Sealed with the Fifth

As if things weren't stressful enough after an electrical fire destroyed Mr. Insured's house, the county's origin and cause expert filed a report with the local fire department stating that the loss appeared to be incendiary and that someone familiar with the dwelling's unconventional construction probably caused the loss. Within two weeks of the fire, Mr. Insured was questioned by the police and arrested on suspicion of arson. After filing a property damage claim with his insurer, he received a response in the form of a Reservation of Rights letter advising him that the cause of the fire was under investigation and that, while the company would investigate the loss, it reserved all of its rights under the policy. Within a month, Mr. Insured received a request from his insurance company to produce receipts, photographs, etc., and to appear for an examination under oath (EUO).

Unfamiliar with the EUO process, Mr. Insured asked his newly hired criminal defense attorney for advice on how to proceed. Counsel reminded him that he need not testify against himself and that he should not testify at the EUO prior to his criminal trial. Consequently, Mr. Insured told the adjuster that he would plead his constitutional right under the Fifth Amendment to refrain from testifying at the EUO. Thus, the adjuster asked his manager this question: Does the insured's constitutional right against self-incrimination override the insurance company's right to take the insured's EUO?

Analysis of this issue involves a review of the constitutional right upon which the insured refuses to testify, the condition in the policy upon which the insurer relied in demanding the EUO, and judicial interpretations of which "right" prevails. According to the bulk of the case law on this point, the decision to submit or not to submit to the EUO, ultimately, remains with the policyholder: Comply with the conditions of coverage (i.e., cooperate in the investigation; testify at EUO; etc.) or forfeit coverage.

First, exactly what does that Fifth Amendment state?

"No person shall...be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law..."

Second, what is the contractual provision to which the policyholder agreed upon purchasing the policy of insurance? As a condition of coverage under the ISO Homeowners 3—Special Form HO 00 03 10 00, the insured agreed to:

As the following cases explain, no one can make the insured testify against himself; separate and apart from this decision, however, is the insured's decision regarding whether or not he chooses to comply with the terms of the insurance contract. Hence, while the insured can stand on his Fifth Amendment right to refrain from testifying against himself, the usual consequence for his failure to comply with the condition of coverage permitting the insurer to examine him under oath is a forfeiture of any payment under the policy. Note, too, the judicial rejection of an insured's argument that the insurer's demand for an EUO violates the due process protection afforded under the 14th Amendment.

Like the insured in our example, the insured in a 2001 suit filed in Michigan relied upon her criminal defense attorney's advice to refrain from testifying at her EUO until the criminal investigation into her involvement in the fire that destroyed the property was complete. In Allen v. Michigan Basic, the court did affirm the policyholder's right to assert her Fifth Amendment privilege in response to her insurer's demand for an EUO, but it held that she did so at the peril of recovering anything under the policy. The court held that the policyholder's failure to comply with the insurer's EUO demand, along with her failure to produce requested documents, constituted a deliberate effort to withhold material evidence and a pattern of non-cooperation sufficient to require dismissal of her claim with prejudice (a lawsuit dismissed with prejudice cannot be re-filed).

Whether the dismissal is with or without prejudice may depend upon whether or not the policyholder's refusal to testify at her EUO was a willful breach of the policy. While it appears implausible to consider a refusal to appear for an EUO as anything other than willful, a 2009 federal court case in Michigan did find in favor of a policyholder on that issue, thus warranting a dismissal of her suit without prejudice to re-filing it. In Yaldo v. Allstate, the insurer paid part of the claim but demanded an EUO before making any more payments. The insured's tactic in this case was to not only refuse to appear for an EUO, but to base the refusal upon the fact that the insured did not have similar rights to take testimony, demand documents, and obtain discovery from Allstate. Hence, the insured relied upon her constitutional right to due process under the 14th Amendment. In addition, the insured argued that the insurer's demand for an EUO was not timely and was, therefore, unenforceable as contrary to the Michigan Insurance Code. In rejecting the policyholder's due process argument, the court held: "The Court therefore rejects the [insured's] assertion that the EUO provision, freely agreed to by the policyholder, violates the Fourteenth Amendment."

Consistent with these decisions is a 2008 federal court decision rendered in Alabama. In State Farm Fire and Casualty Co. v. Richardson, the court rejected the policyholder's reliance on his Fifth Amendment privilege against self-incrimination as his basis for refusing to comply with the insurer's demand for an EUO. In rejecting this approach, the court stated:

That privilege does not excuse his performance of a contractual condition precedent to State Farm's payment obligation, as a matter of law…[W]hen an insured seeks to recover proceeds from an insurance contract to which he is a party, he must be held to the express terms of the agreement. He is not compelled to incriminate himself. He is, however, bound by the provisions to which he stipulated when he signed the insurance agreement and cannot expect State Farm to perform its obligations under the contract, by being subject to suit for payment of proceeds, without compliance on his part.

The aforementioned cases are consistent with cases in many other states, including Connecticut, Massachusetts, New Jersey, New York, Ohio, Washington and Wisconsin. Note, however, that courts have not been unanimous in their resolution of this issue. In California, another approach has been adopted. In Hickman v. London Assur. Corp., a policyholder's refusal to submit to an EUO on the ground of his constitutional immunity warranted a dismissal of his claim against his insurer. The court reasoned that constitutional immunity does not apply to contractual relationships such as an insurance contract. Like the majority of cases on point, this case upholds the contract and does not excuse performance of the EUO condition for an insured raising his Fifth Amendment rights.

While many cases consistent with the decisions summarized above have been decided, courts have not been unanimous in their assessment of this issue. For example, the 1992 federal court decision rendered in Weathers v. American Family Mut. Ins. Co. reached a different conclusion. This case involved a policyholder who attempted to rely upon her Fifth Amendment privilege regarding an insurance investigation the insurer was conducting pursuant to a state arson reporting immunity act. The court stated:

In this instance, the court has no doubt that any information revealed to [the insurer] during the examination under oath would have in turn been given to the state for later use against the [insured] at her criminal trial.

The court went on to state that a position in which the insured would have to choose between possibly breaching her insurance contract and forfeiting her benefits thereunder or revealing critical information to the state authorities which could be used against her in a criminal prosecution was unacceptable and offensive to constitutional sensibilities.

Also, in a New Jersey personal injury protection case decided in 2006, the court, while forcing the insured to attend the EUO, allowed the insured's right to rely upon her privilege against self-incrimination without forfeiting the policy benefits. In Vargas v. National Continental/Progressive Ins. Co., the court concluded that the insurer should not have to wait until the conclusion of a criminal proceeding in order to resolve a pending claim. At the same time, per the following holding, the insured should not have to choose between asserting her Fifth Amendment rights and violating an insurance contract:

[S]ince the court lands squarely in the middle regarding this issue, it is decided that the plaintiff should be forced to attend her IME and EUO; however, the plaintiff should be allowed to assert her Fifth Amendment right against self-incrimination during her EUO, refusing to answer those specific questions she feels would be incriminating in the ongoing criminal investigation.

While this decision initially appears to be a compromise between the majority and minority positions discussed above, it is more accurately classified as a case consistent with the minority approach since it does permit the insured to refuse to answer questions likely material to the loss.

While the court decisions upholding an insurer's right to an EUO—in spite of the insured's pleading his Fifth Amendment privilege against self-incrimination—are not unanimous, there is a landslide of judicial authority in favor of resolving this stalemate in the insurer's favor. No one can compel the policyholder to incriminate himself, but the consequence for his failure to comply with the condition in the policy to testify under oath is usually a forfeiture of any right of recovery under the policy.

Laurie Pegler, J.D., CPCU, is an attorney with the Property Loss Research Bureau (PLRB) in Downers Grove, Ill. She can be reached at lpegler@PLRB.org.