Property insurance policies typically contain provisions requiring the insured to cooperate with the insurer in the investigation and adjustment of the loss. As part of those post-loss obligations, the insured may be required, if requested by the insurer, to submit to an examination under oath and produce documents and records related to the claim. The typical policy provision is phrased as follows:
Your Duties After Loss
After a loss to which this insurance may apply, you shall see that the following duties are performed:
As often as we reasonably require, submit to and subscribe, while not in the presence of any other insured, an examination under oath; about any matter relating to this insurance or the claim, including an insured’s books and records.
The purpose of the examination under oath provision was set forth by the United States Supreme Court in Claflin v Commonwealth Ins. Co., 110 US 81 (1884). The Court stated that the object of the policy provision is to enable the insurer to possess itself of all knowledge and all information as to other sources and means of knowledge, in regards to the facts, material to its rights, to enable it to decide upon its obligations and to protect it against false claims. In regards to the scope of questioning, the court stated that every interrogatory that is relevant and pertinent in such examination is material, in the sense that a true answer to it is the substance of the obligation of the insured.
Illinois courts have historically examined the issue of an insured’s failure to appear for an examination under oath or failure to produce documents under the cooperation clause analysis, which examines whether or not the carrier was prejudiced by the insured’s non-cooperation. For example, in Piro v. Pekin Insurance Company, 162 Ill. App. 3d 225 (5th Dist. 1987), the insured’s company was destroyed by fire. Piro, 162 Ill. App. 3d. 226. Per the fire insurance policy, Pekin Insurance was allowed to examine and audit the relevant books and records of the insured and to request that the insured sit for an examination under oath. Id. While the insured did appear, he failed to produce requested documents and also refused to answer questions concerning the location, his rental properties, and the concerns of other businesses he owned claiming those matters were not relevant. Id. at 226-227. The insured subsequently filed suit demanding the proceeds of the policy. Id. at 227.
In its summary judgment motion Pekin argued that the insured’s actions at the examination under oath and refusal to produce documents amounted to a breach of a condition precedent to recovery under the policy. Id. In its response, the insured provided documents he claimed were responsive to the requested information. Id. The circuit court granted Pekin Insurance’s motion and the insured appealed. Id.
In reversing the circuit court, the appellate court focused on the aspects of the insured’s conduct it found to be cooperative. The court bolstered this viewpoint by citing to other jurisdictions where insureds were allowed to prosecute their actions to judgment without complying with the insurers’ pre-suit requests for documentation and examination under the respective policies. Id. at 228. The appellate court noted that it was undisputed that the insured eventually provided documentation responsive to Pekin’s requests. Id. The court took the position that if the proofs furnished by the insured are not satisfactory, the insured is entitled to be advised, and the insurer is bound to inform him of any want of compliance, and give the insured the opportunity to cure the objection. Id. at 229.
The appellate court held that the procedure followed in C-Suzanne Beauty Salon, Ltd. v. General Ins. Co. of America, 574 F. 2d 106 (2d Cir. 1978), was instructive. In C-Suzanne, the insurer moved for summary judgment on the basis that the insured failed to submit to examination under oath. C-Suzanne Beauty Salon,. 574 F. 2d 106. The motion was denied and the insured was ordered to sit for an examination under oath. Id. The insurer was advised that it could renew its motion provided it could show that the delay prejudiced the investigation. Id. This motion was renewed and eventually denied on the basis that the insurer showed no prejudice. Id. Applying C-Suzanne, requiring a showing of prejudice, the Piro court reversed the trial court. Piro, 162 Ill. App. 3d. 230.
This cooperation clause standard was also discussed in great detail in the matter of Piser v. State Farm Mt. Aut. Ins. Co., 405 Ill. App. 3d 341 (1st Dist. 2010). In Piser, the insured filed a claim related to a stolen motorcycle. Id. at 343. State Farm denied the claim after the insured failed to provide requested documentation or to sit for an examination under oath. Piser, 405 Ill. App. 3d. 343, 344. The insured filed suit claiming breach of contract and vexatious and unreasonable delay pursuant to section 155 of the Insurance Code. Id. at 343. State Farm moved to dismiss based on its policy’s cooperation clause. Id. The circuit court granted the motion and the insured appealed. Id.
While the appellate court reviewed the importance of the cooperation clause to the insurer’s investigation, it further noted that, “it is well settled law that ‘unless the alleged breach of the cooperation clause substantially prejudices the insurer in defending the primary action, it is not a defense under the contract. This is the test to be employed in our courts in cases where the issue is a breach of the cooperation clause.’” Id. at 347. The court found that the insured’s efforts to cooperate were negligible. Id. State Farm’s showing of prejudice was the basis for the court’s holding that it clearly set forth a defense barring Plaintiff’s claim. Id. at 348.
More recently though, Illinois courts have begun to shift their misplaced analysis away from the cooperation clause and substantial prejudice test, and instead, and more appropriately, focus on the issue of condition precedent. In Allstate v. Mack, 2016 Ill. App. (1st) 141171, Allstate filed a declaratory judgment action seeking a declaration that the insured breached the contract by refusing to execute HIPAA authorizations for medical records and to appear for an examination under oath. Allstate, 2016 Ill. App. (1st) 141171 at ¶1. Summary judgment was granted in favor of Allstate and the insured appealed. Id. at ¶3.
On appeal, the insured claimed that the American Arbitration Act precluded her from complying with Allstate’s discovery requests. Id. at ¶1. The court rightly found that the issue on appeal was not a discovery dispute but whether the insured was in breach of the contract for failing, in part, to sit for an examination under oath. Id. at ¶5. It held that Allstate’s requests for executed authorizations and for the insured to submit for the examination under oath were expressly provided for in the insurance policy. Id. at ¶7. The policyholder admitted that she failed to comply with Allstate’s requests. Id. The court found that the insured, therefore, breached the terms of the policy and was not entitled to pursue her UIM claim. Id.
In affirming the trial court’s decision, the appellate court ruled that Allstate was not required to make a showing of prejudice; rather, the analysis focused on the plain language of the contract and the insured’s failure to comply with the same. In the wake of Allstate v. Mack, and when confronted with an insured’s failure to sit for an examination under oath or refusal to produce requested documentation, a carrier should include as a basis for its declination the insured’s breach of its post-loss duty obligations under the policy.