventory specialist to aid the insured in completing a thorough inventory including descriptions, ages, purchase price, and actual cash value. The adjuster should also request any supporting documentation such as receipts, operating instructions, warranties, photographs, or other documents that the insured has, to establish the existence, ownership, and value of the items claimed lost. This information assists the insurer in establishing the amount of the loss.  It also locks the insured into a position concerning the claimed items from which he or she cannot later retreat.

As with intentional misrepresentations in a proof of loss, it is generally well settled law that intentional misrepresentations in a claims inventory will void coverage under the standard fraud provision in most first-party property insurance policies. Most states require insurers place on the inventory forms they provide to insureds a warning that a false statement is criminal and can result in criminal prosecution and loss of the ability to collect on a claim.

Claims can be denied if the jury could find that the actual inventory at the time of the fire was less than that claimed.  In Gregory’s Continental Coiffeurs & Boutique, Inc. v. St. Paul Fire & Marine Insurance Company, 536 F. 2d 1187 (7th Circuit 1976) the Seventh Circuit held that the company’s gross overvaluation would, of itself, support an inference by the trier of fact that the overvaluation had been deliberate and intentional.

Some courts have held that even where an actual loss happens, coverage for the insured’s entire claim may be barred where the insured also claims additional items not damaged or destroyed in a loss.  The New York Court of Appeals in Saks & Company v. Continental Insurance Company, 23 NY. 2d 161, 242 NE. 2d 833 (1968) held:

[t]he insured fraudulently includes additional items to those actually destroyed by fire in his proof of loss, the policy is vitiated and recovery thereunder is not permitted even though the insured has suffered an actual loss as to part of the included items.

It is imperative, therefore, that the adjuster document every communication with the insured or the PA. The information recorded in the adjuster’s file, the adjuster’s electronic log or recorded statements obtained by the adjuster can be sufficient to if proven false to deprive the insured of the right to recovery of indemnity under policy for fraud. For example, in Cummings v. Fire Ins. Exchange, 202 Cal. App.3d 1407 (1988) the insured lied to the insurer about the cause of the loss because she was afraid that her son, who actually caused the damage, would beat her. The excuse was insufficient and the claim was denied and the denial affirmed by the appellate court.

Establish the Amount of the Loss and Claim

The Structure Scope of Loss

To aid the insured in his or her obligation to prove the loss, the adjuster must, on the first visit, establish with the insured the exact scope of loss.  This means that the adjuster and the insured (or the insured with his or her Public Insurance Adjuster (PA)) must walk through the insured’s house or business and agree to exactly what was damaged and destroyed as a result of the peril insured against.

The adjuster can get this agreement orally with a tape recorder or write it down on paper.  The scope of loss must be detailed.  Descriptions, including room dimensions; materials like moldings, flooring, wall coverings, and fixtures; and information about special features, openings, casements, detailing, moldings, and other architectural features must be part of the scope of loss.  The scope of loss must be complete and accurate.

The adjuster must never:

  • take a quick look around and ask the insured to fill out a property loss form at his convenience;
  • leave the insured with blank forms, except for supplemental items learned of after the initial scope was completed;
  • take a partial scope and attempt to do the rest later;
  • rely on the expertise of the insured’s public adjuster; or
  • rely on a reconstruction contractor to establish the scope.
  • Make promises that cannot be kept.
  • Commit to payment before amount of loss and claim is agreed.
  • Commit to coverage when there is an issue raised by the facts and policy conditions or

The adjuster must advise the insured that the adjuster will – if necessary – be retaining experts in the valuation and repair of the type of property that is involved.  These experts will bid on the repair and replacement from the agreed scope.  The adjuster must present the insured with a copy of the agreed scope, and inform the insured that he may, if he wishes, obtain similar opinions based on the same agreed scope.

The adjuster should provide two general contractors (different from the construction consultant if one was used to help the adjuster set the scope) with a copy of the adjuster’s scope of loss.  Each contractor should prepare detailed estimates of the costs of repair based upon, and written in the same order as, the adjuster’s scope of loss so that the adjuster can identify the low bidder.  The adjuster then should prepare an estimate of the cost of repairs for comparison with the estimates made by the contractors using the scope of loss and estimating programs like Xactimate, Marshall and Swift or Boekhs.

Once the adjuster and the insured have agreed to the scope of loss, the adjuster should have the insured sign the form agreeing to the scope.  If the adjuster had tape, digitally or video recorded the scope of loss the insured can sign the tape itself or a transcribed copy of it.

If the adjuster does not have an agreed scope of loss at the beginning of an adjustment the loss will, invariably, be larger when it is finally put together by the insured or the PA.

The Contents Scope of Loss

Like the structure scope of loss the adjuster and the insured should agree on the contents scope of loss by creating a list of each item of personal property claimed damaged or destroyed in the loss. This scope of loss can easily be completed on audio tape or digitally on a smart phone by walking through the structure with the insured or the insured’s PA, identifying each and every item or groups of items damaged and destroyed in the scene of loss.

The insured should then be provided with forms for providing information about the personal property claimed damaged, destroyed or stolen. The schedule provided should have available columns that allowed the insured to provide detail from the scope of loss as to each item:

  • A detailed description.
  • Its date of purchase.
  • Its place of purchase.
  • Its purchase price.
  • Its actual cash value or fair market value at the time of loss.
  • If repairable, the cost of repair.
  • Attached supporting purchase receipts or invoices or sufficient information about the place of purchase to allow the adjuster to verify the claim.
  • Attached estimates prepared by personal property repairers or salvors.

The adjuster, working with the schedule and with the assistance of a professional salvor or other personal property expert, establish the value, if any, of the totally destroyed items.

If the loss is extensive, the adjuster may need to hire a salvor or other experts in personal property scheduling and valuing to perform a complete inventory for the insurer.

If the adjuster does not have an agreed scope of loss at the beginning of an adjustment the loss will, invariably, be larger when it is finally put together by the insured or the PA.

 Photograph the Scene

To substantiate the agreed scope of loss the adjuster must photograph the scene — both the damaged and undamaged portions of the property — that is the subject of the loss. The adjuster must take a complete photographic and written inventory of the loss scene. The adjuster must take photographs of everything damaged, any possible source of ignition of a fire, or any other peril that may have caused the damage and those things not damaged. If the scene is extensive, the adjuster should consider hiring a professional to do a video inventory of the loss location.  It should be taken silently.  A narration can be added later, after everything has been seen.

If there is an extensive contents loss the adjuster must retain the services of a salvor to inventory and price each item of inventory, whether damaged or not, and determine the salvage value of the loss debris. After a claim is paid the insurer owns all of the debris and may reduce its total loss by selling the salvage remaining.

Contact Authorities

Contact must be made with the official investigating officers, either police, fire arson investigators, or both in person. Personal contact is necessary to gain more than cursory information from a report. The prudent adjuster cultivates a relationship with official investigators in his or her area of investigation.  If the adjuster shows an interest in their work and an inclination to help, the official investigator will more readily share information with the adjuster. The adjuster who demands information from a police or arson investigator will invariably be met with a refusal to comment. Remember police officers and firefighters are not highly paid but are dedicated to their duty of fighting crime or fire. They are proud of what they do and if treated with respect and as a part of a team by the adjuster they will cooperate with the adjuster’s investigation.

The adjuster should collect as many investigation reports as are available and may purchase photographs taken by the official agency.  When an arson fire happens both the arson unit and the local police force will be on hand and both will be taking pictures. Although fire department and police authorities will not release their investigation report while criminal charges are anticipated because release of the reports might infringe on the police investigation. However, since photos make no comments and just depict the scene they are willing, as long as the insurer pays for the cost of printing the photos, to provide the photos to the adjuster.

I once received photos in a case taken by an official arson investigator for a California county that were taken immediately after the fire was extinguished and while the house was still smoking. The photos made it clear that the house was devoid of contents that were claimed by the insured which resulted in a false and fraudulent claim being denied and the insured being arrested and convicted of insurance fraud.

Determine Values

The adjuster should obtain from the insured any photographs, videotapes, or motion pictures the insured or its employees may have made of the loss or before the loss.  The adjuster must be ready to help the insured determine the actual cash value and repair or replacement cost value of all of the property insured.  If necessary to establish values, the adjuster should retain the services of a real estate or commercial equipment and stock appraiser.

Additional Living Expenses

If additional living expenses are involved, the adjuster must instruct the insured that the coverage is only for “additional” expenses incurred over normal expenses.  Therefore, the adjuster must obtain the amounts of the insureds’ normal expenses for: mortgage payments, electricity, gas, water, trash pick-up, gardening, laundry, food, eating out, entertainment, travel, dry cleaning, property taxes, and any other continuing usual household expenses. The usual costs and expenses can then be deducted from the actual expenditures to determine what additional living expenses were actually incurred.

 Other Considerations

The adjuster must confirm that the co-insurance, average, or reporting provisions have been fulfilled by the insured. To do so the adjuster must determine the full value of the property before the loss by obtaining a real estate appraisal, a review of the books and records of the commercial insured, and tax records that often state values to determine if the insured is insured to value or to the value required by a coinsurance clause.

If all conditions have been met and the adjuster is confident that he or she and the insured have agreed on the amount of loss, the adjuster must obtain authority from management to accept the proof of loss, unless the amount is within the authority already provided to the adjuster by management.

For example, contrary to the adjustment of normal property insurance claims, an insurance adjuster is not authorized to approve or disapprove National Flood Insurance Program (NFIP) claims, or to tell an insured whether the claim will ultimately be approved. [Morris v. Simsol Ins. Services, Slip Copy, 2013 WL 6590584 (W.D.La.)] The insurance adjuster who was hired by the insurer or the Federal Emergency Management Agency (FEMA) that administers the National Flood Insurance Program, to investigate a claim may furnish the insured with a proof of loss form, and she or he may help the insured to complete it. However, this is a courtesy only, and the insured must still send the insurer a proof of loss within 60 days after the loss even if the adjuster does not furnish the form or help you complete it. The policy, strictly construed permits FEMA to deny coverage where an insured has failed to submit a signed and sworn statement of the amount claimed, and it divests a non-complying insured of the right to sue. [Rojek v. Federal Emergency Management Agency, 234 F.Supp.2d 999 (S.D. Iowa 12/3/2002).

Unlike the adjustment of a NFIP claim, in the typical property insurance claim, when the adjuster obtains authority from management of the insurer to agree with the insured as to the amount of the loss the adjuster should obtain from the insured a signed proof of loss of property, executed before a notary, under oath, or signed under penalty of perjury summarizing the agreement. In addition, the adjuster should obtain a subrogation agreement since almost every loss has a potential for subrogation, at the same time the proof of loss is signed. Once agreement is reached the adjuster or the insurer should then issue a settlement draft or check in the amount agreed in the proof of loss and deliver it – personally or by the U.S. Postal Service – as soon as practical and in no event more than 30 calendar days after the proof of loss is agreed and signed.

The adjuster concludes by writing the closing report with recommendations for the pursuit of subrogation or the disposal of salvage.

There should be agreement with the insured as to what was left after the loss and what work needs to be done.

Write the Captioned Report

Insurers are large organizations with varying levels of authority. The adjuster is the representative at the loss scene. He or she must report, in writing, to superiors with the authority to pay the indemnity required. Writing a clear and comprehensive report is an essential part of the adjuster’s job.

The captioned report should be written immediately after the adjuster’s first meeting with the insured on every file, no matter how small. The length and detail of the report should only be limited by the extent of the loss. The captioned report is written to explain to the adjuster’s supervisor all the adjuster knows about the loss so that decisions required of them by the insurer and the law can be made.

The captioned report should be detailed under, at least, the following captions:


 This should provide information about:

  • the company(ies) insuring the risk;
  • the policy number(s);
  • the term of the insurance;
  • the policy limits;
  • special limits of liability applicable to the loss;
  • the coverages available;
  • the deductibles;
  • the form numbers applicable;
  • if there is other insurance with other insurers, details concerning the other insurance should be listed; and
  • any unusual conditions, limitations, exclusions or warranties.


If the insured is an individual the adjuster must determine his or her:

  • name;
  • age;
  • date and place of birth;
  • Social Security Number;
  • state driver’s license number;
  • citizenship;
  • marital status;
  • names and ages of the spouse and children, if any;
  • occupation;
  • reputation;
  • previous loss history;
  • whether the insured had ever had insurance canceled, nonrenewed, or refused; and
  • the insured’s financial status, earnings and/or net worth.

The information detailed above may sound like exceedingly personal information that will be difficult to obtain. It is not. Ask the insured and the information will be provided. It is the adjuster’s job to obtain all relevant information. Further investigation cannot be conducted without this information.

If the insured is a corporation, the adjuster must report:

  • the names of the officers;
  • where the corporation is incorporated;
  • its standing with the Secretary of State or other appropriate state agency;
  • the identity of the majority shareholder(s); and
  • its financial condition, net worth, and dividends or other profits paid to the shareholders.

If the insured is a partnership the adjuster must report:

  • the identities of the partners;
  • the type of partnership (general or limited);
  • if a limited partnership, the name of the general partner; or
  • if a general partnership the names of all partners and the person acting as managing partner.
  • a description of all properties owned by the partnership, its net worth, and the financial condition of the partnership; If the insured is an estate, the adjuster must report:
  • the identity of the administrator or executor (the adjuster must obtain copies of the official papers appointing a person as the administrator or executor of the insured’s estate);
  • the assets of the estate; and
  • the identities of those who will share in the assets of the estate when it is divided.


The adjuster must answer the following questions about the loss:

  • What happened?
  • When did it happen?
  • Where did it happen?
  • Where was the insured when it happened?
  • What was the insured doing when it happened?
  • Who were the witnesses?
  • Did the loss involve incendiary origin, mysterious disappearance, alleged theft, or evidence of third party involvement?

The adjuster should also cover in the report the use of statements taken by the adjuster from witnesses with summaries of the information obtained.

Potential Fraud

The report must explain facts that lead to the suspicion of fraud.

It should state whether reports have been made of a potential fraud to the local police, the Fraud Division or Bureau of Fraudulent claims if the adjuster’s state has one, or other official agency for the reporting of crimes.

A report of a suspected fraudulent claim is mandated by the Model Insurance Fraud Act of the Coalition Against Insurance Fraud, and various state statutes regarding the reporting of crimes.

Fraud Unit or Bureau Statutes have been enacted in California, Florida, Utah, Washington, Nevada, New Jersey, New York, and Texas, among others.

The adjuster must also report to management whether demands for documents have been made to the adjuster by arson investigators or police authorities. Cooperation with such demands is mandated by the Model Insurance Fraud Act, and various state statutes regarding the reporting of crimes. The adjuster must establish the requirements in the particular jurisdiction in which he or she works. Note that more states have adopted the arson reporting statutes than statutes concerning other types of insurance fraud.

The adjuster must also report whether a report has been filed with the Property Insurance Loss Register (PILR) — a type of “Index Bureau” for property losses where subscribing companies can obtain a report on other losses reported by the insured as reported by other insurers, the National Insurance Crime Bureau (NICB), the INDEX System or the ISO All Claims Database that includes a data base of property losses. It is not complete, but it can provide useful information

Experts the Adjuster Has Retained

The adjuster must report to management any experts that have been retained, for example, if a professional photographer or video operator has been used, or if private investigators, fire cause and origin experts, or expert engineers were retained to advise the adjuster on the cause and origin of the loss.

Meetings With Officials From Authorized Government Agencies

The adjuster must report his or her meeting with police or fire investigators and what they observed. The adjuster discusses demands made, or to be made on investigating officers for their files. As an example, California Insurance Code section 1875 et. seq. requires that an arson investigator for a police agency provide everything in a police agency file to the adjuster if the documents are determined by the agency not to cause damage to its ability to prosecute a criminal who may be responsible for the loss.

Many states have adopted variations on this section.

The California Insurance Code Sections are modeled, to some degree, on provisions recommended by the National Association of Insurance Commissioners (NAIC). The adjuster should consider the statutes of his or her particular state when dealing with this aspect of the investigation and report.

Many states have adopted the NAIC Model Immunity Act which provides an immunity for insurers who, without malice, report information concerning suspected, anticipated or completed fraudulent insurance acts to law enforcement officials. The act, or similar acts, have been adopted in Alaska, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Maine, Missouri, Nebraska, Nevada, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Texas, Utah, Virginia, and Washington. The immunity was upheld in Pearce v. United States Fidelity and Guaranty Co., 476 So. 2d 750 (Fla. App. 1985) and Frommoethelydo v. Fire Insurance Exchange, 42 Cal. 3d. 208, 228 Cal. Rptr. 160 (1986).


A complete and detailed description of the property involved is required. If it is a structure claim the adjuster should report:

  • the type of structure;
  • its age and condition;
  • the use to which the insured put it;
  • the total square footage;
  • the materials from which it was constructed, e.g., frame and stucco;
  • any special characteristics, like an atrium, an indoor pool, or spa; and
  • any unusual hazards the adjuster noted, like a roof peeling off from old age, a perimeter fence about to fall, vicious dogs, or a dangerous activity being conducted by an insured          are reported, such as:
  • reloading bullets in a garage;
  • operating a sausage factory in a dwelling;
  • an upholstery shop, with all necessary equipment, operated as a commercial enterprise from the insured’s dwelling;
  • the presence of wild animals kept as “pets”; or
  • the presence of explosives, gasoline, or other hazardous substances.

The adjuster must also report the replacement value of the entire structure; the actual cash value of the entire structure; and the actual cash value of all the contents or business personal property before the loss. This will give information about the risk to the adjuster’s supervisor, and the underwriter, that might cause an underwriting action to take place.

The adjuster should, if replacement cost coverage is available to the insured report on the adjuster’s estimate of the replacement value of the structure and contents of the property.


Under this caption the adjuster explains the extent and nature of the damage, the types of items damaged, and the adjuster’s estimate of the loss, and the suggested reserve. The adjuster should also cover data necessary to support information dealt with above, like the preparation of estimates, meetings held or to be held, what has been discussed with the insured, what the adjuster will do from the date of the report forward, and what the adjuster has instructed others to do.

Title and Encumbrances

Under this caption the adjuster will give details as to all persons with record title, all mortgage interests, all liens against the property, and all persons with an interest in the property. An “insurable interest” is any interest, the loss of which will cause financial or other harm to the insured.

Insurable interest can also be defined as:

Every interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insured. [California Insurance Code § 281.]

Also recognize that “insurable interest” is defined as including “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage.” According to the New York Court of Appeals, “the rights under a fire insurance policy are fixed both as to amount and standing to recover at the time of the fire loss.” See Whitestone Sav. & Loan Assoc. v. Allstate Ins. Co., 28 N.Y. 2d 332, 334, 321 N.Y.S. 2d 862, 270 N.E. 2d 694 (1971). We likewise have recognized that section 3401 “requires an insurable interest at the time of the loss in cases involving property or casualty insurance.” See Herman v. Provident Mut. Life Ins. Co., 886 F. 2d 529, 534 (2d Cir. 1989). Counihan v. Allstate Insurance Co., 25 F. 3d 109 (2nd Cir. 05/26/1994).

People with unrecorded interests, such as parents who have contributed to the purchase of the property or lenders who have a deed of trust but have failed to record it should be noted. When the insureds have no interest in the property, losses are often reported by people with an interest in the property but who are not insureds. The adjuster must, therefore, carefully show how he or she has established the interest of the insured and all others in the property.

There is no requirement that there be an insurable interest in a specific automobile, since an insurer is liable for personal protection benefits to its insured, regardless of whether or not the vehicle named in the policy is involved in the accident. A person obviously has an insurable interest in his own health and well-being. This is the insurable interest, which entitles persons to personal protection benefits regardless of whether a covered vehicle is involved.

Life insurance policies must be secured by an insurable interest to be valid. The Supreme Court first elucidated the insurable interest requirement nearly a century ago in the 1911 case. The Supreme Court explained that:  “[a] contract of insurance upon a life in which the [policy owner] has no interest is a pure wager that gives the [policy owner] a sinister counter interest in having the life come to an end.” … Without an insurable interest, there would be no actual loss; the contract would thus be a pure gamble.” Sun Life Assurance Co. of Canada v. Paulson, No. 07-3877, 2008 U.S. Dist. LEXIS 11719, *6-7 n.4 (D. Minn. Feb. 15. 2008).

For example: A house in escrow, before the title is transferred, suffers a loss by fire. The named insured is the record owner but the buyer is in possession. By agreement and common law, the risk of loss is on the buyer. The named insured in this example incurred no loss. The buyer in possession is not named as an insured on the seller’s policy so he has no claim.

Policy Violations

The adjuster, under this caption, explains all possible policy violations. The violations may include any of the following:

  • delayed notice;
  • unoccupancy or vacancy;
  • change in ownership;
  • other undisclosed insurance;
  • misrepresentations on the application;
  • warranty violations;
  • a falsely sworn proof of loss;
  • a misrepresentation to the adjuster about the extent of loss;
  • a misrepresentation to the adjuster about the cause of the loss;
  • concealment of material facts;
  • the loss is not within the policy term; or
  • failure by the insured to protect the property from further loss.

The report should also include all material changes in the risk of loss faced by the property.

Subrogation and Salvage

This caption requires the adjuster to comment as to why subrogation is or is not involved. A right to recover under the remedy of subrogation may arise because of the wrongful act of another or a contractual relation that exists between the insured and the person charged with the responsibility for the insured’s property. The adjuster must, to fulfill this requirement, understand the law of torts and the law of contracts.

Salvage requires comments on the nature of the salvage and its sound value. The adjuster should report any arrangements that have been made for the disposal of the salvage including the name and address of the salvor.


Under this caption the adjuster comments on the desirability of the risk and whether or not the adjuster feels coverage should be continued. The adjuster must report detailed facts to support the recommendation. The adjuster also uses this caption to recommend additional investigation, experts, or counsel needed to complete the investigation.

Replacement Cost Agreement

The adjuster discusses here the agreements reached with the insured concerning the amount due to the insured if replacement actually occurs, and whether the adjuster has obtained a written replacement cost agreement signed by the insured. The replacement cost agreement accompanies payment of the actual cash value part of the loss and a promise to pay the difference between the full replacement cost and actual cash value. If the replacement cost agreement has been obtained, a copy of the signed agreement should be attached to the report.

In Rhodes v. Farmers Insurance Co., Inc., 79 Ark. App. 230 (Ark. App. 10/02/2002), the court held that an insured could not force a homeowner’s insurer to pay under the replacement cost coverage without first actually repairing or replacing the premises.

Specifically, an insured has two claim options — actual cash value instead of replacement cost or actual cash value in addition to replacement cost. Reading these provisions together and giving full effect to each, replacement cost valuation applies, [Wetmore v. Unigard Ins. Co., 107 P.3d 123 (Wash. App., 2005)]

The policy is not ambiguous with respect to the insurer’s obligation to pay replacement cost. Actual replacement, and spending funds in that endeavor, is clearly a condition precedent to such a claim. To hold otherwise would necessitate ignoring the plain terms of the policy. It would also be contrary to the obvious provisions of the loss settlement clause taken as a whole, and would result in enlarging the coverage of the policy beyond its natural and obvious meaning. [Hess v. North Pacific Ins. Co., 859 P.2d 586, 122 Wn.2d 180 (Wash., 1993)]

Coverage Question

If a coverage question exists, the adjuster should submit, under this caption, the recommendations for resolution of the question. This caption should appear either at the beginning or end of the report.

Any Other Relevant Caption

The adjuster should not feel limited by the captions. Each investigation will have unique features that may require other captions to make the report complete.

Supplemental Reports

If the claim is not resolved with the first report, the adjuster must supplement that report on no less than a monthly basis with follow up reports that explain what has happened with regard to the claim and its adjustment since the first report.

The adjuster’s supplemental reports must stand alone. For that reason, the adjuster will often repeat – for ease of reading – the original report with additions showing what had occurred in the thirty days since the initial report or the last supplemental report. The supplemental must show in clear and unambiguous detail exactly what happened and what the adjuster expected to do in the future.

Regulations enacted in many states, and good claims handling, also require that the insured be kept informed regularly. The insured will not get a complete captioned report or the supplemental reports but will be advised what the adjuster is doing and what assistance the adjuster needs from the insured before the claim can be resolved.

An adjuster can never provide too much information to the insured.

The Statement of Loss

The adjuster must complete a statement of loss at the close of every adjustment. This is the document the adjuster uses to clarify the agreement between the company and the insured. It should be part of the adjuster’s final report and must be completed before the sworn proof of loss is accepted. A statement of loss is a summary, in numerical form, of the investigation and adjustment.

The statement of loss always contains the following information set up in three columns:

  • Insurance: a description of all insurance available to the insured from any source;
  • Loss: a statement of the amount of the loss broken into as many categories of loss as are applicable to the particular claim; and
  • Claim: a statement of the amount of claim, which is usually less than the amount of loss.
  • To reach the amount of claim the adjuster usually deducts from the amount of loss the deductible, applies a self-insured retention, deletes applicable depreciation or betterment, applies special limits of liability, and/or applies co-insurance or reporting form penalties.

An independent insurance adjuster who was accused of negligence for the issuance of an allegedly erroneous statement of loss had a suit against him dismissed. The insurance adjuster was joined as a third-party defendant by a plumber who alleged that, due to the erroneous statement of loss, their casualty company refused to settle the claim it had with a contractor. Because the independent adjuster owed no duty to the plumber and there was no privity of contract between the parties, the adjuster could not be held liable for common law negligence. [Universal Cas. Co. v. Gilbert Plumbing Co., Inc., Not Reported in F.Supp.2d, 2009 WL 1158844 (S.D.Tex., 2009)]

Grange Insurance was faced with a claim it did not pay the appropriate amount of an insured’s claim because it paid less than the adjuster’s statement of loss. The court, in Fry v. Walters & Peck Agency, Inc., 141 Ohio App.3d 303, 750 N.E.2d 1194 concluded that Grange did not refuse to pay on appellants’ claim. Grange set forth in detail on the “statement of loss” form how it arrived at the amount it believed it owed appellants based on the terms of the policy. The amount Grange offered appellants was in accordance with the conditions of the coinsurance clause.

Adjusting the Commercial Property Loss

The adjustment of a commercial loss is performed in the same manner as any other property loss. The difference is one of tone rather than substance. Adjusters who usually deal with a business entity, and its officers or employees, rather than an individual find claims handling is often, but not necessarily always, easier. The experienced adjuster who deals with commercial claims usually has knowledge of the business and the people who operate the business. Some insurers even assign a single adjuster to a major commercial insured to handle all claims presented by the commercial insured. Familiarity and a good working relationship over a period of months or years benefits both the insured and the insurer.

A fire can be devastating for a business if it is not rapidly put back to work after the fire is extinguished. The adjuster must recognize this fact and act quickly to complete a fair and thorough investigation. To adjust the commercial property loss the adjuster must be familiar with the coverages.

An adjuster must always be absolutely certain which endorsements apply to the insured. The adjuster reviews the loss notice and re-reviews the coverages to ascertain which coverages apply to the type of loss reported. He or she makes immediate contact with the insured so that he or she may inspect the loss.

If there is a potential loss of earnings it is important to collect as much business documentation as possible so the history of the business can help the adjuster and his or her consultants to determine the amount of loss. Loss of earnings forms vary greatly. It is important that the terms and conditions are explained to the insured and why the adjuster should collect documents for analysis, possibly by a forensic accountant, including:

  • four years of corporate tax returns;
  • four years of profit and loss statements and balance sheets;
  • bank account statements and canceled checks;
  • one year of source documents on payroll, expenses, costs that continue, costs that do not continue, leases, contracts, and any other relevant business documents; and
  • if business information is kept on computers, the software used and a backup copy on a disk is necessary for the adjuster, or the retained forensic accountant, to work up the amount of loss.

The adjuster must always conduct a thorough investigation at the scene of the loss. He or she must establish the cause and origin of the loss, and obtain a general idea of the extent of the loss and what expert assistance will be required to complete the investigation and adjustment. If cause and origin of the loss are not obvious it is imperative that the adjuster retain the services of a cause and origin expert or engineer.

For example, if it is a fire loss, the adjuster must decide if a fire cause investigator is needed. If it is a theft or business interruption loss the adjuster must determine if the assistance of a forensic accountant is needed. The adjuster must determine whether the loss is too complex for his or her skill level or involves legal issues the adjuster will retain an insurance coverage lawyer experienced in major losses and potentially fraudulent claims. The attorney will provide advice and counsel to the adjuster who will assist, as a lawyer, the adjuster to make it possible to complete the adjustment of the complex commercial claim.

If, at any time in the investigation, it appears that the loss is suspicious, that there is a possibility that fraud is being attempted, that the co-insurance clause may come into effect, that there may be a penalty under the reporting form, or that a condition or warranty in the policy may have been violated by the insured, the adjuster must immediately ask the insured to sign a non-waiver agreement or issue a thorough reservation of rights letter. The non-waiver agreement is a mutual agreement between the insured and the insurer that nothing done in the investigation of the claim will act to change the positions of the parties or waive any of the rights either party has under the contract. If the insured is unwilling to sign a non-waiver agreement because the insured does not understand it and wishes to seek the advice of counsel, the insured should be requested to seek that advice. However, since waiver could cause a problem the adjuster should not delay the investigation for more than the time necessary to issue and deliver a thorough and detailed reservation of rights letter to the insured. The investigation continues pursuant to the reservation of rights. The non-waiver agreement and the reservation of rights letter are equally effective for maintaining the status quo while the investigation is being conducted; however, the non-waiver is preferred because it is a mutual agreement between the insured and the insurer while the reservation of rights is a unilateral statement of the insurer.

In Scottsdale Insurance Company v. MV Transportation, 115 P.3d 460, 36 Cal.4th 643, 31 Cal.Rptr.3d 147 (2005) the issue on appeal was whether an insurer that had properly reserved its rights could obtain reimbursement of its expenses of defending its insured against a third-party lawsuit where it was determined, as a matter of law, that the policy never afforded any potential for coverage and there was no duty to defend. The court held “yes.” In reaching its decision, the court discussed at length its prior holding in Buss v. Superior Court, 16 Cal. 4th 35 (1997).

A Colorado District Court found that the insurer properly asserted an exclusion from coverage. Moreover, Defendant’s reservation of rights sufficiently informed Plaintiffs of the potential grounds for denial of their claim, as the letter included Policy language describing several exclusions including wear and tear, deterioration, weather, and faulty construction, design, or maintenance—the same Policy language on which the insurer relied. [Gallegos v. Safeco Insurance Company of America, Not Reported in F.Supp.3d, 2015 WL 3526956 (D.Colo., 2015)

Though insurers sometimes send a reservation of rights letter, even when problems have not surfaced as a result of the initial investigation in first party cases, this function is merely to protect the insurer against claims of waiver and bad faith claims, Massachusetts Cas. Ins. Co. v. Rossen, 953 F.Supp. 311, 315 (C.D.Cal.1996. [Equitable Life Assur. Soc. of U.S. v. Schwartz, 291 Fed.Appx. 25, 2008 WL 3863428 (C.A.9 (Cal.) 2008)]

The Public Adjuster

The Public Adjuster (PA) is an insurance claims adjuster who works only for the insured on first party property claims. In California, a specific statute called the Public Adjuster Act is codified at California Insurance Code §15000 et seq. The California Insurance Code defines a PA as follows:

A public insurance adjuster … is a person who, for compensation, acts on behalf of or aids in any manner, an insured in negotiating for or effecting the settlement of a claim or claims for loss or damage under any policy of insurance covering real or personal property.

Building Permit Consultants, Inc. (BPC) appealed from a judgment entered after the defendants’ several demurrers to the first amended complaint were all sustained without leave to amend. The trial court concluded, and the Court of Appeal affirmed in Building Permit Consultants, Inc. v. Mazur, 122 Cal.App.4th 1400, (2004), that BPC’s multiple claims allegedly arose from and were based upon a voidable contract to provide public insurance adjuster services that were regulated and licensed by the Department of Insurance pursuant to California Insurance Code sections 15006, 15007 and 15008. Since BPC did not (and, in fact, could not) allege that it possessed the required license, and that failure has been raised and asserted as a defense to the enforcement of BPC’s contract, the trial court concluded that the contract was void and all of the claims alleged by BPC necessarily failed.

A public insurance adjuster is not practicing law and may practice the profession without being sanctioned by the Bar. In Texas, a court concluded that providing an estimate of property damage and filling out the appropriate forms to present a claim does not constitute the practice of law. In reality, this is the same procedure any insured is required to follow to collect on an insurance policy. The fact that a public adjuster is paid for his services and expertise does not convert his actions into the practice of law. However, if the issue to be submitted to an insurance company involves a coverage dispute, then the services of an attorney are required. [Kubala Public Adjusters, Inc. v. Unauthorized Practice of Law Committee for Supreme Court of Texas, 133 S.W.3d 790 (2004); Thomas v. Unauthorized Practice of Law Committee, Not Reported in S.W.2d, 1995 WL 316926 (Tex.App.-Dallas, 1995)]

The cases present a difficult situation for public insurance adjusters and may require — since coverage issues often are part of an adjustment — hiring an attorney to resolve those issues. A public adjuster can only lawfully do business in Texas as permitted by the licensing statute.

Similarly, in South Carolina, Insureds brought action against public adjusters for a declaratory judgment that they engaged in the unauthorized practice of law and that the contract was void. The Supreme Court held that: (1) adjusters engaged in the unauthorized practice of law by advising the insureds on the extent of coverage and becoming involved in a known coverage dispute; (2) they were entitled to compensation only for activities not amounting to the practice of law; (3) the contract was not void; and (4) no private right of action exists for the unauthorized practice of law. [Linder v. Insurance Claims Consultants, Inc., 348 S.C. 477, 560 S.E.2d 612 (2002)]

In Ohio the legislature defined the work of the PA as:

3951.01 ‘Public insurance adjuster’ means any person, firm, association, partnership, or corporation who, for compensation, acts on behalf of or aids in any manner, an insurer or insured or another in negotiating for, or effecting the settlement of a claim or claims for loss or damage under any policy of insurance covering real or personal property, and any person, firm, association, partnership, or corporation who advertises, solicits business, or holds itself out to the public as an adjuster of such insurance claims, and any person who for compensation investigates, settles, adjusts, advises, or assists an insurer or insured with reference to claims for such losses, on behalf of any such public insurance adjuster.

In Nevada the definition is brief:

‘Public adjuster’ means an adjuster employed by and representing solely the financial interests of the insured named in the policy. [NRS 684A.030.]

Regulation of Public Adjusters

Most states regulate PAs. In California, the California Insurance Code strictly limits the actions   of PAs as follows:

  • The PA’s contract and solicitation form must be approved by the Insurance Commissioner and must allow the insured to cancel the contract, with no obligation, within 72 hours of its signing. California Insurance Code § 15027.
  • The PA may not use any misrepresentation to solicit a contract. California Insurance Code § 15028(a).
  • The PA may not solicit or accept remuneration from, or have a financial interest in, any salvage, repair or other firm that obtains business in connection with any claim he or she has a contact or agreement to adjust. California Insurance Code §15028(b).
  • The PA may not advance money to any potential client or insured in order to obtain business. California Insurance Code § 15028(c).
  • The PA may not offer to pay a fee exceeding $100 to a person for referring a loss unless he or she employs that person to so act for him or her and that person is licensed to act as an adjuster under the provisions of this chapter. California Insurance Code § 15028(d).
  • The PA cannot solicit business during the progress of a loss producing occurrence. California Insurance Code § 15027(b).
  • The PA cannot solicit a client for employment between the hours of 6 p.m. and 8 a.m. California Insurance Code § 15027(c).
  • The PA may not use a badge. California Insurance Code
  • 15027(f).

The California Court of Appeal concluded that the Legislature recognized that insureds would often be susceptible to exploitation in the wake of earthquakes, fires, floods, and similar catastrophes, and that consumers of public adjusting services needed protection.

In addition to price gouging and collusion with contractors, the Public Adjusters Act was designed to protect California consumers from a number of other abuses including high-pressure sales tactics, fraud, and incompetence.

Protecting citizens that have suffered a traumatizing loss from intrusive unsolicited contact by public adjusters by granting them a brief period of breathing room furthers the governmental interest asserted. The Florida statute limiting the activities of public adjusters was supported by a legislative study, statistical data and anecdotal evidence. [Kortum v.  Sink, 54 So.3d 1012 (Fla. App., 2010)]

To ensure accountability and compliance with professional standards already in place for adjusters employed by the insurers, the statutes included the licensure requirement as a part of the statutory scheme. In light of the consumer protection goals of the statute as a whole, courts must infer that the licensure requirement was aimed at any firm that might potentially exploit insureds in a vulnerable position by offering to help them through the insurance claim ordeal. It is not important that the services are characterized as litigation support and assistance rather than claims services.

Furthermore, the legislative history of the Public Adjuster statutes indicates that one of the law’s purposes was to prevent circumvention of existing professional standards. In a letter to the Governor, advocates of the bill claimed that it is very likely that some public adjusters operate without a license contending that current definitions do not apply to their practices. It would be improper and contrary to the clear legislative intent of the Public Adjusters Act to allow firms to bypass the licensure requirement and associated standards by packaging public adjusting services while still presenting the same dangers of dishonesty, sharp dealing, and incompetence to the consumer.

A public adjuster’s function is essentially to determine what services an insured needs and is entitled to after an insured-against event and then to help in achieving a full and fair settlement.

Because the “Public Adjuster” in Mazur was unlicensed, it lost its entire investment in the case. The Public Insurance Adjuster should, therefore, be certain to qualify for and obtain a license – fulfill the local statute’s continuing education requirements, even if the services do not meet the literal requirements of the statute or take the chance on losing its right to be paid for its services.

In Pennsylvania, the Department of Insurance prohibited PAs from making contact with the insured until 24 hours after the loss. The regulation of PAs was found proper in Culbreth v. Miller 328 PA. Super. 374, 477 A. 2d 491 (1984). The PAs were understandably upset. The Commonwealth Court of Pennsylvania held that the limitation at Section 5(a) of the Act of December 20, 1983, P.L. 260, compiled at the third and fourth sentences of 63 P.S. § 1605(a) was not a breach of the PA’s First and Fourteenth Amendment rights and stated:

The twenty-four-hour rule does not violate any substantive due process rights of the Petitioner. In Cott Beverage Corp. v. Horst, 380 Pa. 113, 110 A. 2d 405 (1955), the Pennsylvania Supreme Court held that the General Assembly may not, under the guise of protecting the public interest, arbitrarily interfere with private business or impose unusual and unnecessary restrictions upon lawful occupations. Id. at 118, 110 A.2d at 407. As we held in our analysis of Petitioner’s free speech claim, the restriction on solicitation embodied in the twenty-four-hour rule is reasonable and narrowly drawn. As such, we hold that it does not arbitrarily and unnecessarily impinge upon Petitioner’s right to do business and is a lawful exercise of the Commonwealth’s police power.

The Ohio court found that it was reasonable to require that PAs reside in the state. In Associated Adjusters of Ohio, Inc. v. Ohio Department of Insurance (1977) the court upheld the refusal of a license because the principals of the PA were not residents of Ohio.

No person, firm, association, partnership or corporation shall act within this state as a public insurance adjuster, or receive, directly or indirectly, compensation for services rendered in the adjustment of any claim or claims under the types of insurance policies set forth in R.C. 3951.01, unless he, or it, is the holder of a certificate of authority to act as a public insurance adjuster, issued pursuant to R.C. 3951.01 to 3951.09.

Violation of any of the provisions of the Public Adjuster Act can be punished either as a misdemeanor, or if he or she falsifies his or her fingerprints or photographs which are required for the license, as a felony.

The California statutes referred to above were enacted because of abuses by some unscrupulous public adjusters who were known to be at the scene of a fire before the fire department, who would sign up clients while the house was burning, who would sell their services interminably until the early morning hours, and who would make false promises about the services they could give.

New York has a similar statute:

Insurance Law § 2101 (g) (2) as “any person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts or aids in any manner on behalf of an insured in negotiating for, or effecting, the settlement of a claim or claims for loss or damage to property of the insured in this state.” The duties of a public adjuster, as shown by the foregoing definition, are not limited to those necessary for completing a proof of loss for which reimbursement is provided, but also involve expertise in evaluating, negotiating and effecting settlements of fire loss claims, for which no reimbursement is provided. A public adjuster’s contract for services and its fees are directly regulated by the Superintendent of Insurance (see Insurance Law § 2108 [p]; 11 NYCRR 25.6, 25.13 [a]). Thus, a public adjuster is an independent contractor, not an employee, and its fees are not wages within the meaning of the disputed provision. We conclude, therefore, that plaintiff’s complaint should be dismissed. (Appeal from judgment of Supreme Court, Onondaga County, Mordue, J. — breach of contract.) Tri Town Antlers v. Fireman’s Fund Insurance, 550 N.Y.S. 2d 953, 158 A.D. 2d 908 (1990).

However, in Ochocinska v. National Fire Adjustment Co., Inc., 566 N.Y.S. 2d 998 (1991) the court, over a strong dissent, upheld a PA contract even though the insured had canceled the contract. The insured claimed he had not received notice of the three-day cancellation provision and canceled as soon as he learned of it. The dissent argued that the three-day period could not reasonably begin to run until the PA had complied with the statute by giving notice.

New York does not license PAs to adjust burglary losses. However, in Electorvoice International v. Sarasohn Adjusting Co., 567 N.Y.S. 2d 568, 149 Misc. 2d 924 (1990), the court held the insured could not recover fees paid for such services after receiving the benefit of the services.

In Linder v. Insurance Claims Consultants, supra. the Supreme Court of South Carolina emphasized that public insurance adjusting is not an unauthorized practice of law as long as they limit their activities to those provided for by law.

The court found the following practices permissible:

  1. Providing an estimate of property damage and repair costs, i.e., any purely appraisal oriented activities by the public adjuster.
  2. Preparing the contents inventory and/or sworn statements on proof of loss.
  3. Presenting the claim to the insurance company, i.e., delivering the necessary paperwork and data to the insurer.
  4. Negotiating with the insurance company, as long as the discussions only involve competing property- damage valuations.

More importantly to everyone involved in the claims process, the Supreme Court declared that it is prohibited for a PA to:

  1. Advise clients of their rights, duties, or privileges under an insurance policy regarding matters requiring legal skill or knowledge, i.e., interpret the policy for clients.
  2. Advise clients on whether to accept a settlement offer from an insurance company.
  3. Become involved, in any way, with a coverage dispute between the client and the insurance company.
  4. Utilize advertising that would lead clients to believe that public adjusters provide service which require legal skill.

The claim in Linder involved the loss of a gun collection. The PA advised the Linders on the extent of coverage for the gun collection and discussed this with the insurance adjuster. The Supreme Court found:

While this “advice” may simply have been pointing out the policy language to the Linders, it still constituted counsel on the Linders’ rights under the policy. Moreover, Moore (the PA) knew at the time that the insurer had limited liability on the gun collection based on its interpretation of the policy. It matters not that the insurance company was mistaken. This clearly was a coverage dispute between the Linders and their insurer, and therefore, respondents (the PA) should not have become involved. Their involvement went beyond an evaluation on the vital question of “how much” the gun collection was worth and transgressed into an evaluation of whether, and to what extent, the guns should be covered pursuant to the policy language.

This decision of the South Carolina Supreme Court is an important statement of the rights, duties, limitations, and obligations of the PA in a claim situation. Although they are considered professional claims people they will not be allowed to impinge on the work of the legal profession. Insurance company adjusters and independent insurance adjusters working for insurance companies can deal with insurance coverage issues but a PA may not.

In one case, a public adjuster placed an insured in a position to pay damages to the insurer. In Chubb & Son Inc. v. Consoli, 283 A.D. 2d 297, 726 N.Y.S. 2d 398 (N.Y. App. Div. 05/22/2001), a public adjuster was involved in a scheme with one of Chubb’s adjusters to intentionally inflate a claim and then pay Chubb’s adjuster to approve the claim. The insureds’ public adjuster was later convicted on charges of mail and tax fraud and Chubb’s representative was found guilty of defrauding Chubb. Recognizing that a PA acts as an agent for the insured and that there exists the well settled rule that a principal, even if innocent, is liable for acts of fraud that are within the scope of an agent’s actual or apparent authority, the court found the insured liable to Chubb.

The court concluded:

 [A] principal who has expressly or impliedly appointed another person to make proof of loss under an insurance policy is barred from recovery, under a policy which provides that it shall be void for fraud or false swearing of the insured after the loss, where the agent is guilty of fraud or false swearing in or in connection with the proof of loss; and this is so even though the insured is ignorant of the misrepresentation and innocent of any intent to deceive or defraud, and [even when] the act of the agent is to the detriment rather than the benefit of the insured. 70A NY Jur. 2d, Insurance § 1887, citing Kantor Silk Mills v. Century Ins. Co., 223 AD 387.

Indiana has refused to accept PAs at all. In Professional Adjusters, Inc. v. Tandon, 433 N.E. 2d 779 (1982), the Supreme Court of Indiana found that the statute providing for licensing of certified PAs who could then undertake negotiation of settlements between insureds and insurers was an unconstitutional violation of the separation of powers clause, in that it permitted practice of law by persons not required to be admitted to the bar and not subject to discipline by the Supreme Court.

The core element of practicing law is the giving of legal advice to a client. Merely entering into such relationship constitutes the practice of law. Professional Adjusters, Inc. v. Tandon (1982), Ind., 433 N.E.2d 779; In re Perrello (1979), 270 Ind. 390, 386 N.E.2d 174. The public adjuster was hired by a client to give legal advice. He undertook the proffered employment, proceeded to examine the case, and gave advice as to what legal steps should be pursued. The exercise of such judgment on behalf of a client constitutes the practice of law and is restricted to persons who have qualified and been admitted to the Bar. By entering into the relationship and by giving legal advice, the public adjuster, a non-attorney, has engaged in the unauthorized practice of law. [State ex rel. Disciplinary Com’n of Supreme Court of Indiana v. Owen, 486 N.E.2d 1012 (Ind., 1986)]

On the other hand, when public adjusters satisfactorily performed services that contributed to plaintiffs’ receiving substantial recoveries. The public adjusters have been paid pursuant to agreements that plaintiffs did not challenge. To allow plaintiffs, who were upset with their public adjusters, sued to obtain the benefit of the services and to recoup the fees they paid the public adjusters was determined to be inequitable under all the circumstances. Allowing the insureds to recover back the fees paid to the public adjusters is not necessary to effect the legislative purpose behind the licensing statute.  [Electrovoice Intern., Inc. v. Sarasohn Adjusting Co., Inc., 567 N.Y.S.2d 568, 149 Misc.2d 924 (N.Y.Sup., 1990)]

Florida attempted to enforce a regulation preventing a PA from soliciting business in the state. Larson v. Lesser, 106 So. 2d 188 (1958) held that where the privilege of engaging in business as a PA had been recognized as a valid and legitimate occupation by legislative definition, the statute:

  • would have the practical effect of prohibiting the adjuster from actually engaging in business;
  • had no rational relationship between the demands of public welfare and restraint imposed; and
  • was unconstitutional.

The Florida court found that when the practical effect of a statute is to prohibit the operation of a lawful business, under the guise of regulation, the statute must be declared unconstitutional unless the public welfare demands the contrary.

California, and many other states, are attempting to more closely regulate the actions of PAs. In California, the PAs may not collect on their contracts if they are not licensed. The California Insurance Code states:

(b) Any contract for services regulated by this chapter that is entered into by an insured with any person who is in violation of subdivision (a) [licensing] may be voided at the option of the insured, and the insured shall not be liable for the payment of any past services rendered, or future services to be rendered, by that person under that contract or otherwise. California Insurance Code § 1506.

Working with Public Adjusters

The contract the PA has the insured sign appoints the PA as the agent of the insured for the purpose of making the claim and gives the PA a lien against the proceeds. The basic common law of the United States allows an agent to act for a principal. The PA therefore acts as agent for the insured, the principal under the PA contract.

Basic insurance law allows the insured, at his or her option, to assign away any portion or all of the proceeds of the policy. The PA, by the assignment, steps in the shoes of the insured. As the assignee of the insured the PA is entitled to be treated with the same good faith the adjuster would give to the insured. The PA is required to comply with reasonable requests from the insurer as if the PA was the insured. The adjuster should meet the PA at the loss location as soon as possible after the loss, at which time they will both agree on the scope of loss. The PA should then be advised that the insurer expects the PA to present the insured’s sworn proof of loss within 60 days of the date of the loss.

Reasonable extensions can be granted, but the PA should be made aware that the adjuster expects to close the file promptly and will not accept unseemly delays. If the PA is unwilling, or unable, to prove the loss within a reasonable time, counsel may be retained for the purpose of examination under oath of the insured and for the purpose of making formal demands on the insured and the PA for documents that support the loss.

Some policies allow the insured to recover indemnity for the work of their employees or PAs in presenting claim. In Tri Town Antlers Foundation, Inc. v. Fireman’s Fund Insurance Co., 550 N.Y.S. 2d 953, 158 A.D. 2d 908 (1990), the court concluded that PA fees were within coverage provided for extra wages paid to “employees” for preparing inventories and other loss data for completing the proof of loss. The court reasoned that if it was the insurance company’s intent to exclude payment to a PA employed for that reason by the insured it would have been a simple matter to say so.

The adjuster must carefully review the policy coverage to determine if the insured has coverage for the services of the PA. If it does, payment should be made on a quantum meruit basis (the reasonable value of services) rather than the adjuster’s usual contingency fee. The PA should be questioned to establish the number of hours he or she worked and a reasonable hourly rate for those services should be established. The determination of reasonableness should be by agreement between the adjuster, the public adjuster, and the insured. As a last resort the issue can be submitted to binding arbitration or decided by litigation. Reaching an agreement as to what is a reasonable fee is, by definition, what adjusters do.

PAs offer services such as:

  • assisting in preparing, filing, and negotiating insurance claims with an insurer;
  • assisting in preparing inventories, estimates, and other factual proofs of loss;
  • compiling and filing claims;
  • meeting with the insurance company representatives; and
  • handling negotiations.

The PA’s fee is usually a contingency between 5 percent and 15 percent of the total amount recovered. Some fees are quoted as low as 0 percent and as high as 40 percent. The 0 percent fee adjuster can only be expecting to get illegal payments from vendors and is receiving as consideration from the client a promise not to inform the insurer of the true method of payment. That percent fee and fees over 15 percent are rare. Insureds willing to enter into such fee arrangements, either on the low or the high end, must be considered suspect.

PA fees are subject to negotiation. Very few are willing to work on an hourly rate. Most prefer the profits they can make by the contingency fee. In that regard the prudent insured negotiates the lowest possible contingency fee if the insured needs a PA. It is not unusual, for a large loss, where a professional PA will agree to a fee as low as three percent.

Some unscrupulous PAs lead their client, unwittingly, into fraud. PAs can use the special knowledge that is necessary for the profession to inflate claims. The adjuster must accept the professionalism of the PA with an eye to detect the potential fraudulent acts of an unscrupulous PA.

The adjuster may encounter PAs who are difficult to deal with and are not as professional as they advertise. When such PAs are met the adjuster must deal with them professionally and compel them to comply with the policy conditions. Excuses should not be accepted. Unreasonable delays should not be accepted. A claim can be legitimately denied for failure to comply with basic policy conditions. The file should be on a close (no more than 30 day) diary with reminders to the PA that the company is anxious to close the claim but it cannot do so without the insured’s full compliance with the policy conditions.

When interviewing the insured, the adjuster must ask detailed questions concerning the items claimed to be the subject of the loss to determine the source of the information.

The insured must be able to verify the existence of the item claimed lost, the quantity and quality of the item, and the value of the item. If the interview establishes that a false list was created solely by the PA without the assistance of the insured, the insurer has a basis to reject the claim.

The Examination Under Oath

A Tool Available to Insurers To Thoroughly Investigate Claims

When the initial investigation conducted by the adjuster raises questions of whether the policy applies to the facts of the loss or there is a legitimate suspicion that fraud is being attempted, the first party property policy allows the insurer to require the insured to produce documents and appear for and testify at an examination under oath (EUO). The EUO can be taken by the adjuster or anyone appointed by the insurer. Usually the insurer will select an attorney to examine the insured.

It is important that every adjuster fulfilling the obligation to adjust a first-party property claim to understand the reasons for, and law supporting, the use of the EUO so that the adjuster can conduct an EUO, if needed.

The insurance EUO is a formal type of interview authorized by an insurance contract. It is taken under the authority provided by a condition of the insurance contract that compels the insured to appear and give sworn testimony on the demand of the insurer or find his, her or it claim rejected for breach of a condition. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

The EUO is a tool used sparingly by insurers in the United States. It is only used when a thorough claims investigation raises questions about the application of the coverage to the facts of the loss, the potentiality that a fraud is being attempted, or to assist the insured in the obligation to prove to the insurer the cause and amount of loss. Although rarely used the EUO is an important tool available to the insurer and its adjusters.

The Reason for the Examination Under Oath

Courts that construe submission to an EUO as a condition precedent to recovery generally do not require the insurer to prove that it suffered actual prejudice from an insured’s unexcused refusal to submit to an examination. [Lorenzo–Martinez v. Safety Ins. Co., 58 Mass. App. Ct. 359, 790 N.E.2d 692, 695–96 (2003)]. The EUO provides a mechanism for the insurer to corroborate the claim by obtaining information that is primarily, or exclusively, within the possession of the insured.

The adjuster, the independent adjuster, the Special Investigation Unit (“SIU”) investigator, the independent insurance adjuster and, in complex cases, the attorney retained to represent the insurer questions the person interviewed in a manner similar to a deposition in a legal proceeding. Because of the formality of the proceeding — it includes an oath, and the presence of a certified shorthand reporter — the task of establishing rapport with the person interviewed so that relevant information may be obtained from the insured is more difficult than in an informal interview. Unlike legal proceedings where questions are limited to those seeking a “yes” or “no,” or brief answer, the EUO is different since it seeks narrative responses from the person questioned.

The person taking the EUO, therefore, must be capable of transitioning from lawyer like questions in litigation to the broad, inquisitive, narrative seeking questioning. An EUO should never be conducted as if it is an adversarial activity but merely a fact seeking activity that is directed to the needs of an insurance policy and the need to prove a loss is either compensable or not.

Because the EUO is a tool for gleaning the maximum amount of information the EUO is an effective weapon against insurance fraud. This is because the person taking the EUO is knowledgeable about insurance and insurance law while the person being questioned is only aware of the claim presented and the fraud he or she may be attempting.

Often, however, the purpose of the EUO is not to stop fraud but to allow an insured the opportunity to prove his or her claim of loss in cases where evidence has been destroyed by a casualty or is otherwise unavailable.

The authority to take an EUO is provided by the insurance contract and exists, as a result of statutes, establishing a state mandated fire insurance policy that must be incorporated in every policy in the state that insures against the peril of fire. For example, the New York Standard Fire Policy provides as follows:

The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described and submit to EUO by any person named by this compa­ny, and subscribe the same; and as often as may be reason­ably required, shall produce for examination and copying all books of account, bills, invoices, and other vouchers… (Emphasis added)

Similarly, the 1991 edition of the Homeowners policy provides, in easy to read language:

“2.       Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:

* * *

    “f.        As often as we reasonably require:

                “(1)      Show the damage property.

                “(2)      Provide us with records and documents we request and                        permit us to make copies; and

                “(3)      Submit to EUO, while not in the presence of any other                         “insured” and sign the same.” [ISO form HO 00 03 04 91,                    PAGE 9 OF 10]

In Shaw v. State Farm Fire and Cas. Co., 37 So.3d 329, 35 Fla. L. Weekly D1020 (2010) Florida concluded that State Farm had every right to include the EUO provision in its contract as a condition precedent to payment or suit, just as insurance companies have done in Florida for over a century. State Farm had every right to expect and require the insured to submit to the EUO. According to the Florida Court of Appeal, the insured and his assignees—the Appellants—do not have the right to take this valuable contract right and investigative tool away from State Farm through the mere expedient of an assignment.

Although the EUO is a formal proceeding it is not part of a judicial process. The EUO is not controlled by the rules of civil procedure. In most states it is considered a condition precedent to recovery under a policy of insurance. The EUO is not limited by any statute relating to civil discovery. Some states have enacted regulations that try to limit insurers taking of the EUO and place certain requirements upon the insurer to chill the desire to take an EUO.

Depositions and examinations under oath serve vastly different purposes. First, the obligation to sit for an examination under oath is contractual rather than arising out of the rules of civil procedure. Second, an insured’s counsel plays a different role during examinations under oath than during depositions. Third, examinations under oath are taken before litigation to augment the insurer’s investigation of the claim while a deposition is not part of the claim investigation process. Fourth, an insured has a duty to volunteer information related to the claim during an examination under oath in accordance with the policy while he would have no such obligation in a deposition. [Beasley v. GeoVera Specialty Ins. Co., Slip Copy, 2015 WL 2372328, 2015 WL 2372328 (E.D.La., 2015)]

In practice an insurer’s right to ask questions at EUO is basically unlimited. As early as 1884, the U.S. Supreme Court explained the purpose of the EUO, as follows:

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an EUO, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured. A false answer as to any matter of fact material to the inquiry, would be fraudulent. If it made, with intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if it failed it would be a fraud attempted. And if the matter were material and the statement false, to the knowledge of the party making it, and willfully made, the intention to deceive the insurer would be necessarily implied, for the law presumes every man to intend the natural consequences of his acts. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed; and if they are knowingly false and willfully made, the fact that they are material is proof of an attempted fraud, because their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them, and to whom they are addressed. [Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884)] (Emphasis added)

In Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884)] the U. S. Supreme Court concluded it is proper to investigate a potential fraudulent claim where the insurer needed truthful responses.

The position taken by the U.S. Supreme Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945) the Seventh Circuit stated:

We think there is no escape from the conclusion that these witnesses purposefully refused to answer ques­tions upon EUO which were materi­al to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy.  We would think that defendants had a right to examine as to any matter material to their liability, as well as to its extent. (Emphasis added)

In light of the evidence cited by the defendants (of which these are only a few examples), a reasonable juror could conclude that the plaintiff breached the insurance policy by not carrying out her duties as the insured party, thereby rendering the policy void.[1]

Similarly, based on the undisputed facts, a court concluded that there could be no question that Thomas made false statements when he applied for coverage and during the claims process. Thomas (the insured), “made false statements … relating to this insurance” both before and after the loss. Under the express terms of the Policy, AFI therefore can void “[t]he entire policy[.]” Thomas contended, however, that he “had no intent to defraud at any stage of the insurance procurement or claims processes.” But effective with the repeal of former Michigan Compiled Laws Section 500.2832, the insured’s intent is no longer relevant when the insurer seeks to void a policy based on a false statement where the policy contains the language at issue here. [Thomas v. Armed Forces Ins. Exchange, Slip Copy, 2015 WL 2063064 (E.D.Mich., 2015)]

In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgement because of the refusal of the insured to answer material ques­tions. The court stated:

It is well settled in other jurisdictions that noncompliance with a provi­sion in an insurance policy requiring the insured to submit to an EUO precludes recovery by the insured.

Although a delay in receiving notice does not necessarily impair the insurer’s ability to investigate the claim, an insured’s refusal to submit to an EUO significantly affects the insurer’s investigation of the claim. When the insurer requested the EUO in order to resolve an issue concerning residency and make a coverage determination, the court refused to require the insurer to prove that it has been prejudiced by the petitioner’s refusal to submit to the EUO. [Krigsman v. Progressive Northern Ins. Co., 151 N.H. 643, 864 A.2d 330 (2005)]

In Diamond Blue Enterprises, LLC v. Continental Insurance Company, Not Reported in Cal.Rptr.3d, 2015 WL 1739444 (Cal.App. 2 Dist., 2015) the insured refused to appear for EUO and, as a result judgment was entered in favor of the insurer and plaintiffs’ suit was dismissed.

In addition, even when the insured submits to an EUO, if the insured fails to produce all required documents and fails to sign the transcript of the EUO, under Alabama law, the insured did not comply with the duties after loss requirements of her homeowner’s policy, which were conditions precedent to coverage under the policy following a dwelling loss from fire. [Morton v. Automobile Ins. Co. of Hartford, Conn., 102 F.Supp.3d 1248, 2015 WL 1586092 (N.D.Ala., 2015)]

An appearance at an EUO “is a condition precedent to the insurer’s liability on the policy” (Stephen Fogel Psychological, P.C. v. Progressive Casualty Insurance Company, 35 AD3d 720 at 722, 827 NYS 2nd 217).

In Hudson Tire Mart, Inc. v. Aetna Casualty and Surety Co., 518 F.2d 671 (C.A.2d, 1975) the insured sought injunctive relief against the EUO provision of the standard fire policy because it would deprive him of his Fifth Amendment right against self-incrimination. The court rejected the request and held that:

The purpose of the cooperation clause is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved while the information is fresh in order to protect itself from fraudulent and false claims.  Only after the incriminating question is asked, is he in a position to assert his immunity and seek a protective order.

The failure to appear at EUO was held to be an absolute defense in Lentini Brothers Moving & Storage Co., Inc. v. New York Property Insurance Underwriting Assoc., 428 N.Y.S.2d 684 (1980) affirmed 51 N.Y.2d 740 (1981). The court stated:

Compliance with the policy provisions is a condition precedent to recovery. No compliance with the provisions as to written proof of loss or sworn examination occurred. Thus, recovery is barred.

Since an assignor’s appearance at any properly scheduled EUO is a condition precedent to the insurer’s liability on the policy (see Stephen Fogel Psychological, P.C. v. Progressive Cas. Ins. Co., 35 AD3d 720 at 722, 827 NYS 2nd 217) [2006]), the court ordered that the insurer’s motion for summary judgment dismissing the complaint must be granted. [Performance Plus Medical, P.C. v. Utica Mut. Ins. Co., Slip Copy, 47 Misc.3d 129(A), 2015 WL 1422389 (Table) (N.Y.Sup.App.Term), 2015 N.Y. Slip Op. 50399 (2015)]

To protect its right to the EUO  the insurer should always “require” the insured’s attendance at the EUO . The insurer, its adjuster or attorney should never “request” the presence of the insured. A “request” can be refused with impunity. A demand must be honored or the right to the benefits of the policy will be forefeited.

If the insurer only “requests” the insured’s presence, the insured, can correctly contend he did not violate a policy condition if he fails to appear. If the insurer, through its Insurance claims professional or attorney, “requires” his presence it should be clear that a failure to appear and testify will be a breach of a material condition that will allow the insurer to void coverage or deny a claim as a result of the breach.

An appearance at an EUO “is a condition precedent to the insurer’s liability on the policy” (Stephen Fogel Psychological, P.C. v. Progressive Cas. Ins. Co., 35 AD3d 720, 722 [2006] ), and defendant timely denied the claims at issue on that ground. As a result, upon searching the record (see Merritt Hill Vineyards v. Windy Hgts. Vineyard, 61 N.Y.2d 106 [1984]). Based on the precedent the court in First Class Medical, P.C. v. State Farm Mut. Auto, 55 Misc.3d, 141 (A) 2017 WL 1822145, 2017 N.Y. Slip Op. 50593(U), found that defendant insurer is entitled to summary judgment dismissing the complaint with prejudice because of the failure to appear at EUO.

In Bowlers’ Alley, Inc. v. Cincinnati Ins. Co., 32 F.Supp.3d 817, 89 Fed.R.Serv.3d 50 (2014) the pleadings failed to establish that the defendant ever made a demand for an EUO to occur, specific or otherwise. The only references to an EUO is a letter referencing its intent to “ask our attorneys” about arranging an EUO, and the plaintiff’s subsequent response indicating that the plaintiff was ready to submit to an examination at any time, and demanding that the defendant schedule one promptly. Whether or not the subsequent communications between the parties will show that one or the other acted unreasonably in failing to schedule or failing to submit to an EUO is a question that cannot be answered until the record has been fully developed on this issue. It is the obligation of the insurer to prove that a EUO was demanded and that the insured refused to appear at EUO.

Insurers use the right to EUO seldom and only when its investigation requires sworn testimony from an insured to make an intelligent and well-reasoned decision regarding the claim presented. It is an essential tool in those rare cases where fraud is suspected, where there is a coverage issue that requires a finding of the reasonable expectations of the insured, or when there is no other way for the insured to present the proof needed to allow an insurer to determine that an insurer is obligated to indemnify the insured and the extent of the indemnity owed.

The EUO Is a Serious and Important Part of the Insurer’s Investigation

The attorney, insurance adjuster or investigator who conducts the EUO can take a role similar to the role of a prosecutor without the usual constitutional restraints controlling testimony at a deposition or trial. [Hickman v. London Assurance Corporation, 184 Cal. 524, 195 P. 45 (1920)] A false statement as to any material fact during the EUO can cause the policy to be declared void, even if the fact has no relationship to the loss. Unlike a criminal proceeding the violation need only be proved by a preponderance of the evidence and not without reasonable doubt.

In Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884) the false testimony would not have affected the amount payable under the policy but to protect his reputation for veracity. The Supreme Court found that the testimony about the injury was material to the investigation and declared the policy void for fraud because the witness made false statements under oath.

Contrary to the Belief of Lawyers for the Insured, the EUO  Is Not an Adversary Proceeding like a Deposition in a Lawsuit.

The EUO is an investigative tool made available to the insurer. It allows the insurer to delve deeply and under oath into all aspects of the policy and the loss. The testimony to be elicited is not constrained by rules of discovery or the Codes of Civil Procedure.

The only restraint on the EUO is reasonableness. Unlimited questions are allowed. Only totally irrelevant and unreasonable questions dealing with facts completely outside the policy, its acquisition or the loss are not favored.

Irrelevant questions are tolerated if there is any possibility the question may lead to an inquiry about facts relevant to the policy or claim. In fact, there are no questions that are irrelevant in an EUO since each question may lead to more important information that could never have been learned about had not a foundation been laid by questions that appear, on their face, to be irrelevant. Since there are no rules for the taking of the EUO any question asked is important and must be answered. There is no judge to rule on objections – although the insured’s counsel may raise objections – and find them ignored.

In Ram v. Infinity Select Ins., 807 F.Supp.2d 843 (2011), during the investigation of the insured’s claim, the plaintiff produced limited records. Where an insurer has reason to suspect fraud in relation to a theft claim, inquiries into the insured’s financial status are relevant and material, and a refusal to produce relevant documents and answer questions on that subject constitutes a material breach of the insurance contract. Plaintiff refused to discuss his 2008 income at his EUO, and much of the income and employment information that he was willing to provide throughout the investigation of his claim was admittedly false. The Court found that the Plaintiff’s failure to answer income questions constitutes a breach of the duty to cooperate, and no reasonable juror could find otherwise.

In Deguchi v. Allstate Ins. Co., Not Reported in F.Supp.2d, 2008 WL 1780271 (D.Hawai’I, 2008) a case where Plaintiffs’ testimony raised even more questions of possible motive, Plaintiffs prevented Allstate from further investigating and determining coverage under the Policy. Specifically, Deguchi refused to submit to a further EUO, and Plaintiffs’ attorney limited the EUO to questions on the vessel the Princess Natasha, her loss, the two crew aboard her at the time of the loss, and her value. Under the specific circumstances of the case, the court found that Allstate’s requests for EUOs were reasonable as a matter of law. Deguchi, by refusing to allow a second EUO, and by refusing to answer even basic questions, breached Plaintiffs’ duty under the Policy to “submit to examinations under oath” as reasonably required by Allstate. Because Plaintiffs’ refusal prevented Allstate from determining coverage under the Policy, Allstate had no duty to pay Plaintiffs under the Policy.

Similarly, in Powell v. United States Fid. & Guar. Co., 88 F.3d 271 (4th Cir.1996), the insureds’ home was destroyed by fire. Under their homeowners’ insurance policy, the insureds were required to “submit to questions under oath and sign and swear to them.” Powell, 88 F.3d at 272. During the EUO, the insureds refused to answer several questions and “to turn over financial and other documents,” claiming that an EUO did not permit the insurer to “delve into financial or other information relating to the [insureds’] possible motives to intentionally set the fire … but … [was] instead limited … to an examination relating to the existence and extent of loss under the policy.” The United States Court of Appeals for the Fourth Circuit disagreed, stating that an EUO “encompasses investigation into possible motives for suspected fraud.” Concluding that the EUO “is not restricted to amount of loss, but the insurer has the right to examine the insured and his witnesses as to any matter material to the insurer’s liability and the extent thereof.”

In Michigan, in the context of a homeowner’s insurance policy, the remedy for failing to comply with a requirement to submit to an EUO is dismissal of the insured’s action. [Thomson v. State Farm Ins. Co., 232 Mich.App. 38, 45, 592 N.W.2d 82 (1998); Yeo v. State Farm Ins. Co., 219 Mich.App. 254, 257, 555 N.W.2d 893 (1996)]. The court saw no reason to distinguish between a valid EUO in a homeowner’s insurance policy and a valid EUO in a policy providing uninsured motorist benefits. An insurance policy is much the same as any other contract; it is an agreement between the parties. Because the no-fault statute does not require uninsured motorist benefits, there is no public policy against enforcing the EUO provision and the court must honor the intent of the parties’ contract. [Cruz v. State Farm Mut. Auto. Ins. Co., 241 Mich.App. 159, 614 N.W.2d 689 (2000)].

The EUO  Should Be Required by an Insurer Only:

■          When the insured has insufficient documentary evidence to prove his loss.

■          When the insured refuses to cooperate in the investigation of the insurer.

■          When the insured is unable to present documentary evidence in support of his or  her claim.

■          When the Insured needs help proving his or her loss.

■          When the insurer has no other means of “cross examining” the proof of loss  submitted by the insured.

■          When the insurer witnesses a fraudulent claim is being attempted.

The list of reasons for requiring an EUO above are not the only reasons but a small list of potential reasons for an EUO.

When an insurance professional, whether an adjuster or a lawyer, finds a claim poses questions that cannot be answered by the usual and common methods of investigating a claim, it is important to consider the use of the EUO to get the answers not available anywhere else.

The EUO is A Duty Owed by the Insured to the Insurer

Every fire insurance policy issued in the U.S., like the New York Standard Fire Insurance Policy quoted above, provides that, in the event of a loss, the insurance company can require the insured to produce documents and testify at an “EUO.” By statute in those states like New York that have a standard fire insurance policy, also require that all risk or direct risk of physical loss policies that do not exclude fire, must provide the coverages or better than the coverages stated in the standard fire policy.

In Ransom v. Selective Ins. Co., 229 N.J.Super. 43, 46, 550 A.2d 1006 (Law Div.1988) the court reviewed the examination under oath provision in a policy and concluded that the insured was required to submit to the EUO and produce requested documents in accordance with the written demand of counsel “because the circumstances surrounding the loss arouse[d] a justified suspicion of arson and because the requests are specific, relevant, material and reasonable.” (Emphasis added).

Applying the principles articulated in Ransom, and finding a reasonable basis to suspect that his claim of a theft loss was fraudulent, the court determined that the insured’s failure to produce the requested documents constituted a material breach of the conditions of his policy. Recognizing that the insurer’s rights may be “materially diluted by the delay between the loss and [the] resolution of the issue [,]” the court held:

[A]n insured in these circumstances must promptly file a declaratory judgment action seeking a determination of its obligation to produce the records demanded by its insurer under an insurance policy when the insured objects to their production. The insured may not wait to assert his rights until the eve of the expiration of the statute of limitations for filing suit to compel coverage. Such delay works too great a hardship to the insurer who must be able to promptly investigate the legitimacy of claims.[2]

Reversing a trial court ruling compelling appraisal (arbitration) under an insurance policy, the Eleventh Circuit court, in Jacobs v. Nationwide Mutual Fire Insurance Co., 236 F. 3d 1282 (11th Cir. 2001), applied Florida law in holding that the insured could not prove that he had fully complied with the EUO and document production requirements of the policy. Similarly, applying Florida law, the court in Galindo v. ARI Mutual  Insurance Co., 203 F. 3d 771 (11th Cir. 2000), refused to allow appraisal to go forward until the insureds had submitted to EUO, and stated that:

insureds must comply with post-loss terms of their respective homeowner’s policies, which enabled the insurance companies to investigate the insureds’ claims and to disagree with the loss amount before the appraisal term becomes effective. 203 F. 3d at 771.The failure to appear at EUO was held to be an absolute defense in Lentini Brothers Moving & Storage Co. v. New York Property Insurance Underwriting Association, 76 App. Div. 2d 759, 428 N.Y.S. 2d 684 (1980), aff’d, 51 N.Y. 2d 740, 53 N.Y. 2d 835, 440 N.Y.S. 2d 174 (1981). The intermediate appellate court stated: ‘compliance with the policy provisions is a condition precedent to recovery. No compliance with the provisions as to written proof of loss or sworn examination occurred. Thus, recovery is barred.’ 428 N.Y.S. 2d at 687. In Allstate Insurance Co. v. Longwell, 735 F. Supp. 1187 (S.D.N.Y. 1990), the court held that failure to appear for EUO is a breach of the cooperation clause even if the insured offers to cure the breach by answering the questions after denial of his claim.

The purpose of examinations under oath that was first described in Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 94-95 (1884) made clear that every question that was relevant and pertinent in such an examination was material to the investigation of the insurer and must be answered. It also clarified that a question is material because “a true answer to it was of the substance of the obligation of the assured.”

The position taken by the U.S. Supreme Court in Claflin has been followed by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F. 2d 6, 13 (7th Cir. 1945), the court stated:

We think there is no escape from the conclusion that these witnesses purposely refused to answer questions which were material to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy. . . . We would think that defendants had a right to examine as to any matter material to their liability, as well as its extent.

The EUO and the requirement that insureds produce relevant documents in the event of a fire or any other loss to property are essential tools to insurers faced with a possible fraud or other issue affecting insurance coverage. Insureds, and their counsel, will often argue that they are not required to produce tax returns or other financial documents because to do so would violate the so-called “taxpayers privilege” or right of privacy. They may refuse to testify about subjects they claim are irrelevant or protected by a privilege or right of privacy. In most states, refusals to testify or produce documents can result in a forfeiture of claims presented by the insured.

If, as a result of a fire, where fraud is not suspected, and the insured has lost the documentary evidence necessary to adequately prove the loss, then the insured can only prove the loss by oral testimony at EUO. The state of California, in an attempt to control and limit insurers’ right to take an examination under oath enacted the following statute:

California Insurance Code § 2071.1.

  • This section applies to an examination of an insured under oath pursuant to Section 2071 (the California standard fire insurance policy) labeled “Requirements in case loss occurs” and other relevant provisions of that section, and to any policy that insures property and contains a provision for examining an insured under oath, when the policy is originated or renewed on and after January 1, 2002. The following are among the rights of each insured who is requested to submit to an examination under oath:
  • An insurer that determines that it will conduct an examination under oath of an insured shall notify the insured of that determination and shall include a copy of this section in the notification.
  • An insurer may conduct an examination under oath only to obtain information that is relevant and reasonably necessary to process or investigate the claim.
  • An examination under oath may only be conducted upon reasonable notice, at a reasonably convenient place and for a reasonable length of time.
  • The insured may be represented by counsel and may record the examination proceedings in their entirety.
  • The insurer shall notify the insured that, upon request and free of charge, it will provide the insured with a copy of the transcript of the proceedings and an audio or video recording of the proceedings, if one exists. Where an insured requests a copy of the transcript, the recording, or both, of the examination under oath, the insurer shall provide it within 10 business days of receipt by the insurer or its counsel of the transcript, the recording, or both. An insured may make sworn corrections to the transcript so it accurately reflects the testimony under oath.
  • In an examination under oath, an insured may assert any objection that can be made in a deposition under state or federal law. However, if as a result of asserting an objection, an insured fails to provide an answer to a material question, and that failure prevents the insurer from being able to determine the extent of loss and validity of the claim, the rights of the insured under the contract may be affected.
  • An insured who submits a fraudulent claim may be subject to all criminal and civil penalties applicable under law. (Emphasis added)

The statute, although it appears to limit the rights of the insurer, also effectively expands those rights by telling the insured that he or she can assert an objection and refuse to testify, but only at the insured’s risk since failing to answer a material question can still cause the policy to be declared void or the claim denied for violation of the EUO condition.

Of course, after taking hundreds of EUOs, I recognize that an insured will often, by his or her testimony at EUO, remove the suspicions of the insurer that a fraud is being attempted and will find his or her claim paid promptly. The EUO can also convince the insurer that a fraud is being attempted and cause it to disclaim coverage.

The purpose of the EUO is to allow the insured a medium to prove the loss. Sworn testimony is as effective evidence as documents for an insured to prove his or her loss. Failure or refusal to prove the loss deprives the insured of the right to obtain the indemnity promised by the policy.

In Rymsha v. Trust Insurance Company, 746 N.E. 2d 561 (Mass. App. CT. 2001), the insured failed or refused to provide financial records including her income tax returns, credit card information regarding the purchase of items reported stolen, photographs and receipts. When she failed the insurer denied her claim. The Massachusetts appellate court reasoned:

We think resolution of Rymsha’s appeal is controlled in all respects by Mello v. Hingham Mut. Fire Ins. Co., 421 Mass. 333, 337 (1995). In that case, the court agreed with those authorities therein cited which hold that the ‘submission to an examination, if the request is reasonable, is strictly construed as a condition precedent to the insurer’s liability.’ Id. We see no basis for a distinction between an obligation to submit to a reasonably requested EUO and the duty to produce documents pertinent to the claimed loss. Rymsha does not contend otherwise. Indeed, she does not even cite to, let alone discuss, Mello. Rather, she argues only that, because she informed Trust from the outset that many of the items she reported as stolen had been given to her, the information sought by Trust (specifically, her personal and corporate income tax returns for the years 1988 through 1994) was not pertinent to her claim. In considering whether the documents requested by Trust were pertinent to Rymsha’s claim, the Superior Court judge concluded that Rymsha’s EUO and the undisputed circumstances of her claim gave rise to the reasonable suspicion that she did not have the resources to purchase the allegedly stolen items, that she had a ‘motive to stage the loss,’ that Trust had the right ‘to assure itself of the validity of [the] claim,’ and that the requested documents were relevant to that question. We see no error. See Sidney Binder, Inc. v. Jewelers Mut. Ins. Co., 28 Mass. App. Ct. 459, 462-463 (1990) (in theft claim, evidence of insured’s business affairs and personal finances relevant to show that insured had motive to stage burglary). Numerous other jurisdictions have held that the financial status of an insured can be relevant to an insurer’s investigation of a claim. See, e.g., Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 160 (S.D.W. Va. 1987); Pisa v. Underwriters at Lloyd’s, London, 787 F. Supp. 283, 285 (D.R.I.), aff’d, 966 F. 2d 1440 (1st Cir. 1992); DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601, 612 (App. Div. 1995); Dlugosz v. Exchange Mut. Ins. Co., 176 A.D. 2d 1011, 1013 (N.Y. 1991); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wash. App. 712, 720-721 (1997). In the circumstances here presented, the Superior Court judge was not in error in concluding that the challenged documents were pertinent to Rymsha’s claim.

The insured in Rymsha attempted to defeat the insurer’s argument by claiming the insurer was not prejudiced by her failure to produce documents. The Court rejected the argument. It found that the failure to produce the reasonably requested pertinent information put the insurer in the untenable position of either paying the claim without question and without any means by which to investigate its validity, notwithstanding the circumstances and amount of the loss described in her unsworn statement and EUO testimony, or being sued for breach of contract and unfair acts and practices. The court concluded that, without finding that a showing of prejudice was necessary, that the prejudice to the insurer was “too obvious to warrant discussion.” It was enough to state that the insured’s blanket refusal to provide the reasonably requested documents even stymied the insurer’s ability to show actual prejudice.

Failure to appear for EUO was a priori prejudicial to the rights of the insurer. Similarly, refusal to answer reasonable and necessary questions, is itself prejudicial. By so doing it limited the insureds ability to refuse to testify or answer relevant questions.

Concluding that a breach of an EUO the Indiana Supreme Court in Morris v. Econ. Fire & Cas. Co., 848 N.E.2d 663, 666 (Ind. 2006) held that breaches of EUO clauses do not require a showing of prejudice; rather an insurance company only needed to show a material breach to prevail.

Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 08/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an EUO. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an EUO. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an EUO. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

On the other hand, courts have routinely found that an insurer demonstrates actual prejudice when the insured’s failure to submit to an EUO resulted in delay to the claims investigation, as “[c]ooperation clauses fulfill the reasonable purpose of ‘enabl[ing] the insurer to obtain relevant information concerning the loss while the information is fresh….’” [Holden v. Connex–Metalna Mgmt. Consulting, 302 F.3d 358, at *2 (E.D.La. Nov. 22, 2000) (quoting 14 Couch on Insurance, § 199:4 (3d.ed 1999))].

The Fifth Circuit affirmed the district court’s prejudice finding, noting that the insurer had “certainly demonstrated prejudice to its investigation and adjustment capacity through [the plaintiffs’] unwillingness to submit to the required examinations.” [Mosadegh v. State Farm Fire and Cas. Co., 330 Fed. Appx. 65 (5th Cir.2009)]. There is actual prejudice because plaintiff’s refusal to submit to an EUO prevented the insurer from contacting witnesses in a timely fashion and obtaining material while “fresh”.  [Beasley v. GeoVera Specialty Ins. Co., Slip Copy, 2015 WL 2372328 (E.D.La. 5/15/2015).

In Thomson v. State Farm Insurance Company, 232 Mich.App. at 52–53, 592 N.W.2d at 88 the Michigan Court of Appeals discussed the consequences of an insured’s refusal to submit to an EUO that was requested by its insurer. In that case, the plaintiffs suffered a theft loss at their residence and made a claim to their homeowner’s insurer. They gave unsworn statements to the adjuster, but when asked for an EUO, they flat out refused and filed suit when the claim was not paid. Shortly after the lawsuit was filed, the court of appeals decided Yeo v. State Farm Ins. Co., 219 Mich.App. 254, 555 N.W.2d 893 (1996), which held that when an insurer requests an EUO, the insured must submit to it before bringing suit. If the insured does not submit, then the case should be dismissed without prejudice and should not be refiled until the EUO occurs. When the Thompsons learned of Yeo’s holding, they offered to submit to an EUO. It is not clear that they ever did, but the trial court denied the insurer’s motion for summary judgment. The insurance company appealed and convinced the appellate court that the case be dismissed “with prejudice” because of the breach of the material condition requiring EUO. [Bowlers’ Alley, Inc. v. Cincinnati Ins. Co., 32 F.Supp.3d 817, 89 Fed.R.Serv.3d 50 (2014)]

An EUO requirement is “a condition precedent to suit” under a homeowner’s policy and the insured’s failure to submit to the examination before filing suit “preclude[d] an action on the policy regardless of a showing of prejudice by the insurer.” [Goldman v. State Farm Fire General Insurance Co., 660 So.2d 300 (Fla. 4th DCA 1995)]

Also, the District Court for the Northern District of Florida concluded that an insured materially breached a fire insurance policy by filing suit without submitting to a required EUO. [Laine v. Allstate Ins. Co., 355 F.Supp.2d 1303, 1304 (N.D.Fla.2005)]. In granting summary judgment for the insurance company, the federal court rejected the argument that an insured’s failure to appear for an examination excuses the insurance company’s obligation to pay benefits only if it prejudiced the insurance company, concluding that argument is “subject to considerable doubt” under Florida law, which is concerned with the “materiality of the breach, not prejudice.” [Stringer v. Fireman’s Fund Ins. Co., 622 So.2d 145 (Fla. 3d DCA 1993)].

Policy provisions requiring insureds to submit to an EUO are conditions precedent to a suit, rather than cooperation clauses, and thus, a failure to comply precludes an action on the policy by the insured regardless of a showing of prejudice by the insurer. The refusal of the insured to submit to an EUO when required to do so is also a material breach of the policy, which will justify the insurer’s denial of recovery.  [State Farm Mut. Auto. Ins. Co. v. Curran, 135 So.3d 1071, 39 Fla. L. Weekly S122 (2014)].

Some courts have held that where the insured fails to comply with a condition precedent, the insurer does not need to show any prejudice. See De Ferrari v. GEICO, 613 So.2d 101, 103 (Fla. 3d DCA 1993) (stating that “prejudice is not at issue when an insurer’s reasonable request for an I.M.E. [a condition precedent to coverage] is refused by an insured.”); Goldman v. State Farm Fire Gen. Ins. Co., 660 So.2d 300, 306 (Fla. 4th DCA 1995) (holding that “the policy provision at issue [an EUO requirement] is a condition precedent to suit and that [the insureds]’ noncompliance precludes an action on the policy regardless of a showing of prejudice by the insurer.”); Starling v. Allstate Floridian Ins. Co., 956 So.2d 511, 513 (Fla. 5th DCA 2007) (stating that “[i]t is not necessary for the insurance company to prove prejudice where the insured fails to comply with a policy condition precedent to suit.”).

When the insured fails to comply with a condition precedent, the insurer does not need to show any prejudice. [See De Ferrari v. GEICO, 613 So.2d 101, 103 (Fla. 3d DCA 1993)] that stated that “prejudice is not at issue when an insurer’s reasonable request for an I.M.E.” In Starling v. Allstate Floridian Ins. Co., 956 So.2d 511, 513 (Fla. 5th DCA 2007) the court held that it is not necessary for the insurance company to prove prejudice where the insured fails to comply with a policy condition precedent to suit. [Biscayne Cove Condominium Ass’n v. QBE Ins. Corp., 971 F.Supp.2d 1121, S.D.Fla., 2013, August 30, 2013]. Therefore, failure to fulfill a condition precedent, like that requiring testimony at EUO, is sufficient to deny a claim whether the insurer can show prejudice or not since the failure is, by definition, prejudicial.

What Happens When the Insured Refuses to Testify at EUO?

The Examination Under Oath is a Condition Precedent to Obtain Policy Benefits

Since the EUO is an essential weapon in the insurer’s arsenal of tools to defeat insurance fraud these decisions are exceedingly important to every SIU insurance fraud investigator and insurance fraud counsel.

A Test Case

In Brizuela v. Calfarm Insurance Co.,116 Cal.App.4th 578, 10 Cal.Rptr.3d 661 (Cal.App. Dist.2 03/03/2004) and in California Fair Plan Association v. Superior Court of Los Angeles County, 115 Cal.App.4th 158 (Cal.App. Dist.2, 01/23/2004) the California Court of Appeal concluded that, “as a matter of law,” the insured “violated the requirement of the insurance policy that he submit to an EUO; that the insurer could on that basis deny his claim without a showing of prejudice; that the availability of a deposition in litigation does not excuse his breach of the EUO requirement; that he had no valid bad faith claim; and that the court properly dismissed his action.”

The facts that supported the conclusion of the Court of Appeal in Brizuela were as follows:

  • On April 23, 1999, Brizuela’s adjuster faxed CalFarm 33 pages of documents, including alarm company information, checks and checking account statements, and documents related to the purchase of the business.
  • On May 27, 1999, CalFarm’s counsel sent a letter to Brizuela’s adjuster advising him that CalFarm had scheduled examinations under oath for Brizuela and Brizuela’s wife on June 16, 1999 at that counsel’s offices in Marina del Rey, California.
  • The insurance policy CalFarm issued to Brizuela included a provision allowing CalFarm to “examine any insured under oath” in the event of a claim.
  • In the May 27, 1999 letter, CalFarm’s counsel asked that Brizuela produce certain documents by June10, 1999 and confirm the examination date by June 11, 1999.
  • Brizuela’s adjuster responded by requesting copies of recorded statements that Brizuela and his wife had given to CalFarm shortly after reporting the claim. CalFarm’s counsel denied this request.
  • On June 14, 1999, CalFarm’s counsel offered to reschedule the examination and extend the time to produce documents. Brizuela’s adjuster responded by reiterating the request for copies of the recorded statements, and CalFarm’s counsel again denied the request.

On June 17, 1999, CalFarm’s counsel wrote to Brizuela’s adjuster stating:

“We understand that you have counseled Mr. Brizuela to appear for the EUO without additional delay, but he has elected instead to draw out the claims investigation by insisting on receiving documentation which the Insurance Code clearly and unambiguously indicates he has no entitlement at this stage of the proceedings. [¶] If Mr. Brizuela’s final position on this matter is that he is unwilling to come to an EUO without first receipt and review of his recorded statement testimony and that of his wife …”

Brizuela then retained counsel, who wrote to CalFarm’s counsel on June 24, 1999, complaining at length about CalFarm’s refusal to provide the Brizuelas’ previously recorded statements. Brizuela’s counsel wrote that “[t]he only purpose served by refusing to provide the transcripts would be the interest of the insurance carrier and its counsel to trick and confuse the insured to establish a basis for denial.” Brizuela’s counsel offered no dates for the EUO; instead he wrote that “[w]e will contact you directly to discuss time, dates and places for proceeding with the EUO as demanded.”

On July 6, 1999, CalFarm’s counsel sent Brizuela’s counsel a letter reiterating CalFarm’s denial of Brizuela’s request for the previously recorded statements and requesting proposed dates for the EUO.

Brizuela’s counsel responded by letter the next day accusing CalFarm of having “no interest to act fairly in this matter” by putting Brizuela “through an exercise to allow CalFarm to take advantage of its insured and subsequently deny the claim.”

On July 9, 1999, CalFarm’s counsel sent another request for examination dates and asked Brizuela’s counsel to respond by July 16, 1999. Brizuela’s counsel then sent two letters, dated July 20, 1999 and July 27, 1999, suggesting no dates for the examination but instead asking CalFarm’s counsel to provide dates.

Shortly thereafter, counsel for Brizuela and CalFarm had a telephone conversation during which CalFarm’s counsel said he would be unavailable for three weeks in August 1999, and the parties discussed proposed dates for the examination. On August 18, 1999, CalFarm’s counsel sent a letter to Brizuela’s counsel stating, “[w]hen we last spoke, several weeks ago, several proposed dates for your client’s EUO were exchanged: We have heard nothing from your offices since that time.” CalFarm’s counsel requested that “a date certain for the examination and the production of documents requested in our initial letter be supplied to our offices on or before the close of business on Wednesday, August 25, 1999,” noting that CalFarm would reach a decision on the claim “based on the available information to date” if no EUO occurred.

On August 20, 1999, Brizuela’s counsel responded by stating that his client had been available during the first three weeks of August and that “[w]e will contact you with available dates now that we know you have surfaced from your Trial matter.” There is no suggestion in this letter as to Brizuela’s availability for an EUO at any particular date or period of time.

On October 5, 1999, Brizuela’s counsel wrote another letter to CalFarm’s counsel, criticizing CalFarm’s conduct but offering no dates for the now long-delayed examination. Instead, Brizuela’s counsel suggested that CalFarm’s counsel “contact my office regarding proposed EUO dates.”

On November 15, 1999, Brizuela’s counsel wrote CalFarm’s counsel requesting proposed dates “immediately inasmuch as we are set to commence to Trial on December 13.”

Brizuela had never proposed a date for the EUO, and no examination ever occurred.

Brizuela sued CalFarm for breach of contract and for tortious bad faith breach of an insurance contract. Explaining the reason for its decision that the Insured breached the contract the court recited the history of the condition in California case law as follows:

An insured’s compliance with a policy requirement to submit to an EUO is a prerequisite to the right to receive benefits under the policy. (Hickman v. London Assurance Corp. (1920) 184 Cal. 524, 534 (Hickman).) In Hickman, an insurer investigating a loss under a fire policy demanded that the claimant attend an EUO, as required by the claimant’s policy. The claimant attended the examination, but refused to answer the insurer’s   questions, invoking his Fifth Amendment right against self-incrimination because of pending criminal charges against him for arson. At the examination, the claimant offered to comply with the demand for an EUO after the arson charge was dismissed, or at any time if the insurer would cause the charge to be dismissed. The court held that the claimant’s refusal to submit to an examination was not justified and that by refusing to submit to an examination, the claimant forfeited the right to benefits under the policy: “`If the insured cannot bring himself within the terms and conditions of the policy he cannot recover. The terms of the policy constitute the measure of the insurer’s liability. If it appears that the contract has been violated, and thus terminated by the assured, he cannot recover. He seeks to recover by reason of a contract, and he must show that he has complied with such contract on his part.’” (Hickman, supra, 184 Cal. at p. 534; see also California Fair Plan Association v. Superior Court (2004) 115 Cal.App.4th 158; Globe Indemnity Co. v. Superior Court (1992) 6 Cal.App.4th 725; Robinson v. National Auto, etc. Ins. Co. (1955) 132 Cal.App.2d 709; West v. State Farm Fire & Casualty Co. (9th Cir. 1988) 868 F.2d 348.)  After Brizuela failed to comply with CalFarm’s initial demand for an EUO, the Insured was obligated to take affirmative action to fulfill the requirement of being examined “by offering to submit to such an examination at a later time.” (Bergeron v. Employers’ Fire Ins. Co. (1931) 115 Cal.App. 672, 676.) Brizuela did not submit, or agree to submit to an EUO on any specific date after June 16, 1999. CalFarm “had done all that it was required to do to set in motion the policy provisions for an examination of the insured under oath.” Although CalFarm reiterated its demand numerous times thereafter by asking Brizuela to provide dates for the examination, Brizuela failed to do so.

Brizuela’s failure, six months after CalFarm’s initial request for the EUO, to propose any dates for an examination, to respond in a timely manner to CalFarm’s proposed dates, and to submit to an examination legally constituted a refusal to submit to EUO. For example, note Rosenthal v. Prudential Property & Casualty Co. (2d Cir. 1991) 928 F.2d 493 [applying New York law and granting summary judgment in favor of insurer after concluding that purported scheduling conflicts did not justify the 13-month delay of EUO that included six adjournments]; Gould Investors, L.P. v. General Ins. Co. (S.D.N.Y. 1990) 737 F.Supp. 812 [applying New York law, insured’s unexcused failure to attend EUO was material breach of policy; upon insured’s unilateral cancellation of a scheduled examination, burden is on insured to offer alternative future date for the examination]; Home Ins. Co. v. Olmstead (Miss. 1978) 355 So.2d 310 the insured’s refusal to submit to EUO as scheduled, and subsequent failure to offer to submit to examination for 16 months caused insured to forfeit rights under policy.

One of the most important findings of the court with regard to the failure and refusal of the insured to appear at EUO is its finding that there is no requirement that the insurer prove it was prejudiced as a result of the failure of the insured to appear. The court concluded that there “is no California authority . . . that requires an insurer to show prejudice before denying policy benefits to an insured who has violated a policy provision requiring submission to an EUO.” Finding that the cases provide that compliance with the policy requirement for an EUO is a condition precedent to any claim, and the refusal to submit to such an examination causes a forfeiture of any rights under the policy, the Court of appeal cites its readers to the California Supreme Court’s decision in Hickman quoted above. Regardless of the finding that prejudice need not be shown the Court of Appeal concludes that the failure or refusal to appear is, by definition, prejudicial.

An insured’s failure to comply with the policy requirement for EUO deprives the insurer of a means for obtaining information necessary to process the claim. The inability to obtain such information is, by definition, prejudicial, absent extraordinary circumstances.

Concluding that the insured’s breach made it impossible for him to collect indemnity under the policy there was no possibility for the insured to maintain a bad faith case and that the entire suit was properly dismissed.

Other Cases

The same conclusion reached in the Brizula case was reached in Knowledge A-Z, Inc. v. Sentry Insurance, 857 N.E.2d 411 (Ind.App. 11/27/2006) that concluded that simply filing a declaratory relief action was not, nor could it be, conduct that allows a bad faith suit when the insured had failed to testify at EUO.

The court recognized that the EUO is taken under the authority provided by a condition of the insurance policy, usually statutorily imposed, as part of the standard fire policy that compels the insured to appear and give sworn testimony on the demand of the insurer.

As described in Pervis v. State Farm Fire & Casualty Co., 901 F. 2d 944, 947-48 (11th Cir. 1990), failure or refusal to testify at EUO is a material breach of the contract of insurance:

Appellant made no offer to submit to an EUO at any time during the four months between the completion of his criminal trial and the filing of this lawsuit. Pervis chose between complete silence in response to State Farm’s request and maintaining an action against State Farm. . . . State Farm had no obligation to repeat its request for an examination after appellant breached the contract, and appellant’s offer to be examined, as expressed on appeal, comes too late to be considered. Under the circumstances of this case, there is no principle that excuses Pervis’ refusal to submit to an EUO such that he should be permitted to pursue his action against State Farm. In Hines v. State Farm Fire & Casualty Co., 815 F. 2d 648 (11th Cir. 1987), the Eleventh Circuit reversed and remanded a summary judgment in favor of the defendant insurance company on a diversity suit for recovery by the insured under Georgia law. The Georgia Supreme Court had limited the scope of EUO to “material information called for under . . . the policy.” Halcome v. Cincinnati Insurance Co., 254 Ga. 742, 334 S.E. 2d 155, 157 (1985). The Eleventh Circuit disagreed with the district court’s conclusion that an insured’s tax returns were “per se relevant” in Georgia. 815 F. 2d at 652. However, the Hines court dealt only with the question of whether failure to submit income tax returns on request would constitute breach of the insurance contract. It explicitly noted that the Georgia Supreme Court has held, in Halcome, that “a refusal to provide information relating to an insured’s income and sources of income would constitute a breach of the insurance contract.” Hines, 815 F. 2d at 652.

In Texas, the appellate court in Perrotta v. Farmers Insurance Exchange, 47 S.W. 3d 569 (2001) granted summary judgment in favor of Farmers because Perrotta refused to sign the transcript of the EUO. In its motion Farmers established that Perrotta refused to provide any documents establishing ownership, copies of financial statements confirming his claims of wealth, the names of individuals to corroborate his claims of ownership, locations of the storage facilities where he claimed to have stored various items.

Insurance claims people, insurance lawyers, and insurance management that it is imperative that the insured appear and testify at EUO and if they do not, the claim can be denied without concern.

[1] Akers v. Liberty Mut. Group, 847 F.Supp.2d 21 (2012)

[2] DeMasi v. Lexington Ins. Co., Not Reported in A.2d, 2010 WL 3075674 (N.J.Super.A.D., 2010)


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

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