POLICYHOLDER'S DUTY TO COOPERATE

Introduction

The cooperation clause of a liability policy is perhaps the most variable, least understood, frequently mentioned, and infrequently enforced provisions in an insurance contract. Beyond that, the specific language of the term must be read and interpreted just like any other contract provision.

Purposes of the Cooperation Clause

A "cooperation clauses serve an important purpose. '[A] condition of a policy requiring the cooperation and assistance of the assured in opposing a claim or an action lodged against him by an injured person is material to the risk and of the utmost importance in a practical sense. Without such cooperation and assistance the insurer is severely handicapped and may in some instances be absolutely precluded from advancing any defense.' [S]uch provisions "enable the [insurer] to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to facts, material to [its] rights, to enable [it] to decide upon [its] obligations, and to protect [itself] against false claims."'"1 "[T]he purpose of the cooperation clause is 'to protect the insurer's interests and to prevent collusion between the insured and the injured party.' Some courts . . . tend to focus on other purposes of the cooperation clause, including enabling the insurer to present an effective defense and allowing the insurer to gather information necessary to settle the claim."2

"The insurer is entitled to know from its assured the true facts (of which he may have knowledge) underlying an accident and upon which the injured person bases his claim in order that it may determine for itself, in the light of such information, whether it should contest or attempt to settle the claim. . . . [T]he general rule [is] that under a cooperation clause the assured is required to give a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense. . . . 'The company is entitled, however, to an honest statement by the insured of the pertinent circumstances surrounding the accident, as he remembers them. Lacking that, the company is deprived of the opportunity to negotiate a settlement, or to defend upon the solid ground of fact. Nothing is more dangerous than a client who deliberately falsifies the facts.'"3

"[Liability] policies expressly . . . obligate the insured to cooperate. Insured's failure to cooperate may release the insurer. Such a policy handcuffs the insured's ability to protect himself and creates a fiduciary agency between the two. The interests of the insurer are to delay payment or indulge in other tactical conduct to achieve frugal disposition of claims or reject them. The interest of the insured is that claims against him be finally disposed of as promptly as good faith and fair dealing requires. This conflict obligates the insurer to handle all claims with the interest of the insured uppermost."4

The Language of Cooperation Clauses Varies Widely

While virtually all liability policies include a cooperation clause, the language varies widely. But many policies have very amorphous language. A standard CGL policy states: "You . . . must . . . Cooperate with us in the investigation or settlement of the claim or defense against the 'suit'." A legal malpractice policy reads: "The Insured shall cooperate with the Insurer and provide the Insurer such information as it may reasonably require in the investigation, defense or settlement of any Claim."

Some policies spell out a policyholder's duties: "The Insured shall cooperate with the Company . . . and assist in making settlements, in the conduct of the suits, and . . . the Insured shall provide copies of all pertinent documents to the Company, provide reasonable reports regarding the Claim to the Company, attend depositions, hearings, mediations and trials and assist in securing-and-giving evidence and obtaining the attendance of witnesses." Yet another reads: "The Insured will cooperate with the Company in the defense, investigation and settlement of any claim. Upon the Company's request, the Insured will attend hearings, depositions and trials and assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits and proceedings in connection with a claim."

An excess policy reads: "the insurer 'shall have the right and shall be given the opportunity to associate with the Insured or the Insured's underlying insurers, or both, in the defense and control of any claim, suit or proceeding relative to an occurrence where the claim or suit involves, or appears reasonably likely to involve the [Insurer]. . . .'"5

No standard policies explicitly prohibit the policyholder from cooperating with a plaintiff.

Contract Interpretation

Like all other contractual provisions, the meaning of the language of a cooperation clause must be determined by application of the rules of contract interpretation.6 Nonetheless, some courts gratuitously mention in dicta that certain behavior by a policyholder "would probably breach the policy's 'cooperation' clause".7

The Elements of the Defense of Breach of the Cooperation Clause

The defense has two elements: (1) A breach by the policyholder of the duty to cooperate; and (2) The insurer has suffered substantial prejudice by the insured's failure to cooperate. "[T]he insurer is ordinarily released from its contract by the total and unjustifiable refusal of cooperation by the insured including unjustifiable refusal of the insured to permit the insurer to make any defense."8 "[A]n insurer . . . must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in the insured's favor."9

The Insurer Must Prove Substantial Prejudice to Show a Violation of the Cooperation Clause

"An insurer may assert defenses based upon a breach by the insured of a condition of the policy such as a cooperation clause, but the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby."10 "[I]n order to establish it was prejudiced by the failure of the insured to cooperate in his defense, must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in the insured's favor."11

Prior to 1963, California presumed prejudice by a violation of the cooperation clause. However, today no such presumption exists. "The presumption would not be in keeping with the public policy of this state . . . and we are of the view that a judicially created presumption of prejudice, whether conclusive or rebuttable, is unwarranted."12

The Scope of the Defense of Breach of the Cooperation Clause

1.	Public Policy

"It may not be denied that . . . the cooperation and assistance of the assured in opposing a claim or an action lodged against him by an injured person is material to the risk and of the utmost importance in a practical sense. Without such cooperation and assistance the insurer is severely handicapped and may in some instances be absolutely precluded from advancing any defense."13 "Equally without merit is the contention the noncooperation clause in plaintiff's policy of insurance is contrary to public policy."14

2.	Question of Fact

"It is generally established, and we shall not pause to refer to the authorities, that what constitutes cooperation (or the lack of it) on the part of the assured, within the meaning and effect of a cooperation clause, is ordinarily a question of fact."15 However, prejudice may be established as a matter of law.16

3.	Bars Recovery by Policyholder and Plaintiff

"[T]he injured person stands in no better position than the assured and that a violation by the latter of a cooperation clause which would serve to preclude the assured from indemnity under his policy will likewise bar the injured person from recovering against the insurer should the judgment in his favor and against the assured remain unsatisfied."17

4.	All Types of Policies

The "rule applies to all cases in which the insurer asserts a defense based upon a breach by the insured of a cooperation . . . clause. . . . In would seem, moreover, that an insurer would more likely be able to produce evidence of prejudice because of delay in a "claims-type" case than he would in an "occurrence-type" case, since in the former the span of time between the commission of the tort and the notice of claim to the insured is longer."18

5.	No Sham Defense

"[A] cooperation clause may not be expanded to require the assured 'to combine with the insurer to present a sham defense.'"19

6.	No Collusion

"Collusive assistance in the procurement of a judgment . . . constitutes a breach of the cooperation clause."20

7.	No Waiver of Attorney-Client Privilege

The issue is "whether the standard cooperation clause included in every third party liability insurance policy operates as a contractual waiver of the insured's attorney-client privilege in the event of coverage litigation between the insured and its insurer. . . . [O]ur answer is a resounding no."21 "[T]he suggestion that the cooperation clause abrogates the insured's expectation of confidentiality and thus destroys the attorney-client privilege ignores California's legislative declaration that where, as here, a conflict exists because an insurer has reserved its rights, the insured is entitled to independent counsel and to a relationship with that counsel free from the fear of disclosure of privileged communications."22

8.	No Violation by Assignment

"By executing the assignment, [the policyholder] attempts only to shield himself from the danger to which the company has exposed him. He is doubtless less friendly to his insurer than he might otherwise have been. The absence of cordiality is attributable not to the assignment, but to his fear that the insurer has callously exposed him to extensive personal liability. The insurer's breach so narrows the policyholder's duty of cooperation that the self-protective assignment does not violate it."23

9.	Prejudice Proved After Liability Suit

"Logically, the required showing of prejudice cannot be made while the main tort action is still pending, its outcome uncertain, and therefore declaratory relief against the injured persons at this stage is inappropriate."24

The Insurer Has the Burden of Proof

"[T]he burden of proving that such a breach resulted in prejudice is on the insurer."25

"In view of the foregoing we apprehend that Campbell stands for these propositions: (1) that breach by an insured of a cooperation or notice clause may not be asserted by an insurer unless the insurer was substantially prejudiced thereby; (2) that prejudice is not presumed as a matter of law from such breach; (3) that the burden of proving prejudicial breach is on the insurer; and (4) that, although the issue of prejudice is ordinarily one of fact, it may be established as a matter of law by the facts proved."26

Resisting the Defense of Violation of the Cooperation Clause

1.	The Insurer Must Comply With Policy Terms

The defense that a violation of the cooperation clause caused substantial prejudice "must be interpreted to assume that the insurer, diligently and in good faith, has complied with the terms and conditions of the policy.27

2.	Estoppel May Bar Defense

"An insurer may be estopped to claim breach of a cooperation clause which has been induced by its own action."28

3.	The Insurer May Not Invite the Policyholder's Violation

If the trier of facts finds that the insurer encouraged "its insured not to cooperate . . . or finds that the insurer failed to diligently seek its insured's presence [at trial] a finding that he breached the cooperation clause would not be justified."29

4.	Refusing a Defense Under a Reservation of Rights Does Not Violate the Cooperation Clause

One court was "unable also to agree that the evidence shows a breach [by the policyholder] of the cooperation clause of the policy which bars [the policyholder's] recovery" where the insurer offered a defense "as a matter of courtesy, without the assumption of any liability on [the insurer's] part, and under a non-waiver agreement which [the policyholder was rerquired] to have signed before [the insurer] took any part in the suit."30