Not Answering Material Questions at EUOs Can Doom Coverage

Examinations under oath (EUOs) are an important investigative tool used by insurance carriers to uncover fraudulently filed claims and to commit claimants to their story on the record. EUOs look like depositions but generally do not follow the rules that govern depositions. For example, a witness who refuses to answer questions at a deposition can have the basis for his or her refusal adjudicated by the court; if the refusal is unfounded, the remedy usually is to direct the witness to answer the question and rarely results in forfeiture of the witness’ claim or defense. At an EUO, the consequences for failing to answer a question are more severe.

Generally speaking, a policyholder’s attendance at an EUO is mandatory. Insurance policies typically provide that participation is a condition precedent to coverage of a first-party claim (e.g., a claim by the policyholder) and is required before a policyholder may prosecute a claim. So, for instance, an apartment owner who has filed a claim for stolen jewelry can be required to appear at an EUO, where he or she will be asked questions ranging from “Where was the last place you saw the jewelry?” and “When did you see it last” to “How much did it cost?,” “Do you have receipts?,” and the like.¹ It is worth observing that courts have stated that the duty to cooperate at an EUO is broader even than the scope of discovery in litigation.²

Appearing at an EUO alone, however, is not enough. To comply with the obligations set forth in insurance policies and under New York law,³ insureds need to answer questions thoroughly⁴—or they risk having their claims denied by their insurance companies and having the denials upheld by the courts. These rules traditionally have been applied in the property damage context (e.g., arson and theft) and recently have been applied in the no-fault arena.

Consider the recent decisions by the U.S. District Court for the Western District of New York in Eagley v. State Farm Ins. Co.,⁵ regarding a homeowners insurance policy, and by the Supreme Court, New York County, in Country-Wide Ins. Co. v. Gotham Medical,⁶ regarding a no-fault insurance claim.

The EUOs

As the court explained, on May 14, 2010, a fire caused the total loss of the home owned by Steven and Melissa Eagley. At the time, the Eagleys were insured under a homeowners insurance policy issued by State Farm Insurance Company. They submitted a claim pursuant to that policy, and State Farm paid the claim.

On Oct. 5, 2011, the Eagleys notified State Farm that they had sustained another residential fire. At the time, the Eagleys also were insured under a homeowners policy issued by State Farm. After receiving notice of the 2011 claim, State Farm began an investigation and began evaluating the Eagleys’ coverage. In connection with this investigation, State Farm conducted EUOs of both Eagleys on two separate days, March 19, 2012, and Nov. 19, 2012.

During the March 19 EUO, the Eagleys testified that after the 2011 fire they lived at Melissa Eagley’s aunt’s house for approximately one month. After that, they said, they began renting a house in Clifton Springs, N.Y., for a monthly fee. Ms. Eagley testified that the owner of the house was a friend of her mother’s who lived in Arizona and with whom they had a lease agreement. According to Ms. Eagley, they agreed to pay the owner $1,200 per month, an amount that included utilities. She also said that the owner told them that they did not have to make payment until after State Farm paid their insurance claim. She further said that they stayed at the same residence after the 2010 fire as well.

During the Nov. 19 EUO, Mr. Eagley testified that Ms. Eagley had been arrested and charged with insurance fraud the previous week arising out of their 2010 insurance claim, and that he, too, had been arrested in connection with that “incident.” He testified that he and his family continued to live at the Clifton Springs residence, although he said he was unsure whether they had a written lease agreement. According to Mr. Eagley, the owner had not yet charged them for their use of the house because the insurance claim had not been paid, but he believed that there was an agreement concerning how much they would pay; he said that he was unsure of the agreed-upon amount.

Mr. Eagley also said that they had lived at the Clifton Springs residence following the 2010 fire but that he did not know whether there was a written lease agreement with the owner.

Counsel for State Farm asked Mr. Eagley whether the owner had charged them for their stay in the residence following the 2010 fire. The Eagleys’ counsel objected to the question, contending that questions pertaining to the prior claim were not relevant to the investigation of the 2011 fire claim and were the subject of a pending criminal investigation.

Counsel for State Farm responded that the issue of prior claims was relevant, especially with respect to the claim for additional living expenses.

Following a brief exchange, the Eagleys’ counsel stated, “I’m not going to have him answer questions that—it’s the subject of a current criminal investigation.”

Counsel for State Farm responded:

Of course, I just need to warn you guys that I believe that State Farm has a reason and a good-faith basis to ask these questions to determine, among other things, the reasonableness of the ALE [additional living expenses]. Whether or not ALE was charged in the past, whether or not it’s being charged now, whether or not there was any insurance fraud committed with respect to the prior claim with respect to the ALE, and so I have to continue to ask these questions.

The Eagleys’ counsel reiterated his position that information concerning the prior claim was not relevant, and counsel for State Farm replied:

I just need to continue with the warning to say that, because I believe there’s a good-faith basis to ask the questions, should you elect not to answer the questions, I just have to put the reservation of rights to let you know that your claim could be denied for that reason. It’s up to you.

Counsel for State Farm then asked about 14 questions relating to whether and how payments were made to the owner for the period during which the Eagley family lived at the Clifton Springs residence following the 2010 fire. After each of the questions, the Eagleys’ counsel instructed Mr. Eagley not to answer, and he did not answer the questions.

A similar exchange occurred during Ms. Eagley’s Nov. 19 EUO. Counsel for State Farm questioned her about her agreement with the owner for their post-2011 fire stay at the Clifton Springs residence, and she testified that they had a written lease agreement to pay $1,200 monthly rent but that the rent had not yet been paid because the owner “is just waiting for reimbursement from State Farm so we can reimburse her.”

Following that questioning, counsel for State Farm indicated his intention to inquire into the rental of the property after the 2010 fire, stating that he believed the questions were relevant. He asked her about 14 questions relating to whether and how payments were made to the owner for the period during which the Eagley family lived there after the 2010 fire. The Eagleys’ counsel directed her not to answer each of the questions, and she adhered to her counsel’s direction.

After completing its investigation of the 2011 fire, State Farm disclaimed coverage for the fire.

The Eagleys subsequently sued State Farm for breach of contract for failing to pay their claims. State Farm moved for summary judgment.

The Court’s Decision

The court granted State Farm’s motion.

In its decision, the court explained that, in suspected arson cases, insurers had the right to obtain “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.”

The court rejected the Eagleys’ argument that their refusal should not vitiate their policy coverage because they had substantially complied with the policy’s cooperation provision by attending the EUOs and by answering the majority of the questions posed to them. The court declared that a policyholder “cannot satisfy his or her duty to cooperate, however, by attending an EUO but refusing to answer material questions.”

The court also rejected the Eagleys’ contention that their failure to cooperate could not be deemed a willful breach of their policy because the information sought by State Farm was not material to its investigation. The court found that counsel’s questions to the Eagleys during their November 2012 EUOs relating to their earlier similar claim for additional living expenses “were material to State Farm’s investigation of the validity of their current insurance claim and were likely to bear on [the Eagleys’] credibility.”

Finally, the court decided that the Eagleys’ refusals to answer State Farm’s questions “were willful.” It noted that counsel for State Farm had articulated his view that the questions sought relevant and material information and had warned that the Eagleys’ failure to answer the questions could result in the denial of their claim. That warning, according to the court, belied any suggestion that the Eagleys’ refusal to answer “resulted from confusion or inadvertence, rather than considered and deliberate willfulness.”

Deciding that the fact that the Eagleys’ refusal was based on the Fifth Amendment privilege against self-incrimination and the advice of counsel did “not demonstrate lack of willfulness,” the court concluded that the Eagleys’ failure to answer the material questions about their prior claim for additional living expenses was a willful breach of their duty to cooperate under the insurance policy and vitiated their claim for coverage under that policy.

No-Fault

EUO cases arise not just in the arson/property context but also in the no-fault automobile insurance context, where the purposes of the EUO are the same—as are the consequences of merely showing up but not answering appropriate questions. Although the requirement that a claimant or the assignee of the claimant (usually a medical provider) appear for an EUO is contained in the no-fault endorsement, its origin is in the no-fault regulations.

The recent decision by the Supreme Court, New York County, in Country-Wide Ins. Co. v. Gotham Medical, illustrates the rule in the no-fault context.

Gotham Medical, P.C., a medical provider, sought to recover no-fault benefits that had been assigned to it by about 31 insureds of Country-Wide Insurance Company. Country-Wide conducted an investigation that, it said, revealed that Alexandre Scheer, M.D., Gotham’s owner, was the subject of professional discipline by the Office of Professional Medical Conduct (OPMC) for allegedly engaging in the fraudulent practice of medicine. Dr. Scheer agreed to a consent order under which he did not contest the charge and accepted a 60-month probation period during which he was allowed to practice medicine only with supervision.

With this information, Country-Wide requested that Gotham submit to an EUO to verify its claims. Dr. Scheer appeared at the EUO, but his counsel directed that he not answer questions as to the OPMC’s investigation of him and as to whether he had complied with the probation condition of being supervised by an appropriate doctor while treating the no-fault claimants whose claims were at issue in the Country-Wide action. Gotham’s attorney asserted that issues relating to the OPMC’s investigation, documents, proceedings, and the consent order were not proper subjects of the EUO because the investigation was about prior unrelated conduct by Dr. Scheer and was confidential.

Following the EUO, Country-Wide denied Gotham’s claims. It then filed a declaratory judgment action, seeking a declaration that Gotham was not entitled to no-fault benefits for the approximately 31 claims it had filed. Country-Wide moved for summary judgment, asserting, among other things, that Dr. Scheer had refused to answer material questions at his EUO.

The court granted Country-Wide’s motion. It reasoned that Dr. Scheer’s failure to answer all relevant questions at the EUO, as required by the provisions of the applicable insurance policies that Country-Wide had issued, constituted a “material breach of contract” and precluded recovery by Gotham.

The court ruled that Country-Wide’s inquiry at the EUO regarding Dr. Scheer’s medical license was permissible, noting that, as a professional service corporation, Gotham was required to be owned and controlled by a licensed professional who rendered the services provided by Gotham.⁷ The court stated that although Dr. Scheer was entitled to confidentiality regarding the OPMC administrative proceeding itself, the effect of the consent order on the manner in which Dr. Scheer was entitled to practice medicine “was not confidential.” The court also decided that Dr. Scheer’s refusal to answer questions about treatment resulted in “obstructing” Country-Wide from obtaining relevant information to evaluate the treatments rendered and the sums claimed.

Accordingly, the court ruled, Gotham was not entitled to no-fault benefits from Country-Wide for the claims it had filed.

Conclusion

EUOs help insurers to reduce insurance fraud. The state insurance law, insurance regulators, and federal and state courts all recognize their value. An insurance company with reasonable concerns about the validity of an insurance claim will be permitted to conduct an EUO. A claimant’s failure to thoroughly comply likely will result in the denial of its claim and, if litigated, court confirmation that the claimant was not entitled to payment.

Endnotes:

1. Courts have recognized that an insured must cooperate with an insurer’s investigation to “enable the insurer to obtain all knowledge and facts” concerning a loss “while the information is fresh in order to protect itself from fraudulent and false claims.” Weissberg v. Royal Ins. Co., 240 A.D.2d 733 (2d Dept. 1997).
2. See, e.g., Dyno-Bite v. Travelers Cos., 80 A.D.2d 471 (4th Dept.), appeal dismissed, 54 N.Y.2d 1027 (N.Y. 1981)).
3. See, e.g., N.Y. Ins. Law §3404(e) (setting forth scope of cooperation clause in fire insurance policy).
4. One court has stated that the most common example of a willful failure to cooperate “is when the insured declines to answer questions about his personal finances or to turn over personal tax records.” Staten Island Supply Co. v. Lumbermens Mut. Casualty Co., No. 02-cv-6390 (E.D.N.Y. March 29, 2005).
5. Eagley v. State Farm Ins. Co., No. 13-CV-6653P (W.D.N.Y. Sept. 29, 2015).
6. Country-Wide Ins. Co. v. Gotham Medical, 20 N.Y.S.3d 861 (Sup. Ct. N.Y. Co. 2015).
7. See, e.g., One Beacon Ins. Group v. Midland Med. Care, 54 A.D.3d 738 (2d Dept. 2008).