Claim Denial Based On Insured's Failure To Cooperate Upheld
Generally, first-party insurance policies contain clauses requiring the cooperation of the insured upon making a claim. In Abdelhamid v. Fire Ins. Exchange, 182 Cal.App.4th 990 (2010), the California Court of Appeals explored the consequences of breaching such clauses.
In June 2005, Zary Abdelhamid’s Sacramento, California home burned to the ground. This event capped a series of unfortunate incidents for Abdelhamid. Only a week earlier, she had been forced to stop renovations on the home because of a failure to pull the proper permits. The contractors had also discovered asbestos in the ceiling, and declined to refund the 80% of the fee which she had already paid. This came on the heels of a bankruptcy filed a couple of years earlier, and the subsequent purchase of the home for roughly $750,000.
Fire investigators found traces of accelerants in every room. Abdelhamid’s involvement was suspected based on the fact that Abdelhamid: (1) paid too much for the property; (2) had been forced to carry three mortgages for six months prior to the fire; (3) had paid remodeling contractors for a remodel that was halted because of the failure to obtain permits; (4) discovered that asbestos was present in the home; and (5) called Fire Insurance Exchange's agent two days before the fire to make a change in her policy’s mortgagee provisions and then again the day before the fire to confirm the change.
Fire Insurance Exchange (“FIE”) investigated the claim. It sought documents relating to Abdelhamid’s finances, and conducted an examination under oath (“EUO”). Abdelhamid’s EUO proceeded without the production of relevant documents. In addition, Abdelhamid declined to answer questions on “the advice of counsel”, despite the fact that she was unrepresented.
FIE denied the claim because of Abdelhamid’s failure to produce relevant documents that FIE had requested, her refusal to answer questions during her EUO and her failure to submit a complete proof of loss. However, FIE indicated it would reconsider the claim if Abdelhamid provided additional information.
In response, Abdelhamid provided a new proof of loss and additional documents, although not all that had been requested. Abdelhamid asked to take another EUO, but the request went unanswered. Subsequently, Abdelhamid sued FIE for breach of contract and bad faith. The trial court granted a summary judgment in favor of FIE based on the insured’s lack of cooperation with FIE’s investigation. Abdelhamid appealed.
Abdelhamid raised several grounds in her appeal. First, she claimed that the advice of counsel defense should preclude a finding of lack of cooperation. She contended that because a criminal investigation was ongoing, she had the right to avoid questions that might compromise her position. She then argued that FIE’s promise to consider additional information provided by the insured, reopened its duty to conduct an investigation into the loss. Finally, Abdelhamid maintained that FIE could not show prejudice in relation to her failure to cooperate, and therefore could not deny the claim on that basis.
None of these points were persuasive to the Court of Appeals.
First, the court considered the right to avoid questions on the advice of counsel. The court noted that an insurer may contractually require an insured to submit to an EUO and answer all proper questions as a condition of coverage. This practice was specifically sanctioned by the California Legislature. The Legislature had also recognized an insured's right to withhold information on the basis of privilege or other legal objection. However, the Legislature placed the risk of withholding such information on the insured, should such actions hamper the insurer’s investigation. Therefore, an advice of counsel objection will not excuse the insured from providing relevant information at an EUO. The court held that FIE properly denied coverage on the basis that Abdelhamid’s failure to comply constituted material breaches of her contractual duties.
Next, the court considered the additional documents supplied after FIE’s initial denial of the claim. The court found nothing in these documents which conflicted with FIE’s position, and declined to impose a duty on FIE to reopen its investigation when its investigation had not been contradicted.
Finally, the court considered the issue of prejudice. Abdelihamid relied upon two third party cases, Campbell v. Allstate Ins. Co., 60 Cal.2d 303 (1963), and Allstate Ins. Co. v. King, 252 Cal.App.2d 698 (1967), for the proposition that an insurer can deny a claim based on a breach of the cooperation clause only where there is a showing of substantial prejudice. The court declined to decide this issue. Instead, it stated that even if substantial prejudice was required, it had been shown. The court noted that FIE was clearly prejudiced in its investigation of Abdelhamid’s claim because of her breach of the contract, i.e., her failure to produce documents, failure to answer material questions, failure to submit a complete proof of loss with supporting documentation, and her refusal to cooperate.
Here the insurer’s persistent efforts to investigate the claim paid off and allowed it to demonstrate substantial prejudice resulting from the insured’s failure to cooperate. But this was not a close case on the facts. As the court made clear, a different result might have obtained had the insured produced new information contradicting the insurer’s coverage position. Insurers should carefully document an insured’s lack of cooperation in order to rely on similar policy provisions to deny claims in cases with facts that are less clear-cut.