How broad is an insured's duty to cooperate with its liability insurer? Must an insured release its own claim against a third party to facilitate settlement of a covered claim against the insured? Maybe, one federal court recently held in Mid-Continent Cas. Co. v. Petroleum Solutions, Inc., 2016 U.S. Dist. LEXIS 133972 (S.D. Tex. Sept. 29, 2016).
General liability policies commonly give the insurer the right and duty to defend the insured against a lawsuit in which the plaintiff asserts at least one claim that is potentially covered by the policy. As a corollary to the duties imposed on the insurer, such policies also require the insured to "cooperate with [the insurer] in the investigation or settlement of the claim or defense against the suit."
Cases Involving the Cooperation Clause
A key purpose of a cooperation clause is to "protect the insurer from collusion between the insured and injured third parties, while making it possible for the insurer to conduct a proper investigation of the claim, and determine its own obligations." Continental Cas. Co. v. City of Jacksonville, 550 F. Supp. 2d 1312 (M.D. Fla. 2007), quoted in Doe v. OneBeacon Am. Ins. Co., 2014 U.S. Dist. LEXIS 144150 (N.D. Fla. Oct. 9, 2014), aff'd, 639 F. Appx. 627 (11th Cir. Fla. 2016); see also Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389 (5th Cir. Tex. 1995).
Breach of the duty to cooperate, if it prejudices the insurer, can result in loss of coverage. See State Farm Lloyds v. Brown, 2009 U.S. Dist. LEXIS 82287 (N.D. Tex. Sept. 9, 2009). Florida has likewise recognized that "an insurer may deny coverage and avoid payment of compensation to the victim of the insured's tort where the insured has been guilty of lack of cooperation." See Ramos v. Northwestern Mut. Ins. Co., 336 So. 2d 71 (Fla. 1976); Doe.
To avoid a potentially devastating forfeiture, courts have traditionally reserved such a remedy to particularly egregious conduct, such as fraud or collusion (Frazier v. Glen Falls Indem. Co., 278 S.W.2d 388 (Tex. Civ. App. Fort Worth 1955)), or interfering with the insurer's ability to investigate or defend the case (Progressive County Mut. Ins. Co. v. Trevino, 202 S.W.3d 811 (Tex. App. San Antonio 2006)).
Not every failure to cooperate will release the insurance company. Only that failure which constitutes a material breach and substantially prejudices the rights of the insurer in defense of the cause will release the insurer of its obligation to pay. Ramos
Further, the insurer must have "exercised diligence and good faith in seeking to bring about the cooperation of the insured," and complied in good faith with the terms and conditions of the policy. Id.
Disputes about the scope of the duty to cooperate and the circumstances under which the insurer can deny coverage because of a breach arise in a variety of contexts. See, e.g., Fugro-McClelland Marine Geosciences, Inc. v. Steadfast Ins. Co., 2008 U.S. Dist. LEXIS 102997 (S.D. Tex. Dec. 19, 2008) (rejecting insurer's argument that cooperation clause effected a waiver of the insured's attorney-client privilege in underlying lawsuit); Brown, at *7 (insured breached duty to cooperate by failing "to attend scheduled appointments [with counsel] to discuss facts of the case, respond to discovery, and to prepare for his deposition," resulting in counsel's withdrawal).
In a common scenario, under the "voluntary payments" provision, an insured may breach its duty to cooperate by settling a claim without the insurer's consent. See, e.g., Doe, at *41; Rodriguez v. Tex. Farmers Ins. Co., 903 S.W.2d 499 (Tex. App. Amarillo 1995). Such cases often turn on whether the insurer breached first by refusing to defend or indemnify the insured against underlying claims. See Association of Apt. Owners of Imperial Plaza v. Fireman's Fund Ins. Co., 939 F. Supp. 2d 1059 (D. Haw. 2013) (surveying case law from several jurisdictions to identify majority and minority rules).
For example, in Presrite Corp. v. Commercial Union Ins. Co., 680 N.E.2d 216 (Ohio Ct. App. 1996), the court held the insured did not breach its duty to cooperate when it settled a lawsuit after the insurer denied coverage. Similarly, in Arizona Prop. & Cas. Ins. Guar. Fund v. Helme, 735 P.2d 451 (Ariz. 1987), the court held doctors who sued for malpractice did not breach their duty to cooperate by settling a lawsuit after the insurer breached its duty to indemnify. The court of Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982), explained it as follows.
While the defendant insureds have a duty to cooperate with the insurer, they also have a right to protect themselves against plaintiff's claim.... If, as here, the insureds are offered a settlement that effectively relieves them of any personal liability, at a time when their insurance coverage is in doubt, surely it cannot be said that it is not in their best interest to accept the offer. Nor, do we think, can the insurer who is disputing coverage compel the insureds to forego a settlement which is in their best interests.
The parties' duties are reciprocal.
Mid-Continent Cas. Co. v. Petroleum Solutions, Inc.
In Petroleum Solutions, the district court considered a different, less common issue concerning settlement—whether the insured's duty to cooperate required it to contribute its own assets to settle a covered claim. The lawsuit arose out of Petroleum Solutions, Inc.'s (PSI's), 1997 construction and installation of an underground fuel storage system at a truck stop owned by Bill Head. One component of the fuel tank was a flex connector purchased from Titeflex.
When Head discovered 20,000 gallons of fuel had seeped into the soil under the truck stop, he attributed the problem to a fuel tank leak for which he held PSI responsible. PSI notified Mid-Continent, which retained counsel to defend PSI while reserving its rights to deny coverage.
To test the theory that the leak was caused by a defective flex connector, PSI's counsel had the part sent to an expert for testing. The test was inconclusive, and the expert retained the part in a storage facility. Unfortunately, the flex connector was lost when the storage facility was torn down in 2006.
Head sued PSI in 2006, and PSI filed a third-party claim against Titeflex for contribution or indemnity under the Texas Product Liability Act. Head subsequently amended his petition to add a product liability claim against Titeflex.
Titeflex requested a spoliation instruction because of the lost flex connector, and Head dismissed his claim against Titeflex without prejudice. Titeflex then filed a counterclaim against PSI, seeking indemnity for its attorney's fees and expenses. Titeflex offered to dismiss its counterclaim if PSI dismissed its own claim against Titeflex. PSI dismissed its claim without prejudice, but Titeflex insisted its offer required dismissal with prejudice, so it retained (and later expanded) its indemnity counterclaim. Because the insurer had reserved the right to contest coverage, PSI did not want to release its claim against Titeflex.
At trial in September 2008, the trial court instructed the jury it could presume the lost flex connector, if it were available, would have been evidence unfavorable to PSI. The jury returned a verdict against PSI in favor of Head and Titeflex. PSI appealed. The judgment was affirmed by the court of appeals, and PSI requested review by the Texas Supreme Court.
That court, holding the spoliation instruction was erroneous, reversed Head's judgment and remanded for a new trial—Petroleum Solutions v. Head, 454 S.W.3d 482 (Tex. 2014). It affirmed, however, the Titeflex judgment. On remand, the trial court entered summary judgment for PSI against Head.
Meanwhile, Mid-Continent filed a declaratory judgment action in federal court, seeking to avoid liability for Titeflex's judgment against PSI. Mid-Continent alleged PSI breached its duty to cooperate by refusing to dismiss its claim against Titeflex with prejudice. PSI counterclaimed for breach of contract and statutory bad faith. The federal action was stayed pending completion of the state court appeal. After the case was reopened, both parties moved for summary judgment.
In a lengthy opinion issued in September 2016, the judge granted in part and denied in part both motions. On the duty to cooperate, the court began with the policy language requiring the insured to "[c]ooperate with [the insurer] in the investigation or settlement of the claim or defense against the 'suit.'" After reviewing the policy's definitions of certain terms, the court concluded the policy "contains no textual limitation on the terms or scope of settlement that are governed by the ... cooperation clause."
The court summarily rejected as "off the mark" PSI's argument "that the cooperation clause's phrase 'settlement of the claim' encompasses purely defensive actions related to Titeflex's specific claim against PSI, but does not extend" to PSI's offensive action against Titeflex. The court noted that "the broad definition of 'suit' [encompasses] the entire 'civil proceeding'" and that dismissal of PSI's affirmative claim "was among the items of value that could be offered to Titeflex as part of a 'settlement of the claim.'"
The court also rejected PSI's argument that Mid-Continent's position would "transform the cooperation clause into a 'hammer clause,'" under which an insurer may limit its liability when an insured refuses to consent to a settlement recommended by the carrier. Such a provision (which was not included in this policy) was irrelevant, the court said, because "a material breach of the cooperation clause ... voids coverage entirely."
The court did not, however, determine that PSI's conduct violated the cooperation clause as a matter of law. Rather, it held that whether the conduct was "reasonable and justified under the circumstances" is a question of fact on which material disputes remained.
Neither case law nor commentators, unfortunately, offer much guidance for resolving that issue. On the other hand, the court held that if PSI is found to have breached the cooperation clause, "Mid-Continent was prejudiced as a matter of law by the ... Titeflex judgment" because it was "deprived ... of the opportunity to avoid liability entirely." In the end, this case leaves many questions unanswered about the scope of an insured's duty to "cooperate" by contributing its own funds or other assets to a settlement that benefits the insurer more than the insured.
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