Court Conflict on EUOs for Lenders
If the policy doesn’t explicitly say that a mortgagee must submit to an examination under oath, an insurer might not have the right to demand one…depending on the court that hears the case.
By Rick Hammond
Most property insurance policies provide the insurer with the right to demand an examination under oath (EUO) of its insured as well as the right to demand records and documents in support of a presented claim. In that regard, the typical EUO provision provides:
YOUR DUTIES AFTER LOSS. After a loss to which this insurance may apply you shall see that the following duties are performed:
[A]s often as we reasonably require, submit to and subscribe, while not in the presence of any other insured..., examinations under oath; and produce employees, members of the insured's household or others for examination under oath to the extent it is within the insured's power to do so...
An issue that periodically arises is whether an insurer has the right to demand a mortgagee's EUO. Courts, even within one state, have issued conflicting decisions. The following cases highlight some of the contrasting views on this subject.
Looking to Policy Language
In Thomas W. Brien v. Kullman Industries, Inc., the insurer issued property insurance coverage to Thanos 79 Realty Corp. dba Waterfall Restaurant. Kullman, a named mortgagee on the policies, claimed that, shortly after the policies were issued, during a showing of the premises to prospective buyers, it was discovered that the property had sustained extensive damage.
Kullman reported the loss to its insurer, and the insurer demanded that Kullman submit a proof of loss. It also gave notice that it would require Kullman to submit to an examination under oath after receiving the proof of loss. Kullman's attorney questioned why, as a mortgagee, Kullman would need to appear for an examination under oath:
[I]t appears that there is no provision in the insurance contract requiring the mortgagee to appear for an Examination Under Oath. If you can direct me to the policy language that authorizes the insurer to examine the mortgagee, I will be in a position to properly advise my client as to their obligations under the insurance contract.
The insurers filed a declaratory judgment action seeking a declaration of non-coverage for Kullman's claims based upon several policy breaches, including Kullman's "refus[al] to submit to an Examination Under Oath at the time and place designated by the representatives of the insurers pursuant to the policies of insurance." The court held, however, that under New York law a mortgagee is not obligated to comply with provisions of an insurance policy requiring the insured to appear for an examination under oath.
Benefits Suggest Responsibility
Conversely, in Mortgagee Affiliates Corp., v. Commercial Union Insurance Company of New York, the New York appellate court was presented with a different case concerning one narrow issue. The court looked at whether this mortgagee's suit against the insurer of certain mortgaged property should be dismissed because of the mortgagee's refusal to comply with the policy provision requiring an insured to "submit to examinations under oath and produce for examination all books of account, bills, invoices and other vouchers."
The court first cited the majority opinion in Syracuse Sav. Bank v. Yorkshire Ins. Co., which noted that, in New York and in most other states, a mortgagee clause creates an independent insurance of the mortgagee's interest just as if it had received a separate policy from the company. On that basis, the Syracuse Bank v. Yorkshire Ins. court, though divided 4 to 3, held that the mortgagee was entitled to notice of and opportunity to participate in any appraisal to fix the value of the loss, notwithstanding the fact that no such right was given in the mortgagee clause and appeared only in the standard policy provisions.
Taking that concept one step further, the court reasoned the following regarding the insurer's right to demand the mortgagee's examination under oath:
[T]he insured mortgagee is clothed with responsibilities as well as benefits. He should, when he is the claimant and beneficiary, meet the minimal safeguards contained in the standard fire insurance policy, designed to protect the insurer from fraudulent and erroneous loss payments. The requirement for examination under oath and disclosure of pertinent records is such a safeguard and it applies to a mortgagee.
This case was later overruled by U.S. Fidelity v. Annunziata. However, at least one other case has ruled in favor of the insurer's right to examine the mortgagee under oath (see Doyle Decker v. Government Employees Ins. Co., 511 F. Supp. 563; 1981 U.S. Dist. LEXIS 11683).
This inconsistency in court rulings indicates an underlying problem for insurers—the lack of explicit language in policies of insurance regarding the rights and responsibilities of mortgagees who hold a stake in insured properties. Since an examination of a lender under oath represents a potentially necessary component in the adjustment or adjudication of property claims, the language in the policy should reflect the insurer's expectation and requirement of the mortgagee's participation. Courts look first to the specific language of the insurance contract. If there is no explicit requirement in the mortgagee clause, the court is left with a broad map of decisions with which to chart its course.
[Editor's Note: A follow-up article on the problems associated with loose policy langauge and mortgagees will appear in the upcoming print issue of Claims Advisor.]