Prejudice Requirement – An Invitation to Commit Fraud
As a justice of the California Supreme Court once said: “The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.” [White v. Western Title, 40 Cal. 3d 870, 221 Cal. Rptr. 509(December 31, 1985).]
The Supreme Court of the state of Washington fell into the trap that Justice Kaus pointed out in White when it was required to examine an insured’s duty to cooperate with an insurer’s claim investigation. The petitioner, John Staples, had his insurance claim denied for failure to cooperate-namely, failure to submit to an examination under oath (EUO). In John Staples v. Allstate Insurance Company, No. 86413-6 (Wash. 01/24/2013), Staples sued his insurer for bad faith and related causes of action. The trial court dismissed the case on summary judgment and Staples appealed.
On or around August 18, 2008, a 1992 Ford Econoline van belonging to John Staples was stolen from a parking lot in Redmond, Washington. In the back of the van, Staples had stored a large collection of tools. Staples reported the theft to the police, telling them the tools were worth around $15,000. The police report says, “Staples told me that it would cost $15,000 to replace the tools and equipment stored in the van.” The report describes the van as a “work truck” and says that it was a “mobile workshop for the business that Staples contracted with.”
Two weeks later, Staples submitted a claim for loss of the tools to Allstate under his homeowner’s policy. He told Allstate that the tools were worth between $20,000 and $25,000 and that they were for his personal use (although they “could be used” for work).
Based on these apparently inconsistent statements, Allstate transferred Staples’ claim to its special investigation unit. Allstate requested documents from Staples, including proof of ownership, a sworn statement in proof of loss, an authorization to release information, and three years of tax returns. Allstate took two recorded statements from Staples, neither of which was under oath (despite Staples’ claims that he believed they were).
Over the next few months, Staples failed to provide the requested documentation despite several written requests from Allstate. It was not until December 11, 2008, nearly three months after the loss, that Staples submitted his sworn statement in proof of loss and authorization to release information.
On January 15, 2009, Allstate requested by letter that Staples appear for an EUO on January 29, also requesting documentation related to the loss by the following day, January 16. This gave Staples only one day to produce the requested documents. The letter said, “If there are legitimate reasons which make attendance [at the EUO] on this day impossible, please advise immediately so that the examination can be rescheduled if appropriate.” On January 23, Allstate sent a letter to Staples stating that his EUO was canceled because he had not produced the requested documentation. The letter also said, “If the materials are provided, we will contact you to reschedule the exam.”
This suggests Allstate would only reschedule the exam once the documents were produced, although the record is unclear on this point. The letter was mailed on the same day as a letter from James Sullivan, an attorney Staples had recently hired, who informed Allstate that Staples could not attend an EUO on January 29.
Upon receiving Staples’ letter, Allstate requested that Staples contact Allstate to reschedule the EUO, also reiterating its request for documentation. This time, Allstate did not indicate that it would only reschedule the EUO after Staples produced the requested documents. The record is unclear whether this was in fact a condition that Staples would need to meet before he would be permitted to reschedule his EUO.
Staples hired attorney Daniel Fjelstad, who immediately began accusing Allstate of delay and of violating the Insurance Fair Conduct Act (IFCA). Allstate responded by reiterating its request for Staples to provide documentation and reschedule the EUO.
Staples did neither, instead accusing Allstate of making “burdensome” and “vexatious” requests constituting “harassment.” Staples demanded a justification for Allstate’s documentation request, and Allstate responded that the records were necessary to evaluate whether Staples had filed a false claim.
When Staples did not attempt to reschedule, Allstate denied his claim on April 30, 2009.The parties dispute whether Staples provided the documents Allstate requested, but it appears Staples provided many of the documents substantiating the value of his stolen tools.
Three and a half months after Allstate denied his claim, Staples’ attorney wrote a letter to Allstate saying that Staples was “willing to appear at an EUO” if Allstate would agree to extend the contractual time limit for filing suit (which was about to expire). Allstate responded that it was “unwilling to extend the one year suit limitation . . . .”
On August 24, 2009, Staples sued Allstate in King County Superior Court, alleging breach of contract, bad faith, and violation of the IFCA. Three months later, Allstate moved for summary judgment, seeking to dismiss the claims. Staples opposed the summary judgment motion, but in the alternative asked the court to grant a continuance to allow him to conduct discovery.
(1) Must an insurer’s request for an EUO be reasonable or material to the insurer’s claim investigation?
(2) Did the insured in this case, John Staples, substantially comply with Allstate’s request for an EUO?
(3) Must an insurer show prejudice before denying a claim for failure to submit to an EUO?
Most insurance policies contain cooperation clauses requiring the insured to cooperate with the insurer’s handling of claims. Typically, an insured that “substantially and materially” breaches a cooperation clause is contractually barred from bringing suit under the policy if the insurer can show it has been actually prejudiced. The burden of proving non-cooperation is on the insurer.
Cooperation is essential to the insurance relationship because that relationship involves a continuous exchange of information between insurer and insured interspersed with activities that affect the rights of both. The relationship can function only if both sides cooperate.
Staples’ homeowner’s policy with Allstate is a first-party policy containing specific, enumerated cooperation duties including the requirement that Staples submit to an EUO:
3. What You Must Do After A LossIn the event of a loss to any property that may be covered by this policy, you must:d) give us all accounting records, bills, invoices and other vouchers, or certified copies, which we may reasonably request to examine and permit us to make copies. . . . .
Under the policy, Allstate has no duty to provide coverage if Staples does not comply with his duties and Allstate is prejudiced:
We have no duty to provide coverage under this section if you, an insured person, or a representative of either fail to comply with items a) through g) above, and this failure to comply is prejudicial to us.
Failure to comply also precludes Staples from suing Allstate:
12. Action Against Us
No one may bring an action against us in any way related to the existence or amount of coverage, or the amount of loss for which coverage is sought, under a coverage to which Section I Conditions applies, unless:
a) there has been full compliance with all policy terms; and
b) the action is commenced within one year after the inception of loss or damage.
Based on this language, Allstate denied Staples’ claim. The parties dispute whether this decision was correct and whether summary judgment was appropriate. Staples raises three duty to cooperate issues, and we address each in turn.
Issue 1: Must an insurer’s request for an EUO be reasonable/material to the insurer’s claim investigation?
Given the quasi-fiduciary nature of the insurance relationship, the Supreme Court held that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it. However, in this case, it appears that Allstate was within its rights to request an EUO. Although it appears an EUO was justified given the discrepancies between the police report and Staples’ insurance claim, we cannot be sure because Allstate never explained what information it was seeking from the EUO that Staples had not already provided. Staples had already given two recorded interviews, produced documents, and signed a broad authorization allowing Allstate to obtain records from other sources. It is not clear what additional information Allstate hoped to uncover by conducting an EUO.
Issue 2: Did Staples substantially comply with Allstate’s request for an EUO?
Breach of a cooperation clause in Washington state is measured by the yardstick of substantial compliance.
Here, there are unresolved fact issues regarding substantial compliance. Staples does not dispute that no EUO took place. However, he did appear for two scheduled interviews, giving Allstate ample opportunity to examine him. Staples also offered to appear for an EUO if Allstate would extend the deadline for filing suit and signed a broad authorization allowing Allstate access to a wide range of financial documents. These facts on their own do not prove substantial compliance, but at the summary judgment stage they do not need to because we are required to view all facts in a light most favorable to Staples. It is enough that the record demonstrates a genuine question of material fact.
Given this, Allstate should have rescheduled the EUO. But it did not.
Issue 3: Must an insurer demonstrate prejudice before denying a claim for failure to submit to an EUO?
In the first-party insurance context non-cooperation does not absolve an insurer of liability unless the insurer was actually prejudiced. A showing of prejudice is still required by the clear terms of Staples’ policy.
Allstate has not met its summary judgment burden of showing actual prejudice. A claim of actual prejudice requires affirmative proof of an advantage lost or disadvantage suffered as a result of the breach, which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability. Prejudice is an issue of fact that will seldom be established as a matter of law. Prejudice will be presumed only in extreme cases.
Even though Allstate was within its rights to ask for an EUO, the Supreme Court found that there are fact issues about whether Staples substantially complied with Allstate’s request. Further, the trial court should have required a showing of prejudice, and there are fact issues about whether Allstate in fact suffered prejudice. It may well be that Staples did not substantially comply and that Allstate was sufficiently prejudiced to justify denying Staples’ claim. The Supreme Court concluded that on the record before it material issues of fact preclude summary judgment.
An insurer suffers prejudice, as a matter of law, when its insured fails to provide it with the financial records it reasonably needs in order to complete an investigation into the question of whether the insured’s claim was fraudulent. The majority holds an insured individual with a questionable claim frustrates the company’s claim investigation for months by refusing to submit to an EUO as required by the insurance policy may still bring suit against the insurance company for denying his claim based on his non-cooperation. “Today’s decision invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”
Allstate’s first problem is the wording of its policy when it added “prejudice” to its EUO clause.
The right to an EUO has existed as a condition precedent to indemnity since the first New York Standard Fire Insurance policy was issued in the 19th Century. Adding a requirement to show prejudice for failure is an invitation to those intent on committing fraud to simply spend his time and energy accusing the insurer of wrongful conduct and refuse to appear for EUO until the claim is denied.
Allstate gave the court an opening by refusing to schedule the EUO after the insured agreed to appear after the claim was denied. I have often done so without withdrawing the denial so that the information would be available. EUO is a tool and should always be used if offered. By refusing to do so it gave the Supreme Court the hook on which to allow the case to go forward and allows future claimants to present fraudulent claims and then avoid the insurer raising a defense by obfuscation.
© 2013 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.
Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.