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Policyholders often think that once their insurer has agreed to cover their claim, their obligations are done. That is not the case. Insurance policies generally contain provisions imposing a “duty to cooperate,” which requires policyholders to provide additional information and assist the insurers in their investigation. Unfortunately, far too often, insurers rescind coverage based on information policyholders provide in response to requests that seem innocuous. Given that insurers regularly use the gathered information to deny coverage obligations, it is critical for policyholders to understand their coverages and limitations to ensure they don’t inadvertently give information insurers can use against them.
This article analyzes a policyholder’s duty to cooperate with its insurer, the extent of the obligations owed, insurer attempts to fish for information that can later be used to dispute coverage and what policyholders can do to protect themselves.
Many insurance policies purport to impose a duty to cooperate on the policyholder. These provisions require the policyholder to cooperate with the insurer in the investigation of a claim and assist with the defense of a suit brought against the policyholder.
A common cooperation clause in a commercial general liability policy may state, “You must cooperate with us in the investigation or settlement of the claim or defense against the ‘suit.’” Insurers contend that such provisions are necessary to assist them in the adjustment of claims or to help them defend policyholders against underlying lawsuits.
A policyholder may breach the duty to cooperate by refusing to: provide any information to its insurers, attend examinations under oath, assist insurers in their investigation, participate in the defense of an underlying claim or otherwise stonewall the insurers. Failure to cooperate may be grounds to deny coverage.
If a claim is made or a suit is filed, the insurer will often request information from the policyholder. While the insurer may appear to be gathering information about the claim, sometimes it may be fishing for information it could later use to deny the claim.
Though these tactics are employed by insurers in both first-party and third-party contexts, it is often more pronounced with third-party policies. For example, most third-party liability insurance policies impose a duty to defend upon the insurer, meaning the insurer has an obligation to hire defense counsel to defend the policyholder against a lawsuit brought by a third party. When a policyholder provides notice of a third-party suit, the insurer should be focused on providing a legal defense. However, insurers sometimes agree to defend under a reservation of rights, while gathering information that could be used to deny a claim.
In this regard, an insurer may ask the policyholder questions that could elicit responses that are later used to rescind coverage. For example, many CGL policies do not cover bodily injury or property damage known to have occurred prior to the policy period or is expected or intended from the standpoint of the policyholder. If an underlying suit alleges bodily injury or property damage, but is unclear regarding the time frame, an insurer may inquire as to when the bodily injury or property damage first occurred or when the policyholder first had knowledge of the damage or injury. As a practical matter, defense counsel is often the go-between for the insurer and the policyholder. Thus, if an unwitting policyholder tells defense counsel that the injury or damage pre-dates the policy period, the insurer may use the information to deny coverage. The insurer-appointed defense counsel is not generally permitted to withhold information from insurers, even if the information leads to a coverage denial. Thus, as the architect of the litigation strategy, defense counsel is sometimes able to control whether to pursue discovery on issues that may be germane to coverage disputes. This creates an inherent conflict of interest for the parties.
Fortunately for policyholders, many states have developed statutory or common law to address this concern. Specifically, if the insurer has reserved rights to later deny the claim based on certain facts that may be developed during the case, the policyholder may be entitled to select its own independent counsel to defend against the third-party suit.
Although insurers must still pay for independent counsel, they do not have the right to receive information directly from independent counsel. Understanding this conflict of interest can allow a policyholder to demand independent defense counsel and help avoid the issue.
Many policyholders misunderstand their relationship with their insurers. While an insurance policy does create a contractual bond between the policyholder and insurer, it is an arm’s-length relationship.
Depending on the policy limit, an insurer may literally have millions of reasons (read: dollars) to try to avoid providing a defense or paying for a judgment or settlement of a third-party suit against a policyholder. If your insurer has not agreed to provide a complete defense, its interests may not be aligned with yours. This situation can also raise privilege issues: If the policyholder provides documents and information to the insurer, some courts have held that this can constitute a waiver of attorney-client privilege — another important consideration for policyholders to keep in mind when communicating with their insurers.
Policyholders that receive a request for information from their insurer should try to understand the purpose behind the request. Is the request for information material to the defense of the third-party suit or the coverage investigation? Or does the request seek information seemingly unrelated to the claim or defense? If it’s the latter, beware: Your answer may provide the insurer with an escape from its coverage obligations.
Policyholders should be especially cautious regarding requests for information related to timing or the policyholder’s knowledge of specific events. Policyholders should review the coverage triggers and exclusions of their policies to better understand the purpose behind insurer requests for more information and avoid making statements that the insurer can later cite as an argument for why a particular exclusion should apply.
If an insurer threatens to argue that a policyholder has breached its duty to cooperate, the policyholder should know that under applicable law the insurer must demonstrate that it suffered prejudice, or even substantial prejudice, from the alleged breach. This is a high bar.
Forewarned is forearmed: better understanding their duty to cooperate and the purpose behind insurer requests for information can help policyholders better protect their interests and avoid talking themselves out of coverage.
Jacquelyn Mohr Heitman is a partner in Pasich LLP’s Manhattan Beach, California, office and a member of the firm’s insurance recovery practice. She can be contacted at firstname.lastname@example.org. Tae Andrews is a senior managing associate in Pasich’s New York office. He can be contacted at email@example.com.