I represented a Memphis homeowner a couple of years ago whose residential rental property was destroyed by fire. The policy provided coverage for fire loss, but contained an exclusion for "vandalism and malicious mischief . . . if the dwelling has been vacant for more than 30 days immediately before the loss." In our case, it was undisputed that the house had been vacant for more than 30 days at the time of the fire, which was intentionally set by an unknown third person. These undisputed facts left one unanswered question - - does arson constitute vandalism or malicious mischief? If so, there would be no coverage for the claim. If not, then the claim should be paid in full.
After summary judgment briefing, Chancellor Armstrong in Shelby County ruled that arson isn't necessarily the same thing as vandalism or malicious mischief. Noting the split of authority across the country, Chancellor Armstrong ultimately ruled that fire is a separate peril from vandalism and malicious mischief, and that arson was not included within the exclusion applying to losses caused by vandalism or malicious mischief. Accordingly, the court granted my client's motion for summary judgment and the case was concluded, marking another victory for insureds in Tennessee.
Download a copy of Chancellor Armstrong's Order by clicking here.
In Parks' last post, "What is the Proper Scope of Appraisal in Tennessee?", he pointed out the Merrimack decision in which the Court of Appeals held that appraisal is not appropriate for decisions regarding coverage and liability. In considering my response, I spoke with Chuck Howarth, who is part of The Howarth Group, a claims consulting and public adjusting business based out of Nashville. Chuck's perspective on the appraisal process is unique for two reasons. First, his group handles more insurance appraisals in Tennessee than anyone else of which I'm aware. Second, he worked for eight or ten years with State Farm as an adjuster before moving to the other side of the fence as a public adjuster, which is where he's served for almost 25 years now. In fact, he even trained staff adjusters for State Farm so his experience with the inner workings of insurance companies can come in handy.
So, when Chuck and his business partner, Denis Rowe (both Tennessee Public Adjusters), read Parks' recent post about appraisal, they had a few comments. First, as to whether appraisal can be beneficial, they stated:
While we have used both public adjusting and the appraisal process to resolve claims, we have found that in Tennessee, Alabama, and Kentucky we get far better settlements using appraisal than serving as a property owner's public adjuster. Of course its critical that a public adjuster have signficant experience with the appraisal process before heading this road.
Another issue they pointed out was that some insurance companies are taking the Merrimack case to the extreme and "are trying to prevent appraisals from happening by saying that the only thing an appraisal panel can do is to determine the pricing of their scope that they have decided is part of the loss." Under this interpretation, the insurance company, not the appraisers, determine the scope of the damage. This is definitely not good for insureds because the biggest problem with insurance adjusters' estimates is usually the scope of the necessary repairs, not the price. For example if a tornado damages a home and everyone agrees the damage is covered, an appraiser's job would be to determine what needs to be repaired and the necessary cost of those repairs. In that situation, some insurance companies would counter that an appraisal is inappropriate to determine what items need to be repaired (i.e., the scope), but rather appraisal is only appropriate for determining the necessary cost of repairs for the scope as determined by the insurance company. Although I've not researched that particular issue yet, I feel certain that insurance companies taking this position are dead wrong. More on that next time.
There are a few issues here that need to be clarified for our insureds out there who may be dealing with an insurance company making accusations of misrepresentations. First, the rules are different depending on whether the alleged misrepresentation occurred before the loss or after the loss. The one I see more often is the misrepresentation that occurs during the application process. That topic is certainly worthy of several posts on its own, but suffice it to say here that a material misrepresentation on an insurance application that increases the risk of loss can completely void the policy, meaning that the insurance company will refund the premiums as if the policy never existed at all. As for misrepresentations that occur after the loss during the claim process, the law is much more generous to the insured. In those cases, to avoid its obligations under the policy, the insurance company has the burden to show that the misrepresentation was intentional and designed to deceive. A simple mistake isn't enough. For example, if an insured fills out his proof of loss and makes a mistake in adding his personal property inventory and thus fills in the wrong number on the proof of loss, that would not be an intentional misrepresentation.
Another requirement is that the alleged post-loss misrepresentation be material in nature. So what is material? In Nix v. Sentry Ins., 668 S.W.2d 462 (Tenn. Ct. App. 1983), the Court of Appeals dealt with precisely that question. In that case, the issues at trial centered around whether the plaintiff had committed arson and whether the plaintiff had made material misrepresentations regarding what property was actually destroyed by the fire and its value. The trial court found that there was no arson, but that there had been misrepresentations concerning the value of the property destroyed in the fire. The judge therefore found that the insurance company had no liability for the loss. On appeal, the Tennessee Court of Appeals reversed, holding:
When the false swearing is in the application it forms the basis upon which the contract rests, and if fraud enters into it the policy would be voided even though the policy does not so provide. But after the loss occurs then voiding the policy is in the nature of a penalty or forfeiture; in other words, in such cases the holding is virtually that, although the insured has had a loss, and may be entitled to recover from it, yet, as he has been guilty of fraud in the proofs, he must have his policy vacated and set aside as a punishment for such fraud, or attempted fraud. In the latter case, as in all cases of forfeiture, a strict construction should be adopted, and the forfeiture not enforced except on the plainest grounds, if at all.
Nix, 666 S.W.2d at 463-64. Most importantly to the issue of materiality, the court also noted "that if rights are to be forfeited under the terms of this insurance policy, the concealment or misrepresentation made must be relative to the loss claimed." In that case, the insurance company pointed to alleged misrepresentations concerning the insured's financial condition which might have provided a motive for arson, but did not point to any specific misrepresentations in the proof of loss. Because the court found there was no arson, any misrepresentations concerning the insured's financial condition were not material to the issue of his valuation of certain personal property, and the policy could not be voided.
Nix is a very important case, and can be incredibly useful in insurance disputes. It obviously isn't a license to misrepresent material facts, but it does substantially limit an insurance company's ability to void a policy altogether when the alleged misrepresentations just don't have anything to do with the issues at hand.
In bad faith and Tennessee Consumer Protection Act cases, I routinely run into work product objections during discovery. Often these objections are made even as to reports and documents generated before the claim was denied. I believe work-product objections as to pre-denial materials are improper. As we know, Rule 26.02(3) protects against disclosure of materials prepared in anticipation of litigation. In general, courts seek to distinguish those materials that are generated “in the ordinary course of business” from those prepared “in anticipation of litigation.” The work product doctrine does not protect documents prepared in the ordinary course of business. See Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 225 n.33 (Tenn. Ct. App. 2002) (citing Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). In light of the above, the obvious question in litigation involving an insurance claim is when the insurance company begins investigating and acting “in anticipation of litigation” as opposed to doing so in the ordinary course of its business. Fortunately, there is case law to help, and I’ve compiled a few helpful citations below for use by lawyers fighting this decades old battle:
- “The investigation and evaluation of claims is part of the regular, ordinary and principal business of insurance companies." Fine v. Bellefonte Underwriters Ins. Co., 91 F.R.D. 420, 422 (S.D.N.Y. 1981).
- “It is . . . well established that insurance companies have an independent obligation to review and follow up on claims, and their reports are thus not protected, although they are usually prepared with an eye toward litigation." Fru-Con Constr. Corp. v. Sacramento Mun. Util. Dist., 2006 U.S. Dist. LEXIS 53763 at *4 fn. 3 (E.D. Cal. July 20, 2006) (citing Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991)).
- Any investigation, including statements obtained as part of this process, would fall within the insurance company's ordinary business and independent duty to investigate and evaluate claims. Accordingly, it can be presumed that "documents which were produced by an insurer for concurrent purposes before making a claims decision would have been produced regardless of litigation purposes . . . ." Stout v. Illinois Farmers Ins. Co., 150 F.R.D. 594, 605 (S.D. Ind. 1993).
If any Tennessee practitioners have dealt with this issue and received rulings from trial courts, I keep a database of such Orders and would love to hear from you.
Shaun Marker and Jeremy Tyler, attorneys at Merlin Law Group in Florida, recently posted a pair of blog posts - here and here -- regarding the difference between "supplemental" claims and "reopen" claims. Indeed, there is a difference, and Shaun and Tyler did a good job showing why. The distinction is especially relevant here in Tennessee after the recent flooding, as many Nashville and Middle Tennessee residents will find additional, previously unknown, damage in the months to come.
Thanks as always to the fine minds at the Property Insurance Coverage Law Blog.
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.