Judge Michael Urbanski just issued an opinion in the Western District of Virginia that deals with the insured’s rights and duties when their carrier wants to examine them under oath.

Those exams happen often, and many if not most insureds are woefully unprepared for the experience.  (Just ask any court reporter.)  You can do your clients and friends a favor by learning from this case.

The opinion, Hurst v. State Farm Mutual Automobile Insurance Co., 2008 U.S. Dist. LEXIS 53628, also serves as a cautionary tale for the tone used with carriers, even those carriers whose behavior isn’t perfect.

The Facts

Hurst, the insured and an Arlington resident, made an insurance claim to his carrier
State Farm for a van allegedly stolen from a parking lot near the Maryland-Delaware border.

After some phone calls with Hurst,
State Farm hired John McGavin to collect information and examine Hurst under oath.  (Hurst’s policy specifically provided that the insured must “submit to an examination under oath” if requested.)

McGavin asked Hurst for his current tax return, bank records, documents connected to other past insurance claims, any bankruptcy filings, and any documents showing his location on the alleged date of theft.  He also unilaterally scheduled the exam for twelve days later in his Fairfax office.  Id. at *2-3.

Hurst responded a week later with a six-page letter headed “UNFAIR CLAIM SETTLEMENT PRACTICES.”  That letter asked for documents, including the insurance policy, as well as legal support justifying State Farm’s information requests.  Id.
at *4-5.  Hurst also wrote that he would “be delighted to participate in the examination under oath at the soonest convenient date on a Saturday in Arlington. . . .”  Id.

McGavin responded to Hurst five days later.  He promised to send both a policy copy and case authority supporting the document requests “shortly.” (McGavin sent the policy 20 days later, along with a letter asserting extensive case authority justified the information requests, but without cites to any specific cases.)  Id. at *5-6.  McGavin, without offering any factual support, also rejected the request for a Saturday exam in Arlington and insisted it go forward at his office during regular business hours. He asked Hurst for available dates and times for a weekday exam in Fairfax.

McGavin sent two more follow up letters after that letter, the last just about two months after his first.  Three months after that last letter, State Farm sent a denial letter based on Hurst’s supposed failure to cooperate.  Id. at *6-7.  Hurst did not respond to any of those letters.  Four years after the denial, he sued State Farm.  Id. at *9.

The Holding

Judge Urbanski upheld the denial on summary judgment, arguing Hurst failed to cooperate as a matter of law.

In doing so, he acknowledged that the burden of proving a breach of cooperation provisions rests with the carrier, citing Continental Casualty Co. v. Burton, 795 F.2d 1187, 1193-94 (4th Cir. 1986).  He also noted Virginia does not require the carrier show prejudice, but he thereafter acknowledged the insurer must show a material breach.

He applied this standard from Burton to State Farm’s lack of cooperation position:  “In order to establish that the insured has breached a cooperation clause by being unavailable, the insurer must prove that the insured willfully breached the clause in a material or essential particular and that the insurer made a reasonable effort to secure the insured’s cooperation.”  Id.

The court remarked several times on the tone Hurst used in his letters:  At one point, it wrote that letter is “better characterized as a free-wheeling attack on State Farm rather than a cooperative, cordial standing offer.”  Hurst at *16.

Indeed, when Hurst argued that his letter showed cooperation because he offered to appear for an exam, just at a different time and place, the judge rejected that based largely on its tone.  “Construing [that letter] in a light most favorable to the [insured], this letter hardly suggests cooperation.  Rather it stakes
out a confrontational and hostile position.”  Id. Later the court wrote “As State Farm received one combative letter and no response to three others, Hurst certainly cannot be considered to be ‘at all times willing’ to conduct the [exam].”  Id. at *20 n. 8.

The court also said Hurst should have shared his reasons that a Fairfax weekday exam was not reasonable with his insurer at the time of the objection, rather than wait to share them in a later lawsuit.

The court also rejected a position taken by Hurst that carriers often take:  the exam must happen where the lost property was kept.  For support, Hurst relied on the latest edition of Couch on Insurance, which in turn cited to a 1919 Washington case.  Id.
at 22.  Judge Urbanski rejected that support as “ancient” and inapposite.  Id. Such exams, the Hurst
opinion seems to say, need only be set for a reasonable place.

The Lessons

1. Maintain an even tone when writing to carriers

Letters to and from your insurance company, along with the policy, make up the bulk of evidence for any lack of cooperation defense by a carrier or bad faith claim by you.  Hurst’s letter evidently annoyed the judge here, although the quoted offer to appear in Arlington on a Saturday appears politely phrased.

Carriers may delay (State Farm took 25 days just to send a policy form here) or not respond (McGavin never provided case citations to support his information requests — just conclusory statements on the law).  And that is frustrating, especially if you the insured are without a car or a home during the process.

But don’t let that affect your tone.  Hurst’s behavior here was arguably no worse than the carrier’s, other than perhaps his silence in response to later letters.  But the image conveyed by the anger in his letter hurt his case.  McGavin’s tone might have helped State Farm.

2. Provide substance to support your requests

Claims handlers need to support their decisions with written materials — receipts, letters, bills, invoices, case authority.  Courts need the same thing.  Here, the judge agreed that some of the reasons offered by Hurst could have supported
locating the exam in Arlington on a weekend.  But Hurst did not share them until after the denial, and the court said that was too late.

Now, again, State Farm arguably acted no better.  Rather than provide reasons he could not examine Hurst on a Saturday, McGavin merely wrote “we are unable to accommodate” that request, and said it would have to happen during weekday business hours — with no other grounds.  And he never provided case authority for the information requests.

3. Where should an exam happen?

Here, the court rejected the position that carriers themselves often take — the exam under oath must happen where the property was kept (whether a house or a car).  No Virginia case has ever addressed the issue, and the only authority I have seen carriers offer is as old or older than the case cited by Couch for that proposition.  Moreover, most if not all insurance policies are silent as to location.

Rather, the judge here found the location merely had to be reasonable.  And he suggested, based on the policy’s requirement that the insured shall “submit to an examination under oath” if requested, the carrier got to pick the time and location, as long as they were reasonable.  (That may be the judge’s most strained reading — a better argument is that the policy’s silence on location leaves an ambiguity that resolves against the carrier who drafted it.)

The case also suggests that if you ask for the exam to happen in a different time or place, you should do so in writing and offer reasons to support that request.  If the carrier insists on the first time and place, continue to respond in writing and offer compromises that will later appear reasonable.

4. And what about prejudice to the carrier?

The Hurst opinion correctly notes that Virginia cases have held that an insurer can deny claims based on lack of cooperation even if the carrier is not “prejudiced.”  But insurers also must show the breach was “material” or violated an “essential particular.”  In practice, that comes awfully close to a prejudice test.  If a breach did not prejudice the carrier in some important way, it probably was not material.  The lesson: don’t argue prejudice, instead frame the issue as “materiality.”

For all the reasons discussed above, this case is worth a read — and certainly worth filing away until when the insurance company wants to examine your client or a friend under oath.