The Insured Must Produce Tax Returns If the Insurer Demands Production

The Need for an Insured to Cooperate with Insurer's Investigation as a Condition Precedent

© 2025, Barry Zalma, Esq., CFE

Every first party property policy contains a provision requiring an insured to produce all relevant documents required to be produced by the Insurer and to appear for examination under oath [California Insurance Code § 2071; NY Standard Fire Insurance policy]. The language of the California and New York Standard Fire Insurance policy, mandated to be in all policies of fire insurance issued, provides:

The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described, and submit to examinations under oath by any person named by this company, and subscribe the same; and, as often as may be reasonably required, shall produce for examination all books of account, bills, invoices and other vouchers, or certified copies thereof if originals be lost, at such reasonable time and place as may be designated by this company or its representative, and shall permit extracts and copies thereof to be made. [California Insurance Code § 2071]

The state of California, concerned about what the Legislature believed to be abuse of insureds by demands for production of documents and and/or an examination under oath, amended the statute to add:

The insured, as often as may be reasonably required and subject to the provisions of Section 2071.1, shall exhibit to any person designated by this company all that remains of any property herein described, and submit to examinations under oath by any person named by this company, and subscribe the same; and, as often as may be reasonably required, shall produce for examinations all books of account, bills, invoices, and other vouchers, or certified copies thereof if the originals be lost, at any reasonable time and place as may be designated by this company or its representative, and shall permit extracts and copies thereof to be made. The insurer shall inform the insured that tax returns are privileged against disclosure under applicable law but may be necessary to process or determine the claim. (emphasis added.)

In addition, the Legislature added 2071.1 that provides:

(a) This section applies to an examination of an insured under oath pursuant to Section 2071 labeled “Requirements in case loss occurs” and other relevant provisions of that section, and to any policy that insures property and contains a provision for examining an insured under oath, when the policy is originated or renewed on and after January 1, 2002.

The following are among the rights of each insured who is requested to submit to an examination under oath:

1. An insurer that determines that it will conduct an examination under oath of an insured shall notify the insured of that determination and shall include a copy of this section in the notification.

2. An insurer may conduct an examination under oath only to obtain information that is relevant and reasonably necessary to process or investigate the claim.

3. An examination under oath may only be conducted upon reasonable notice, at a reasonably convenient place and for a reasonable length of time.

4. The insured may be represented by counsel and may record the examination proceedings in their entirety.

5. The insurer shall notify the insured that, upon request and free of charge, it will provide the insured with a copy of the transcript of the proceedings and an audio or video recording of the proceedings, if one exists. Where an insured requests a copy of the transcript, the recording, or both, of the examination under oath, the insurer shall provide it within 10 business days of receipt by the insurer or its counsel of the transcript, the recording, or both. An insured may make sworn corrections to the transcript, so it accurately reflects the testimony under oath.

6. In an examination under oath, an insured may assert any objection that can be made in a deposition under state or federal law. However, if as a result of asserting an objection, an insured fails to provide an answer to a material question, and that failure prevents the insurer from being able to determine the extent of loss and validity of the claim, the rights of the insured under the contract may be affected.

7. An insured who submits a fraudulent claim may be subject to all criminal and civil penalties applicable under law. (California Insurance Code Section 2071.1)

Counsel for insureds will often claim that the tax returns are privileged and refuse to produce them after a demand from an insurer. In doing so they ignore the clear statement of public policy made when the insurance policy was adopted by the Legislatures of the various states that all “books of account” are produced when an insurer requires production. No reasonable person can claim that a tax return filed with the U.S. Government is anything other than a “book of account,” “bill,” “invoice,” or “other voucher.” In addition, the statute giving special rights to those insured who are required to produce tax returns explains to the insured that: “The insurer shall inform the insured that tax returns are privileged against disclosure under applicable law but may be necessary to process or determine the claim.” The “privilege” may exist from requirements of state or other governmental agencies. It does not avoid the contractual requirements.

The California statute makes it clear that refusal to produce tax returns under a claim of privilege is fraught with hazard. The Insureds who follow the misguided advice of counsel to refuse to produce tax returns to the insurer may find that the insured has forfeited the right to indemnity under the policy because the production of documents is a material condition of the policy of insurance. An insurer may, faced with such a breach of contract, deny any claim presented if the documents the Insured refuses to produce are even colorably relevant to its investigation.

The attorney for the Insured and Insurance Claims Professional (attorney, adjuster or investigator) should, if in California, or any other state advise the insured in accordance with the California statute that the tax returns are necessary to process or determine the claim. Refusal to produce tax returns and other financial information can put the insured at peril of losing the benefits promised by the insurance contract for failure to fulfill a material condition of the policy.

While parties may be compelled to produce tax returns only if the returns are relevant and the information contained in them is not "readily attainable" elsewhere, returns "do not enjoy an absolute privilege from discovery." [Sneller v. City of Bainbridge Island, 606 F.3d 636 (9th Cir. 2010) (citing Premium Serv. Corp. v. Sperry & Hutchinson Co., 511 F.2d 225, 229 (9th Cir. 1975) & Allstate Ins. Co. v. Lighthouse Law P.S. Inc. (W.D. Wash. 2017)]

Although there is no absolute privilege that protects tax returns and related documents from discovery, "due to the sensitive information contained therein and the public interest to encourage the filing by taxpayers of complete and accurate returns, their production should not be routinely required." See Mitsui & Co. v. Puerto Rico Water Resources Authority, 79 F.R.D. 72, 80 (D.P.R. 1978). A court may order production of tax returns where they are relevant and the information contained in the returns is not readily available from another source. [4 MVR, LLC v. Warren W. Hill Constr. Co., Civil Action No. 12-cv-10674-DJC (D. Mass. Jun 26, 2015)]

The Ohio Court of Appeal found that:

when cooperation is a policy condition and an insured fails to comply, the insurer may be relieved of further obligation on the claim.

This court has held that where, as here, the insurance company raises arson as an affirmative defense to liability, there are strong public policy considerations supporting the admission of evidence of the insured's financial position to show a possible motive for the incendiarism. Dabash v. Royal Indemn. Co. (July 15, 1982), Cuyahoga App. No. 43967, unreported, 1982 WL 2472. ... The insured's financial condition is relevant to a determination of possible motive for incendiarism. ...

We hold that the insured's refusal to produce his income tax returns for the year before he purchased the Oldsmobile was a substantial and material breach of his contractual duty to cooperate, which clearly prejudiced the insurer's investigation into possible motives for arson. ... Summary judgment was proper because the insured's breach of the cooperation clause relieved the insurer of further obligation with respect to his claim as a matter of law. [Gabor v. State Farm Mut. Auto. Ins. Co., 583 N.E.2d 1041, 66 Ohio App.3d 141 (Ohio App. 1990) [

To constitute a defense to liability, an insured's lack of cooperation must result in material and substantial prejudice to the insurance company. Prejudice has been described as actions which seriously impair the insurer's ability to investigate a claim. [Weller v. Farris, 125 Ohio App.3d 270, 276, 708 N.E.2d 271 (1998).] Failure to cooperate by refusing to affirm the contents of a tax return is sufficient to defeat an insurance claim. [Tran v. Fed. Ins. Co., Case No. 17-3921 (6th Cir. Apr 18, 2018) ]

In Savage v. Am. Family Ins. Co., 897 N.E.2d 195, 178 Ohio App.3d 154, 2008 Ohio 4460 (Ohio App. 2008) the Ohio Court of Appeals concluded that the insurer’s requested tax returns were relevant to assessing the Savages' financial condition and to clarify the large discrepancy between the personal property in their possession at the time of bankruptcy versus their personal property at the time of the burglary.

When State Farm argued that it was prejudiced by its inability to complete its investigation of the facts underlying the Pilgrims’ claim and the risk of litigation if it denied the claim. Without access to tax returns and other financial documents, State Farm could not evaluate the validity of the Pilgrims’ claim. It could not decide whether the claim was covered, much less prepare a defense to the inevitable suit by the Pilgrims if it denied coverage. It could not satisfy its statutory duty to ferret out fraud. The Pilgrims’ refusal to disclose relevant financial information prejudiced State Farm as a matter of law. [Pilgrim v. State Farm Fire & Casualty Insurance, 89 Wash. App. 712 (Wash. App. 1997)]

In Pedone v. State Farm Fire & Cas. Co., 95 F.3d 1158 (9th Cir. 1996) the Pedones materially breached the obligation by, among other ways, refusing to grant State Farm access to bank records which would show their financial condition.

In Berneking v. Mass. Mut. Life Ins. Co. (D. Ariz. 2020) the USDC held that Plaintiff's tax returns were relevant as they may provide information regarding whether Plaintiff has worked since making her disability claim and, if so, how her income compares to her pre-claim income, which would affect whether she was “disabled” under the Policy.

In a case of suspected arson, the insurer requested personal and business bank statements, tax returns, loans, and cell phone statements. The plaintiff provided some information, but not tax returns. After correspondence between the parties' attorneys, the plaintiff ultimately stated the defendant's request to examine plaintiff's business records was unreasonable because the documents already provided showed plaintiff was mostly current on his financial obligations. In letters, the defendant also warned plaintiff that failure to provide the requested records could be considered a failure to cooperate, which would be a basis for denial of the claim. After the denial, the plaintiff filed suit, arguing the requested records were not relevant to the defendant's investigation. The court noted that because an insured's financial condition is relevant to a determination of possible motive for arson, the requested documents were, in fact, relevant. Thus, "Plaintiff's failure to provide the requested financial documents resulted in a failure to satisfy a condition precedent to State Farm's obligation to pay his claim.” [Bolton v. State Farm Fire & Cas. Co. (N.D. Ohio 2017)] State Farm unsuccessfully made repeated attempts to make arrangements for its accountant to review plaintiff's financial records. Authority in Ohio supported a finding there was a substantial and material breach of policy's cooperation clause where plaintiffs failed to produce tax returns in the nine month period between the fire and the filing of plaintiffs' action.