As a condition to coverage under standard liability policies, the insured is required to cooperate with its insurer. The provision, termed the “cooperation clause,” typically requires the insured to assist with and participate in the investigation, defense and settlement of a claim or suit. However, even if an insured does not honor the cooperation clause, it does not necessarily lose coverage. Courts across the country frequently have ruled that the circumstances under which an insurer may deny coverage due to an insured’s failure to cooperate are limited.

In many jurisdictions, an insured’s failure to fully cooperate is excused where the insured has otherwise substantially complied, and several jurisdictions impose additional limitations before absolving the insurer of its duty to defend or indemnify its insured. For example, the insurer may be required to demonstrate that it diligently sought the insured’s cooperation, that the insured's lack of cooperation was material, that the insurer suffered prejudice as a result of the insured’s failure to cooperate, or any combination of the above.

On the other hand, when the factual record satisfies the particular jurisdiction’s legal requirements, courts have not been reluctant to rule that an insured’s lack of cooperation may constitute a breach of the policy and serve as a complete defense to coverage. In a recent case decided under Florida law, the US Court of Appeals for the Eleventh Circuit affirmed a summary judgment entered in favor of an insurer's contention that the insured failed to cooperate during the defense and settlement of an underlying tort claim. Doe v. OneBeacon America Insurance Co., No. 15-12665, 2016 WL 2620716 (11th Cir. May 9, 2016) (per curiam). In the underlying tort case in state court, the insured—before trial and without the insurer's consent—settled with the tort plaintiff. The US District Court for the Northern District of Florida found that (i) the insured unilaterally engaged in settlement negotiations over the insurer’s express objections; (ii) the insured’s failure to cooperate was material because the insurer had expressly withheld its consent to engage in such negotiations, citing its lack of sufficient information to fully evaluate the claim; (iii) the insurer’s right to control the defense was substantially prejudiced by the $5 million settlement; and (iv) the insurer exercised diligence and good faith in seeking the insured’s cooperation.

On appeal, the insured argued that, even if the settlement constituted a breach of the cooperation clause, its failure to cooperate was excused by the insurer’s negligence, failure to provide an adequate defense, and bad faith. The 11th Circuit summarily rejected these arguments due to insufficient evidence. In contrast, the Circuit Court found it dispositive that, based on the record, the insurer reasonably believed it lacked sufficient information to evaluate the claim against the insured and had meritorious defenses that would have precluded liability against the insured. The Circuit Court therefore concluded that, as a matter of law, the insured breached its duty to cooperate and that the insurer therefore had no duty to indemnify it for the $5 million settlement. 

For insurers, the District Court's analysis in OneBeacon, followed by the 11th Circuit’s affirmance, serves as a roadmap to successfully managing uncooperative insureds. Most notably, the lower court decision repeatedly cited the content of the insurer’s “numerous correspondence” with the insured’s counsel, thus reaffirming the importance of communications, both in terms of substance and frequency, between insurer and insured during the investigation, defense and/or settlement of a claim or suit.

Accordingly, we recommend that an insurer, at a minimum, regularly communicate the following information to its insured, in writing:

• The contractual basis for the insured's duty to cooperate so that the insured knows it is bound by the condition;
• The action(s) or inaction(s) being requested of the insured—to eliminate any ambiguity;
• The reason why such cooperation is necessary, i.e., "material"; and
• The potential consequences of the insured's failure to cooperate.

Additionally, as an investigation or defense progresses, the insurer should supplement or amend its defense and settlement positions as needed.

In short, an insured’s failure to cooperate, if meticulously and thoroughly documented, as in OneBeacon, can serve as a complete coverage defense. And thorough and frequent correspondence between insurer and insured is the easiest and most effective method of developing a factual record sufficient to satisfy the high burden that many jurisdictions impose on insurers asserting the breach of cooperation clause defense.