When faced with a first-party claim that is suspected of being fraudulent, an insurer will typically undertake an investigation by demanding from the insured certain documents, records, and any material in support of the presented claim. In addition, the insurer will often demand that the insured appear for an examination under oath (EUO). Increasingly, insureds are seeking legal counsel regarding the extent of their duty to comply with the insurer's demands, for representation at the EUO, and for assistance in effecting a settlement of the matter.
Most property policies provide the insurer with the right to avoid coverage when there is a finding of fraud by an insured. The fraud defense frequently arises when there the insured is found to have intentionally misrepresented or concealed material facts in the presentation of a claim.
In the past, most fraudulent claims were denied, and the resulting suit defended, with little fanfare. Currently, however, there is increasing interest in bringing a civil action against the insured found to have committed fraud and severe scrutiny of the attorney that represented the insured throughout the claim's presentation.
OVERVIEW OF THE INSURER'S RIGHT TO EXAM ITS INSURED
Experienced lawyers who approach their first examination under oath as they would a discovery deposition typically find themselves in for a sudden shock. In such cases, the attorney representing the insured may find himself less than prepared to present his client for questioning. Similarly, the attorney representing the insurer may find herself uncertain of the scope and depth of the insurers' right to examine its insured.
While property insurance policies differ somewhat amongst insurers, most policy forms provide the insurer with a right to demand an "examination under oath" ("EUO") of its insured, along with the right to demand records and documents.
The standard policy provision respecting an insurer's right to conduct an EUO typically provides:
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:
- Provide us with records and documents we request and permit us to make copies;
- submit to examinations under oath and subscribe the same.
Simply, an EUO is a formal proceeding during which an insured, while under oath, and typically in the presence of a court reporter, is questioned by a representative of the insurer regarding the presented claim. The scope of the examination can be wide ranging, and can probe many areas of the insured's background and other matters relevant to the claim.
ALLOWABLE SCOPE OF QUESTIONING
During an EUO, all questions considered material and relevant to the claim must be answered by the insured. The refusal of an insured to answer such questions, whether under advice of an attorney or not, may result in a legitimate denial of the claim. CITE.
While Courts have given broad scope to what an EUO may encompass, (See Passero v. Allstate Ins. Co., 196 Ill.App.3d 602, 554 N.E.2d 384, at 387 (1990)), the scope has been limited to whatever is material. Thus, the EUO may include anything considered material for the purpose of determining the insurer's liability to a claim, and may include anything that reasonably allows the insurer to protect itself from false claims. (See Passero, at 388).
For example, in a case of suspected arson, the insurer generally may question the insured on matters relating to the insured's financial condition in an effort to establish whether a motive for arson existed. Accordingly, in Gipps Brewing v. Central Manufacturers, 147 F.2d 6 (1945), the Court allowed a "searching exam" of the insured where the insurer had a reasonable basis for suspecting fraud by the insured.
PRODUCTION OF RECORDS
Generally the insurer, in addition to a demand for an EUO, will demand that the insured produce certain documents to assist in substantiating their claim. Refusal to comply with the demand to produce the requested documents, if material and relevant to the insurer's investigation, will likely result in a legitimate basis for denial of the claim.
Courts have frequently allowed the insurer to demand from the insured, as part of its claims investigation, material documents such as income tax returns and bank statements. (See U.S. Fidelity & Guaranty Co. v. Conaway, 674 F.Supp. 1270 (N.D.Miss. 1987); Stover v. Aetna Casualty, 658 F.Supp. 156 (S.D.W.Va. 1987); and Kisting v. Westchester Fire Ins. Co., 290 F.Supp. 141 (W.D. Wis.1968), aff'd 416 F.2d 967 (7th Cir. 1969)). However, in Chavis v. State Farm Fire and Cas. Co., 317 N.C. 683, 346 S.E.2d 496 (1986), the Court qualified the above-stated general rule and held that an insurers' request for financial documents must be both reasonable and specific.
INSURED'S RIGHT TO LEGAL COUNSEL
Typically, an attorney is retained to represent the insurer and will make the demand and conduct the exam. In many cases, the insured will likewise retain legal counsel who, needless to say, will request to be present during the proceeding.
Courts have held that while an insured has a right to have its own attorney present at any EUO, the insured's attorney can not participate in the EUO. (see Hart v. Mechanics & Traders Ins. Co. of Hartford, 46 F.Supp. 166 (W.D. La. 1942) and Shelter Ins. Co. v. Spence, 656 S.W.2d 36 (Tenn App. 1983)). Also, it is important to mention that denial of an insured's right to legal representation may bar the insurer from denying a claim on the basis of the insured's failure to comply with its demand for an EUO.
It is interesting to note that an Illinois Appellate Court recently held in Crowell v. State Farm Fire and Casualty, 259 Ill.App.3d 456, 631 N.E.2d 418 (Ill. 1994), that the insured, who was suspected of arson, should be given the opportunity to cure his breach of contract by answering those questions during a deposition which he earlier refused to answer during an EUO because he was not represented by counsel. It is also important to note that in that case the insured was given numerous opportunities to continue the exam and to retain counsel.
INSURED'S RIGHT TO SEEK PROTECTION UNDER THE 5TH AMENDMENT
Courts have held that while the insured has the right to assert protection under the 5th Amendment, it has no application to a private examination arising out of a contractual relationship. In short, the 5th Amendment is not an excuse for failure to comply with an EUO. See Galante v. Steel City Nat. Bank, 66 Ill.App.3d 476, 384 N.E.2d 57 (1987), Abraham v. Farmers Home Mutual Ins. Co., 439 N.W.2d 48 (Minn.App. 1989), and Hickman v. London Assurance Corp., 184 Cal. 524, 195 P. 45, 18 A.L.R. 742 (1900). The Court in Kisting v. Westchester Fire Ins. Co., 290 F.Supp. 141, (W.D. Wis. 1968), reasoned that an insured should not be allowed to use the 5th Amendment as both a shield and a sword.
In Floyd Baldwin v. Bankers & Shippers Ins. Co., 222 F.2d. 953 (9th Cir. 1955), the Court held that, so long as the request was material to the examination, an insured must reveal its tax records even if it might subject the insured to possible criminal prosecution. Furthermore, in Pervis v. State Farm Fire and Cas. Co., 901 F.2d. 944, footnote 4 (11th Cir. 1990) the Court stated that whether or not the insurer knew of and cooperated with the prosecution of the insured, the insurer was still entitled under the contract to seek a sworn statement from the insured.
COMPLIANCE WITH INSURER'S DEMAND IS A CONDITION PRECEDENT TO SUIT BY THE INSURED
According to the terms of most property policies, failure by the insured to comply with the insurer's demand for an EUO will likely impede a suit by the insured against the insurer for the insurer's denial of coverage. The applicable policy provision provides:
Suit Against Us. No action shall be brought against us unless there has been compliance with the policy provisions.
FRAUD AND FALSE SWEARING
Avoidance of a contract for insurance due to post-loss fraud can be distinguished from the general common law approach in that:
- there need be no reliance by the insurer on the misrepresentation; and
- the misrepresentation may relate to a circumstance relevant to the insurer's investigation and can have occurred at virtually any point during the investigation.
APPLICABLE POLICY PROVISION
The applicable policy provision (i.e., Fraud and False Swearing Clause) respecting the insurer's right to deny coverage typically provides as follows:
Concealment or Fraud. The entire policy will be void if, whether before or after a loss, an "insured" has:
- Intentionally concealed or misrepresented any material fact or circumstance;
- Engaged in fraudulent conduct; or
- Made false statements; relating to this insurance.
RELIANCE BY INSURER UNNECESSARY
Under the common law, the defrauded party must show that they relied to their detriment on false statements in order to establish fraud. In insurance law, however, Courts have generally upheld forfeiture of the insured's rights where the insured misrepresented material facts concerning the loss, even if the misrepresentation did not actually mislead the insurer in its adjustment and determination of the loss. Thus, post-loss insurance fraud is not subject to the common law burden of proving some form of detrimental reliance by the defrauded party. Passero v. Allstate Insurance Co., 196 Ill.App.3d 602, 554 N.E.2d 384 (1990).
Whether a misrepresentation is considered "material" depends upon the nature of the claim and is generally a question for a trier of fact. In Passero, the Court held that attempts calculated to discourage, mislead, or deflect the insurer's investigation into a relevant area, e.g., questions regarding the ownership of property, by concealing facts surrounding their acquisition of the property constituted material misrepresentations. Passero at 389.
The Passero Court also adopted the holding in Fine v. Bellefonte Underwriters Insurance Co. (725 F.2d 179, 184 [2nd Cir. 1984]) that a representation is material if the false statement concerns a subject relevant to the insurer's investigation as it is then proceeding. Passero, at 388. This holding indicates that the misrepresentation or concealment must be viewed at the time it occurs and recognizes the insurer's need to obtain information at the time it is useful during an investigation. Passero at 388.
However, an insured is only required to give the best information obtainable at the time. Thus, unintentional false statements do not constitute grounds for forfeiture. It should be noted, however, that for a defense of fraud to apply, false statements of an insured need not be made while under oath. Jay-Bee Realty Corp. v. Agricultural Ins. Co., 50 N.E.2d 973, 320 Ill.App. 310 (1st Dist. 1943).
MISREPRESENTATION BY OVERVALUATION OF LOSS
When an insured knowingly and willfully overestimates the value of the property in his proof of loss with the intention of deceiving an insurer, such overvaluation may allow the insurer to avoid the policy and defeat any right of the insured to recover thereon. Furthermore, the insured's knowledge of the overvaluation is not necessary in order to work a forfeiture of this right under the policy. It is sufficient if he swears with disregard to the truth. In order words, a reckless overvaluation of the property claimed equally voids the policy. 16 ALR 3d 779.
On the other hand, Courts generally hold that the term "fraud or false swearing", as used in a fire insurance policy, does not refer to unintentional error. Thus, the rights of the insured are in no way prejudiced by overvaluation of property which the insured inadvertently and innocently made in his proof of loss. Werner's Furniture Inc. v. Commercial Union Insurance Co., 349 N.E. 2d 616, 39 Ill.App.3d 59 (1st Dist. 1976). Harrold J. Warren Co. v. Federal Mutual Ins. Co., 386 F.2d 579 (1st Cir. 1967).
It is important to note that most Courts hold that the extent of the overvaluation is a very important factor in determining whether there was a fraudulent intent on the part of the insured. Thus, it has been said that overvaluation raises the presumption of fraud in proportion to the amount of the overvaluation, and a mere trivial and immaterial overvaluation is rarely considered sufficient to void the policy. 16 ALR 3d 779, 788.
It is a generally recognized rule that the attorney-client privilege is destroyed when the client reveals the intention to commit a crime and the attorney is unable to dissuade him from his plan. This rule has been re-stated in the following way:
There is a privilege protecting communications between attorney and client. The privilege takes flight if the relation is abused. A client who consults an attorney for advice that will serve him in the commission of a fraud will have no help from the law. He must let the truth be told. Clark v. United States 289 U.S. 1, 53 S.Ct. 465 (1933).
Such a rule has been held over during the changes that have taken place during the last fifteen years in many states' Rules for Professional Conduct. Several sections of the A.B.A Model Rules of Professional Conduct have been enacted by the majority of the states either verbatim or with minor amendments.
Probably the most famous rule is Model Rule 1.6.
RULE 1.6 CONFIDENTIALITY OF INFORMATION
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b).
(b) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary:
- To prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm; or
- To establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client.
While many attorneys have read this section to either give them the right or require them to continue the representation of a person known to be perpetrating a fraudulent claim, courts have not seen this as the issue:
In order that the [privilege] may apply there must be both professional confidence and professional employment, but if the client has a criminal object in view. . . one of the elements must necessarily be absent. The client must either conspire with his [counsel] or deceive him. If his criminal object is avowed, the client does not consult his adviser professionally, because it cannot be the [lawyer's] business to further any criminal object. If the client does not avow his object, he reposes no confidence. . .. The [lawyers] advice is obtained by a fraud. State v. Phelps, 24 Or.App. 329, 545 P.2d 901,904 (1976).
This interpretation, which has its roots in the contract theories of mutual assent, takes a more common law look at the Rule than one that is rooted in strict construction.
The New York State Bar Association, used the following definition for fraud in its CPR:
. . . "Fraud" means conduct which involves an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations which can be reasonably expected to induce detrimental reliance by another person, but does not included conduct lacking these elements, although characterized as fraudulent by statute or administrative rule.
Thus, because a client has no right to use a lawyer as an instrument of fraud, the client has no right that the lawyer maintain the information about the intended fraud in confidence. Thus, as the client has no right to conceal the information, the lawyer has no right to conceal the information, i.e., the lawyer's rights and duties correspond to the rights and duties of the client.
RULE 3.3 CANDOR TOWARD THE TRIBUNAL
(a) A lawyer shall not knowingly:
- Make a false statement of material fact or law to a tribunal;
- Fail to disclose a material fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client;
- Fail to disclose the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel; or
- Offer evidence that the lawyer knows to be false. If a lawyer has offered material evidence and comes to know of its falsity, the lawyer shall take reasonable remedial measures.
(b) The duties stated in paragraph (a) continue to the conclusion of the proceeding, and apply even if compliance requires disclosure of information otherwise protected by rule 1.6.
(c) A lawyer may refuse to offer evidence that the lawyer reasonable believes is false.
(d) In an ex parte proceeding, a lawyer shall inform the tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse.
Many would also argue a fiduciary duty or agency relationship as a bolster to Rule 1.6 in requiring an attorney to continue with an arguably improper representation. However, courts have held that professional obligations are also to be followed when representing a client's interest.
An attorney owes his first duty to the court. He assumed his obligations toward it before he ever had a client. His oath requires him to be absolutely honest even though his client's interests may seem to require a contrary course. The [attorney] cannot serve tow masters and the one [he has] undertaken to serve primarily is the court. In re Integration of Nebraska State Ass'n, 133 Neb. 283, 275 N.W. 265 (1937).
Rule 3.3 may seem to be in direct tension with Rule 1.6, since it requires the disclosure to a tribunal of material facts if such disclosure is necessary to to avoid a fraudulent act by the client. While no cases could be found that are on point, it can be argued that an examination under oath is a "tribunal" within the rule, and forbids the offering of information by a client (insured) that is known to be false to the attorney.
CIVIL REMEDIES BY INSURER
A statute pertaining to insurance fraud may be extend to the acts of attorneys who knowingly presents, on behalf of their client, a fraudulent claim for payment of loss under the contract of insurance. People v. Benson, 206 Cal.App.2d 519, 23 Cal.Rptr. 908 (1962); Scofield v. State Bar of California, 43 Cal.Rptr. 825, 401 P.2d 217 (1965); Sampson v. State Bar, 115 Cal.Rptr 43, 524 P.2d 139.
For example, the State of Illinois recently enacted Illinois criminal statute for persons who have defrauded, or who even attempt to defraud their insurance company by presenting a fictitious claim for insurance proceeds. In addition to criminal penalties for the convicted, the statute also provides civil remedies to the defrauded insurer.
Civil Damages for Insurance Fraud
A person who knowingly obtains, attempts to obtain, or causes to be obtained, by deception, control over the property of any insurance company by the making of a false claim on a policy of insurance issued by an insurance company, intending to deprive an insurance company permanently of the use and benefit of that property, shall be civilly liable to the insurance company that paid the claim or against whom the claim was made or to the subrogee of that insurance company in an amount equal to 3 times the value of the property wrongfully obtained or twice the value of the property attempted to be obtained, plus reasonable attorneys fees. 720 ILCS 5/46-5 (1993).
It should be noted that it is not an attorney's responsibility to decide the truth or falsity of client's representations unless he has actual knowledge or unless from the facts within the attorney's personal knowledge or his professional experience he should know or reasonably suspect that the client's representations are false. State v. Zwillman, 270 A.2d 284, 112 N.J.Super. 6. Thus, the duty of the attorney is to seek for his client all that the client is entitled to under the law and not to act in the first instance as judge and jury. Id. at 289.
DR 4-101(C)(3), which provides that a lawyer may reveal "[t]he intention of his client to commit a crime and the information necessary to prevent the crime," reflects the common law. See also EC 7-5. An A.B.A. ethical advisory opinion has stated that an attorney must disclose when the facts in his knowledge indicate beyond a reasonable doubt that a crime will be committed. The CPR provides for permissive withdrawal as well when a client "[p]ersonally seeks to pursue an illegal course of conduct." DR 2-110(C)(1)(b).
Before the attorney-client privilege will be found to be waived under the exception, there must be a prima facie showing or colorable claim of intent to commit a crime, by evidence extrinsic to the attorney-client relationship. A mere assertion of an intended crime or fraud is not sufficient to destroy the privilege. The extent to which the intent of the client to perjure himself destroys the privilege is discussed in Ch. 15. K. Rectifiable Fraud
DR 7-102(B)(1) provides that an attorney who receives information clearly establishing that "[h]is client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal, except when the information is protected as a privileged communication." In spite of its apparently strong wording, which suggest mandatory revelation, the disciplinary rule leaves much room for attorney discretion: The fraud must be "clearly establish[ed]," must occur in the "course of representation," and cannot be revealed "when the information is protected as a privileged communication." The advisory committee opinion interpreting the rule states that "[t]he tradition . . . that permits a lawyer to assure a client that information given to him will not be revealed to third parties is so important that it should take precedence, in all but the most serious cases, over the duty imposed by DR7-102(B)." A.B.A. Op. 341 (1975).