INSURANCE ADVOCATE - March 1995

INSURANCE LAW REVIEW

Federal Appeals Court Rules Claim Repudiation by Insurer Waived Required Proof of Loss Submission

Failure of an insured claimant to file proofs of loss even after the insurer makes a written request for such proofs, is, under New York Law, a material breach of the insurance contract. It precludes recovery by the insured of any loss.

However, this failure to submit the proofs may be excused, where the insurer repudiates the claim "before" it demands sworn proofs of loss.

That was the central issue in a suit in federal court by a retail store chain against the Insurance Company of North America, to recover the loss suffered as the result of a burglary in one of its stores.

Varda, Inc. operated a chain of clothing and shoe stores and was insured against losses for burglary under a policy issued by INA. One of the stores was burglarized on October 23, 1984 and Varda filed a notice of claim. INA began its investigation of the loss and received from Varda "an extensive post-loss inventory with its pre-loss records," according to the decision handed down January 13, in United States Court of Appeals for the Second Circuit. The policy included a provision to submit sworn proofs of loss after filing a claim.

Almost a year after the burglary, with no apparent effort by INA to settle the claim, Varda brought suit in the United States District Court for the Southern District of New York.

INA filed an answer to the suit asserting as one of its defenses that Varda failed to submit sworn proofs of loss. The case was tried before District Court Judge Lawrence M. McKenna and the jury brought in a verdict of $110,833.03. The court added $83,478.92 in pre-judgment interest and this became an issue on appeal because INA's contention that the policy precluded the award of pre-judgement interest. The court ultimately ruled against INA on the interest question.

In its appeal from the jury verdict and the award of interest, INA argued that Judge McKenna erroneously charged the jury about repudiation and its effect on non-compliance with the policy provision about proofs of loss. INA said there was no repudiation.

Judge McKenna's charge dealt specifically with the question of repudiation. He said: "If you find by a preponderance of the evidence that the defendant (INA), before demanding that plaintiff submit a sworn proof of loss---had formed a definitive intention not to pay plaintiff's (Varda's) claim in any event, then you will find that plaintiff was excused from submitting a sworn proof of loss."

The Fraud Allegation

Another aspect of the INA's defense was that the claim was fraudulent. The district judge had refused to permit that issue to go to the jury and the appeals court sustained that finding, indicating that there was no evidence of fraud.

the claim.

The unanimous Court of Appeals held that under the circumstances there was adequate evidence of repudiation to support the jury's verdict.

The appeals court observed in its decision that although INA pored through Varda's books, it made no independent effort to determine whether any of the supposedly stolen inventory remained in the store. Moreover said the court, INA's claims adjuster, Robert Dwyer, informed Varda that it had no provable loss. He also told INA that the claim was "ludicrous." "Nevertheless," the appeals court decision states: "even after almost a year, INA still had not told Varda whether it would pay the claim."

It was not until almost one year after the loss and just before the statutory limitation to sue was reached that Varda brought the action and INA requested submission of proofs of loss. Varda had 60 days after that INA request in which to reply. At the time it asked for the proofs, INA also asked Varda's principal, Ezra Omri, to appear for an examination under oath (EUO). He did appear but did not bring along proofs of loss nor did he return a signed copy of the transcript of the EUO that INA had sent him.

In its answer to the complaint in the Varda suit, INA cited the failure to submit the proofs of loss, fraud, and failure to sign and return the EUO transcripts. INA moved for summary judgment in the district court.

During the trial, counsel for Varda, Dennis T. D'Antonio of the New York law firm of Weg & Myers, P.C., cross examined INA Adjuster Dwyer concentrating on what he had told the insurers about the claim and his opinion of its validity.

The thrust of the examination was to support the plaintiff's premise that INA had repudiated the policy thereby excusing Varda from the requirement for submitting sworn proofs of loss.

To D'Antonio's question as to whether Dwyer offered his opinion to INA that the claim should not be paid because he thought it "ludicrous." He said he did not believe the facts about the burglary or that there was a burglary.

In the succeeding questions and answers Mr. Dwyer acknowledged that not every aspect of the burglary, which involved cartons of merchandise, was researched. That included the site of the store and its surroundings. D'Antonio directed his inquiry to undermining Dwyer's rejection of the claims as "ludicrous."

The appeals court, in affirming the decision of Judge McKenna not to permit the INA defense of fraud to go to the jury, said that there was not evidence of an intent to defraud, characterizing that as "a necessary element of defense," language used in a precedent decision in 1984. The appeals court said that "no reasonable jury could find fraud on so sparse a record, and the court properly took that issue away from the jury.

On the question of Varda's failure to return the signed transcripts of the EUO, the court said it could find no such obligation in the insurance policy. The policy in the Varda case, the court said, required the insured, upon request to "submit to an examination under oath and sign a copy of the examination." However, the decision notes that the policy is silent or ambiguous, at best, about whether Varda had to "return" any EUO transcript it signed. The court emphasized the word return. According to the appeals court, the policy "certainly does not expressly require Varda to return the transcript."

The court noted that there is little value in a signed transcript that is not returned, but added that "the policy's fuzzy language---coupled with INA's failure to demand that Varda return the signed transcript and Varda's cooperation during earlier parts of INA's investigation, persuades us that Varda's failure to return the signed transcript did not warrant the dramatic remedy of dismissing Varda's suit."

The case was tried by Mr. D'Antonio of Weg & Myers, P.C. representing the plaintiff, Varda, Inc., with Debra Ruth Wolin of the firm, assisting on the appeal.

INA was represented by Robert M. Sullivan, New York, NY., with Ira J. Greenhill, P.C., of counsel.