Defense Digest

Baiting the Mousetrap:  Effective Recorded Statements and Examinations Under Oath
By Doug Alba, Esq. & Jack S. Senechal, Esq.*

Last year, approximately ten percent of all insurance claims paid nationwide were fraudulent.  Though state and federal bureaus continue to post solid gains in preventative and enforcement measures, carriers cannot rely on the public sector alone to stand guard against this growing problem.  Insurers must make their in-house anti-fraud measures a priority.  The recorded statement and examination under oath (hereinafter "EUO") are the most important investigative tools available to the insurance industry for early detection of fraud or for building a case for denial based on material misrepresentations or non-cooperation.  If used effectively, these devices can lead the potential defrauder to his own demise like a mouse to a trap.

What Is A Recorded Statement Or EUO?

The purpose of the recorded statement, or EUO, is to enable an insurance company to obtain all information relevant and material to a claim to enable it to decide upon its obligations under a policy.  More specifically, a recorded statement is an informal proceeding, either by telephone or personal interview, with a recording device.  The fact that it is recorded must be disclosed to the insured.  The record from the interview will usually be transcribed.  By contrast, an EUO is a formal proceeding during which an insured, while under oath and in the presence of a court reporter, is questioned by a representative of the insurer regarding the presented claim.

The authority to conduct a recorded statement or EUO is dependent on the language in the policy.  Most policies provide an insurer with a right to demand a statement.  All questions considered material and relevant to the claim are within the scope of proper questioning and must be answered by the insured.  Also, courts in most jurisdictions, including Pennsylvania, New Jersey, Delaware, and Florida, have upheld an insurer's right to examine contemporaneously with a statement any financial records, including tax and payroll records, where an insured's financial motive for committing fraud was at issue.

When Can A Recorded Statement Or EUO Be Taken?

There is no specific time that a recorded statement or EUO must be taken.  An insurer may take a statement at any time after a claim for coverage has been made so long as the insurer has a reasonable basis for requesting such.  Insurers in New Jersey have more latitude in requesting a statement from an insured than in most jurisdictions.  Typically, once an insurer terminates benefits, an adversarial relationship comes into existence rendering obsolete any rights of an insurer to a statement.  A request for a statement is then viewed as a discovery tool and must be presented in accordance with the rules of the forum chosen to adjudicate the claim.  However, the New Jersey Appellate Division held that, "Subject to ordinary standards of reasonableness and fairness, an automobile insurer is entitled to an EUO of a person who received or seeks to receive benefits, even if the insurer had previously terminated payments and even if the insured has demanded arbitration."  N.J. Auto. Full Ins. Underwriting Ass'n v. Jallah, 256 N.J.Super. 134, 141 (App. Div. 1992).

Regardless of the jurisdiction a claim is presented in though, strategically, the earlier a statement is taken, the better.  The insurer is at a disadvantage the longer it waits because information can be lost over time, documents can be misplaced, or witness recollections can fade.  Also, an effective statement taken early in the claims process can bring an early resolution to any potential issues.  This can substantially cut costs for the insurer that would otherwise be incurred from protracted investigations and litigation.

A good rule of thumb to follow is to make arrangements to take the statement of an insured at the first sign of one or more "Red Flags" during the claims process.  Some examples of "Red Flags" include:  (1) a claim was reported or treatment began more than two to three weeks after the occurrence; (2) a hit-and-run or phantom vehicle with extremely limited identifying information; (3) multiple injured, unrelated passengers within the same vehicle being treated by the same doctor or represented by the same attorney; and (4) property in deteriorating condition or property that is heavily over-insured for its relative value.

Who Is Subject To A Recorded Statement Or EUO?

The language of a policy determines who is subject to a statement.  The named insured and all those persons who fall within the policy definition of "insured" must submit to a proper request for a recorded statement or EUO.  Employees of the insured, agents of the insured, loss payees, or mortgagees can also be required to submit to a statement.  Where the named insured is a corporate entity, any officer or employee with knowledge of the circumstances of the loss or damages may be compelled to appear.

In cases where an insured assigns his rights under a policy to another party pursuant to an assignment of benefits, the assignee is bound by the assignor's contract terms.  The assignee has no greater rights than the assignor had.  As such, the assignee must comply with the contractual EUO and cooperation clauses precedent to seeking benefits.

How To Conduct A Recorded Statement Or EUO?

The initial step in conducting a recorded statement or EUO is giving proper notice to the insured of the insurer's intention to take a statement.  An insurer's demand for a statement is generally a condition precedent to the insured's obligation to comply.  The demand must designate the time and location of the statement as well as the identity of the individual conducting the statement.  The statement must be scheduled at a mutually convenient time and place for the insured.  If an insured is represented, proper notice must also be sent to the insured's attorney.  Denial of an insured's right to legal representation at a recorded statement or EUO will bar the insurer from denying a claim on the basis of the insured's failure to comply.  However, the insured's attorney has no right to ask questions or offer information during the statement.

The next step in conducting a recorded statement or EUO is to begin the examination with an introductory statement.  An introductory statement should be made on the record identifying whose statement is being taken, the date, time, place, and everyone present.  If the insured has waived his right to have counsel present, this should also be put on the record.  The insured should also be told that all the answers he provides will be reproduced in a booklet form called a transcript.  He should be instructed that if there are any questions he cannot recall or give accurate answers to, he should let the examiner know.  This will prevent the insured from later claiming he was confused.

Once the introductory statement is given, the examiner has considerable discretion in how to proceed with questioning.  Much of the questioning will be dictated by the individual style of the examiner.  However, every examiner should follow some basic guidelines.  First, the examiner should pay careful attention to the insured and his counsel and take note of any non-verbal cues.  One of the goals in taking a statement is assessing the credibility of the insured.  Any non-verbal behavior inconsistent with the testimony of the insured should be weighed into the credibility equation.  The examiner should not be afraid to put any of these non-verbal cues on the record.  For instance, in a case where an insured is claiming a back injury, the examiner should put on the record that the witness came in carrying a backpack, or was wearing high heels, or bent over to pick something up that was dropped on the floor.  If the insured testified that he is unable to sit for extended periods of time, at the end of the examination, the examiner should state on the record that the insured had remained seated during the entire three hours of questioning without getting up or requesting a break.

Second, the examiner should ask open-ended questions.  The principal goal of conducting a recorded statement or EUO is to gather information.  It is frequently a good approach to let the witness ramble on rather than control the witness with narrow, focused questions.  An examiner is more likely to have the witness volunteer useful information if the questions are asked in a broad, friendly, and informal manner.  Another benefit to the open-ended question format is that the examiner will learn what the insured does not know, which in most cases is equally as important as determining what the witness does know.  A response to an open-ended question where the insured describes events and details in his own words will prevent the insured from adding to his testimony at a later trial.  Additionally, there are frequently times when an examiner has information at the time of a statement that the insured is not privy to.  By asking open-ended questions rather than leading questions, the examiner will not telegraph the direction of the investigation.

Next, after an examiner has allowed an insured to define the scope of his knowledge on the facts and issues in his own words through open-ended questions, it is important to then follow up with questions specifically designed to pin the insured down.  A common mistake is to allow a witness to offer ambiguous or qualified answers that do not disclose any detail.  This can be prevented by following up with focused questions that box the witness in on important information.  The objective of every statement is to get the insured to provide meaningful testimony.  If an insured resists any line of meaningful testimony, the examiner must look to be creative in his questioning.

Using The Recorded Statement Or EUO

Following the EUO or recorded statement, all new information and leads should be investigated.  Any further documents helpful to the resolution of the claim should be requested from the insured at that time.  It may be helpful to investigate any innocent explanations provided by the insured to corroborate the testimony as a whole.  Once the investigation is concluded, a coverage decision should be made.  This decision should objectively consider all relevant and material information gathered.  Making a coverage decision in the absence of gathering and considering as much relevant and material information as possible is an invitation to the insured to argue that the insurer had already made a coverage decision in bad faith without having conducted an investigation.  Additionally, an adjuster should take precautions to avoid making any early notes in the file about how a claim should be decided.  These notes and opinions can later be used to argue that the adjuster never intended in good faith to conduct an objective investigation and gather all information necessary before making a coverage decision.

One final note should be made.  Although any representative of an insurance company may conduct a statement, it is usually best to have an attorney do, so for several reasons.  First, the attorney whose job it is to ask questions is often more familiar with and comfortable in such a setting.  The attorney can handle tactics thrown at the examiner, especially when the insured is represented by counsel.  Second, after completing a statement, an attorney can provide a report to the insurance company which should contain:  (1) an assessment of the credibility of the witness; (2) a summary of the facts learned; (3) an analysis of the testimony in terms of the insurer's rights and obligations under the policy; and (4) a statement about any follow-up measures that should be taken.

Conclusion

Like the unsuspecting mouse led to the trap, if used timely and effectively, the recorded statement and examination under oath can be a powerful weapon to thwart fraud or limit an insurer's exposure under any claim.

*Doug and Jack, associates in the Cherry Hill, New Jersey office, can be reached at (856) 414-6000 or dalba@mdwcg.com and jsenechal@mdwcg.com.