In Staples v. Allstate Insurance Co. (pdf), the Washington Supreme Court squarely held (disapproving prior precedent to the extent contrary) that an insurer does not have an unfettered right to request that a policyholder submit to an Examination Under Oath (“EUO”).  Instead, the EUO must be material to the insurer’s investigation or handling of a claim.  The court also held that an insurer cannot deny a claim based on failure to submit to an EUO unless it first establishes prejudice.  The court’s opinion seeks to strike a reasonable balance between an insurer’s interest in obtaining information that is reasonably necessary to investigate a claim and a policyholder’s contractual right to coverage.

BACKGROUND

In August 2008, Staples’ van was stolen from a parking lot in Redmond, Washington.  A large collection of tools was stored in the van.  Staples informed the police that the tools were worth approximately $15,000 and that the van was used for work.  Two weeks later, Staples submitted to Allstate a claim under his homeowner’s policy for loss of the tools.  He told Allstate that the tools were worth $20,000-$25,000 and that they were for his personal use.

Based on the above apparent inconsistencies, Allstate transferred Staples’ claim to its special investigation unit.  That unit then requested documentation, including proof of ownership and a sworn proof of loss.  Allstate subsequently requested that Staples appear for an EUO and reiterated its request for documentation.  Allstate later cancelled the EUO when Staples did not provide the requested documentation. 

After significant back-and-forth between Staples’ lawyer and Allstate, Staples’ lawyer stated that Staples would appear for an EUO if Allstate would extend the contractual time for filing suit, which was about to expire.  When Allstate declined to do so, Staples sued Allstate for breach of contract, bad faith, and violation of the Insurance Fair Practices Act.  The superior court dismissed those claims on summary judgment.  The court of appeals affirmed in an unpublished opinion. 

The Washington Supreme Court granted review and reversed.

ANALYSIS

  • Given the quasi-fiduciary nature of the insurance relationship, the court held that if an EUO is not material to the insurer’s investigation or handling of a claim, the insurer cannot demand it.  To the extent that prior precedent suggests otherwise, the court “disapprove[d] it.” 
  • Applying its materiality requirement, the court concluded that “it appears Allstate was within its rights to request an EUO” given the discrepancies between the police report and Staples’ insurance claim.  The court, though, declined to decide the appeal on this basis because it “is not clear what additional information Allstate hoped to uncover by conducting an EUO” and “the record is incomplete in this regard.” 
  • The court likewise found unresolved fact issues as to whether Staples had “substantially complied” with Allstate’s request for an EUO.  Specifically, it was unclear whether Allstate had refused to reschedule the EUO unless and until Staples complied with Allstate’s document requests.  If so, there would be a fact issue as to substantial compliance with those requests.  The court concluded that the summary judgment record was not sufficient to resolve that issue either.
  • Turning finally to prejudice, the court squarely held that Allstate was required to demonstrate prejudice before it could deny Staples’ claim for failure to submit to an EUO.  Allstate argued that “an EUO is a valid condition precedent to bringing suit” and that it therefore was not required to show prejudice.  The court rejected that argument, stating that it had previously abandoned “the condition precedent rule.”
  • A claim of actual prejudice requires “affirmative proof of an advantage lost or disadvantage suffered as a result of the [breach], which has an identifiable effect on the insurer’s ability to evaluate or present its defenses to coverage or liability.”  Addressing this issue, the court concluded that “genuine issues of material fact exist regarding whether Allstate was prejudiced by Staples’ failure to appear for an EUO.”

DISSENT

Justice James M. Johnson dissented.  Justice Johnson concluded that Staples “engaged in delay tactics for months,” that he “did not substantially comply with his insurance policy,” and that “Allstate suffered prejudice as a result.”  He then expressed concern that the majority’s holding “invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”