Examinations Under Oath - When Can We Swear By Them?

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1 Examinations Under Oath - When Can We Swear By Them? Kelly C. Tranquilli & Jacqueline A. Bunt February 2005 Lerners LLP Insurance Defence Group 1 Examinations Under Oath (EUOs) are one of the most effective tools available to insurers when investigating and reviewing a claim. The examination has uses for both the immediate needs in reviewing the claim and also serves to put any possible future disputes into proper context. If the opportunity is used effectively, the insurer's ability to confront and question an insured under oath about the circumstances of the loss can play an important role in the claims decision process and also in responding to any future litigation that may arise from the claim. However, if used improperly, such as where the examiner is unprepared or has not contemplated the proper scope of the questioning, the end result may offer no further understanding of the claim or worse, could expose the insurer to a bad faith claim. While both policy and legislation may entitle the insurer to other investigative tools, such as written statements or statutory declarations, it is only the EUO that provides the insurer with an opportunity to receive a sworn, detailed, unedited and first hand account of the loss. The fact that it is sworn does not necessarily make the evidence foolproof, but if the EUO is done correctly, it effectively commits the insured to a version of the events connected to the loss; a version which the insured will have a more difficult time in contradicting than if they had simply provided a statutory declaration, written statement or even a recorded interview. 1 The writers wish to acknowledge Anthony Bedard's guidance and contribution to this paper, particularly through his article on Examinations Under Oath and fraud claims as published in Without Prejudice in November, 2003.

2 - 2 - While the Examination Under Oath is an effective claims investigation tool, the insurer must be aware of how the right to the examination arises, the limits on the examination and the potential pitfalls that could expose one to a bad faith claim. 1. The Insurer's Right to an Examination Under Oath The entitlement to use an EUO and the scope of the examination is based in both legislation and contract. In general, the power to require an EUO will be found in the legislation and contractual language governing homeowner's and automobile (being property and accident benefits) policies. In this climate of punitive damage claims and the perception of the almighty corporate insurance company bearing down on the lonely insured, it is important to understand whether the insurer can even insist upon this right, and in what circumstances. a. Automobile The ability of the insurer to test an insured's claim, be it related to first party injury or property claims, or to issues of third party liability, is heavily circumscribed by the Insurance Act and its regulations. Further, these rules appear to be zealously interpreted and guarded by the courts in favour of the insured. To date, the ability to require an EUO in the context of automobile claims is restricted to: 1. property; and 2. accident benefits

3 - 3 - For example, for third party liability issues, the insurer can only require a statutory declaration from its insured. 2 For claims arising from uninsured or unidentified automobiles, only a written statement need be provided. 3 Property The Insurance Act incorporates several critical statutory conditions into the standard automobile insurance policy. Statutory condition 6 addresses the obligations that arise in the event of loss of or damage to the insured automobile. In particular, following notice of loss or damage to the automobile, the insurer may exercise its right to require that the insured undergo an EUO: The insured shall submit to Examination Under Oath, and shall produce for examination at such reasonable place and time as is designated by the insurer or its representative all documents in the insured's possession or control that relate to the matters in question, and the insured shall permit extracts and copies thereof to be made. 4 [emphasis added] Therefore, while one can imagine several areas of questioning that would be of interest in the event of a motor vehicle accident, i.e. first party and third party injury in addition to property issues, statutory condition 6 only appears to contemplate that the examination will be conducted in respect of those matters that relate to the property claim. Further issues relating to the matter of relevance in an EUO are discussed in greater detail in the latter part of this paper. Statutory Accident Benefits Prior to the 2003 amendments, accident benefit carriers had no ability to require a claimant to undergo an EUO as part of the application process. Indeed, attempts to read such a requirement into the section 33 application and investigation process were rebuffed by the 2 Regulation 777/93, Statutory Conditions - Automobile Insurance, section 5(1)(b), Ontario Automobile Policy No. 1(OAP No. 1) section Regulation 676, Uninsured Automobile Coverage, section 3(3), OAP No. 1 sections & Regulation 777/93, Statutory Conditions - Automobile Insurance, Statutory Condition 6(4).

4 - 4 - courts as being contrary to the legislative purpose of the Statutory Accident Benefits Schedule; to expedite claims for benefits at minimal expense or delay. Further, it was thought that such examinations were inimical to these objectives because they are time consuming, expensive and inherently confrontational. 5 Notwithstanding these concerns, the entitlement expressly changed with the following amendments that came with Bill 198, which entitle the insurer to require that the insured person submit to an examination under oath as part of the application process. It must be emphasized that this new right of the insurer comes with several conditions which must be kept in mind: 33(1.1)If requested by the insurer, a person who applies for a benefit under this Regulation as a result of an accident shall submit to an examination under oath, but is not required to, (a) (b) submit to more than one examination under oath in respect of matters relating to the same accident; or submit to an examination under oath during a period when the person is incapable of being examined under oath because of his or her physical, mental or psychological condition. (1.2) A person is entitled to be represented at his or her own expense at the examination under oath by such counsel or other representative of his or her choice as the law otherwise permits. (1.3) The insurer shall make reasonable efforts to schedule the examination under oath for a time and location that are convenient for the person and shall give the person reasonable advance notice of the following: 1. The date and location of the examination. 2. That the person is entitled to be represented in the manner described in subsection (1.2). 3. The reason or reasons for the examination. 4. That the scope of the examination will be limited to matters that are relevant to the person's entitlement to benefits. 5 Govedarica v. General Accident Assurance Co. of Canada (1998), 10 C.C.L.I. (3d) 62 (Ont. Gen. Div.).

5 - 5 - (1.4) The insurer shall limit the scope of the examination under oath to matters that are relevant to the person's entitlement to benefits under this Regulation. (2) The insurer is not liable to pay a benefit in respect of any period during which the insured person failed to comply with subsection (1) or (1.1). (3) Subsection (2) does not apply in respect of non-compliance with subsection (1.1) if, (a) (b) the insurer fails to comply with subsection (1.3) or (1.4); or the insurer interferes with the insured person's right to be represented as described in subsection (1.2). (4) If an insured person who failed to comply with subsection (1) or (1.1) subsequently complies with that subsection, the insurer, (a) (b) shall resume payment of the benefit, if a benefit was being paid; and shall pay all amounts that were withheld during the period of non-compliance, if the insured person provides a reasonable explanation for the delay in complying with the subsection. 6 Failure by the insurer to conduct the examination in accordance with this procedure could expose it to a bad faith claim. This section applies to all motor vehicle accidents, not just those occurring on or after October 1, The amendment was originally heralded as a tool to prevent fraud, particularly with fake accidents (or seat sales, whereby an involved vehicle suddenly appears to have had several injured passengers). However, the examination under oath should be viewed as an effective claims investigation tool that can assist in managing all aspects of the claim, not just where fraud is suspected. It can be particularly valuable when there is no tort action and only an accident benefits action. With the examination, you have an opportunity to meet the insured 6 Ont. Reg. 403/96 - Statutory Accident Benefits Schedule - Accidents On or After November 1, 1996 as amended by O. Reg. 281/03 - section 33(1.1) to (4)

6 - 6 - and assess the his or her credibility prior to any mediation or arbitration that may ensue in the future. This opportunity can provide invaluable information to help the claims handler in assessing the insured's entitlement to benefits. In the event of a dispute that goes to arbitration (as opposed to litigation), there will likely be no other opportunity to gather information, evaluate the insured as a witness and, most importantly, to require the insured to commit himself or herself to their theory or evidence. Note, however that there are express restrictions attached to the insurer's right to require an EUO: 1. an insured does not have to submit to more than one; 2. an insured does not have to submit when they are incapable because of physical, mental or psychological condition; and 3. the scope of the examination is limited to matters that are relevant to the person's entitlement to benefits. There can be little doubt that the safeguards will be used by resourceful insureds or their counsel so as to avoid or severely limit the scope of the examination or to imply that the insurer is managing the claim in bad faith. The insured is entitled to be represented by counsel at their own expense and the insurer must use reasonable efforts to schedule the examination at a time and location convenient to the insured and give reasonable advance notice. The scope of the examination is limited to matters relevant to entitlement to benefits. Obviously, an insured's counsel will want to give this a restrictive interpretation in that questions should be related simply to entitlement to benefits, whereas the insurer will want to give this a much broader interpretation. For example, insured's counsel may only permit questions that relate to those benefits for which the insured has actually applied at the time of the examination. On the

7 - 7 - other hand, the insurer will want to have a good understanding of the insured's pre-accident health and treatment, employment history, injuries in the accident and subsequent limitations in both employment and daily activities so that it will be prepared to contemplate not just the benefits that have been applied for, but also those claims that could potentially arise in the future. The fact that the insurer is limited to one examination would also suggest that it should be entitled to ask all questions relating to any benefits for which it is reasonably contemplated that the insured could apply. There is no decision making mechanism whereby the relevance of questions can be determined when and if a dispute arises. It is likely that it will take some time for arbitral or judicial decisions to consider the proper scope of this section. A disagreement will therefore have to be carefully managed. Withholding benefits on the basis of a question that was refused should be given close scrutiny and referral for a legal opinion is advised. The specific limitation of the number of mandatory examinations (only one) makes it imperative that accident benefit and property adjusters confer with one another shortly after a property or injury claim is submitted by an insured regarding the scheduling of an examination. Although it seems that a first party insurer would potentially be entitled to two separate examinations in the event of a motor vehicle accident (one for property under statutory condition 6 and one for accident benefits under section 33 of the SABS), some Plaintiff counsel are advocating an interpretation of section 33 that would limit an insurer to only one examination for all issues. This seems difficult to reconcile, as section 33 clearly provides that the examination is limited to only accident benefit issues and would therefore arguably fall afoul of the section if the examination was conducted for dual purposes. However, given previous judicial rulings on the entitlement of the insurer in an investigation of a claim, it is debatable whether a court or

8 - 8 - arbitrator would agree that the insurer is entitled to a separate EUO pursuant to the property damage claim and the accident benefits claim. 7 A further dilemma arises with enforcement. There is no legislative mechanism whereby an insured can be ordered to attend for an examination or to answer a particular question. Section 33 does entitle the insurer to withhold benefits if the insured fails to attend for an examination; however, before so doing, an insurer would be well advised to ensure that it is satisfied that the examination under oath (or questions and information that were refused) was reasonably necessary to considering the application. Withholding benefits because of an alleged failed attendance at an examination under oath or refusal to answer a question could expose the insurer to a bad faith claim if the reasons for withholding are later held to be unjustified. Again, it must be emphasized that an insurer in this position should obtain legal advice before withholding benefits on this basis. b. Homeowner's or Multi-Peril Coverage (Fire) The right to an examination under oath is typically written into the homeowner's policy. There is no statutory provision that dictates the right or scope of the examination under oath. The insured is under an obligation to co-operate with the insurance company in investigation of the claim as a condition precedent to indemnification of the loss. As part of that obligation, the insured must submit to an examination under oath as often as the insurer reasonably requires. Absent a statutory prohibition (such as in automobile legislation), an insurer should be free to incorporate a requirement for an examination under oath into its insurance contract as a condition precedent to payment of a claim. However, this approach has not been unchallenged by insureds. 7 Govedarica, supra

9 - 9 - Part IV of the Insurance Act governs fire insurance. As the multi-peril or homeowner policy has evolved, the statutory conditions that are part of every policy of fire insurance have been drafted into the comprehensive policy. Section 148 of Part IV of the Insurance Act, R.S.O. 1990, c. I.8, sets out the statutory conditions that are part of every contract of fire insurance. Unlike the standard automobile insurance policy, the statutory conditions applicable to fire insurance do not provide for an examination under oath. As such, the examination under oath typically appears as a condition in addition to the statutory conditions. The challenge is that section 148(1) of the Insurance Act specifically indicates that no variation or omission or addition to any statutory condition is binding on the insured. In other words, only the statutory conditions, and no other conditions are enforceable against the insured. In Foster v. Chubb Insurance Company of Canada, 8 it was held that an EUO clause in a homeowner's policy for a single family residence that had been damaged by fire was not binding upon the insured because it constituted a variation or addition to the statutory conditions provided for by Section 148(1) of the Insurance Act, under Part IV of the Insurance Act, which applies to fire insurance. Foster v. Chubb was not taken to appeal. It is important to be aware of its implications. Its correctness is in question because of a lack of analysis of the applicable insurance policy and an apparently unchallenged assumption that the homeowner's policy was governed by Part IV of the Insurance Act. This assumption may be incorrect because there is a significant volume of case law holding that multi-peril homeowner policies are not principally fire insurance and therefore not governed by Part IV of the Insurance Act. It would therefore follow the EUO clause is not a variation of a statutory condition and as such, is therefore enforceable (in accordance with the common law rules of contract and policy interpretation). 8 [2002] I.L.R [1999] (O.J.) No. 132 (S.C.J.)

10 This school of thought was most recently endorsed in 2003 by the Supreme Court of Canada in K.P. Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada. 9 There, the Supreme Court of Canada interpreted the B.C. insurance legislation, which is similar in most respects to the Ontario Insurance Act. 10 Although the issue did not concern examinations under oath, the Court considered the extent to which statutory conditions and other legislative restrictions governing fire insurance could be applied to multi-peril or comprehensive insurance policies. The court expressly commented that multi-peril policies could not be shoehorned into the fire insurance statutory provisions. In other words, legislation restricted to fire insurance does not apply to multi-peril policies. With respect to examinations under oath and multi-peril or homeowner policies, the reasoning in K.P. Pacific should mean that a contractual requirement for the insured to submit to an examination under oath is not a variation or addition to a statutory condition of a fire policy, and should be an enforceable contractual term as against the insured. 11 It is submitted that K.P. Pacific should be determinative, yet there is no Ontario decision on point to confirm this to date. Adjusters dealing with homeowner's insurance policies should be aware of this issue and seek a legal opinion concerning the application of the Foster v. Chubb and K.P. Pacific to their particular insurance policy. The contractual language typically permits a far wider scope of the examination under the homeowners/multi-peril policy as opposed to automobile insurance. However, there are limits. 9 [2003] 1 S.C.R In K.P. Pacific, an insured failed to commence an action on the policy within 12 months of the loss, as was stipulated in the statutory conditions contained in the standard multi-peril policy. The Court ruled that the policy was not a fire policy, and that it therefore could apply a general limitation period with the result that the insured's action was not time-barred. The net effect of this decision is that fire insurance and Part IV of the Insurance Act is largely irrelevant. The Court encouraged the legislatures to draft new legislation to apply to multi-peril or comprehensive policies. It is understood that the industry is currently reviewing proposed draft legislation; however, any concrete amendments appear to be very much into the future. 11 Ironically, the interpretation in K.P. Pacific advocated by the Supreme Court of Canada was to the benefit of the insured. In the case of examinations under oath and multi-peril policies, the same logic is to the benefit of the insurer.

11 Matters relating to the conduct of the EUO, including when, why and how it is completed, are limited by the insurer's duty of good faith. As stated by the Ontario Court of Appeal in Ontario Inc. v. Non-Marine Underwriters, Lloyd's of London, the duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by insureds... the duty of good faith obliges the insurer to act with reasonable promptness during each step of the claims process. Included in this duty is the obligation to pay a claim in a timely manner when there is no reasonable basis to contest coverage or to withhold payment. 12 Thus, the right to the examination under oath must be considered in the context of the insurer's obligations to act in a timely and fair manner. As with an automobile claim, the examination under oath must be carefully and fairly used in the investigation of the insured's claim. It should not be used as a technicality in withholding resolution or stalling the claims process when there is already enough information with which to reasonably review the claim. 2. So When Should an EUO be Required? Once it is determined there is a legal right to conduct an EUO, the adjuster must determine whether there is a factual basis to warrant compelling the insured to undergo this process. Demanding an EUO without any factual basis to justify doing so could be characterised as unfair treatment of the insured or an unreasonable delay in the claims adjudication process. An EUO is not a substitute for a thorough field investigation. Ideally, the EUO will take place after the field investigation has been substantially completed and the adjuster has evaluated the investigation and reached an informed decision as to whether an EUO is warranted. The application or proof of loss should be received and as much supporting documentation as possible should be obtained in advance of the examination. Examples of when an examination may be worthwhile in either property or automobile include: 12 [2000] O.J. No. 866 (Ont. C.A.)

12 a. concerns regarding fraud or exaggeration in the application or proof or loss; b. vagueness or conflicting information regarding the circumstances of the loss; c. the need to confirm the extent of and nature of the loss (be it property loss or physical injury); or d. obtaining further particulars (including documentation) pertaining to an accident benefits claimant whose income derives from self-employment, or who had ostensibly entered into a contract of employment prior to the loss or who was in otherwise unspecific employment circumstances at the time of the loss. These are just a few obvious examples. The context of the claim will dictate the need for an examination. Given the concerns regarding bad faith, if there is any doubt, a brief legal consultation as to whether an examination is necessary could prevent a lot of doubt and uncertainty in the future management of the claim. 3. Who Should Conduct the Examination? If the EUO is seen as part of a strategy to assist the insurer in evaluating the claim and also demonstrating that the claim has been fairly handled, then it is important to have the right person conduct the EUO. Exactly who should conduct the EUO is a matter for debate. At the very least, it should be someone who is skilled in asking questions and conducting a crossexamination. While there is no requirement that an EUO be conducted by a lawyer, there are certain advantages to doing so that can maximize the effectiveness for the examination under oath: a. It puts an objective buffer between the insured and insurer;

13 b. A lawyer has training and experience to determine which issues and questions are relevant to the claim in issue; c. Awareness of the necessity and ability to establish a fair, coherent and unambiguous record that can be used for investigation and future litigation, if necessary; d. Skills to establish the appropriate rapport with the witness and manage the evidence; e. Evaluation of how the presentation of the witness may be received at trial and what potential ramifications, positive or negative, it may have on the trial outcome. A more subtle advantage to having the EUO conducted with the lawyer and in the presence of an Official Examiner (after the field investigation is substantially complete) is that it makes it very clear to an insured who may be committing a fraud that the claim is being treated seriously. While an insured setting out to commit insurance fraud expects to provide a statement to the police and an insurance adjuster, he or she may not anticipate a thorough investigation and attendance at an EUO. It is remarkable how many fraudulent claims are stopped at this stage. 4. Conduct of the Examination - Relevance The manner in which an EUO is conducted may be one of the issues that an insurer is required to explain in any subsequent bad faith litigation. It will not serve the insurer well if the examination is treated as an inevitable confrontation, or in accordance with a pre-determined view of the claim ( this guy's a total fraud ) or if the manner in which the examination unfolds suggests that the exercise was designed to intimidate and bully the insured rather than to legitimately gather information necessary to the claim.

14 It is, therefore, important to have some understanding of the boundaries which may be applicable to questioning during EUO. Some assistance in defining the scope of an EUO may be drawn, by way of analogy, from the Rules of Civil Procedure and cases pertaining to examinations for discovery in the litigation process. Permissible questioning is limited by the concept of relevance. Parties to an action are only required to answer questions or disclose information that relate to any matter in issue in the litigation. Questions must have a reasonable semblance of relevancy to the matters in dispute. The Rules provide for sanctions in the event that the Examination is being conducted in bad faith or in any unreasonable manner so as to annoy, embarrass or oppress the person being examined or where the examinee is being abused by an excess of improper questions. While cross-examination is permitted, it must not cross these boundaries. These are sound principles to consider when conducting EUOs. Relevance is determined by what facts are necessary to determine the outcome of the insured's claim. Questions during an EUO which bear no semblance of relevancy to the matters in issue would likely be considered abusive or harassing and would likely trigger a bad faith claim. It is critically important for the examiner conducting the EUO to understand what the relevant issues are. For example, typical issues in a fraud case include: the insured's knowledge of the circumstances of the loss motive opportunity credibility financial circumstances

15 What is relevant in any case will depend entirely on the particular factual circumstances of the claim. An in-depth questioning of an insured's finances may be relevant to the issue of motive where there is some objective evidence of financial pressures on the insured prior to the claim. However, that same level of questioning may not be appropriate in another case where financial motive is otherwise non-existent. Awareness of what is relevant is essential to keeping the EUO questioning within reasonable limits. Requests of insureds to produce tremendous amounts of documentation ( the fishing expedition ) without regard to relevancy may be seen as harassing or unnecessarily delaying the claims decision, which, in turn, could be considered a breach of the insurer's duty of good faith. Consider that the extensive requests, if not justified in the circumstances, will unduly delay the process and potentially contribute to the grounds for a bad faith claim. Requests for document production can be intrusive on the insured's privacy and very time consuming. Care must be taken by adjusters to constantly evaluate the claim, to ensure the production request is reasonable. It is important to remember that the EUO is part of the claims assessment process. Its purpose is to question the insured in a manner which puts the evidence into perspective or context. Since the case of Whiten v. Pilot Insurance, claims handling practices have been and will continue to be put under increased scrutiny in the context of punitive damage claims. The EUO can be a valuable component in the claims handling strategy. Done properly, the EUO provides a sound factual foundation upon which the claims decision can be made. It should be seen as part of a strategy to assess the merits of the claim in a balanced and reasonable manner. KCT/JAB