Sixth Circuit Rules that Insurer Need Not Disclose its Investigation Prior to an Examination Under Oath
The Sixth Circuit Court of Appeals (federal court system) has ruled that an insurance carrier need not provide an insured with any of its investigation prior to the taking of an examination under oath. Many times, the insureds or their counsel, will request certain documentation from the file before the examination under oath is taken. The Sixth Circuit has addressed these questions in the recent case of Lester v. Allstate Property and Casualty Insurance Company, Case No. 13-6070 (appealed from the United States District Court for the Eastern District of Tennessee at Knoxville)(download PDF here).
In that case, Allstate demanded an examination Under Oath, and the insured responded by stating that she and her husband would submit to the examination only if Allstate first showed them its investigative file. The 6th Circuit held that the insurance company is not required to turn over its files prior to taking an EUO, and the insured’s refusal to submit to the Examination without having the opportunity to review the claim file materials was a breach of the policy and warranted denial of the claim. The seminal language appears at p.2-3 of the opinion:
The point of an examination is to allow insurance companies to sort out fraudulent claims from honest ones, exorbitant claims from accurate ones. Telling the policyholder what the investigation has already uncovered undermines that purpose, as it would allow the policyholder to tailor her answers to the facts already discovered by the company. Suppose the insurance investigator suspects arson. And suppose his investigation uncovered a potential source of the arson or disclosed that the policyholder had moved some items out of the house shortly before the fire. That is useful information, particularly for a policyholder suspected of fraud. Alerted to these suspicions, the policyholder could shape her answers accordingly.
This seems to me to be the most fair and equitable resolution. It allows the carrier to gather the most competent, impartial and truthful information.
Back in 2009, Parks wrote about the Spears v. TFMIC case and correctly cited it for the proposition that an insured must submit to an examination under oath upon request, and that a failure to do so can bar recovery on an insurance claim. Notably absent from the Spears opinion was any requirement of prejudice in order to avoid payment. However, the Spears opinion is muddied a bit by a prior decision from the Sixth Circuit Court of Appeals in Talley v. State Farm Fire & Cas. Co., 223 F.3d 323 (6th Cir. 2000), in which the court held that an insurance company must prove prejudice in order to preclude recovery.
So what's the rule? Must an insurance company show prejudice to avoid payment of a claim on the basis of a refusal to submit to an EUO? In 2012, we almost got an answer to that very question in Farmers Mutual v. Atkins, 2012 Tenn. App. LEXIS 184 (Tenn. Ct. App. 2012). In that case, Judge Stafford noted the potential conflict between Spears and Talley, and seemed primed to rule on this murky issue. But unfortunately the ruling wasn't meant to be. In short, the trial court apparently just noted the divergence of opinion on the issue and then granted an interlocutory appeal without ever ruling at all. Thus, the matter was not ripe for consideration by the Court of Appeals and was remanded.
This particular topic isn't particularly exciting, but nonetheless should be considered by both insurers and insureds when claims are denied for failure to submit to an EUO. Depending on how this issue is ultimately decided, an insured's failure to show up just might not put the proverbial "nail in the coffin" of the insured.
"Examinations under oath" and "recorded statements" are not the same thing. A recorded statement is usually taken within a few hours or days after the loss, and is typically taken by an adjuster. The questions asked are usually standard in nature, often asked verbatim from a written form, and the whole process customarily takes only twenty minutes or so. The statements are sometimes audio recorded by the adjuster, but sometimes the adjuster just takes notes. Examinations under oath, on the other hand, are much more formal and detailed in nature, and are almost always taken by an attorney engaged by the insurance company. The questions and answers are transcribed by a court reporter, and the insured is typically required to sign the transcript. Another distinction is that an examination under oath is literally "under oath," meaning that the insured legally swears or affirms that his or her answers are truthful. A recorded statement is not a substitute for an examination under oath, meaning the insurance company gets to ask the same questions at least twice.
An issue I often run across is the insured that can't remember the questions presented and the answers provided during the recorded statement. Although such a lack of memory may be understandable due to the traumatic nature of major losses, such as a house fire, consumers in Tennessee may not be entitled to receive a copy of their recorded statement before submitting to an examination under oath. In fact, the Tennessee Court of Appeals noted in a 2004 unreported decision that "the contractual right of the insurer to compel the insured to submit to a statement under oath concerning a fire loss is unconditional," impliedly holding that an insured has no right to obtain copies of his or her recorded statement prior to an examination under oath. Jones v. Tenn. Farmers. Mut. Ins. Co., 2004 WL 170359 (Tenn. Ct. App. Jan. 27, 2004). For you lawyers out there, the insured's attorney in the Jones case engaged in some "outside the box" tactical maneuvering, and filed a pre-suit petition under Rule 27 to take the depositions of the insurer's employees who took the insured's statements. That petition was granted by the trial court, but the Court of Appeals reversed, holding that the petition was purely tactical in nature and was not designed to perpetuate testimony pursuant to the spirit of Rule 27, but rather was being used as a discovery tool.
A few thoughts about the impact of this decision. First of all, be honest when answering the insurance company's questions. If insureds will just do that, then the risk of giving conflicting testimony goes down significantly. Second, bring an audio recorder with you and record the initial "recorded statement" yourself. Although the adjuster probably won't like it, I don't think there is much he or she can do about it. And finally, if you don't have a tape recorder handy, just ask the adjuster to confirm, on the record, that the insurance company will promptly provide a transcript of the statement upon request. If the adjuster agrees, then the insurance company has arguably waived the right to take an EUO without first providing a copy of the recorded statement. If the adjuster refuses, well . . . I guess you better find that recorder.
What is an Examination Under Oath?
The number one trigger that drives clients to my office is that dreaded letter from some fancy law firm, usually with lots of names at the top of the letterhead, that directs the insured to show up at a designated time and place for an “examination under oath.” The letter usually will also request the insured to bring numerous documents with him or her to the examination under oath. Those receiving the letter are usually frightened by the formality of it all, and then that fear turns into anger because the company they've been paying premiums to all these years is now treating them like a criminal. My next few posts will deal with common issues and questions surrounding examinations under oath. Hopefully it will help a few insureds understand what an examination under oath is, and why, in my opinion, a request for an examination under oath should be a red flag that the insurance company believes something is afoul.
An examination under oath, commonly referred to as an “EUO”, is a formal statement taken by the insured on issues related to the insurance claim or insurance policy at issue. EUOs are typically, although not always, conducted by an attorney representing the insurance company. A court reporter will be present, typing every question and answer verbatim. There is sometimes a videographer present as well. Examinations under oath usually last only a few hours, but I’ve been involved in a few that have taken multiple days.
The subject matter of the questions in an EUO varies depending on the issues at hand. For example, in a fire damage case, an insured should anticipate questions about the cause and origin of the fire, the financial condition of the insured leading up to the fire (motive), the insured’s whereabouts at the time of the fire (opportunity), the nature and extent of the loss, particular items claimed to have been damaged or destroyed, and the accuracy of answers provided in the insurance application. This is just a small sampling of the multitude of pitfalls for the unwary, and an insured would be wise to seek qualified legal counsel well before appearing for the examination under oath.
An insurance company’s authority to take an examination under oath comes from the insurance contract, which typically contains a provision, under the section “Duties of the Insured,” that the insured must answer questions under oath when requested by the insurer. Even without such a provision, there is almost always a “duty of cooperation” provision in the policy which would also require the insured’s participation in an examination under oath. If an insured refuses, it could result in the insurance company’s denial of the claim based on its assertion that the insured breached the insurance policy by refusing to cooperate. See Spears v. Tenn. Farmers Mut. Ins. Co., 300 S.W.3d 671 (Tenn. Ct. App. 2009).
Tennessee courts have consistently recognized an insurer’s right to take an examination under oath. See Shelter Ins. Co. v. Spence, 656 S.W.2d 36 (Tenn. Ct. App. 1983) (holding insurer was entitled under cooperation clause of policy to take sworn statement from each insured privately and out of each other’s presence); Widener v. Tenn. Farmers Mut. Ins. Co., 1995 WL 571868 (Tenn. Ct. App. 1995) (recognizing an insurer’s right to take an insured’s examination under oath); Jones v. Tenn. Farmers Mutl. Ins. Co., 2004 WL 170359, at *2 (Tenn. Ct. App. 2004).
Examinations under oath are certainly valid tools in an insurance company’s vast arsenal of weaponry to be used to deny claims, but there are several nuances which most insureds and many lawyers who represent them are unaware. Over the next few posts, I’ll try to identify those to better equip those unfortunate souls who receive the dreaded letter requesting an EUO.