The question of whether the actions of an insurance company or its representatives and investigators can be viewed as “state action” raises important legal considerations. This is the proverbial dividing line between the actions of a private citizen and the actions of the government (“state action”) so as to trigger the constitutional rights of a subject under investigation. While a private citizen or corporation is generally considered not to be engaging in state action by merely conducting an investigation, there are circumstances under which those actions can be considered to be “state action” raising important issues of 5th amendment rights against self-incrimination, 4th Amendment rights against unreasonable search and seizure, and other important rights whose violation can not only affect the investigation being conducted, but can have even more serious implications on the person or corporation resulting in legal liability under both civil and criminal laws. This most often arises in the context of investigative actions reported to law enforcement authorities under a state Immunity Reporting Act and the interaction between an insurance company and a law enforcement agency when reporting suspected fraud discovered in the investigation of an insurance claim.

Typically, an insured cannot invoke the Fifth Amendment privilege against self incrimination at an examination under oath.  Pervis v. State Farm Fire & Cas. Co., 901 F.2d 944, 947 (11th Cir. 1990), cert. denied, 498 U.S. 899 (1990); Mello v. Hingham Mut. Fire Ins. Co., 656 N.E.2d 1247, 1251 (Mass. 1995) (citations omitted).  This is true even though generally one who invokes the privilege cannot be penalized for that invocation, as such a penalty would create an impermissible compulsion to testify.  Mello, 656 N.E.2d at 1250.  The most common reason for this distinction offered by the courts is that the state is not compelling the testimony, but rather is the requirement under the insured’s own contractual obligation.  Id. at 1251; Hickman v. London Assurance Corp., 195 P.2d 45, 49 (Cal. 1920).
One case went against this general rule, however.  Weathers v. Am. Family Mut. Ins. Co., 793 F. Supp. 1002, 1022 (D. Kan. 1992).  In Weathers, the insured invoked the Fifth Amendment privilege at the EUO.  Id.  At trial, the insurer asserted a lack-of-cooperation defense, and the trial judge instructed the jury that it could not find the insured breached the policy if, by doing so, she was exercising her Fifth Amendment privilege.  Id.  The insurer objected to this by citing a number of cases, including Pervis.  Id.
The court noted that the insurer was complying with the Kansas Arson Reporting Immunity Act.  Weathers, 793 F. Supp. at 1022.  The court found that none of the cases the insurer cited, including Pervis[i], involved an insurer “conducting itself pursuant to an arson reporting immunity act,” id.  The court found there was “no doubt” that any information revealed to the insurer during the insured’s examination would have been disclosed to the state for use in the criminal proceedings.  Id.  Because of this, the insured’s dilemma became one of breaching her insurance contract or revealing information to state authorities, which could then be used against her in a criminal prosecution.  Id.  The court found the insurer’s position that the insured could not invoke the Fifth Amendment at her examination “absurd” and “simply unacceptable and offensive to constitutional sensibilities.”  Id.
Weathers represents a striking departure from the generally accepted rule that insureds cannot invoke the Fifth Amendment at an EUO.  In State Farm Indem. Co. v. Warrington, the court noted that it was the only decision cited that held an insured could invoke the Fifth Amendment in that context.  795 A.2d 324, 328 (N.J. Super. Ct. App. Div. 2002).  The only distinction between Weathers and the contrary weight of authority is that, in the words of the Warrington decision, the insurer “was, in effect, a conduit for information for the state’s criminal investigation.”  Id.
Another insured argued that the entry of private insurance investigators on his property, without a warrant and without the insured’s consent, violated the insured’s Fourth Amendment rights.  Conn. v. Smith, 673 A.2d 1149, 1151 (Conn. App. Ct. 1995).  The trial court held that the insurer’s investigators were agents of the state and therefore violated the insured’s rights.  Id.  In support of its ruling, the trial court noted that the policy of turning over insurance reports to the state was required by Connecticut’s immunity reporting act; that the state police would sensibly want to see the reports; and that the state fire marshal typically requested fire scene investigation reports from insurance companies, incorporated those reports into the marshal’s file, and provided them to the prosecutor’s office.  Id. at 1152.
On appeal, the state argued that the trial court found that the insurer was an agent of the state by virtue of Connecticut’s immunity reporting act.  Smith, 673 A.2d at 1155.  The appellate court found that the Act did not require insurance investigators to act for the state or to conduct an investigation in any particular way.  Id.  The court noted further that the statute did not require insurers to investigate every fire, nor did the statute indicate that insurers have accepted such an endeavor.  Id.  Finally, the statute did not provide that the state exercised any degree of control over insurers in conducting cause and origin investigations.  Id.  Accordingly, the court concluded that the immunity act did not create an agency relationship between the insurer and the state by operation of law[ii].  Id.
a.    What else can create state action?
According to the United States Supreme Court, state action may be found where “there is a sufficiently close nexus between the State and the challenged action of the regulatory entity so that the action of the latter may be fairly treated as that of the State itself.”  Houghton I, 615 F. Supp. at 306 (citations omitted).  State action may also be found where the state “has so far insinuated itself into a position of interdependence with [the defendant] that it must be recognized as a participant in the challenged activity . . . .”  Id. (citations omitted).  It seems fair to say that the as the level of coordination between the insurer’s investigation and the state’s investigation increases, the chances of a finding the insurer is acting under color of state action increase concomitantly.  See Cromley v. Ohio Casualty Ins. Co., 1987 U.S. Dist LEXIS 8731 (E.D. Penn. 1987) (holding that where insured alleged insurance investigator acted in concert with state law enforcement officer to maliciously prosecute insured, the insured presented a jury question on whether the investigator and officer conspired to maliciously prosecute insured.  If the jury so found, the investigator was considered a state actor for purposes of the Civil Rights Act).
Coordination with the state can be helpful and is often required.  Since coordination cannot be avoided, insurers must instead avoid the appearance (or reality) of being an agent of the state.  To help do so, note that after the court in Smith found that the immunity act did not create an agency relationship as a matter of law, the court turned its attention to whether the particular facts of the case supported an agency relationship.  673 A.2d at 1155.  The court found there is no bright line test for determining whether a private citizen or entity is acting as an agent of the state.  Id. at 1156.  Some factors include whether the action was initiated by the private citizen or entity; who decides whether “the fruit of the action” is given to the state; who determined the way in which the action was conducted; and whether the private citizen or entity receives some kind of inducement from the state.  Id. at 1157.  The court found no evidence that the state coerced, suggested, or initiated the insurer’s investigation.  Id.  Instead, the court found that the investigators acted at the behest of the private insurers.  Id.  The court also found that there was no evidence that the state maintained any control over the insurer’s investigation, noting that while the immunity reporting act required the insurer to turn over its investigative reports, the act did not require any investigation at all.  Id.  Finally, the court found that while the trial court’s factual findings were largely correct, they did not equate to a finding of agency.
Thus, the actions of an insurance company and its investigators must be carefully conducted to be sure they are independent of the actions of public agencies and cannot be seen as an extension of their authority so as to be unofficial “agents” whose actions will be subject to scrutiny under applicable laws and constitutional rights. This is always an important consideration to keep in mind when interacting with public authorities.
[i] Actually, the insured in Pervis argued that the insurer only sought an EUO after it became aware of a grand jury indictment, which the insurer assisted prosecutors in obtaining.  901 F.2d at 946 n.4.  The insurer maintained that it did not know about the indictment before it requested the EUO, and at any rate was required to cooperate with law enforcement.  Id.  The court found that “[w]hether or not [the insurer] knew of and cooperated with the prosecution of [the insured], [the insurer] was entitled under the contract to seek a sworn statement and [the insured] is not excused for this reason.”
[ii] The reasoning of the court’s opinion on this point could be an effective counterweight to the Fifth Amendment ruling in Weathers.  In Smith, the court observed that “[s]tate action can exist by legislative fiat only when the legislation confers on private parties a power that traditionally belongs to the government and grants coercive power or provides significant overt or covert encouragement to private parties to engage in a particular act.”  673 A.2d at 1155 (citing San Francisco Arts & Athletics v. U.S.O.C., 483 U.S. 522 (1987)).  An insurer could argue that a state immunity act does not confer upon them a power that traditionally belongs to the government, as the contractual right to question insureds under oath about their claim is long-standing and exists apart from the state.  Moreover, the immunity acts do not grant coercive power to the insurers.  (In Mello, the insured apparently argued that because Massachusetts prescribes policy terms by statute, by requiring a provision for questioning under oath, the state effectively mandated an EUO.  Mello, 656 N.E.2d at 1247.  The court rejected this argument, noting this statute “was but a statutory restatement and formalization . . . of the general obligation of insureds in many kinds of contracts of insurance to cooperate with the insurer in the investigation and verification of his claim.”  Id. at 1247 n.6.)  Finally, immunity acts do not overtly or covertly encourage the insurer to take EUO’s; insurers have plenty of incentive to do so without an immunity act.  Accordingly, the insurer could argue that the immunity act does not convert taking an EUO into state action for Fifth Amendment purposes.

Guy E. “Sandy” Burnette, Jr. P.A