Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The California Insurance Code allows insurers to impose conditions on coverage and requirements that must be satisfied by the insured in order to institute coverage for a loss. Sometimes insureds are surprised that they have to provide the expected notice and proof of loss, as well as examinations under oath (EUO). For insureds, an EUO may feel like an inquiry where their integrity is questioned.

The most common complaint I hear among insureds regarding an insurer’s imposition of conditions on coverage is that insurers have difficult standards for a layperson to uphold. There is no concrete roadmap that tells an insured how to structure a proof of loss or what receipts or other paperwork documentation would be needed at the time their property is flooded or burnt.

For those insureds who have attempted their own proofs of loss and were denied based upon a lack of satisfying the conditions for coverage, there is relief. Depending on the circumstances, California courts have been inclined to examine an insureds behavior and sometimes not all coverage is lost. If a carrier denies coverage for a reason other than a failure to satisfy conditions, it waives defenses based upon those conditions. Select Ins. Co. v. Superior Court, (1990) 226 Cal. App.3d 631, 637. “An insurer is not allowed to rely on an insured’s failure to perform a condition of a policy when the insurer has denied coverage because the insure has, by denying coverage, demonstrated performance of the conditions would not have been altered its response to the claim.” Campbell v. Allstate Ins. Co., (1963) 60 Cal.2d 303, 306. “An insurer may assert defenses based upon a breach by the insured of a condition of the policy such as a cooperation clause, but the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.” This is because a condition in an insurance policy is “not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice not to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid.” Ins. Co. of the State of Pennsylvania v. Associated International Ins. Co., (9th Cir. 1990) 922 F.2d 516, 523.

Insureds should always try to comply with all requirements and conditions contained in most policies, however, in the event that a condition fails, California law provides a scope of protections for the insured. A court may find coverage even when a carrier initially chooses to deny it.

In EDM, the insured corporation suffered a loss from Hurricane Ike, and the insurer denied and underpaid the insured’s claims. The insured filed suit, and the insurer asked the court to compel appraisal under the policy. The insured objected to appraisal on the basis that the insurer had not conducted a reasonable investigation of the insured’s claims. The insured cited both policy and statutory language to support its argument that the insurer must comply with certain duties before it can compel appraisal.

The insured argued that under the policy, the insurer must: acknowledge receipt of the claim; investigate the claim; request a signed, sworn proof of loss; notify in writing if the claim would be paid, denied, if additional information was required, or if the insurer needed more time; and reach a decision within a prescribed time. The insured argued that Texas statutes required the insurer to: notify the claimant of acceptance or rejection of the claim; state statutory reasons for any rejection of the claim; notify the insurer of any need for additional time for investigation; promptly and fairly settle claims; provide reasonable explanations of the basis for a denial or settlement offer; and affirm or deny coverage within a reasonable time.

For purposes of argument, the court assumed that the insurer failed to comply with all of these conditions in the investigation of the insured’s claims. However, the court analyzed these legal duties and determined that none of them were conditions precedent to a demand for appraisal. The court reasoned:

“In order to determine whether a condition precedent exists, the intention of the parties must be ascertained; and that can be done only by looking at the entire contract.” [citation omitted]. “In order to make performance specifically conditional, a term such as ‘if’, ‘provided that’, ‘on condition that’, or some similar phrase of conditional language must normally be included.” [citation omitted]. “While there is no requirement that such phrases be utilized, their absence is probative of the parties intention that a promise be made, rather than a condition imposed.” [citation omitted]. The appraisal clause does not use conditional language and EDM has not identified any provision in the contract showing that the parties intended that Hartford fully comply with the “Claims Handling” provisions and Texas Insurance Code before seeking appraisal. [citation omitted]. Compliance with the “Claims Handling” provisions and the Texas Insurance Code is not a condition precedent to compelling appraisal.

The Texas court found there were no express conditions precedent, or conditions that are actually stated in the policy or statutes. As I have previously written on this blog, Florida courts have taken a slightly different approach by creating a constructive conditions precedent to appraisal. Constructive conditions are those that do not exist in the contract itself, but are read into the contract by the courts. Florida courts have created a constructive condition precedent to appraisal by interpreting the “disagreement” requirement found in most appraisal clauses as requiring the insured to comply with post-loss obligations and the insurer to conduct a reasonable investigation before a “disagreement” will trigger appraisal.

The end result is that requirements to compel appraisal differ in different jurisdictions. As always, if you have a dispute over the amount of loss on an insurance claim, please contact competent counsel to advise you on your rights and obligations in your jurisdiction.

A recent opinion from the Fourth District Court of Appeal in Florida, Kroener v. FIGA, No. 4D09-3604 (Fla. 4th DCA June 22, 2011), does not discuss the Florida Supreme Court’s rebuttable presumption test from Macias and instead holds that:

[A]s a matter of law, notice to the insurer of a claim of loss more than two years and two months after the loss occurred was not prompt notice; the untimely reporting of the loss violated the insurance policy and was sufficient to bar the claim. (emphasis added)

There is no mention in the opinion of the Florida Supreme Court’s rebuttable presumption test or why it was not applied. However, there is one distinguishing fact of the case that makes it different from many late reported claims.

In Kroener, the claim involved damages from Hurricane Wilma, which hit on October 24, 2005. The Kroeners purchased the house involved in the claim on April 10, 2007. The prior owners never made a claim under the policy for the Hurricane Wilma damages they were purportedly aware of. Sometime after the sale, the Kroeners discovered a roof leak, which their contractor attributed to Hurricane Wilma. The prior owners signed an Assignment of Benefits form on December 5, 2007, which directed their insurer to pay to the Kroeners any and all insurance benefits for all coverage periods available under the policy they had with Atlantic Preferred. Thereafter, the Kroeners filed a claim with Florida Insurance Guaranty Association (FIGA) for the Hurricane Wilma damage, as Atlantic had become insolvent, and FIGA had been appointed its successor in interest.

This assignment appears to have been the distinguishing detail for the Fourth District. The Court noted that

“[A]ny authorized benefits that had arisen under the policy during the time of the prior ownership of the property could be assigned.”

The Court concluded in the pertinent part that:

[T]he Kroeners did not receive any claims through the previous owners’ assignment because there were no claims timely made by the previous owners to assign.

It seems that the Court viewed the prior owners’ failure to present a claim to Atlantic Preferred fatal to the assignment of benefits that the parties executed after the sale. Oftentimes, there are numerous factual issues surrounding a late reported claim, as well as factual issues surrounding potential prejudice to the insurer. It seems unfair that the Court reached this conclusion without applying the rebuttable presumption test outlined by the Florida Supreme Court in Macias.

The Kroener decision is not final until the Fourth District Court of Appeal rules on any motion for rehearing that may be filed.

Underwriters at Lloyd’s filed a lawsuit in Los Angeles this week seeking a declaration of no coverage for various reasons, including an application defenses. One curious and common theme throughout the complaint is that the policyholders failed to cooperate and satisfy post-loss conditions. Proofs of loss, examinations under oath and other information were allegedly not provided. For example, the complaint states:

This is an insurance dispute between sophisticated parties to a contingency non-appearance and cancellation policy. The policy was issued with regard to Michael Jackson’s series of concerts to be held London, England at the Arena during the summer and fail of 2009. In light of Mr. Jackson’s death, the concerts never went forward. The insured, AEG Live LLC (“AEG”) made a claim for coverage under the policy and UNDERWRITERS have sought to obtain documents, witness statements and other information necessary to determine AEG’s entitlement to coverage under the policy. The parties have an actual and present controversy regarding what coverage, if any, is afforded under the policy and/or whether the policy should be rescinded for non-disclosures and/or misrepresentations as more fully set forth below. AEG has failed and refused to provide UNDERWRITERS with necessary information, including but not limited to, information and documents regarding Dr. Conrad Murray, Mr. Jackson and AEG, which UNDERWRITERS are informed and believe are directly relevant to and necessary for the determination of whether AEG’s claim is covered. (emphasis added)

Regarding the application defense, the complaint states that misrepresentations made before Michael Jackson’s death voided policy conditions:

"UNDERWRITERS contend that they do not have a duty to indemnify AEG and/or Jackson LLC, based upon THE POLICY’S applicable Conditions Precedent, including but not limited to “Pre-existing Medical Conditions” and “Other Pre-existing Conditions.” THE POLICY states as Conditions Precedent as follows:

It is a condition precedent to the liability of [UNDERWRITERS] that [AEG and/or Jackson LLC] has:...

4.1 truthfully declared all material facts likely to influence a reasonable Insurer in determining:

(4.1.1) whether or not to accept the risk or any subsequent amendment,

(4.1.2) the premium,

(4.1.3) the conditions, exclusions and limitations, having reasonably made all necessary inquiries to establish those facts.

4.2 ... established to their best knowledge and belief after making reasonable inquiry that [Jackson] has no physical, mental or medical condition or is undergoing any treatment, medical or otherwise, other than those advised to [UNDERWRITERS] and agreed to them in writing, and that [Jackson] is fit to fulfill the commitment insured herein.

4.3 no knowledge at inception, of any undisclosed matter, fact or circumstances, actual or threatened, that increases or could increase the possibility of a loss under this Insurance.

4.5 declared that all information supplied to support the application for this Insurance is in all respects true and complete and unchanged at the inception of this Insurance.
...

56. UNDERWRITERS contend that they have no duty to indemnify AEG and/or Jackson LLC based upon THE POLICY’S applicable Exclusions, including, but not limited to, Duty of Care, Drugs, and Fraud. THE POLICY includes the following:

This Insurance does not cover any loss directly or indirectly arising out of, contributed to by, or resulting from: ...

7.3 non-appearance at an Insured Performance or Event of any Insured Person due to:

(7.3.4) any known pre-existing, physical, psychological or medical condition unless otherwise agreed in writing by [UNDERWRITERS],

7.4 [AEG’s and/or Jackson LLC’s] or [Jackson’s] lack of care, diligence or prudent behavior, the result of which would increase the risk, and/or likelihood of a loss, hereunder;

7.5 the illegal possession or illicit taking of drugs and their effects; ...

7.12 any fraud, misrepresentation or concealment by [AEG and/or Jackson LLC] or [Jackson].

The policy does not list Michael Jackson by name. Instead, the parties used "Mark Jones" in place of "Michael Jackson" throughout the policy. This is not an uncommon practice when insuring the rich and famous.

Michael Jackson's estate has a fine lawyer, Howard Weitzman. He was quoted as saying, "This legal action is nothing more than an insurance company trying to avoid paying a legitimate claim by the insured."

The issues in this lawsuit are similar to many of the routine insurance coverage cases we handle. Unlike many of ours, though, this is certain to be a Thriller:
 

What is an examination under oath, you ask? Well, it is essentially a one-sided deposition where the carrier gets the opportunity to ask the policyholder anything it wants, while the policyholder is under oath. The policyholder can have an attorney present, but that attorney is essentially powerless because she/he is unable to object to any of the carrier’s questions, other than those affecting some form of privilege (e.g. attorney-client privilege). Moreover, the carrier later gets a second bite at the apple during litigation, when it gets the opportunity to depose the policyholder. Sounds fair, right?

Regardless, time and time again, the courts have held that litigation cannot proceed without the policyholder submitting to an examination under oath. For example, on April 11, 2011, Judge Hoyt from the Houston Division of the United States District Court for the Southern District of Texas ruled that Texas law is on the carrier’s side when it comes to examinations under oath.

In Rossco Holdings, Inc. v. Lexington Insurance Co., No. H-09-CV-04047, 2011 WL 1363799 (S.D. Tex. April 11, 2011), the carrier moved for summary judgment based on its allegations that the policyholder had failed to comply with the pre-suit conditions of the policy. Specifically, the carrier alleged that the policyholder had failed to: (1) submit documentation requested by the carrier; and (2) submit to an examination under oath. After hearing the arguments from both sides, Judge Hoyt stated that:

Given the express language of the policy at issue, the Court agrees that Lexington is well within its right to enforce the conditions precedent to coverage in this case, i.e., requesting the production of certain documents and/or requiring the insured to submit to an [examination under oath], nevertheless, it declines to conclude, at this juncture, that Lexington is entitled to summary judgment … .

The Court further reasoned that, “it is well-settled law in Texas that abatement rather than exclusion or barring of a claim is the insurer’s appropriate remedy for enforcement of an insured’s conditions precedent to coverage.” In practice, what this means to you – the policyholder – is that every effort must be made to comply with the policy’s requirements in the event of a loss. Otherwise, you risk delay and a fight over whether your case can proceed.

The traditional statute of limitations in Texas for a contract dispute is four (4) years from the accrual of a cause of action (i.e., when you can file suit). However, Texas law allows for contracting parties to shorten their limitations period, but not for a period less than two (2) years. Under Texas law, a provision creating a limitations period of less than two years is automatically void. Insurance companies know this law well and most have provisions in their policies which shorten the limitations period to two years. Since Hurricane Ike passed through on September 13, 2008, if your insurer shortened the statute of limitations, the last day you could file a lawsuit for damages related to Hurricane Ike is September 13, 2010. That is less than two months away!

So where does the confusion lie? Perhaps some people are confused because of the Texas case that negated a contractually-shortened limitations period which reduced the limitations period to less than two years. On June 21, 2009, Chip Merlin discussed Spicewood Summit Office Condominiums Association, Inc. v. America First Lloyd’s Insurance Company. In Spicewood, the Texas Court of Appeals held that the two year and one day contractual limitations period contained within the policy was void because additional provisions within the policy, which were conditions precedent to filing suit, made it impossible for the policyholder to file suit immediately after the loss. This had the effect of making the limitations period less than two (2) years and void under Texas law. Because the limitations provision was void, the court determined that the traditional four (4) year statute of limitations applied instead.

The insurance company in Spicewood petitioned the Supreme Court of Texas to review this case, but the court declined. This does not necessarily mean that the Texas Supreme Court agrees with the Spicewood decision; it might have declined to hear the case for other reasons.

There will continue to be confusion over this issue until the Supreme Court of Texas delivers a definitive ruling. Although your statute of limitations period may be later than September 13, 2010, Merlin Law Group advises everyone to use the date of loss as the starting point for computing the two-year limitations period, just to be on the safe side. As an added bonus, filing by September 13, 2010, will prevent insurance companies from slowing down the resolution of your claim by litigating defenses based on the limitations period.

In Vision I, a homeowner’s association in Palm Beach County sustained damage to its property from hurricane Wilma on October 24, 2005. The association’s insurance policy required that it provide “prompt notice” of damage to the insurer. The association gave verbal notice of a lesser loss to the insurer about eight months after the hurricane, but did not give written notice of property-wide damage until August 2007, some 22 months after the loss. The association filed suit after the insurer did not pay, and the insurer filed a motion for summary judgment, arguing a defense of late notice.

The insurer argued that prejudice should be presumed, given the nearly two year delay between the hurricane and the notice given by the insured. The association argued that the calculation for any delay should be between discovery of the damage and notice given to the insurer. The Southern District Court sided with the association on the calculation for delay in a late notice claim.

“Under Florida law, a failure to provide timely notice of loss in contravention of a policy provision is a legal basis for the denial of recovery under the policy. See Waldrep, 400 So.2d at 785 (‘Notice is necessary when there has been an occurrence that should lead a reasonably prudent man to believe that a claim for damages would arise.’). Indeed, Florida law provides that the failure to give timely notice creates a rebuttable presumption of prejudice to the insurer. ‘If the insured breaches the notice provision, prejudice to the insurer will be presumed, but may be rebutted by a showing that the insurer has not been prejudiced.’ Macias, 475 So.2d at 1216. The ‘determinations of (I) whether the notice provision was complied with and (ii) what is a reasonable time under the surrounding circumstances are questions of fact.’ Bray & Gillespie IX, LLC v. Hartford Fire Ins. Co., 2009 WL 1513400, at *6 (M.D.Fla.2009) (citing Waldrep, 400 So.2d at 785). In order to prevail on a late notice defense, ‘a party must therefore show that there are no genuine issues of material fact regarding 1) what the Policy required with respect to notice, 2) when notice was provided, within the meaning of the Policy and Florida law, 3) whether notice was timely, and 4) whether prejudice exists, either by operation of the unrebutted presumption or otherwise.’ Id. The Court concludes that [the insurer] cannot carry that burden on this record.

The Bray court faced a similar scenario to the present facts-that is, the insurer argued that the insured provided late notice in violation of the policy provision requiring notice ‘as soon as practicable.’ Id. The court held that under Florida law, application of this specific policy language is for the jury, as such language means that ‘notice is to be given within a reasonable time in view of all the facts and circumstances of each particular case.’ Id. at *7 (citing Morton v. Indemnity Ins. Co. of North America, 137 So.2d 618 (Fla. 2d DCA 1962), State Farm Mut. Auto. Ins. Co. v. Ranson, 121 So.2d 175 (Fla. 2d DCA 1960)). The Bray court concluded that the ‘surrounding circumstances’ of that case were ‘replete with factual disputes’ regarding when notice was required to be given and the manner in which notice was provided. Id. For example, the court noted that the plaintiff ‘presented evidence which, if credited, shows that [the plaintiff] did not know the extent of the claimed damage would implicate the [insurer's] policy until 2005, after certain reports were concluded.’ Id. at *7, fn. 9. The court emphasized that since ‘the duty to provide notice arises when a reasonable person, viewing all available facts and information, would conclude that an award implicating the policy is likely,’ the insurer could not establish for purposes of summary judgment, when the duty to notify the insurer first arose. Id. (citing See Harbor Ins. Co. v. Trammell Crow Co., Inc. 854 F.2d 94, 99 (5th Cir.1988)). Therefore, the court concluded that ‘[a]bsent a finding as to exactly when the duty to notify arose, the [c]ourt cannot determine that notice was untimely as a matter of law,’ precluding the granting of summary judgment on the issue of late notice. Id.”

While this case is not binding on all Florida courts, it does cite Florida state case law in its analysis and offers some excellent reasoning as to why late notice claims should be evaluated based on the date the damage was discovered rather than the date of the event that initiated the loss.

The issue on certiorari was whether a bad faith claim was ripe, not whether bad faith existed, therefore, the facts giving rise to the bad faith claim were not necessary to the opinion. In this case though, the majority opinion detailed the facts, noting “extraordinary length of time it has taken to resolve the Association's claim,” and describing State Farm's actions as “aggressive legal tactics” and “unfounded imposition of conditions.” As the facts giving rise to the potential bad faith claim may well have been crucial to the two justice majority’s decision, they are detailed below.

The Facts

On October 24, 2005, Hurricane Wilma caused substantial damage to the forty five roofs covering the Seville Place residential condominiums. Seville Place filed a claim with State Farm under its condominium association insurance policy, which specifically covered direct physical loss or damage to property caused by a hurricane. The policy specified that any dispute between the insurer and insured regarding the loss amount would be resolved by appraisal:

If we [State Farm] and you [the Association] disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. Each party will notify the other of the selected appraiser's identity within 20 days after receipt of the written demand for an appraisal. The two appraisers will select an umpire. If the appraisers cannot agree upon an umpire within 15 days, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. . . . If we submit to an appraisal, we will still retain our right to deny the claim.

In January 2006, State Farm made two payments on the claim which totaled $90,564.62. Seville Place’s estimate of the damage exceeded $4.6 million. By October 2006 (a year after the loss), Seville Place concluded that further negotiation would be fruitless and made a written demand for appraisal.

State Farm claimed there was “no clear disagreement” between the parties because it had not yet been allowed access to all the damaged condominium units and declared it would agree to appraisal only if Seville Place agreed to two conditions: 1) any appraisal award “must be a line item document, broken down by building and unit number, including the pricing that establishes the award of that item;” and 2) State Farm required a sworn “proof of loss” form.

In February 2007, Seville Place filed suit against State Farm for breach of the insurance contract and sought declaratory relief regarding coverage and State Farm's waiver of policy defenses. Seville Place also asked the court to enforce the appraisal provision without State Farm's required conditions. State Farm claimed that it agreed to appraisal, but renewed its request for the special conditions.

The trial court granted Seville Place’s motion for partial summary judgment on the policy condition defenses, based on the facts that State Farm acknowledged the loss was covered by making the January 2006 payments and then denied the balance of Seville Place’s claim. The circuit court also ordered appraisal, without the conditions sought by State Farm, and allowed sixty days for the completion of the process. State Farm moved for an additional sixty days in order to inspect the interior of several of the condominium units. The trial court granted the extension, directed Seville Place to assist State Farm in accessing the units, and set a final appraisal hearing for June 28, 2008.

Seville Place’s appraiser and the umpire signed a final appraisal award, fixing the insured loss at $2,960,405. The award excluded any interest, costs, and attorney's fees that might be determined by the court, and noted it should be reduced by amounts State Farm previously paid and any applicable deductible.

The day before that hearing, State Farm filed an emergency motion and affidavit seeking removal of the neutral umpire appointed by the court. State Farm later supplemented this motion with a request for an “entirely new panel to conduct a new appraisal,” asserting that otherwise it would “require many weeks, months, and possibly even years to sort through the multiple issues related only to this highly problematic and invalid appraisal gone wrong.”

The trial court confirmed the award, denied State Farm's emergency motion for removal of the neutral umpire, and granted the Seville Place's motions to amend the complaint to add a statutory bad faith claim and a demand for punitive damages. The court also reaffirmed that State Farm's affirmative defenses had been subsumed in the confirmation order “and/or such defenses were waived by State Farm.” State Farm then filed the petition for certiorari at issue, arguing that the trial court erred in allowing the complaint to be amended with the bad faith claim.

Whether the bad faith claim was ripe

The Third District explained that two conditions must be met before a statutory first-party bad faith action is ripe. First, the insurer raises no defense which would defeat coverage, or any such defense has been adjudicated adversely to the insurer. Second, the actual extent of the insured's loss must have been determined.

The Court rejected State Farm’s argument that a trial was required on certain affirmative defenses it believed were still pending and all appellate remedies regarding that judgment must be exhausted before a bad faith claim may proceed. No affirmative defenses remained pending; State Farm waived most or all defenses to coverage by acknowledging and paying Seville Place for the loss after the claim was made. In dismissing State Farm’s argument, the Court explained:

 [T]he procedural trenches and hurdles proposed by State Farm would contravene the express objectives of the bad faith statute and the Florida Insurance Code: the fair and prompt investigation and adjustment of claims by insurers.

The Court found no authority to support State Farm’s contention that Seville Place must obtain a final judgment from a jury before it may proceed with its bad faith and punitive damages claim. To the contrary, the Florida Supreme Court has held that an arbitration award determining liability and extent of loss is sufficient for a bad faith claim. The Court further noted that State Farm bargained for the binding nature of the appraisal award in the policy it drafted. The Third District held the remaining calculations to the award, including subtraction of the three percent hurricane deductible and prior payments and the computation of prejudgment interest, were ministerial acts which did not affect the final nature of the award. The Court further held that Seville Place’s reserved motion for attorney's fees and costs allowed that issue to be determined at the conclusion of the entire case.

The Court also rejected State Farm’s argument that a bad faith claim is premature until the insurer exhausts all appellate remedies regarding liability and loss amount, noting no “decision by this Court or the Florida Supreme Court has held that liability and the extent of damages must also be “finally final,” surviving any appellate remedies sought by an insurer, before the insured's bad faith claim is ripe.”

The Court concluded with the following observation regarding State Farm’s conduct:

State Farm originally estimated the Association's covered loss at $324,017. This is less than eleven percent of the amount determined by the appraisal process. State Farm will have an opportunity to explain this fact, to explain the extraordinary length of time it has taken to resolve the Association's claim, and to defend State Farm's aggressive legal tactics (including the unfounded imposition of conditions on the contractually-stipulated appraisal provision and the last-minute attempt to remove the neutral umpire). For now, however, we find no basis in this record to quash the orders below as requested by State Farm.

Justice Shepherd dissented, writing that the majority’s decision to deny State Farm’s petition for certiorari conflicted with North Pointe Ins. Co. v. Tomas, 999 So. 2d 728 (Fla. 3d DCA 2008), and XL Specialty Ins. Co. v. Skystream, Inc., 988 So. 2d 96 (Fla. 3d DCA 2008). Shepherd took issue with the fact that no judgment had been entered in the case. According to Shepherd, it is prejudicial to allow issues of bad faith into a coverage case, with expanded bad faith discovery, before the underlying claim for damages has been determined.

As noted above, State Farm’s seemingly bad faith conduct in handling the claim was not relevant to the sole issue before the court-whether, by law, the bad faith action was ripe. Yet Justice Salter took care to detail the abusive tactics and even commented upon them in concluding his opinion. In this case, bad facts made good law.

The series will discuss the practical, legal and coverage aspects of the following articles we have lined up for you each Wednesday for the next thirteen weeks:

1. Examinations and Sworn Statements Under Oath: What Are They and Their Relevance to Insurance Coverage From a Historical Study of Older Cases
2. What Happens if A Policyholder Does Not Attend an Examination Under Oath?
3. Where Do and Can Examinations Under Oath Be Held? Does a Policyholder Have to go to Timbuktu?
4. Who Can Be Compelled to Attend Examinations Under Oath? Do Public Adjusters, Contractors and Employees Have to Attend Examinations Under Oath?
5. Under What Circumstances Can a Policyholder Refuse to Answer a Question at an Examination Under Oath and Not Lose Policy Benefits?
6. The Practical Reasons Insurers Take Examinations Under Oath and Why Policyholders Need Representation By Legal Counsel
7. What is the Impact of a Wrong Answer at an Examination Under Oath? Do all Incorrect Answers Lead to Denial?
8. How to Prepare for an Examination or Sworn Statement Under Oath if You are a Policyholder or Public Adjuster.
9. What Public Adjusters Need to Tell Their Clients About Examinations Under Oath and Why Public Adjusters Need to Be Careful About Giving Legal Advice.
10. The Examination Under Oath is Over: What Now?
11. Typical Questions Asked During an Examination Under Oath of an Arson or Suspicious Fire Case.
12. Typical Questions Asked During an Examination Under Oath of a Questionable Theft Loss.
13. Typical Questions Asked During an Examination or Sworn Statement Under Oath of a Disputed Structural or Personal Property Valuation Claim Suspected of Being Inflated, Exaggerated, or Made Up.

For those that have not studied the examination under oath clause, it is one of the few property insurance clauses to be specifically addressed by the United States Supreme Court. In Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 94-95; 3 S. Ct. 507, 515; 28 L. Ed. 76, 82 (1884), the Supreme Court stated:

The object of the provisions in the policies of insurance, requiring the assured to submit him-self to an examination under oath, 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, knowingly and willfully made, with intent to deceive the insurer, would be fraudulent.

In Claflin, the insured’s false statements during the examination under oath were not made to deceive the insurer, but to cover-up false statements previously made to other parties. Nevertheless, the Supreme Court held the false statements regarding the ownership and value of the insured goods were material, and therefore, a breach of the conditions of the policy and a bar to recovery.

...it is no palliation of the fraud that Murphy did not mean thereby to prejudice them [the insurer], but merely to promote his own personal interest in a matter not involved in the contract with them. By that contract the companies were entitled to know from him all the circumstances of his purchase of the property insured, including the amount of the price paid and in what manner payment was made; and false statements, willfully made under oath, intended to conceal the truth on these points, constituted an attempted fraud by false swearing which was a breach of the conditions of the policy, and constituted a bar to the recovery of the insurance.

Id. at 97.

For a number of practical and legal reasons, any policyholder being asked to undergo an examination under oath should always hire insurance coverage counsel and carefully consider who that counsel is going to be. I would suggest that opposing insurance company counsel and claims managers consider who the legal opponent will be if a denial is contemplated.

Good, experienced and reputable policyholder attorneys add value to claims and sometimes prevent claims disasters and litigation from ever occurring.

Guideone sought declaratory judgment in the U.S. District Court for the Northern District of Mississippi that it was entitled to rescind the homeowner's insurance policy and had no duty to indemnify the Rocks' insurance claims. The Rocks filed a counterclaim alleging bad faith throughout the claim investigations and subsequent claim denials. Guideone then filed a Motion for Summary Judgment that the Rocks' homeowner's policy was void due to alleged material misrepresentations on the insurance application, that the loss for home and auto was excluded due to material misrepresentations and concealment throughout the claim investigations, that the Rocks failed to perform contractual duties during the claim process, and that its claim investigations and denials did not constitute bad faith. The U.S. District Court for the Northern District of Mississippi granted Guideone's Motion for Summary Judgment holding that Guideone's investigation and subsequent claim denials did not constitute bad faith, but denied Guideone's Motion for Summary Judgment on all material misrepresentation and failure to perform contractual duties issues.

Under Mississippi law misstatements of material fact in insurance applications provide grounds to declare a policy issued in reliance on such statements void. A misrepresentation is considered material if (1) the application contains answers which are false, incomplete, or misleading; and (2) the false, incomplete, or misleading answers are material to the risk contemplated by the policy. The court noted, however, that an insurer cannot rescind a policy for material misrepresentations if an insured acted in good faith, and any false answers were inserted without his or her knowledge. Thus, an applicant had not misrepresented if he or she answered all questions asked. According to the Rocks, Guideone's agent never asked them the application question whether or not a household member had any criminal convictions, and thus answered all application questions in good faith. The record, however, contained conflicting testimony on whether or not Guideone's agent asked the Rocks the criminal history question. Therefore, there was a genuine issue of material fact as to whether or not the Rocks misrepresented their criminal history, and Guideone's Motion for summary judgment was denied on that issue.

The court also denied Guideone's Motion for Summary Judgment on other grounds and held that there was a genuine issue of material fact as to the Rocks' alleged concealment during the claims process and intentional acts, and also held that the Rocks' did not fail to perform their contractual duties by failing to produce their children for examinations under oath.

Guideone claimed they could deny the Rocks coverage based on the Rocks' home and auto insurance policies' concealment and intentional acts exclusions. First, Guideone claimed that the Rocks' inconsistent statements regarding their financial condition amounted to concealment that excluded coverage. Under Mississippi law, in order to deny coverage based on concealment the insurer must establish that the insured knowingly and willfully made false statements that were material. In Mississippi, an insured's financial matters are material to a fire investigation. However, Guideone used unsworn recorded statements and depositions without providing transcripts as evidence. The court concluded that such evidence was not proper Summary Judgment evidence because it required the court to make impermissible credibility determinations. Second, Guideone claimed that the Rocks' loss was excluded because the damage was caused by arson. Not only did the Rocks' policy have an intentional acts exclusion provision, but, in Mississippi arson is a defense to insurer liability even if it is not excluded in the policy. To invoke this defense, the insurer must prove (1) an incendiary fire, (2) motive of the insured to destroy the property, and (3) evidence that the insured had the opportunity to set the fire or to procure its being set. The court declined to grant Guideone's Motion for Summary Judgment on this issue, however, because inconsistent testimony created a genuine issue of material fact.

Finally Guideone claimed that the Rocks' failure to produce their children for examinations under oath was a breach of the Rocks' home and auto insurance policy provisions that required the "insured" to submit to questions under oath. The court concluded, however, that the Rocks' children were not considered the "insured" under the homeowner's insurance contract. The Rocks' homeowner's insurance policy defined "insured" as "you" and "your" and a spouse in the same household. The court reasoned that this language did not include the Rocks' children. Likewise, the court concluded that the children did not have to submit for questioning under the auto insurance policy because the auto policy provided that a person seeking coverage must submit to questions, and the parents, not the children, were the persons seeking coverage. Thus, the court denied Guideone's Motion for Summary Judgment on this basis.

The court ultimately granted Guideone's Motion for Summary Judgment as to the Rocks' bad faith counterclaim and held that Guideone's investigation and subsequent denial of the Rocks' claims did not constitute bad faith. In Mississippi insurers have a duty to perform an adequate investigation and make a reasonable, good faith decision based on that investigation. The court noted, however, that to show bad faith an insured must show more than mere negligence by the insurer. Instead the insurer must have denied a claim (1) without an arguable or legitimate basis, either in fact or in law, and (2) with malice or gross negligence in disregard of an insured's rights. In Mississippi a policy exclusion or defense may constitute a good faith, arguable basis for denial. Accordingly, the court held that Guideone's denials were not done in bad faith because they were based on valid policy provisions, and:

"were not the sort of tortuous conduct" such as "a conscious wrongdoing, dishonest purpose, willful wrong, malice, or reckless disregard of an insured's rights necessary to support a bad faith claim."

You can read the full opinion here.