Can an Insured Restrict the Insurer’s Right to Use Pre-Litigation IMEs?

It is not uncommon in UM/UIM claim submissions for the attorney representing the insured to refuse a request for an independent medical examination (IME) unless the insurance company will waive its right to any additional IMEs in the future.

This issue recently came before the Florida Court of Appeals in State Farm Mut. Auto. Ins. Co. v. Curran, 83 So.3d 793 (Fla. App. 5th Dist. 2011), rehearing denied (2012). The Florida Supreme Court granted review on the case and held oral argument on October 2, 2012. Irrespective of what the Florida Supreme Court decides, the Florida Court of Appeals split on the issue and the collective discussion of the Court through the majority and dissent provides a good overview of the issue.

The Florida Court of Appeal in Curran held that the insured breached the insurance contract by failing to attend the requested IMEs and by filing suit before complying with the IME provision of the contract. The principal reason for the refusal to proceed with the IME was the insured’s insistence upon the insurance company waiving its rights under the policy to future IMEs and waiving the right under the state’s rules of civil procedure if litigation was begun to having an IME.

The Court found that the insured breached the insurance contract by imposing that condition but because the insurance company was not prejudiced by the breach, there was no forfeiture of coverage.

In Curran, the insured presented a UIM claim for the $100,000 policy limits of the State Farm policy. The injuries sustained in the accident were significant. State Farm requested an IME under the policy on several occasions. In response, the insured conditioned attendance at the proposed IME upon the execution of a stipulation by the insurance company that the scheduled IME would be the only IME the insured was required to undergo and that the insurance company would waive further examinations once the matter was in litigation.

State Farm was not prepared to offer its policy limits until the IME was completed. The insured filed suit against State Farm for not timely resolving the claim through payment of its policy limits. In the trial court the parties filed cross-motions for summary judgment. The trial court found that it was “not unreasonable” for State Farm to request an IME and the Court expressed uncertainty about the reasonableness of the insured’s requested waiver of future IMEs. The case proceeded to trial which culminated in a jury award greatly in excess of State Farm’s $100,000 policy limit.

On appeal, the Court found that the trial court had incorrectly focused the analysis on the reasonableness of the insured’s proposed condition rather than the reasonableness of State Farm’s actions. Because the insured did not act reasonably in insisting that State Farm abandon a contractual right as a precondition to an examination, the Court of Appeals concluded that the insured had breached the contract.

Under the terms of the policy the insured was obligated to attend an IME upon request. The insured’s “condition” that State Farm waive any further examinations was found to be unreasonable because the insurance contract expressly permitted future examinations under reasonable circumstances. Therefore it was not necessary that State Farm agree to any proposed condition proffered by the insured (even if reasonable from the standpoint of the insured), only that State Farm act reasonably. The Court found that the insured had no contractual right to unilaterally change the contract terms under the guise of proffered conditions.

However, the Court observed that the finding of breach did not end the analysis. Although the policy provided that there was no right of action against the insurer until all policy terms had been met, there was no language within the policy that imposed a forfeiture of benefits in the event of a breach of the duty to submit to an IME.

In the absence of policy language imposing a penalty or forfeiture in the event of noncompliance the Court found that the remedy for noncompliance needed to be proportionate to the harm that could result from the breach just as would exist in any other contract dispute. The Court noted that State Farm treated the breach in its reservation of rights letter as a breach of the duty to cooperate. Whether the IME clause in the policy was more analogous to a claims notice provision or a cooperation clause beared only on who had the burden on the prejudiced issue and not the materiality of a resulting prejudice analysis according to the Court.

The majority opinion found that the IME provision in the policy was a “condition subsequent,” and that the insurer had the burden of proof on the question of prejudice when the breach involved a condition subsequent.

Acknowledging that a breach of a condition subsequent in an insurance policy could result in a suspension or termination of the contract, depending upon the nature of the breach and the language of the contract, the Court found that the contract was silent regarding the non-occurrence of any of the insured’s obligations when presenting a claim. In a different section of the policy, the language of the policy precluded any action against the insurer “until” the insured complied with the terms of the contract.

The Court found that the term “until” was consistent with an interpretation that a breach of the IME provision only suspended performance by the insurer and could be cured by the insured. When the insurance company made a request for an IME, the request invoked the “until” language and the combination of the IME clause and the service clause established a conditioned precedent to maintaining an action which, if raised as an issue, could be cured under most circumstances.

The majority then found that although the insured had prematurely filed suit in contravention to the contract, State Farm never raised that argument. Had State Farm raised that argument, the trial court could have ordered the action abated, necessitating compliance with the IME clause before either party was burdened with the expense of further litigation. However, State Farm took a position that a breach of the policy had occurred and that performance under the contract was excused. The reservation of rights letter issued by State Farm asserted a complete defense and denial of coverage. The reservation of rights letter did not address the premature nature of the suit. The majority of the court placed the burden of proving prejudice on the insurance company not the insured.

In a dissenting opinion, Judge Sawaya presented a cogent analysis as to why the insured should bear the burden of proving a lack of prejudice from its breach of the IME contract provision. The dissent found that IMEs, like examinations under oath, play an important part in reducing the incidence of fraud and meritless claims. When an insurance company is deprived of its right under the examination provisions of the policy to properly investigate a claim, the insurer is prejudiced by the denial of a meaningful opportunity to settle meritorious claims prior to facing suit and by its potential exposure to a bad faith action. The prejudice to the insurance company is the deprivation of its rights under the policy including the right to properly investigate the claim and therefore no further showing of prejudice was needed after the material breach of the examination provision has been established. The dissent concluded that a breach of the IME clause was a breach of a condition precedent to recovery, not the breach of a cooperation clause that required a separate showing of prejudice. The dissent also noted that the majority of courts in other jurisdictions had adopted the view that a willful breach of an examination provision is a material breach that bars recovery under the policy.

The dissent did an exhaustive review of the case law in the country on the issue of violations of examination clauses in policies as being violations of a condition precedent to recovery. After this review, the Court found that no further showing of prejudice was required by State Farm because prejudice to State Farm was established by the fact of the willful breach. The breach is material because the insurer loses its right to properly investigate and evaluate the claim and settle that claim prior to suit to avoid the expense, time, and effort of litigation.

The takeaway from the Curran case is that insurance companies, faced with recalcitrant insureds who refuse requests for IMEs, should characterize the insureds’ conduct as a breach of a condition precedent to the policy. Communication should be initiated with the insured advising the insured of the important need for an IME as a necessary tool in the investigation of the claim and that failure to permit the IME to take place impairs the investigation. Not every claim requires an IME to be performed. However, where the decision to convene an IME has been made by the insurance company, it is because the insurance company deems the IME to be beneficial to the investigative process. The insured should not be permitted to reject the insurance company’s request for an IME while subsequently suing the insurance company for bad faith because of a failure to investigate. When faced with the issue, a close reading of the Curran case will be helpful to the claim representative in identifying with great analytic depth the argument and case law supporting the insurance company’s right to convene an IME without the IME being conditioned upon a waiver of future reasonable IMEs that may be necessary.