Virtually every insurance contract imposes on the policyholder a “duty to cooperate” with the carrier during the fact-gathering and investigation process. Typically, this requires the policyholder to assist its carrier in the investigation, defense, and settlement of a claim or suit, both in the coverage context and in a third-party liability case. The failure to cooperate can have severe consequences, as it did recently in Charter Oak Fire Ins. Co. v. Interstate Mechanical, Inc., where it resulted in complete denial of coverage. There, the insurer won summary judgment on its argument that the insured breached the duty to cooperate by colluding with the plaintiff in the underlying lawsuit. Indeed, the insured and the plaintiff shared a common owner and failed to maintain even the appearance of an arm’s-length relationship. Given such consequences, policyholders would be well-advised to consider what the duty to cooperate really requires, especially because the answer can vary significantly with jurisdiction and context.
How strictly courts enforce the duty to cooperate varies with context. For example, courts tend to enforce the duty more firmly when an insurer is defending in an underlying third-party lawsuit, as opposed to making a coverage determination. Just last year, in Developers Surety and Indemnity Co. v. Towne & Country Development, LLC, the U.S. District Court in Washington refused to grant an insurer’s request for declaratory relief and restraining order against the insured for failure to cooperate. There, the insurer argued that the policyholder had breached its duty to cooperate by refusing to participate in interviews as part of the insurer’s coverage investigation. Applying Washington law, the court denied the injunctive relief because the insurer could not demonstrate a likelihood of success on the merits, suggesting that the policyholder’s duty to cooperate may be limited to defense of the underlying suit, and may not extend to the insurer’s coverage investigation. This is undoubtedly attributable to the difference in posture of the insurer vis-à-vis the insured in the two contexts. When defending against a third-party, the insurer and insured are typically aligned, whereas their interests are adverse for coverage purposes.
The burden of proving that an insured actually breached its duty to cooperate can also vary by jurisdiction. In Oregon, the insurer faces a hefty burden and must show that the insured willfully failed to cooperate and that this failure caused the insurer prejudice. By contrast, other jurisdictions do not require a showing of prejudice. For example, unlike Oregon (and California, Illinois, and Texas), New York courts will deny coverage if an insured fails to cooperate even though the lack of cooperation did not prejudice the insurer.
The insurer in Oregon must also prove that it diligently sought the insured’s cooperation. This diligent demand for cooperation is becoming increasingly important in other jurisdictions as well. For example, the Eleventh Circuit recently affirmed two summary judgments in favor of insurers based on the insured’s failure to cooperate. In both Doe v. OneBeacon Am. Ins. Co. and Hsu v. Safeco Ins. Co., the Eleventh Circuit found that the insurers had exercised diligence and good faith by sending multiple letters to their insureds in efforts to secure their cooperation. These cases highlight the importance of an insurer’s sustained communication efforts, which, if ignored, can result in a complete coverage defense.