Opinion
Civil Action No. 1:01-CV-102-M
March 26, 2003.
MEMORANDUM OPINION AND ORDER
This matter is before the Court on a motion by Plaintiff, Cincinnati Insurance Company, for summary judgment [DN 28], on a motion by Defendants, Andy Taylor and Angelina Taylor, to compel discovery from Plaintiff [DN 21]; on a motion by Defendants to hold Plaintiff's motion for summary judgment in abeyance pending resolution of the motion to compel [DN 32]; and on a motion by Plaintiff to strike Defendants' surreply to the motion to compel [DN 37]. On January 27, 2003, a hearing was held on the motion for summary judgment. The parties submitted additional briefs regarding the issue of prejudice. Fully briefed, these matters are ripe for review.
STANDARD OF REVIEW
In order to grant a motion for summary judgment, the Court must find that the pleadings, together with the depositions, interrogatories and affidavits, establish that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. The moving party bears the initial burden of specifying the basis for its motion and of identifying that portion of the record which demonstrates the absence of a genuine issue of material fact.Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the moving party satisfies this burden, the non-moving party thereafter must produce specific facts demonstrating a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The inquiry under Fed.R.Civ.P. 56(c) is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Id. at 251-52 (1986). See also Street v. J.C. Bradford Co., 886 F.2d 1472, 1479 (6th Cir. 1989).
FACTS
On October 20, 2000, a fire occurred at the home of Andy and Angelina Taylor in Warren County, Kentucky. At the time of the loss, the home and contents were insured by a policy of insurance issued by Cincinnati Insurance Company ("Cincinnati Insurance"). Subsequently, the Taylors made a homeowner's claim with Cincinnati Insurance.
The insurance policy provides in part as follows:
2. Your Duties After Loss. In case of a loss to covered property, you must see that the following are done: . . .
f. as often as we reasonably require: . . .
(2) provide us with records and documents we request and permit us to make copies; and
(3) submit to examination under oath, while not in the presence of any other insured, and sign the same;
g. submit to us, within 60 days after we request, your signed, sworn proof of loss which sets forth, to the best of your knowledge and belief: . . .
(6) an inventory of damaged personal property. . . .
Cincinnati-Taylors Insurance Policy, Section 1 — Conditions. The policy further provides that "[n]o action can be brought unless the policy provisions have been complied with and the action is started within one year after the date of the loss." Section 1 — Conditions, (8). On November 3, 2000, Cincinnati Insurance sent the Taylors a letter advising them of their duties after loss under the policy of insurance. The duties identified in the November 3, 2000, letter were the same conditions set forth in the policy of insurance. Cincinnati Insurance scheduled the examination under oath of Andy and Angelina Taylor for February 12, 2001. Notice of the examination was mailed via certified restricted delivery to the Taylors. Counsel for Defendants contacted the undersigned and requested the examination be rescheduled for February 26, 2001. On February 26, 2001, a partial examination under oath of Andy Taylor was conducted. Both Plaintiff's counsel and Andy Taylor agreed that the examination would be completed at a future time. Angelina Taylor's examination under oath was also postponed to a later date due to a doctor's appointment. Both examinations under oath were rescheduled for April 24, 2001. Both Defendants failed to appear on that date.
In June of 2001, Cincinnati Insurance filed this declaratory judgment action requesting the Court to determine whether or not insurance proceeds are properly payable for the fire loss of Defendants, Andy and Angelina Taylor. The Taylors have filed a counterclaim against Cincinnati Insurance for breach of fiduciary duty, for violation of the implied covenant of good faith and fair dealing, and for violations of both the Kentucky Unfair Claims Settlement Practices Act and the Kentucky Consumer Protection Act. Additionally, the Taylors also filed a third-party complaint against Citifinancial Mortgage Company, the loss payee of the subject insurance policy.
Cincinnati Insurance now files this motion for summary judgment arguing that it is not liable to the Taylors under the insurance contract because the Taylors have failed to submit to an examination under oath. Plaintiff further argues that summary judgment is proper because the insureds have failed to provide their completed proof of loss forms despite being given several blank copies of these forms by Bobby Carver directly and by Plaintiff's counsel in the November 3, 2000 and December 5, 2000 letters. Additionally, Plaintiff states that Mr. Taylor's W-2 statements for 2000 have not been provided nor has Taylor subscribed to his previous partial examination under oath testimony taken on February 26, 2001.
The Taylors contend that summary judgment is not proper. The Taylors argue that they both have given lengthy recorded statements to Cincinnati Insurance. The Taylors insist that they have not filed a proof of loss because the insurer never provided them with the documents to do so. Further, the Taylors argue that they have not willfully refused to participate in the examination under oath. Instead, they contend that a break down in communication with the Taylors' former attorney concerning the date agreed upon caused their failure to appear. Finally, the Taylors argue that the insurance company cannot show that it has been materially prejudiced by any lack of cooperation by the Taylors and the question of prejudice is one for the jury.
However, an affidavit in support of this claim has not been tendered by Defendants.
DISCUSSION
In a diversity action involving an insurance contract, a federal court applies the law of the forum state as set forth by the state's highest court. See Erie R. Co. v. Tompkins, 304 U.S. 64 (1938); Talley v. State Farm Fire and Casualty Co., 223 F.3d 323, 326 (6th Cir. 2000). If the state's highest court has not yet decided an issue of law, federal courts should "`apply what they find to be the state law after giving `proper regard' to relevant rulings of the other courts of the state.'" Lewis v. State Farm Fire and Casualty Co., 238 F.3d 422, 2000 WL 1828711, *2 (6th Cir. December 5, 2000) (quoting Comm'r v. Estate of Bosch, 387 U.S. 456, 465 (1967)).
The terms and provisions of the insurance policy in question require as conditions precedent to any right of recovery against Cincinnati Insurance for the fire loss that the Taylors submit to an examination under oath and provide a proof of loss. Examination under oath provisions are enforceable conditions precedent to recovery under insurance contracts under Kentucky law, see Temple v. State Farm Mut. Ins. Co., 548 S.W.2d 838 (Ky. 1977), as are provisions requiring submission of a proof-of-loss, see American Centennial Ins. Co. v. Wiser, 712 S.W.2d 345, 346 (Ky.App. 1986). It is undisputed that the Taylors did not strictly adhere to the prerequisites for payment pursuant to the terms of the policy. As of the hearing on this motion for summary judgment, the Taylors have not presented themselves to Cincinnati for a complete examination under oath or provided a proof of loss.
The Taylors argue that they have substantially complied with the examination under oath provision by submitting to recorded interviews with Cincinnati Insurance representatives. Kentucky does recognize the doctrine of substantial compliance with regard to duties under insurance contracts. See Westchester Fire Ins. Co. v. Gray, 240 S.W.2d 825, 827 (Ky. 1951). However, recorded interviews or non-sworn interrogations with the insurance company are not equivalent to an examination under oath and thus, do not satisfy the doctrine of substantial compliance. Lewis, 2000 WL 1828711, *4; 13 Lee R. Russ Thomas F. Segalla, Couch on Insurance § 196.30 (3d ed. 1999).
While the Court agrees with Cincinnati Insurance that an examination under oath and submission of a proof of loss are conditions precedent to recovery under the insurance policy, the Court disagrees with its argument that an insured's failure to comply with the examination under oath provision renders the insurance contract void. It is clear that under Kentucky law a showing of prejudice is required before an insurance provider is permitted to defeat liability based on a breach of a notice provision. Jones v. Bituminous Casualty Corp., 821 S.W.2d 798 (Ky. 1991). In Jones, the insurer brought an action for judgment declaring that it had no obligation or duty to appear or defend under a liability policy with regard to injuries sustained by a visitor on the insured's premises because the insured breached the prompt notice clause of the insurance policy. The trial court agreed finding that this breach was fatal to the coverage without regard to whether the liability insurer sustained prejudice from the delay in giving notice. The Kentucky Supreme Court, overruling Kentucky case law to the contrary, reversed the trial court finding that failure to provide prompt notice did not result in forfeiture of coverage in the absence of prejudice. Id. at 803. Furthermore, the Supreme Court held that the insurer has the burden of proving probable prejudice from delay. Id. Recognizing that Jones does not specifically address other condition precedents such as examinations under oath, the question before the Court is whether under Kentucky law a showing of prejudice is required before an insurance provider is permitted to defeat liability for the failure of the insureds to submit to an examination under oath.
Cincinnati Insurance maintains that the law is clear in the Sixth Circuit that an insured's failure to submit to an examination under oath requires automatic forfeiture of the policy without a showing of prejudice to the insurer. Additionally, Cincinnati Insurance argues that the failure to provide notice cases relied upon by Plaintiff are not analogous to cases involving the failure to submit to examinations under oath; and therefore, the Court should not rely on them.
First, with respect to its argument that an insured's failure to submit to an examination under oath requires automatic forfeiture, Cincinnati Insurance cites two cases decided by courts in the Sixth Circuit in support of this argument. In Northern Ins. Co. of New York v. Taghavi, 68 F.3d 475, 1995 WL 600567 (6th Cir. 1995), the Sixth Circuit, interpreting Tennessee case law, held that failure to comply with a request for examination under oath excused the insurer from performance under the insurance contract whether or not prejudice was shown. However, the Tennessee case law relied upon by the Sixth Circuit inTaghavi has since been overturned. See Talley, 223 F.3d at 326-327. In fact, contrary to Cincinnati's argument, the Sixth Circuit has held that under Tennessee law a showing of prejudice is now required in a failure to submit to an examination under oath case. Id. Similarly, the district court's decision in Lewis v. State Farm Fire and Casualty Co., 2000 WL 1828711, while instructive, is not dispositive of this issue. The district court in Lewis did grant summary judgment in favor of the insurance company on the insured's bad faith claim. The district court found that the insurance company had a good faith basis for denying the claim because the insured had not yet complied with the policy provisions. However, Lewis did not involve a declaratory judgment action by the insurance company to completely avoid payment under the policy.
Interestingly, during the course of the lawsuit in Lewis, State Farm paid the Lewises the full extent of the coverage for both their real and personal property. The district court in Lewis never addressed the current issue before this Court.
Second, the Court finds Cincinnati Insurance's argument that failure to provide notice cases are not analogous to cases involving failure to submit to examinations under oath unpersuasive. The purpose of the notice provision in insurance contracts is to afford the insurance provider an opportunity to investigate the occurrence. "[T]he notice requirement helps to protect the carrier against fraudulent and otherwise invalid claims."Winters v. State Farm and Fire Casualty, 35 F. Supp.2d 842, 845 (E.D.Okla. 1999). Similarly, the purpose of the examination under oath provision is to enable the insurance company to investigate the claim and prevent "fraudulent or inflated claim[s]." See Taghavi, 1995 WL 600567, *2. The stated purposes of the two conditions appear to be indistinguishable. In fact, the Sixth Circuit in Taghavi, a case relied upon by Plaintiff, noted that notice provisions and examination under oath provisions are "closely-related principle[s]." Id. at 2. Furthermore, the Sixth Circuit in Talley actually relied upon Tennessee failure to provide notice cases to conclude that Tennessee would require a showing of prejudice in a failure to submit to examination under oath case. See Talley, 223 F.3d at 326-327.
Based upon a review of the purpose of the examination under oath provision and the above case law, the Court believes that it would logically follow, in light of Jones, that a showing of prejudice is required before an insurance provider is permitted to automatically defeat liability where an insured fails to submit a proof of loss or submit to an examination under oath. The Court's interpretation of Kentucky law leads it to believe that the Kentucky Supreme Court, if faced with the issue, would require a showing of prejudice in the instant case before rendering the insurance contract void. See Talley, 223 F.3d at 326-327; Jones, 821 S.W.2d 798.
Under Jones, once it is demonstrated that the insured breached a condition precedent to recovery, the burden of proof is on the insurance company to prove that is has been prejudiced by the breach. Jones, 821 S.W.2d at 803. According to the Supreme Court of Kentucky, the question is "whether it is reasonably probable that the insurance carrier suffered substantial prejudice from the delay in notice. If the evidence on this issue is in conflict, or if reasonable minds could differ as to what the evidence proves in this regard, the issue is one for the trier of fact." Id. Therefore, the question before the Court is whether Cincinnati Insurance has set forth any evidence of prejudice that would indicate a complete forfeiture of coverage results under the facts of this case.
As recognized by the Sixth Circuit, under Tennessee law breach of a condition precedent to recovery establishes a presumption that the insurance company was prejudiced by the delay and the burden then shifts to the insurer to prove that the insurance company was not prejudiced. However, no such presumption exists in Kentucky under Jones. 821 S.W.2d at 803 ("[W]e hold that the burden is on the insurance carrier to prove there was in fact some substantial prejudice caused by the delay. . . ." Id.)
Cincinnati Insurance has failed to submit by affidavit or even argument any specific facts or evidence that it has suffered substantial prejudice as a result of the failure of the Taylors to submit to an examination under oath. As the party moving for summary judgment, Cincinnati Insurance bears the burden of showing the absence of genuine factual disputes with regard to the issue of prejudice. However, Cincinnati Insurance did not even attempt to satisfy this burden. Cincinnati Insurance never recognized that it would need to prove prejudice. Instead, it continued to argue that the Taylors' breach of the condition precedent excused the insurance company from performance under the insurance contract whether or not prejudice is shown. The Court has rejected this argument. Since Cincinnati Insurance has failed to show that there is a lack of genuine issue of material fact as to prejudice, the Plaintiff's motion for summary judgment is denied.
Finally, because it appears from a review of the case law that the Taylors do not currently have a viable bad faith claim against Cincinnati Insurance because of their failure to provide a proof of loss and submit to an examination under oath, see Lewis, 2000 WL 1828711, *4, the Defendants' motion to compel discovery related to their bad faith claim is denied. Similarly, the motion by Plaintiff to strike Defendants' surreply to the motion to compel is denied.
CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED as follows:
1. The motion by Plaintiff, Cincinnati Insurance Company, for summary judgment [DN 28] is denied.
2. The motion by Defendants to hold Plaintiff's motion for summary judgment in abeyance pending resolution of the motion to compel [DN 32] is denied.
3. The motion by Defendants to compel discovery from Plaintiff [DN 21] and the motion by Plaintiff to strike Defendants' surreply to the motion to compel [DN 37] are denied.