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Limits on Policyholder’s Duty to Cooperate

By Thomas C. Mielenhausen
Lindquist & Vennum, P.L.L.P.

Property and liability insurance policies typically require the policyholder to cooperate with the insurer when claims arise. Coverage may be jeopardized or even eliminated if the policyholder fails to fulfill this duty. But it is important to remember that the duty to cooperate is a two-way street. The insurer’s requests for cooperation must be reasonable, and if the insurer breaches any of its own duties to its policyholder, the policyholder may no longer have a duty to cooperate.

Policyholder’s Duty to Cooperate with Property Insurer

Property insurance policies usually specify several ways in which the policyholder must cooperate with the insurer’s investigation of loss:

• Inspection of Property. The policy may require the policyholder to allow the insurer to inspect the property loss or damage.
• Proof of Loss. The policy usually requires a written proof of loss, reasonably identifying the lost or damaged property and its value. The policyholder may be required to attach receipts and similar records verifying the value.
• Production of Documents. The policy may require the policyholder to produce to the insurer any other documents reasonably related to the property loss or damage.
• Examination under Oath. The policyholder may have to submit to reasonable examination, under oath, regarding its claim for property loss or damage.

Policyholder’s Duty to Cooperate with Liability Insurer

Liability insurance policies typically contain a general requirement that the policyholder cooperate with the insurer in the investigation, defense, and settlement of any claim or suit against the policyholder. Policies sometimes also specify that this duty include the following:

• Securing and Providing Evidence. The policy may require the policyholder to allow the insurer access to witnesses and documents reasonably related to the claim. If the claim is litigated, the policyholder may be required to provide reasonably related affidavits, deposition and trial testimony. The policyholder may also have to provide a pre-litigation statement. But such a statement likely would not be required if it would prejudice the policyholder’s defense.
• Attendance. The policyholder may be required to attend hearings and trials when reasonable and necessary.
• No Settlement or Payment without Insurer’s Consent. Policies usually specify that the policyholder may not, except at its own expense, assume any obligation or make any payment without the insurer’s consent.
• No Releases without Insurer’s Consent. The policy may likewise specify that the policyholder may not, without the insurer’s consent, release a person or entity that may be liable to the policyholder for sums paid by the insurer under the policy. Upon payment to its policyholder, the insurer is usually subrogated to the policyholder’s right to recover those sums from liable parties. The policy may state that the policyholder may not prejudice the insurer’s subrogation right.

Limits on Policyholder’s Duties to Cooperate

Insurers sometimes seek to deny coverage by arguing that the policyholder has breached its contractual duty to cooperate, and has therefore forfeited all of its rights under the insurance policy. But most courts recognize that there are limits on a policyholder’s duty to cooperate with its insurer. Generally, those courts hold that a policyholder need only comply in good faith with insurer requests that are specific, reasonable, and necessary. And courts also hold that an insurer may forfeit any right to demand cooperation when it breaches its own duties to the policyholder. Policyholders should check applicable state law to determine whether they have a duty to cooperate under the following circumstances:

Insurer’s Failure to Make Specific Requests or Diligently Secure Cooperation. A policyholder may have no duty to produce information or documents that are not specifically requested by the insurer. For example, some states require that an insurer specifically ask the policyholder to provide a proof of loss within a definite time, provide the policyholder with a form to complete, and alert the policyholder to any purported deficiencies in the proof of loss. The onus is on the insurer to act diligently to secure the policyholder’s cooperation. An insurer’s waiver of proof of loss may be inferred from its words or conduct, including evasive, dilatory or inconsistent acts or omissions.

Unreasonable or Unnecessary Requests by Insurer. A policyholder may have no duty to comply with an unreasonable or unnecessary request by the insurer. In many states, an insurer bears the burden of proving that the policyholder’s failure to comply with a specific request is a “substantial and material” lack of cooperation resulting in “substantial prejudice” to the insurer. An insurer will be unable to meet this burden if its request is unreasonable or unnecessary. See, e.g., Kundiger v. Metro. Life Ins. Co., 218 Minn. 273, 15 N.W.2d 487, 494 (1944) (The insurer is not the sole judge of the sufficiency of information provided by the policyholder. It is sufficient that the policyholder provide the insurer with information from which it may estimate its liability.) See also L. Russ & T. Segalla, Couch on Ins. 3d § 196:1 (In determining reasonableness, the insurer’s interest in investigating the claim should be balanced against the policyholder’s right to privacy, protection, and prompt payment of insurance proceeds.).

Mistakes by Policyholder. A policyholder must be truthful when providing information and testimony requested by the insurer, but many courts recognize that honest mistakes and minor inaccuracies should not void coverage. As to proofs of loss, for example, a policyholder may not be bound by inaccuracies or mistakes, and may even be allowed to contradict statements made in the proof. Likewise, a policyholder may contradict prior mistaken testimony without breaching its duty to cooperate.

Policyholder’s Right to Counsel. Although a policyholder has a duty to cooperate with its insurer, the policyholder also has a right to protect its own interest. Most courts require the insurer to give as much consideration to its policyholder’s interests as its own. Insurers may therefore have a duty to notify the policyholder that it has the right to hire counsel, at the policyholder’s expense, to represent it at an examination under oath. Many state statutes expressly require this notice in fire loss policies.

Policyholder’s Right to Preserve Privilege and Work-Product Protections. Policyholders often have information and documents in their possession that are protected by the attorney-client privilege or work product doctrine. These protections may be deemed waived if the policyholder discloses privileged information or work product to an insurer that is adverse to the policyholder. Under these circumstances, the policyholder’s duty to cooperate may not require it to jeopardize its attorney-client privilege and work product protections through disclosure of confidential information.

Insurer Requests That Are Inconsistent With State Statutes. The policyholder has no duty to comply with insurer requests that are inconsistent with state statutes. States often have statutes governing the terms of cooperation clauses in specific policies. States may also have statutes governing privileges, data privacy, examination of witnesses, and procedures for obtaining evidence. All such statutes should be examined to determine whether they preempt all or part of the insurer’s requests.

Insurer’s Breach of Its Duties to Policyholder. If an insurer breaches any of its duties to its policyholder, the policyholder may have no further duty to cooperate with the insurer. Depending on applicable state law, the duty breached by an insurer may be a:

• Contractual duty (e.g., breach of duty to defend; breach of duty to pay property loss);
• Tort duty (e.g., breach of fiduciary duty; misrepresentation; defamation; abuse of process); or
• Statutory duty (e.g., deceptive trade practices; consumer fraud).

An insurer’s breach of its duties may include a denial of coverage, as well as evasive or dilatory conduct amounting to neither an absolute denial nor recognition of liability.

Insurer’s Unreasonable Withholding of Its Consent or Other Conduct Preventing Performance. Insurance policies often require the policyholder to obtain the insurer’s consent before engaging in certain activities, or making certain payments. Many courts recognize that a policyholder may be excused from its duty to cooperate when the insurer unreasonably withholds or delays the required consent. Likewise, courts relieve the policyholder from its duty to cooperate when the insurer engages in unreasonable conduct that renders the policyholder’s performance impossible. This is a fundamental tenet of contract law. One who without justification prevents another party from complying with the terms of their contract cannot use that breach to escape its obligations. Thus, if an insurer by its own conduct prevents the policyholder from complying with a policy condition, the insurer cannot use the policyholder’s noncompliance as an excuse to avoid coverage.

Conclusion

A policyholder’s contractual duty to cooperate is not unlimited. Depending on applicable state law, a policyholder may have no duty to comply with unreasonable or unnecessary demands by its insurer. And a policyholder may be relieved of the duty to cooperate if the insurer breaches any of its duties to the policyholder. When confronted with unreasonable demands or conduct by an insurer, a policyholder should seek assistance and resolution from the state insurance commissioner, a neutral mediator, or the courts.

ABOUT THE AUTHOR

Thomas Mielenhausen is a member of Lindquist & Vennum’s Minneapolis Insurance Coverage and Environmental and Land Use groups. He can be reached at 612-371-3559; or e-mail tmielenhausen@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
April 2005