In Philadelphia Indemnity Insurance Co. v. BAS Holding Corp., the Court of Appeals for the First Circuit rejected an insurer’s “insupportable” defense that the insured company had breached its duty to cooperate by refusing the insurer’s request for an examination under oath of the company’s president. The decision is a reminder that, while examinations under oath can be effective tools to allow the insurer to properly investigate a claim, an insured’s duty to cooperate is not boundless and does not demand attendance at examinations that are not reasonably requested.
BAS Holding involves the destruction of a landmark building in Boston by an arsonist. The owner, BAS Holding Corporation, submitted an insurance claim to its property insurer to recover insurance proceeds for the damage to the building. The insurer investigated the claim to determine whether the damage to the building was covered and issued a reservation of rights letter suggesting that the policy may not provide coverage for the fire. As part of its investigation, the insurer requested an examination under oath as a condition to coverage under the policy, which led to BAS presenting the property’s operations coordinator for an interview. Shortly after examining the operations coordinator, the insurer sought another examination of BAS’s president and owner, as well as five other employees. In response, BAS questioned whether the additional examinations were “reasonably required” and said that it would consider the requests if the insurer could explain why they were necessary.
The insurer stated that it was not required to explain why it needed to conduct additional examinations and asked BAS to confirm within 14 days that it would be presenting the president on the proposed examination date. Less than 72 hours after making that request, however, the insurer told BAS that it had materially breached the policy by refusing to participate in the requested examinations and denied coverage for the building. The insurer then filed an action seeking a declaration that BAS breached its duty to cooperate with the insurer’s investigation and settlement of the claim.
The Coverage Action and First Circuit Decision
The trial court granted summary judgment for the insurer on the ground that BAS failed to cooperate by not complying with the insurer’s request to submit BAS’s president for examination. BAS appealed the trial court’s decision. The appellate court vacated the lower court’s decision, stating that it was “well outside the normal” of similar cases and concluding that the evidentiary record did not support the trial court’s finding.
In reaching its decision, the First Circuit focused on the communications between the insured and its insurer. The evidence showed that although BAS had not submitted its president to the examination by the insurer, BAS had already submitted the operations coordinator, who handled all the insurance for BAS and was employed by other companies owned by the president of BAS, most of which were connected to the damaged building. The parties did not dispute whether the representative tried to answer all of the insurer’s questions during the examination, but the parties disagreed about the adequacy of the representative’s answers.
The appellate court explained that an insurer may disclaim coverage when faced with a willful and unexcused refusal by its insured “to submit to an examination under oath, without proof of actual prejudice.” The court found that was not the case in BAS. It reasoned that there was no way to read the correspondence about the examinations as refusals by BAS since BAS promised to respond to the request and when it did, BAS simply asked for an explanation for why additional examinations were reasonably required. BAS contended that it complied with the policy’s cooperation condition by submitting a representative to the initial examination and simply wanted to know why others were needed, which was consistent with the policy. The court agreed.
The insurer further challenged whether BAS even complied with the initial examination request by questioning the knowledge of BAS’s representative about the building at issue. The court rejected this argument, finding that BAS’s choice was reasonable because its representative handled all of the insurance for BAS, had intimate knowledge of the building at issue, was not evasive, and agreed to get back to the insurer concerning topics she did not know about.
Based on the evidentiary record, the court determined it was “impossible” to find that BAS “willfully and without excuse” refused to present its president for an examination. The court explained that, in typical cases, coverage was disclaimed for failure to submit to an examination only after multiple failed attempts to schedule the examination, after the examination was missed or weeks after an unproductive examination was completed, which did not align with BAS’s conduct. In the court’s view, BAS’s conduct did not resemble the behavior of insureds in cases finding lack of cooperation because BAS (i) attended the requested examination, (ii) did not refuse to answer questions, (iii) did not miss the examination or delay it, and (iv) never refused to produce its president. The court also noted that the insurer had identified no Massachusetts cases with similar facts that supported a denial of coverage based on the insured’s lack of cooperation.
BAS is a cautionary tale about how insurers may try to expand the scope of cooperation provisions in insurance policies and exaggerate the insured’s conduct to try to avoid their contractual coverage obligations. BAS honored its cooperation obligations under the policy while also ensuring that the insurer’s requests for additional examinations were supported and necessary. In contrast, the insurer did not help itself by giving deadlines and then denying coverage in the interim without giving the insured a chance to respond by the stated deadline. Nevertheless, the record in the case was clear, based in large part on BAS’s documentation and written responses to the insurer’s requests. Evaluating those rights and obligations at the outset of a claim can help guide communications with insurers and ensure that the company and its executives understand their rights and facilitate the insurer’s prompt and thorough investigation of claims.