As a negotiation tactic, counsel for policyholders sometimes file suit during the claim investigation — prior to the conduct of an Examination Under Oath (EUO) — and later argue that the EUO has been rendered moot by depositions conducted during the ensuing litigation.

A federal court recently rejected this tactic in The Wingates, LLC v. Commonwealth Insurance Company of America. In November 2011, a fire tore through two buildings owned by The Wingates, LLC and insured by the Commonwealth Insurance Company of America. Commonwealth commenced an investigation into the claims requesting numerous documents, some of which were provided by the insureds. Pursuant to the cooperation clause of the policy, Commonwealth next requested that certain officers and employees of the insureds submit to EUO’s. The insureds refused, claiming it was a stand against insurance companies who are “crooks” that try to “weasel” their way out of paying claims.

Before Commonwealth made any final coverage determination, the insureds commenced a declaratory judgment action asserting causes of action for breach of contract and a bad faith refusal to adjust the claim. During the course of discovery, Commonwealth deposed the same officers and employees of the insureds that it sought to examine under oath.

Commonwealth moved for summary judgment, and the district court found that although depositions were conducted, Commonwealth was entitled to EUO’s, and therefore the insureds’ refusal to cooperate constituted a violation of a condition to coverage. The court acknowledged that Commonwealth had a “heavy burden” to demonstrate that the insureds’ deliberately failed to cooperate. But the court also noted that Commonwealth was not required to show that it was prejudiced by the insureds’ failure. The insureds’ opportunity to comply with the policy had passed, it offered “no credible reason excusing their total failure to submit” to any EUO, and therefore the court held in favor of Commonwealth.  Notably, the court rejected the insured’s delayed offer to comply, finding that it would not cure the initial breach of a condition precedent to coverage.

Thanks to Steve Kaye for his contribution to this post.  For more information, please write to Mike Bono.