Under-Utilization of the Cooperation Clause and Related Policy Conditions

Recently, a number of insurance industry clients have been bringing to my attention with increasing frequency questions regarding an insured's duty to cooperate. The questions have been much more frequent with respect to first-party coverage. Thus, I thought this would be an opportune time to address these issues.

There are numerous “standard” conditions in various types of liability and first-party insurance policies. One common condition is the “cooperation clause.” First-party policies often have several clauses that require the insured to cooperate during the investigation and processing of claims. Typical conditions in a first-party policy, in addition to the cooperation clause, would include the condition mandating that an insured provide a proof of loss, as well as the condition mandating that an insured provide necessary documents to process a claim, and then submit to an examination under oath.

It is widely understood that in order for an insurer to prevail on a claim regarding lack of cooperation, the insurer must prove substantial prejudice. Beck v. State Farm Mut. Auto Ins. Co., 54 Cal. App. 3d 347 (1976). With respect to third-party claims, the ability to prove substantial prejudice may frequently be difficult. An insurer may need to prove that it could have settled the claim for substantially less money than if the insured had cooperated.

This article focuses on first-party claims in which there is an issue regarding applicability of the cooperation clause, as well as the condition mandating that an insured submit to an examination under oath.

First-Party Policies and Cooperation

In first-party policies, the first applicable condition relating to cooperation involves the notice provision. The typical notice provision will require the insured to “notify the company promptly in writing” with respect to the facts of the claim. The insured's failure to do so shall “terminate” any obligation of the insurance company, if there has been prejudice to the insurer.

Most first-party policies also require that the insured submit a “written proof of loss or damage,” which must be signed by the insured, typically within 90 days after the insured claimant knows of the facts giving rise to the claim. Once again, the policy states that the company's obligations terminate if the failure to provide a proof of loss causes prejudice.

Finally, most first-party policies require an insured to submit to “examinations under oath by an authorized representative of the company.” With respect to these examinations, typically referred to as EUOs, an insured will be asked to bring all books, records, ledgers and correspondence pertaining to the claim in question for inspection. With respect to this provision, policies typically provide that “failure by the insured claimant to submit to an examination under oath, produce other reasonably requested information or grant permission to secure reasonably requested information from third parties as required in this paragraph ' shall terminate any liability of the company under this policy as to that claim.” Please note, with respect to this policy condition, nothing in the policy wording requires that the insurer prove prejudice in order to prevail.

Typically, when an insured fails to comply with the policy conditions mandating cooperation and production of documents, it “generally results in a forfeiture of coverage by relieving the insurer of its liability to pay, and provides the insurer an absolute defense to an action on a policy.” Cook v. Allstate Insurance, 337 F. Supp. 2d 1206, 1214 (C.D Cal. 2004).

In a very recent California Court of Appeal case, a lower court granted summary judgment in a first-party fire loss case, allowing the insurer to deny the claim. Abdelhamid v. Fire Insurance Exchange, 182 Cal. App. 4th 990 (2010). The loss in question occurred in July 2005. Although the insured did provide notice of the fire, he submitted very few details about the alleged loss. In August 2005, the insurer requested detailed information including 11 categories of documents. Thereafter, despite additional requests, the insured provided very few details. Then, an examination under oath was scheduled for November 2005. At that time, the insured refused to answer numerous questions and also failed to provide documents. Shortly after the examination, the insurer concluded that the insured's “failure to provide documents reasonably requested ' and failure to answer even basic questions about finances, [sic] constitutes material policy breaches.” Id. at 996. The company thus denied coverage based on a failure to submit a detailed and documented proof of loss. Thereafter, in February 2006, the insured did submit a detailed proof of loss, with attached documents. However the insured refused to submit to a second examination under oath, and then the insured filed suit.

After the suit was filed, the insurance company moved for summary judgment. The motion was granted based on the insured's failure to meet its burden of proof regarding compliance with policy conditions. The insured then appealed the lower court's ruling.

The court of appeal concurred with the lower court and ruled that the burden of proof rests with the insured to prove that he complied with policy conditions. Id. at 999. This policy mandated that the insured submit a proof of loss, which would enable the insurer to analyze and process the claim. The insured made a very general claim. However, the insurer asked for detailed supporting information, and failed to receive any response until February 2006, 10 months after the loss. The court of appeal concluded that the failure to timely respond to the request for information to allow the processing of the claim was a material breach of the policy. Id. at 1000 citing McCormick v. Sentinel Life Insurance Company, 153 Cal. App. 3rd 1030, 1036 (Cal. Dist. Ct. App. 1984). The court of appeal went on to note that the failure to answer material questions at an examination under oath “shows a failure to give the insurer the degree of cooperation required by the provision of the policy.” Id. For another decision on similar facts, see West v. State Farm & Casualty Company, 868 F. 2d 348 (9th Cir. 1988).

Also, recently a federal court granted summary judgment to an insurer, whose insured failed to provide supporting documents of a claim. See Martinez v. Infinity Insurance Company, 714 F. Supp. 2d 1057 (C.D. Cal. 2010). This was a first-party auto theft claim. After the alleged theft, the insurer requested financial information and asked for an examination under oath. The financial records related to proof of ownership and proof of payment of the vehicle's financing. These documents were critical. Infinity also requested an examination under oath, which took months to schedule and then several months more for Martinez to complete. Infinity denied coverage based on the alleged failure to cooperate. Shortly thereafter, Martinez sued Infinity. Ultimately, Infinity moved for summary judgment. Infinity contended that the failure to disclose financial information as well as the subsequent failure to “timely certify and return the transcripts of examination under oath ' breached the insurance policy's cooperation clause.” Id. at 1061. The court concluded that, “Martinez failed to produce financial documents that Infinity requested for over twelve months, failed to certify a transcript for over four months, failed to produce car payment records, failed to produce maintenance records and otherwise failed to respond to the numerous requests for information. ' ” Id. at 1062. The court, citing Washington law in Pilgrim v. State Farm Fire and Casualty Insurance Company, 89 Wn. App. 712 (1997), held that the failure to produce such records resulted in prejudice as a matter of law. Id.

In reaching its decision, the court relied on the appellate decision in Brizuela v. California Insurance Company, 16 Cal. App. 4th 178 (2004). This was a first-party fire loss. The court noted the burden of proof regarding compliance with all policy conditions rests entirely upon the insured. Id. at 586. The court in Brizuela then went on to uphold the granting of summary judgment in favor of the insurer. In so doing, this court relied on the California Supreme Court decision in Hickman v. London Assurance Corp., 184 Cal. 524, 534 (1920). The court noted that the failure to provide requested information resulted in a forfeiture of the policy. The court went on to state that if the insured cannot bring himself to fall within the “terms and conditions of the policy he cannot recover.” Id. at 534.

One of the primary benefits available to an insurer regarding the policy condition concerning examinations under oath and the obligation to provide necessary documents, is that the policy itself does not require prejudice to terminate coverage. In California, the courts have enforced this condition and terminated coverage while paying scant lip service to the issue of prejudice. For example, in Martinez v. Infinity Insurance Company, 714 F. Supp. 2d 1057, 1061 (S.D. Cal. 2010), the court discussed at length the failure of the insured to provide the insurer “financial documents that Infinity requested for over 12 months ' failed to produce car payment records, failed to produce maintenance records, and otherwise failed to respond to the numerous requests for information ' ” Id. at 1062. As noted, this policy provision does not carry with it a written requirement of prejudice. The Martinez court noted that prejudice may well not be an issue with respect to that policy condition. However, the court concluded that the failure of an insured to provide material documents and to attend a mandated examination under oath would constitute prejudice as matter of law. See also the Washington case of Pilgrim v. State Farm Insurance Company, 89 Wn. App. 712 (1997). For very similar results in other states, see Porcello v. Allstate Ins. Co., 4 Fed. Appx. 531 (9th Cir, Wash. 2001); and Deguchi v. Allstate Ins. Co., 2008 US Dist. Lexis 34368 (HI 2008).

In a similar case, the insured consistently failed to provide documents necessary for the insurer to process the claim. See Abdelhamid v. Fire Insurance Exchange, supra. There, the insurer asked for 11 categories of important documents. The insured failed to respond with anything other than skeletal information. Then, there was an unproductive examination under oath. At the time of the examination, the insured again failed to provide documentation reasonably requested. Id. at 996. Ultimately, the court ruled that the insured's failure to meet policy conditions constituted a material breach. Id. at 1000. Once again, this court noted that the failure to provide necessary documents and the failure to appear and answer mandated questions at an examination under oath would constitute prejudice as a matter of law.

Conclusions

The EUO is an old, time-tested tool. It is a condition in the policy, and the purpose is to allow insurers to obtain necessary information and documentation to process claims. The purpose of the discussion in this article is to show that courts recognize this condition and enforce cooperation between insured and insurer. When insureds present claims, and there are questions regarding proof of the claims, magnitude, causation, timeliness, etc., then an insurer is well within its rights to demand an EUO. Furthermore, the insurer can ask for, and be entitled to receive specific categories of documents that the insurer feels are necessary to evaluate the claim, and to ascertain the credibility of the claim. The policy mandates that the insured cooperate with the insurer throughout this process. Moreover, the failure of the insured to provide necessary documents or to submit to an EUO will very likely result in the termination of policy benefits.

Robert N. Berg is a senior litigation partner at Michelman & Robinson, LLP's San Francisco office, where he focuses on insurance coverage and bad faith disputes. He may be contacted by e-mail at [email protected].

Recently, a number of insurance industry clients have been bringing to my attention with increasing frequency questions regarding an insured's duty to cooperate. The questions have been much more frequent with respect to first-party coverage. Thus, I thought this would be an opportune time to address these issues.

There are numerous “standard” conditions in various types of liability and first-party insurance policies. One common condition is the “cooperation clause.” First-party policies often have several clauses that require the insured to cooperate during the investigation and processing of claims. Typical conditions in a first-party policy, in addition to the cooperation clause, would include the condition mandating that an insured provide a proof of loss, as well as the condition mandating that an insured provide necessary documents to process a claim, and then submit to an examination under oath.

It is widely understood that in order for an insurer to prevail on a claim regarding lack of cooperation, the insurer must prove substantial prejudice. Beck v. State Farm Mut. Auto Ins. Co. , 54 Cal. App. 3d 347 (1976). With respect to third-party claims, the ability to prove substantial prejudice may frequently be difficult. An insurer may need to prove that it could have settled the claim for substantially less money than if the insured had cooperated.

This article focuses on first-party claims in which there is an issue regarding applicability of the cooperation clause, as well as the condition mandating that an insured submit to an examination under oath.

First-Party Policies and Cooperation

In first-party policies, the first applicable condition relating to cooperation involves the notice provision. The typical notice provision will require the insured to “notify the company promptly in writing” with respect to the facts of the claim. The insured's failure to do so shall “terminate” any obligation of the insurance company, if there has been prejudice to the insurer.

Most first-party policies also require that the insured submit a “written proof of loss or damage,” which must be signed by the insured, typically within 90 days after the insured claimant knows of the facts giving rise to the claim. Once again, the policy states that the company's obligations terminate if the failure to provide a proof of loss causes prejudice.

Finally, most first-party policies require an insured to submit to “examinations under oath by an authorized representative of the company.” With respect to these examinations, typically referred to as EUOs, an insured will be asked to bring all books, records, ledgers and correspondence pertaining to the claim in question for inspection. With respect to this provision, policies typically provide that “failure by the insured claimant to submit to an examination under oath, produce other reasonably requested information or grant permission to secure reasonably requested information from third parties as required in this paragraph ' shall terminate any liability of the company under this policy as to that claim.” Please note, with respect to this policy condition, nothing in the policy wording requires that the insurer prove prejudice in order to prevail.

Typically, when an insured fails to comply with the policy conditions mandating cooperation and production of documents, it “generally results in a forfeiture of coverage by relieving the insurer of its liability to pay, and provides the insurer an absolute defense to an action on a policy.” Cook v. Allstate Insurance, 337 F. Supp. 2d 1206, 1214 (C.D Cal. 2004).

In a very recent California Court of Appeal case, a lower court granted summary judgment in a first-party fire loss case, allowing the insurer to deny the claim. Abdelhamid v. Fire Insurance Exchange , 182 Cal. App. 4th 990 (2010). The loss in question occurred in July 2005. Although the insured did provide notice of the fire, he submitted very few details about the alleged loss. In August 2005, the insurer requested detailed information including 11 categories of documents. Thereafter, despite additional requests, the insured provided very few details. Then, an examination under oath was scheduled for November 2005. At that time, the insured refused to answer numerous questions and also failed to provide documents. Shortly after the examination, the insurer concluded that the insured's “failure to provide documents reasonably requested ' and failure to answer even basic questions about finances, [sic] constitutes material policy breaches.” Id. at 996. The company thus denied coverage based on a failure to submit a detailed and documented proof of loss. Thereafter, in February 2006, the insured did submit a detailed proof of loss, with attached documents. However the insured refused to submit to a second examination under oath, and then the insured filed suit.

After the suit was filed, the insurance company moved for summary judgment. The motion was granted based on the insured's failure to meet its burden of proof regarding compliance with policy conditions. The insured then appealed the lower court's ruling.

The court of appeal concurred with the lower court and ruled that the burden of proof rests with the insured to prove that he complied with policy conditions. Id. at 999. This policy mandated that the insured submit a proof of loss, which would enable the insurer to analyze and process the claim. The insured made a very general claim. However, the insurer asked for detailed supporting information, and failed to receive any response until February 2006, 10 months after the loss. The court of appeal concluded that the failure to timely respond to the request for information to allow the processing of the claim was a material breach of the policy. Id. at 1000 citing McCormick v. Sentinel Life Insurance Company , 153 Cal. App. 3rd 1030, 1036 (Cal. Dist. Ct. App. 1984). The court of appeal went on to note that the failure to answer material questions at an examination under oath “shows a failure to give the insurer the degree of cooperation required by the provision of the policy.” Id. For another decision on similar facts, see West v. State Farm & Casualty Company , 868 F. 2d 348 (9th Cir. 1988).

Also, recently a federal court granted summary judgment to an insurer, whose insured failed to provide supporting documents of a claim. See Martinez v. Infinity Insurance Company , 714 F. Supp. 2d 1057 (C.D. Cal. 2010). This was a first-party auto theft claim. After the alleged theft, the insurer requested financial information and asked for an examination under oath. The financial records related to proof of ownership and proof of payment of the vehicle's financing. These documents were critical. Infinity also requested an examination under oath, which took months to schedule and then several months more for Martinez to complete. Infinity denied coverage based on the alleged failure to cooperate. Shortly thereafter, Martinez sued Infinity. Ultimately, Infinity moved for summary judgment. Infinity contended that the failure to disclose financial information as well as the subsequent failure to “timely certify and return the transcripts of examination under oath ' breached the insurance policy's cooperation clause.” Id. at 1061. The court concluded that, “Martinez failed to produce financial documents that Infinity requested for over twelve months, failed to certify a transcript for over four months, failed to produce car payment records, failed to produce maintenance records and otherwise failed to respond to the numerous requests for information. ' ” Id. at 1062. The court, citing Washington law in Pilgrim v. State Farm Fire and Casualty Insurance Company , 89 Wn. App. 712 (1997), held that the failure to produce such records resulted in prejudice as a matter of law. Id.

In reaching its decision, the court relied on the appellate decision in Brizuela v. California Insurance Company , 16 Cal. App. 4th 178 (2004). This was a first-party fire loss. The court noted the burden of proof regarding compliance with all policy conditions rests entirely upon the insured. Id. at 586. The court in Brizuela then went on to uphold the granting of summary judgment in favor of the insurer. In so doing, this court relied on the California Supreme Court decision in Hickman v. London Assurance Corp. , 184 Cal. 524, 534 (1920). The court noted that the failure to provide requested information resulted in a forfeiture of the policy. The court went on to state that if the insured cannot bring himself to fall within the “terms and conditions of the policy he cannot recover.” Id. at 534.

One of the primary benefits available to an insurer regarding the policy condition concerning examinations under oath and the obligation to provide necessary documents, is that the policy itself does not require prejudice to terminate coverage. In California, the courts have enforced this condition and terminated coverage while paying scant lip service to the issue of prejudice. For example, in Martinez v. Infinity Insurance Company , 714 F. Supp. 2d 1057, 1061 (S.D. Cal. 2010), the court discussed at length the failure of the insured to provide the insurer “financial documents that Infinity requested for over 12 months ' failed to produce car payment records, failed to produce maintenance records, and otherwise failed to respond to the numerous requests for information ' ” Id. at 1062. As noted, this policy provision does not carry with it a written requirement of prejudice. The Martinez court noted that prejudice may well not be an issue with respect to that policy condition. However, the court concluded that the failure of an insured to provide material documents and to attend a mandated examination under oath would constitute prejudice as matter of law. See also the Washington case of Pilgrim v. State Farm Insurance Company , 89 Wn. App. 712 (1997). For very similar results in other states, see Porcello v. Allstate Ins. Co. , 4 Fed. Appx. 531 (9th Cir, Wash. 2001); and Deguchi v. Allstate Ins. Co., 2008 US Dist. Lexis 34368 (HI 2008).

In a similar case, the insured consistently failed to provide documents necessary for the insurer to process the claim. See Abdelhamid v. Fire Insurance Exchange, supra. There, the insurer asked for 11 categories of important documents. The insured failed to respond with anything other than skeletal information. Then, there was an unproductive examination under oath. At the time of the examination, the insured again failed to provide documentation reasonably requested. Id. at 996. Ultimately, the court ruled that the insured's failure to meet policy conditions constituted a material breach. Id. at 1000. Once again, this court noted that the failure to provide necessary documents and the failure to appear and answer mandated questions at an examination under oath would constitute prejudice as a matter of law.

Conclusions

The EUO is an old, time-tested tool. It is a condition in the policy, and the purpose is to allow insurers to obtain necessary information and documentation to process claims. The purpose of the discussion in this article is to show that courts recognize this condition and enforce cooperation between insured and insurer. When insureds present claims, and there are questions regarding proof of the claims, magnitude, causation, timeliness, etc., then an insurer is well within its rights to demand an EUO. Furthermore, the insurer can ask for, and be entitled to receive specific categories of documents that the insurer feels are necessary to evaluate the claim, and to ascertain the credibility of the claim. The policy mandates that the insured cooperate with the insurer throughout this process. Moreover, the failure of the insured to provide necessary documents or to submit to an EUO will very likely result in the termination of policy benefits.

Robert N. Berg is a senior litigation partner at Michelman & Robinson, LLP's San Francisco office, where he focuses on insurance coverage and bad faith disputes. He may be contacted by e-mail at [email protected].