Burke’s Law: Seventh Circuit Confirms Strict Application of ‘Your Duties After Loss’ Provision

After a loss, insurers and insureds turn to the policy provisions to understand their rights, obligations and duties. Standard insurance policies require the insured to cooperate with the insurer’s investigation of the claim. However, these “cooperation clauses” are generally read in favor of the insured and do not require strict compliance. Insurers may only escape their duties under the policy if they show that they were materially prejudiced by the insured’s lack of compliance.

The Seventh Circuit Court of Appeals recently held that a “Your Duties After Loss” provision, requiring the insured to submit to examinations under oath and produce requested documents, was not a cooperation clause, and therefore an insured was required to strictly comply with the insurer’s requests. Insured homeowners were found to have breached a policy where they produced requested documents within their possession, but failed to acquire additional requested documents not within their possession.

In the case, Foster v. State Farm Fire and Casualty Co., 674 F.3d 663 (7th Cir. 2012), homeowners submitted a claim to their insurer, State Farm, after a fire damaged their Indiana home. As part of its investigation, State Farm requested numerous documents from the homeowners and pointed to the policy’s “Your Duties After Loss” provision, which obligated the policyholders to provide records and documents “as often as [State Farm] reasonably require[s].”

The homeowners complied with a portion of State Farm’s requests, producing all of the requested documents within their possession, but many of the requested documents remained outstanding.

Despite repeated requests by State Farm for additional records and indications from the homeowners that they would be acquired and produced, the homeowners eventually informed State Farm that they were unable to produce the remaining documents. The homeowners then filed a claim against State Farm for breach of contract and bad faith.

Although the court was presented with a number of issues, the primary question was whether the homeowners had satisfied the terms and conditions of the “Your Duties After Loss” provision by submitting all of the requested documents within their possession but by not acquiring additional requested documents.

Nature of the Provision

The court first addressed the nature of the “Your Duties After Loss” provision. The homeowners argued the provision was a cooperation clause that did not require strict compliance. The majority of courts, including courts in Indiana whose law controlled this case, have held that an insurer cannot invoke a cooperation clause to escape its duties under the policy unless the insured does not substantially comply with the provision and the insurer demonstrates that it was materially prejudiced by the lack of compliance. See Indiana Ins. Co. v. Williams, 463 N.E.2d 257 (Ind. 1984); see also e.g. Talley v. State Farm Fire and Cas. Co., 223 F.3d 323 (6th Cir. 2000); Rodriguez v. Southern Fidelity Ins. Co., 2011 U.S. Dist. Lexis 17529 (E.D. La. 2011); Union Ins. Co. of Providence v. Williams, 261 F.Supp. 2d 1150 (E.D. Mo. 2003). But the Seventh Circuit, applying Indiana law, refused to interpret the “Your Duties After Loss” provision as a cooperation clause.

Although most states have interpreted “Your Duties After Loss” provisions as cooperation clauses, Indiana has expressly rejected this interpretation. See e.g. Nichols v. Aetna Life and Cas. Co., 1995 U.S. Dist. Lexis 2738 (S.D.N.Y. 1995); Hoekstra v. Farm Bureau Mut. Ins. Co., 382 N.W.2d 100 (Iowa 1986); Hamilton v. State Farm Fire and Cas. Co., 2012 U.S. App. Lexis 8744 (5th Cir. 2012).

In Morris v. Economy Fire and Casualty Co., 848 N.E.2d 663 (Ind. 2006), the Indiana Supreme Court held that “Your Duties After Loss” provisions are not cooperation clauses, but rather distinct conditions within the policy with which the insured must strictly comply. Relying on this decision, the Seventh Circuit summarily rejected the homeowners’ argument, noting that “compliance is not optional or subject to a trial court determination of reasonableness.” Foster at 667.

The homeowners argued in the alternative that, even outside the context of the leniently applied cooperation clause, they had complied with State Farm’s requests by producing all documents within their possession. The court was unsympathetic to the homeowners, stating: “The [homeowners] emphasize that they produced for State Farm everything they possessed. We assume they did. But the [homeowners] misunderstand their duty under the contract as construed by Morris: Their duty was not (only) to give State Farm documents they happened to possess physically but to acquire and deliver requested documents…” Foster at 668.

Policyholders’ Concerns

At first blush, the decision has worrisome implications for policyholders. The homeowners articulated these concerns in their brief to the court, asserting that a ruling in favor of State Farm would give insurers the unchecked ability to impose unreasonable and onerous requests on insureds to force them into noncompliance. The court largely ignored this concern and the potential problems stemming from a strict application of the “Your Duties After Loss” provision, but instead consistently reasserted that the plain terms of the policy mandated strict compliance.

The court explained that the reasonableness requirement in the provision attached only to how often the insurer could request documents and could not be read into other aspects of the provision. “The policy contract does not itself impose an explicit general ‘reasonableness’ requirement on the insurer regarding what documentation the insurer might demand … [and] an insured cannot impose a reasonableness limit on ‘the nature and extent of the information or statement sought.” Foster at 667-668.

Despite the court’s harsh tone, elements of its opinion suggest that limitations remain on an insurer’s ability to request documents and impose other demands on its policyholders.

First, the court attempted to soften its strict application of the provision by cautioning: “Our conclusion should not be overread … we do not understand Morris to license badgering and irrelevant demands for documents and information or endless EUOs.” Foster at 671.

In addition, the court appears to have penalized the homeowners for initially indicating their intention to acquire and produce all of the requested documents. The court noted that “having unambiguously agreed to produce documents … the [homeowners] have left themselves no room to argue that State Farm’s requests were so numerous or frequent that they violated the insurance contract …” Foster at 668. The inference can be drawn that the homeowners may have been in a better position, and that the court may have considered the reasonableness of the document requests, had the homeowners objected to State Farm’s requests. The court ultimately enforced a strict application of the policy conditions, and while disclaiming any external considerations, it certainly factored the reasonableness of the requests into its decision.

The Foster decision confirms Indiana’s strict application of “Your Duties After Loss” provisions. It also demonstrates the extent to which this position can be applied. When an insurer requests documents, an insured has a duty not only to produce those documents in its possession, but to acquire every requested document to comply with the “Your Duties After Loss” provision. And, despite a contrary tone and demeanor, the court’s decision remains grounded in reasonableness. While insureds generally receive favorable treatment under a cooperation clause, this is not the case with a “Your Duties After Loss” provision, at least not in Indiana.