Why a Policyholder Must Fulfill all Conditions before Filing Suit: Failure to Submit to EUO Abates Lawsuit.

• Author: Zalma, Barry

Almost every first party policy contains a provision requiring the insured to produce relevant documents and submit to an examination under oath (EUO) and to do so before filing suit. Similar conditions have been enforced since the early Nineteenth Century.

In AXO Staff Leasing, LLC v. Zurich American Insurance Company, McCeeadie & McCreadie, Inc., Lassiter Ware Insurance, Case No. A-19-CV00002-LY, United States District Court Western District of Texas Austin Division (September 16, 2019) Zurich sought to abate the lawsuit and compel AXO's president to appear for and testify at EUO.

THE INSURANCE DISPUTE

In an insurance coverage dispute between insurer Zurich American Insurance Company ("Zurich") and named insured AXO Staff Leasing, LLC ("AXO"). AXO is a Texas limited liability company that was in the business of providing "temporary and permanent staffing for companies, processing payroll, withholding income taxes, and managing other similar human resources functions as requested" from 2010 through 2017.

FACTS

The President of AXO, was notified by the Internal Revenue Service Criminal Investigation Division that AXO's Chief Financial Officer, John Herzer, was under criminal investigation. The IRS claimed that AXO had failed to file quarterly tax returns and pay payroll taxes from 2010 to 2017. AXO alleged in its suit that after the President, Marchant, confronted Herzer regarding the IRS criminal investigation, Herzer confessed that "instead of paying over the taxes owed by AXO, he had embezzled the money for personal use." AXO promptly terminated Herzer.

AXO notified Zurich of the embezzlement and filed a Proof of Loss with Zurich, alleging that AXO "was the victim of its Chief Financial Officer's 'dishonest acts,' which resulted in at least $3.6 million in losses through embezzlement, and has become liable for at least $4.9 million in penalties and interest for the CFO's willful non-payment of payroll taxes (and the underlying tax, at least $9.7 million, remains unpaid)."

Zurich reserved its rights in writing summarizing the terms of the Policy and raising questions as to whether Herzer was an "Employee" as defined in the Policy. Zurich noted that the Policy "expressly provides that "Employee" does not include: "(i) any broker, factor, commission merchant, consignee, contractor or other agent or representative of the same general character, or (ii) any natural person who is authorized by you to sign your checks or make withdrawals from...