One More Chance: Appellate Court Affirms Conditional Decision Allowing Insured To Comply With Policy's Cooperation Clause
January, 2010
In Erie Insurance Company v. JMM Properties, LLC, 66 A.D.3d 1282 (3d Dep't 2009), commercial property insurer, Erie Insurance Company ("Erie") brought a declaratory judgment action against its insured, JMM Properties, LLC ("JMM"), seeking a declaration that Erie's denial of JMM's claim was proper based on JMM's breach of the policy's cooperation clause. JMM was a limited liability company, the sole members of which were Michael Orr, Michael Froncek and Jeffrey Truman. JMM sought damages after a fire in November, 2006, damaged property owned by JMM in Oneida, New York.
Shortly after receipt of JMM's claim, Erie initiated an investigation of the facts and circumstances surrounding the fire. Erie's investigator conducted a recorded interview with Mr. Truman on December 7, 2006, asked that JMM provide a variety of documents pertaining to the claim and requested that JMM's members, Orr, Froncek and Truman appear for an Examination Under Oath ("EUO") in accordance with the Policy. Through the first few months of 2007, a number of EUOs were scheduled and postponed due to the scheduling conflicts of counsel. During that same time, criminal charges were filed against Truman in connection with the fire and the circumstances surrounding its origin.
Erie scheduled an EUO for Truman to be held on March 7, 2007. In light of the criminal charges filed against him, Erie was advised by Truman's criminal counsel that he will be unavailable for an EUO until there was a disposition of the criminal charges. The March EUO was canceled. Erie advised JMM that Truman's refusal to submit to the EUO, as a member of the company, may result in the denial of its claim under the Policy. Erie also sent a letter to Truman's criminal counsel requesting that Truman make himself available for an EUO pursuant to the Policy's cooperation clause.
In April, 2007, Erie advised JMM and Truman's criminal attorney that an EUO will be conducted for both Truman and Orr on May 16, 2007. Both Truman, through his criminal counsel, and counsel for JMM confirmed Truman and Orr's attendance. Two days prior to the EUO, counsel for Erie changed the location where the EUO was to be held. Erie advised JMM's counsel of the location change but failed to inform Truman's attorney and as a result, only Orr appeared for the EUO. Erie refused to take the EUO of Orr in Truman's absence. The Supreme Court noted in its decision that there was evidence that Truman did in fact appear for the EUO at the location initially selected by Erie.
After continued efforts to reschedule by both counsel were fruitless, Erie denied the claim primarily based on Truman's failure to submit to the EUO. Erie commenced a declaratory judgment action in the Supreme Court, Madison County seeking a ruling that there was no coverage as a result of JMM's breach of the Policy's cooperation clause and that Erie's denial of the claim was proper. The Supreme Court granted Erie's motion unless, within 30 days JMM made Truman, Orr or Froncek available for an EUO. Id. at 644. Erie appealed the decision arguing that the conditional nature of the decision was improper as it allowed JMM a final opportunity to appear despite its willful violation of the Policy's cooperation clause.
In affirming the Supreme Court's decision, the Appellate Division, Third Department, began its analysis by reasserting the maxim that "[t]he purpose of a cooperation clause . . . is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved . . . in order to protect itself from fraudulent and false claims." Id., citing Weissberg v. Royal Ins. Co., 240 A.D.2d 733, 733-734 (1997). The Third Department opined that a willful failure of an insured to submit to an EUO may amount to a material breach of the policy that would bar recovery. Id. However, the Court noted that in making that kind of determination, the insurer bears a heavy burden of not only proving a lack of cooperation but requires the showing of a "willful and avowed obstruction involving a pattern of noncooperation for which no reasonable excuse [is] offered." Id., citing Turkow v. Erie Ins. Co., 20 A.D.3d 649 (2005); see Matter of New York Cent. Mut. Fire Ins. Co. (Bradfield), 61 A.D.3d 1139 (2009).
The Appellate Court found that Truman's failure to submit to the EUO amounted to a breach of the Policy and that the existence of the pending criminal charges in connection with the fire did not provide a valid excuse. Erie Insurance Company at 644-45. However, in regards to the second portion of the analysis, the Court questioned whether JMM's conduct, based on the totality of the circumstances, was so willful to justify excusing Erie from liability under the policy. Id. at 645. As a part of its analysis, the Court reviewed the particular circumstances at issue: (1) JMM initially made its principals available to Erie; (2) shortly after the loss Truman submitted to a recorded interview with Erie's investigator; (3) all of the documents requested by Erie were provided including sworn Proof of Loss statements; (4) there was evidence that Truman appeared for the May EUO at the initial location; and (5) JMM continuously offered the cooperation of Orr and Froncek that were refused by Erie. Id. at 645.
The Court held that based upon the specific facts presented, JMM's conduct was not so willful that it warranted excusing Erie from liability without providing JMM one final opportunity to comply with the Policy. Id. at 645. The Court observed that any prejudice resulting from any delay in the investigation was due to Erie's own conduct in refusing to take the EUOs of Orr or Froncek prior to the EUO of Truman. Id. The Court noted that because Orr was allegedly with Truman on the day of the fire, Erie may have obtained the information necessary to its investigation by conducting an EUO of Orr. Id. The Court concluded that based on the specific facts of the case, the Supreme Court's conditional decision was not improper. Id.
Learning Point: The Erie decision illustrates the heavy burden placed on an insurer to demonstrate a breach of the cooperation clause and exemplifies the reluctance of courts to limit an insurers liability based on the underlying facts and circumstances of a particular loss.Back to New York CM Report of Recent Decisions (2009v4) 2009 Volume 4 Table of Contents
