Do Insurers Have to Disclose Their Investigative File Before an EUO?

Does the insurance policy’s implied covenant of good faith and fair dealing require the insurer to show its insured the insurance company’s investigative file before requiring the insured to submit to an examination under oath? This question was recently answered by the Court in Lester v. Allstate Property and Cas. Ins. Co., 2014 WL 687188 (6th Cir. (Tenn.), Feb. 24, 2014).

In Lester, the insured’s home was damaged by a fire that occurred in 2012. The fire claim was submitted to Allstate. During the fire investigation, Allstate asked the insureds to answer questions about the claim under oath. The insureds responded that neither she nor her husband would submit to EUO’s unless Allstate first showed them its investigative files. Allstate refused to turn over the files explaining that doing so “could jeopardize the “integrity” of its inquiry. For the next two months the parties went back and forth on the issue. Eventually, Allstate gave the insured 10 days to schedule the examination. Allstate warned the insured that if she did not submit to the EUO, the company would deny her claim. The insured then sued Allstate. The U.S. District Court granted Allstate’s summary judgment. The matter was appealed to the Sixth Circuit Court of Appeals.

The Court of Appeals affirmed the District Court’s dismissal of the case. In doing so, the Court noted that the Allstate policy “required the insured to submit to an examination under oath” at Allstate’s request. The policy also provided that Allstate had no duty to provide coverage if the insured failed to comply with the request for the EUO when failure to comply would be prejudicial to Allstate. Tennessee law, which governed the case, provided that insurance companies could deny claims when the policyholder refused to participate in an examination under oath. See e.g., Spears v. Tennessee Farmers Mut. Ins. Co., 300 S.W.3d 671, 680 (Tenn. Ct. App. 2009). Taking the words of the policy and the law of Tennessee together, the Court in Lester found that the insured’s refusal to submit to the EUO meant that Allstate had no obligation to pay the claim.

The insured argued that even if the terms of the policy did not give her the right to see the investigative files, the policy’s implied covenant of good faith and fair dealing did require the disclosure of the files. Responding to this argument, the Court asked the following question: “Why is it reasonable to expect an insurance company to share its investigative files with a policy holder before examining her?”

The Court then made the following observation:

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. The investigation files of the insurance company are not the investigation files of a policy department.

The insured then argued that Allstate was required to pay the claim because even if the insured had an obligation to attend the examination, the insured never refused to carry out that duty. The Court found that the insured’s argument was “a stretch.” The facts established that when Allstate asked to examine the insured, the insured’s lawyer responded by asking Allstate to share its files. Allstate declined and repeated its demand for the EUO. The insured’s lawyer replied that he would allow a EUO provided the investigative material was turned over well in advance of the statement. Allstate again refused to turn over its files and once again insisted on the EUO, giving the insured 10 days to schedule it, and warned the insured that if she did not do so the company would deny her claim. The insured’s response to that letter was not to schedule the EUO, but to sue the company. Based on those facts, the Court held that the insured had refused to participate in the EUO even after she knew that the company insisted on keeping its investigative files private. The Court found that the insured’s response to all of these facts were long on formalism and short on merit. “Why would Allstate schedule an examination when [the insured] said she would not participate unless given the files first?”