The Cooperation Clause

Most liability insurance policies have a “cooperation clause.” This clause typically is found in the “conditions” section of the policy. The standard clause states that the insured must “[c]ooperate with us in the investigation or settlement of the claim or defense against the 'suit.'” Commercial General Liability Coverage Form, ' IV, 2.c(3) (ISO Properties Inc., 2007). Insurers frequently argue that they need not perform their duties when an insured fails to cooperate with them.

By its terms, the duty to cooperate specifically addresses an investigation or settlement of a claim or a defense in a suit brought against the insured that may be covered by the policy. Nothing in the clause states that an insured must cooperate with an insurer in its efforts to assess possible coverage defenses. Rather, the focus is on the defense of the insured in the underlying lawsuit.

As California courts have recognized, the cooperation clause mandates that an insured “give a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense.” Valladao v. Fireman's Fund Indem. Co., 13 Cal. 2d 322, 329, 89 P.2d 643 (1939). Thus, courts have recognized that if an insured does not appear at deposition or otherwise cooperate with the insurer in preparing its defense, the cooperation clause may have been breached. See, e.g., Hall v. Travelers Ins. Cos., 15 Cal. App. 3d 304, 93 Cal. Rptr. 159 (1971).

Cooperation and Conflicts of Interest

The cooperation clause does not give an insurer the right to control the defense of the claim when it has reserved rights or denied coverage. An insurer that reserves its right to deny coverage may not require an insured to obtain its approval before the insured retains defense counsel. See San Diego Navy Fed. Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (1984) (“Cumis“). The reason is straightforward ' in such a situation, there is a conflict of interest between the insurer and the insured regarding the defense of the underlying claims. See Id.

Cumis is perhaps the most widely cited case establishing an insured's right to independent counsel paid for by its insurer in these situations. In Cumis, the court noted that when an insurer reserves its right to deny coverage under a policy, “there may be little commonality of interest” between the insurer and the insured. Id. at 364. The court thus held that “when a conflict exists, the insured may have control of the defense if he wishes, it follows the insurer must pay for such defense conducted by independent counsel.” Id. at 369. See Cal. Civ. Code ' 2860 (codification of Cumis providing that insured has right to independent counsel paid for by the insurer when control of the defense of the underlying claim may affect coverage).

Similarly, in Rockwell International Corp. v. Superior Court, 26 Cal. App. 4th 1255, 32 Cal. Rptr. 2d 153 (1994), the court observed that under California law, when an insurer has reserved its rights, the insured is entitled to independent counsel. According to the court:

When an insurer provides an unconditional defense for its insured, the insured and the carrier share the same goal ' minimizing or eliminating liability in the third party action ' and no conflict of interest inhibits the ability of one lawyer to represent both the insurer and its insured. But where the carrier questions the availability of coverage and provides a defense in the third party action subject to a reservation of rights, a conflict exists ' because the insured's goal is coverage, which flies in the face of the insurer's desire to avoid its duty to indemnify. Since it is unavoidable that, in the course of investigating and preparing the insured's defense in the third party action, the insured's attorney will come upon information relevant to a coverage issue, it is impossible for the carrier's attorney to represent the insured (unless, of course, the insured consents) and the insured is entitled to independent counsel. Id. at 1263-64.

See also Assurance Co. of Am. v. Haven, 32 Cal. App. 4th 78, 84, 38 Cal. Rptr. 2d 25 (1995) (because there is a conflict of interest or a potential conflict of interest between the insurer and the insured, the insured is entitled to obtain, at the insurer's expense, independent counsel, i.e., Cumis counsel, who then controls the litigation).

Furthermore, “even if the insurer has not denied coverage or refused to defend, the insurer has a duty to accept a reasonable settlement, and the insurer's refusal to settle may give rise to the insured's action for reimbursement of the settlement. ' In such a case, the insured has the burden of showing the settlement was reasonable and if he meets that burden, then again the act of settlement raises two presumptions: that the claim was legitimate and that the amount of the settlement was the amount of the insured's liability.” Armstrong World Indus. Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 85, 52 Cal. Rptr. 2d 690 (1996).

Cooperation and an Insurer's Duty to Investigate

Another question that frequently arises is the impact of the cooperation clause on an insurer's duty to investigate. Insurers often cite the cooperation clause in asking an
insured to provide information about the underlying claim or suit. However, an insurer cannot use the cooperation clause as a basis to transfer its own duty to investigate to its insured. California courts have repeatedly held that an insurer has a non-transferable duty to investigate. As the California Supreme Court has held, “it is essential that an insurer fully inquire into possible bases that might support the insured's claim. ' [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (1979).

An insurer must seek information relevant to its insured's claim. See, e.g., Frommoethelydo v. Fire Ins. Exch., 42 Cal. 3d 208, 721 P.2d 41, 228 Cal. Rptr. 160 (1986) (bad faith failure to investigate existed when the insurer did not interview known witnesses who might have been able to testify about matters bearing on coverage). An insurer cannot simply rely on information provided by its insured. It must inquire independently into all available information bearing on its coverage determination. For example, in Hughes v. Blue Cross, 215 Cal. App. 3d 832, 263 Cal. Rptr. 85 (1989), the plaintiffs sought coverage for their son's hospitalization. The insurer argued that the treating physician should have sought more information to support the claim. The court rejected this notion, holding that the insurer bears the primary duty of inquiry and must make reasonable efforts to obtain all relevant records. Therefore, the court concluded that the insurer had placed “an undue burden of inquiry on the insured's physician.” Id. at 846.

Another court reached a similar conclusion. In Mariscal v. Old Republic Life Insurance Co., 42 Cal. App. 4th 1617, 50 Cal. Rptr. 2d 224 (1996), an insured was killed in an automobile accident. His wife was the beneficiary under a life insurance policy. The insurer disregarded the wife's evidence supporting coverage and made no independent effort to find further evidence supporting her claim, arguing that doctors were “notoriously difficult to contact by telephone.” The Mariscal court noted that, rather than evaluating “all the evidence available to it with a view towards coverage, [the insurer] relied on a short phrase in the death certificate” that supported its denial of coverage. Id. at 1625. The court held that the insurer breached its duty to investigate because it turned its back on evidence supporting the claim and failed to pursue additional evidence through further independent investigation. Id. at 1624.

The Impact of an Insured's Failure to Cooperate

Before it can prevail on a defense that the insured failed to cooperate, an insurer must establish that it has exercised “reasonable diligence” in seeking to procure the cooperation of the insured. Billington v. Interins. Exch., 71 Cal 2d 728, 456 P.2d 982, 79 Cal. Rptr. 326 (1969). However, even if the insurer carries its burden, this does not mean that the insured loses its coverage.

California courts long have held that 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.” Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 305, 384 P.2d 155, 32 Cal. Rptr. 827 (1963). The insurer “must show actual prejudice, not the mere possibility of prejudice.” Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 15 Cal. Rptr. 2d 815 (1993). “[P]rejudice is not shown simply by displaying end results; the probability that such results could or would have been avoided absent the claimed default or error must also be explored.” Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 587 P.2d 1098, 151 Cal. Rptr. 285 (1978).

A federal court recently summarized the California rule:

Under California law, it is settled that an insurer, in order to avoid liability on the basis of a breach of a procedural condition such as a notice or cooperation clause, must establish actual and substantial prejudice. The prejudice requirement has been extended to apply to other procedural conditions, such as “consent-to-payment” conditions. ' The overriding purpose of the actual prejudice requirement is to prevent the complete forfeiture of coverage based upon an insured's harmless breach of a policy condition. Silicon Valley Bank v. New Hampshire Ins. Co., 203 F. Supp. 2d 1152, 1159 (C.D. Cal. 2002) (citations omitted and emphasis added).

As the Ninth Circuit has explained, the purpose of a condition in an insurance policy is “not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid.” Ins. Co. of Pennsylvania v. Associated Internat'l Ins. Co. 922 F.2d 516, 523 (9th Cir. 1991).

Therefore, “an insurer, in 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.” Billington v. Interins. Exch. of So. California, 71 Cal. 2d 728, 737, 456 P.2d 982, 79 Cal. Rptr. 326 (1969). “[P]rejudice does not arise merely because a delayed or late notice has denied the insurance company the ability to contemporaneously investigate the claim or interview witnesses” or because the insurer has been denied “the opportunity to make an early settlement of the claim.” Northwestern Title Sec. Co. v. Flack, 6 Cal. App. 3d 134, 143, 85 Cal. Rptr. 693 (1970).

The Effect of an Insurer's Denial of Coverage

If an insurer has denied coverage, then, as a matter of law, it cannot claim prejudice. “[A]n insurer is not allowed to rely on an insured's failure to perform a condition of a policy when the insurer has denied coverage because the insurer has, by denying coverage, demonstrated performance of the condition would not have altered its response to the claim.” Select Ins. Co. v. Superior Court, 226 Cal. App. 3d 631, 637, 276 Cal. Rptr. 598 (1990). For example, in Flintkote Co. v. General Accident Assurance Co. of Canada, 480 F. Supp. 2d 1167 (N.D. Cal. 2007), the insured filed a lawsuit against its insurers because they had not responded to its request for defense and indemnity in connection with asbestos-related litigation. The court found that the insurer waived its right to claim that the insured did not provide notice of the claims because the insurer's failure to respond was the same as denying coverage:

It is striking to the court that [the insurer] cites communications between the parties from March 1983 to refute the argument that it waived notice with respect to claims filed after May 1996. [The insurer's] attempt to distinguish its earlier, stalling behavior from a denial of coverage is spurious. While [the insurer] never explicitly denied claims prior to 1996, its decision to 'not respond[ ] to [the insured's] notice documentation' is, for the purpose of waiver, the same as denying coverage. Id. at 1176.

See also Isaacson v. Cal. Ins. Guar. Ass'n, 44 Cal. 3d 775, 791, 244 Cal. Rptr. 655 (1988) (“wrongful failure to provide coverage or defend a claim is a breach of contract”).

The rationale for this rule is that when an insurer denies coverage, it would be futile for the insured to comply with a policy condition. By denying coverage, the insurer has made clear that the insured's continued compliance with the provision will not affect its position:

The fundamental defect in [the insurer's] position here is that it has at no time suggested that, in the event that a timely tender of the defense of the wrongful death action had been made, it would have undertaken the defense. The record clearly suggests to the contrary. Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 883, 586 P.2d 1098, 151 Cal. Rptr. 285 (1978).

See also Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 763, 15 Cal. Rptr. 2d 815 (1993) (“we see no substantial probability that the insurers' response to the ' claims would have been different had [the insured] given earlier notice.”).

These principles were recently applied in Insurance Co. of the State of Pennsylvania v. Roman Catholic Archbishop of Los Angeles, Case No. CV 05-0587-NM (MCx) (C.D. Cal. May 13, 2005), aff'd, 227 Fed. Appdx. 643 (9th Cir. 2007). The court held that when an insurer had stated grounds for denying coverage and filed a coverage action against its insured, it could not then claim that the insured failed to cooperate:

[C]ourts are naturally skeptical of an insurance company that argues both that the underlying claims are not covered and that the insured has breached the duty to cooperate. The reasoning is that “an insurer is not allowed to rely on an insured's failure to perform a condition of a policy when the insurer has denied coverage because the insurer has, by denying coverage, demonstrated performance of the condition would not have altered its response to the claim.” Id., Slip op. at 10 (citations omitted).

Timing of Failure to Cooperate Defenses

Even if an insurer believes that an insured has failed to cooperate, it is not entitled to judicial relief until the underlying lawsuit against its insured has been resolved:

Logically, the required showing of prejudice cannot be made while the main tort action is still pending, its outcome uncertain. ' To permit speculation at this stage as to whether the insurer may or will be prejudiced in the main tort action would be inconsistent with the requirement laid down by our Supreme Court that the insurer must prove prejudice in order to assert the insured's lack of cooperation as a defense against the insured persons. United Servs. Auto. Ass'n v. Martin, 120 Cal. App. 3d 963, 966, 74 Cal. Rptr. 835 (1981).

Conclusion

Given these standards, an insured's alleged failure to cooperate will not often be a successful defense to coverage. Furthermore, even if the claim may have some merit, there must be substantial prejudice, something that an insurer typically cannot prove while the underlying lawsuit is pending.

Kirk A. Pasich, a member of this newsletter's Board of Editors, is a partner in the Los Angles office of Dickstein Shapiro LLP and the Chair of its Insurance Coverage Practice. He represents insureds in complex coverage disputes.

Most liability insurance policies have a “cooperation clause.” This clause typically is found in the “conditions” section of the policy. The standard clause states that the insured must “[c]ooperate with us in the investigation or settlement of the claim or defense against the 'suit.'” Commercial General Liability Coverage Form, ' IV, 2.c(3) (ISO Properties Inc., 2007). Insurers frequently argue that they need not perform their duties when an insured fails to cooperate with them.

By its terms, the duty to cooperate specifically addresses an investigation or settlement of a claim or a defense in a suit brought against the insured that may be covered by the policy. Nothing in the clause states that an insured must cooperate with an insurer in its efforts to assess possible coverage defenses. Rather, the focus is on the defense of the insured in the underlying lawsuit.

As California courts have recognized, the cooperation clause mandates that an insured “give a fair and frank disclosure of information reasonably demanded by the insurer to enable it to determine whether there is a genuine defense.” Valladao v. Fireman's Fund Indem. Co. , 13 Cal. 2d 322, 329, 89 P.2d 643 (1939). Thus, courts have recognized that if an insured does not appear at deposition or otherwise cooperate with the insurer in preparing its defense, the cooperation clause may have been breached. See, e.g. , Hall v. Travelers Ins. Cos. , 15 Cal. App. 3d 304, 93 Cal. Rptr. 159 (1971).

Cooperation and Conflicts of Interest

The cooperation clause does not give an insurer the right to control the defense of the claim when it has reserved rights or denied coverage. An insurer that reserves its right to deny coverage may not require an insured to obtain its approval before the insured retains defense counsel. See San Diego Navy Fed. Credit Union v. Cumis Insurance Society, Inc. , 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (1984) (“ Cumis “). The reason is straightforward ' in such a situation, there is a conflict of interest between the insurer and the insured regarding the defense of the underlying claims. See Id.

Cumis is perhaps the most widely cited case establishing an insured's right to independent counsel paid for by its insurer in these situations. In Cumis, the court noted that when an insurer reserves its right to deny coverage under a policy, “there may be little commonality of interest” between the insurer and the insured. Id. at 364. The court thus held that “when a conflict exists, the insured may have control of the defense if he wishes, it follows the insurer must pay for such defense conducted by independent counsel.” Id. at 369. See Cal. Civ. Code ' 2860 (codification of Cumis providing that insured has right to independent counsel paid for by the insurer when control of the defense of the underlying claim may affect coverage).

Similarly, in Rockwell International Corp. v. Superior Court , 26 Cal. App. 4th 1255, 32 Cal. Rptr. 2d 153 (1994), the court observed that under California law, when an insurer has reserved its rights, the insured is entitled to independent counsel. According to the court:

When an insurer provides an unconditional defense for its insured, the insured and the carrier share the same goal ' minimizing or eliminating liability in the third party action ' and no conflict of interest inhibits the ability of one lawyer to represent both the insurer and its insured. But where the carrier questions the availability of coverage and provides a defense in the third party action subject to a reservation of rights, a conflict exists ' because the insured's goal is coverage, which flies in the face of the insurer's desire to avoid its duty to indemnify. Since it is unavoidable that, in the course of investigating and preparing the insured's defense in the third party action, the insured's attorney will come upon information relevant to a coverage issue, it is impossible for the carrier's attorney to represent the insured (unless, of course, the insured consents) and the insured is entitled to independent counsel. Id. at 1263-64.

See also Assurance Co. of Am. v. Haven , 32 Cal. App. 4th 78, 84, 38 Cal. Rptr. 2d 25 (1995) (because there is a conflict of interest or a potential conflict of interest between the insurer and the insured, the insured is entitled to obtain, at the insurer's expense, independent counsel, i.e., Cumis counsel, who then controls the litigation).

Furthermore, “even if the insurer has not denied coverage or refused to defend, the insurer has a duty to accept a reasonable settlement, and the insurer's refusal to settle may give rise to the insured's action for reimbursement of the settlement. ' In such a case, the insured has the burden of showing the settlement was reasonable and if he meets that burden, then again the act of settlement raises two presumptions: that the claim was legitimate and that the amount of the settlement was the amount of the insured's liability.” Armstrong World Indus. Inc. v. Aetna Cas. & Sur. Co. , 45 Cal. App. 4th 1, 85, 52 Cal. Rptr. 2d 690 (1996).

Cooperation and an Insurer's Duty to Investigate

Another question that frequently arises is the impact of the cooperation clause on an insurer's duty to investigate. Insurers often cite the cooperation clause in asking an
insured to provide information about the underlying claim or suit. However, an insurer cannot use the cooperation clause as a basis to transfer its own duty to investigate to its insured. California courts have repeatedly held that an insurer has a non-transferable duty to investigate. As the California Supreme Court has held, “it is essential that an insurer fully inquire into possible bases that might support the insured's claim. ' [A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” Egan v. Mut. of Omaha Ins. Co. , 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (1979).

An insurer must seek information relevant to its insured's claim. See, e.g., Frommoethelydo v. Fire Ins. Exch. , 42 Cal. 3d 208, 721 P.2d 41, 228 Cal. Rptr. 160 (1986) (bad faith failure to investigate existed when the insurer did not interview known witnesses who might have been able to testify about matters bearing on coverage). An insurer cannot simply rely on information provided by its insured. It must inquire independently into all available information bearing on its coverage determination. For example, in Hughes v. Blue Cross , 215 Cal. App. 3d 832, 263 Cal. Rptr. 85 (1989), the plaintiffs sought coverage for their son's hospitalization. The insurer argued that the treating physician should have sought more information to support the claim. The court rejected this notion, holding that the insurer bears the primary duty of inquiry and must make reasonable efforts to obtain all relevant records. Therefore, the court concluded that the insurer had placed “an undue burden of inquiry on the insured's physician.” Id. at 846.

Another court reached a similar conclusion. In Mariscal v. Old Republic Life Insurance Co. , 42 Cal. App. 4th 1617, 50 Cal. Rptr. 2d 224 (1996), an insured was killed in an automobile accident. His wife was the beneficiary under a life insurance policy. The insurer disregarded the wife's evidence supporting coverage and made no independent effort to find further evidence supporting her claim, arguing that doctors were “notoriously difficult to contact by telephone.” The Mariscal court noted that, rather than evaluating “all the evidence available to it with a view towards coverage, [the insurer] relied on a short phrase in the death certificate” that supported its denial of coverage. Id. at 1625. The court held that the insurer breached its duty to investigate because it turned its back on evidence supporting the claim and failed to pursue additional evidence through further independent investigation. Id. at 1624.

The Impact of an Insured's Failure to Cooperate

Before it can prevail on a defense that the insured failed to cooperate, an insurer must establish that it has exercised “reasonable diligence” in seeking to procure the cooperation of the insured. Billington v. Interins. Exch. , 71 Cal 2d 728, 456 P.2d 982, 79 Cal. Rptr. 326 (1969). However, even if the insurer carries its burden, this does not mean that the insured loses its coverage.

California courts long have held that 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.” Campbell v. Allstate Ins. Co. , 60 Cal. 2d 303, 305, 384 P.2d 155, 32 Cal. Rptr. 827 (1963). The insurer “must show actual prejudice, not the mere possibility of prejudice.” Shell Oil Co. v. Winterthur Swiss Ins. Co. , 12 Cal. App. 4th 715, 15 Cal. Rptr. 2d 815 (1993). “[P]rejudice is not shown simply by displaying end results; the probability that such results could or would have been avoided absent the claimed default or error must also be explored.” Clemmer v. Hartford Ins. Co. , 22 Cal. 3d 865, 587 P.2d 1098, 151 Cal. Rptr. 285 (1978).

A federal court recently summarized the California rule:

Under California law, it is settled that an insurer, in order to avoid liability on the basis of a breach of a procedural condition such as a notice or cooperation clause, must establish actual and substantial prejudice. The prejudice requirement has been extended to apply to other procedural conditions, such as “consent-to-payment” conditions. ' The overriding purpose of the actual prejudice requirement is to prevent the complete forfeiture of coverage based upon an insured's harmless breach of a policy condition. Silicon Valley Bank v. New Hampshire Ins. Co. , 203 F. Supp. 2d 1152, 1159 (C.D. Cal. 2002) (citations omitted and emphasis added).

As the Ninth Circuit has explained, the purpose of a condition in an insurance policy is “not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid.” Ins. Co. of Pennsylvania v. Associated Internat'l Ins. Co. 922 F.2d 516, 523 (9th Cir. 1991).

Therefore, “an insurer, in 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.” Billington v. Interins. Exch. of So. California , 71 Cal. 2d 728, 737, 456 P.2d 982, 79 Cal. Rptr. 326 (1969). “[P]rejudice does not arise merely because a delayed or late notice has denied the insurance company the ability to contemporaneously investigate the claim or interview witnesses” or because the insurer has been denied “the opportunity to make an early settlement of the claim.” Northwestern Title Sec. Co. v. Flack , 6 Cal. App. 3d 134, 143, 85 Cal. Rptr. 693 (1970).

The Effect of an Insurer's Denial of Coverage

If an insurer has denied coverage, then, as a matter of law, it cannot claim prejudice. “[A]n insurer is not allowed to rely on an insured's failure to perform a condition of a policy when the insurer has denied coverage because the insurer has, by denying coverage, demonstrated performance of the condition would not have altered its response to the claim.” Select Ins. Co. v. Superior Court , 226 Cal. App. 3d 631, 637, 276 Cal. Rptr. 598 (1990). For example, in Flintkote Co. v. General Accident Assurance Co. of Canada , 480 F. Supp. 2d 1167 (N.D. Cal. 2007), the insured filed a lawsuit against its insurers because they had not responded to its request for defense and indemnity in connection with asbestos-related litigation. The court found that the insurer waived its right to claim that the insured did not provide notice of the claims because the insurer's failure to respond was the same as denying coverage:

It is striking to the court that [the insurer] cites communications between the parties from March 1983 to refute the argument that it waived notice with respect to claims filed after May 1996. [The insurer's] attempt to distinguish its earlier, stalling behavior from a denial of coverage is spurious. While [the insurer] never explicitly denied claims prior to 1996, its decision to 'not respond[ ] to [the insured's] notice documentation' is, for the purpose of waiver, the same as denying coverage. Id. at 1176.

See also Isaacson v. Cal. Ins. Guar. Ass'n , 44 Cal. 3d 775, 791, 244 Cal. Rptr. 655 (1988) (“wrongful failure to provide coverage or defend a claim is a breach of contract”).

The rationale for this rule is that when an insurer denies coverage, it would be futile for the insured to comply with a policy condition. By denying coverage, the insurer has made clear that the insured's continued compliance with the provision will not affect its position:

The fundamental defect in [the insurer's] position here is that it has at no time suggested that, in the event that a timely tender of the defense of the wrongful death action had been made, it would have undertaken the defense. The record clearly suggests to the contrary. Clemmer v. Hartford Ins. Co. , 22 Cal. 3d 865, 883, 586 P.2d 1098, 151 Cal. Rptr. 285 (1978).

See also Shell Oil Co. v. Winterthur Swiss Ins. Co. , 12 Cal. App. 4th 715, 763, 15 Cal. Rptr. 2d 815 (1993) (“we see no substantial probability that the insurers' response to the ' claims would have been different had [the insured] given earlier notice.”).

These principles were recently applied in Insurance Co. of the State of Pennsylvania v. Roman Catholic Archbishop of Los Angeles, Case No. CV 05-0587-NM (MCx) (C.D. Cal. May 13, 2005), aff'd , 227 Fed. Appdx. 643 (9th Cir. 2007). The court held that when an insurer had stated grounds for denying coverage and filed a coverage action against its insured, it could not then claim that the insured failed to cooperate:

[C]ourts are naturally skeptical of an insurance company that argues both that the underlying claims are not covered and that the insured has breached the duty to cooperate. The reasoning is that “an insurer is not allowed to rely on an insured's failure to perform a condition of a policy when the insurer has denied coverage because the insurer has, by denying coverage, demonstrated performance of the condition would not have altered its response to the claim.” Id., Slip op. at 10 (citations omitted).

Timing of Failure to Cooperate Defenses

Even if an insurer believes that an insured has failed to cooperate, it is not entitled to judicial relief until the underlying lawsuit against its insured has been resolved:

Logically, the required showing of prejudice cannot be made while the main tort action is still pending, its outcome uncertain. ' To permit speculation at this stage as to whether the insurer may or will be prejudiced in the main tort action would be inconsistent with the requirement laid down by our Supreme Court that the insurer must prove prejudice in order to assert the insured's lack of cooperation as a defense against the insured persons. United Servs. Auto. Ass'n v. Martin , 120 Cal. App. 3d 963, 966, 74 Cal. Rptr. 835 (1981).

Conclusion

Given these standards, an insured's alleged failure to cooperate will not often be a successful defense to coverage. Furthermore, even if the claim may have some merit, there must be substantial prejudice, something that an insurer typically cannot prove while the underlying lawsuit is pending.

Kirk A. Pasich, a member of this newsletter's Board of Editors, is a partner in the Los Angles office of Dickstein Shapiro LLP and the Chair of its Insurance Coverage Practice. He represents insureds in complex coverage disputes.