Expert Commentary

Can an Insurer Obtain Insured’s Tax Returns?

Whenever an issue about insurance coverage can be resolved by presentation of the insured’s tax returns, the insured would claim that tax returns are privileged and not subject to discovery by the insurer. That tax returns are private is axiomatic. However, when an insured sues an insurer seeking insurance coverage that can be resolved by information contained in a tax return, the privilege was either waived by the filing of suit or are so essential that they must be produced to prove or disprove the issue.

 


Claims Practices
August 2015

Farm Bureau Property and Casualty Insurance Company ("Defendant") moved the district court to compel production of certain tax records in Awadh v. Farm Bureau Mut. Ins. Co., 2015 WL 4771733, 2015 U.S. Dist. LEXIS 110200 (D. Utah Aug. 11, 2015).

Background

The underlying action arises from an insurance claim for a stolen skid loader. Naser Awadh and Stacy Awadh ("Plaintiffs") submitted a claim to Defendant for the value of the skid loader. Defendant determined that the skid loader was property of the Plaintiffs’ business, and thus subject to a $2,500 business property coverage limitation.

Plaintiffs, on the other hand, claimed that the skid loader was personal property purchased in 2004, and that they were entitled to insurance coverage for the full value of the skid loader.

Defendant served requests for production of documents on Plaintiffs, including requests for business tax returns and schedules for the years 2004 through 2011, the period from acquisition of the skid loader until Plaintiffs submitted their insurance claim. Defendant believed that these records were relevant because they showed whether Plaintiffs treated the skid loader as a personal or business asset in the tax records; whether Plaintiffs claimed the stolen skid loader as a business loss; and Plaintiffs’ stated value of the asset.

Plaintiffs objected to the request, but eventually produced just eight pages of tax documents relating to a few of the years in question. Plaintiffs did not produce any schedules for 2007, 2009, and 2010 and did not produce any records at all for years 2004, 2005, 2006, 2008, or 2011. Plaintiffs claimed that they did not have any additional tax records for the years in question. Defendant contended that if Plaintiffs did not have the records, the records could be obtained from the Internal Revenue Service (IRS), provided Plaintiffs provided the appropriate authorization. The tax records were obviously important since, if they the skid loader was depreciated as an asset in a business tax return, the $2,500 limit would apply. If not, it might be evident that the skid loader was personal property without a small limit.

Defendant made a good-faith attempt to obtain production of the tax records from Plaintiffs without the court’s involvement, but was forced to file a motion to compel production after the parties were unable to reach agreement.

Analysis

The court ruled that the Defendant’s request for production of the tax documents was relevant and proper. Plaintiffs’ tax records appeared highly relevant to claims and defenses in the case, and the requested documents appeared likely to be admissible at trial or “reasonably calculated to lead to the discovery of admissible evidence.” Fed.R.Civ.P. 26(b)(1). The crux of the underlying action appeared to be (1) whether the skid loader was personal or business property, and thus subject to their respective coverage limits. Further, Defendant controlled the documents in that Defendant either had possession of the documents or had the ability to authorize release of the documents by the IRS.

The court ordered Plaintiffs to produce all personal and/or business tax returns and schedules for the years 2004 through 2011 in their possession, custody, or control, including copies of tax returns and schedules held by Plaintiffs’ accountants, attorneys, or other professionals. Further, the court held that Plaintiffs’ production should include an affidavit verifying whether the documents produced include full copies of all returns and schedules for the requested years. If the affidavit stated that they could not produce full copies of all returns and schedules for the years in question, Defendant was instructed to prepare for Plaintiffs’ signatures any paperwork required by the IRS for release of the tax records. Plaintiffs were to sign and return the authorization paperwork within 5 days of receipt of the authorization paperwork from Defendant. If necessary, Plaintiffs were to cooperate with Defendant and perform any other actions reasonably necessary for Defendant to be able to obtain the tax records from the IRS.

Conclusion

Tax returns are presumably reliable documents since they are submitted to the IRS under oath, and false statements on tax returns are subject to both civil and criminal penalties. When, as here, a tax return can resolve the key issue in the case, the only reason the Plaintiffs seem to be attempting to conceal the tax returns is because they prove the skid loader was business property. When the documents are produced, the issue will be resolved, and the case will be subject to summary judgment by the plaintiff or the defendant.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More