Key point. Most liability insurance policies contain a provision requiring the insured to cooperate with the insurer’s investigation of claims. Such a provision is not necessarily violated by a church’s refusal to turn over personal information having little, if any, relevance to the insurer’s investigation.

A federal court in Indiana ruled that a church did not necessarily breach a requirement in its liability insurance policy that it cooperate with the insurance company in its investigation of claims by refusing to respond to the insurance company’s demand to inspect personal records including the pastor’s tax returns. A church’s pastor and his wife arrived at church on a weekday morning and immediately discovered that there had been a fire on the premises. The local fire department responded to the pastor’s 911 call. Later that morning the pastor contacted the church’s insurance agent to report the fire and make an insurance claim.

The insurance company retained a certified fire investigator to investigate the cause and origin of the fire. The investigator determined that the fire had been intentionally set in the kitchen area of the church building using an accelerant. The fire department’s investigator concurred with this conclusion following his investigation. The insurance company took recorded statements of the pastor and his wife, the couple’s son-in-law (who was the treasurer and a trustee of the church), and the other church trustees. At some point the insurance company began to suspect that the pastor was responsible for the fire and that his motive was to improve the financial situation of the church and himself.

The insurance company, as part of its continuing investigation, asked the pastor to turn over several church corporate and financial records, including contribution records. It also asked the pastor to turn over various personal records, including his W-2 forms and federal income tax returns. The insurance company insisted that these records were needed for it to confirm its theory that the pastor intentionally set the fire or directed the fire to be set and that he was motivated to do so by the financial situation of the church and his own personal financial situation. The pastor refused to turn over his personal records, and some of the records pertaining to the church. As a result, the insurance company determined that it was not obligated to pay anything under the church’s insurance policy.

The insurance company insisted that these records were needed for it to confirm its theory that the pastor intentionally set the fire or directed the fire to be set and that he was motivated to do so by the financial situation of the church and his own personal financial situation.
The church sued the insurance company for breach of the insurance contract and bad faith. The insurance company asked the court to dismiss the lawsuit, citing the following provisions in the insurance policy:

Duties in the Event of Loss. You must see that the following are done in the event of loss to covered property … if requested, permit us to question you under oath at such times as may be reasonably required about any matter relating to this insurance or your claim, including your books and records … cooperate with us in the investigation or settlement of the claim.

No one may bring legal action against us under this insurance unless … there has been full compliance with all of the terms of this insurance.

breach of contract

The court denied the insurance company’s request to dismiss the church’s breach of contract claim. It agreed that the church, as the insured, was obligated under the policy to turn over certain records to assist the insurance company in the investigation of claims. But, it concluded that contribution records and the pastor’s tax returns and W-2 forms were personal records and not “church records,” and as a result, neither the pastor nor the church violated the insurance policy by not producing them.

The court also pointed out that in order for the insurance company to prevail on the basis of the church’s failure to “cooperate” in the investigation of the claim, it had to demonstrate that “it was prejudiced by [the church’s] failure to cooperate, which it does not attempt to do.”

The church turned over all of its financial records requested by the insurance company except for contribution records. The court concluded that this did not justify the insurance company in denying coverage under the policy. It pointed out that “only a material breach by the church would affect [the insurance company’s] obligations under the policy,” and it defined a material breach as one “that goes to the heart of the contract.” The court noted that the church had substantially complied with all of the insurance company’s demand for records, but “balked at providing [contribution records] on the ground that the information was not relevant to the investigation and to produce it would violate the privacy of its contributing members.”

bad faith

The court also refused the request to dismiss the church’s “bad faith” claim against the insurance company. It noted that to prevail on its bad faith claim, the church would have to demonstrate that the insurance company denied its claim “without a rational, principled basis for doing so” and acted with “a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or ill will.” The court conceded that this was a heavy burden, but it concluded that there was enough evidence supporting the church’s bad faith claim to deny the insurance company’s motion to dismiss this claim. 2010 WL 2010464 (S.D. Ind. 2010).

What This Means For Churches:

Churches should be aware of what their insurance policy requires. Does your church have a provision requiring the insured to cooperate with the insurer’s investigation of claims? Finding out the answer to this question and understanding what kind of information is relevant to an insurer’s investigation will help your church comply whenever necessary. If ever you feel uncomfortable with your insurance company’s requests, consult a lawyer before proceeding.

This Recent Development first appeared in Church Law and Tax Report, March/April 2012.