Don't You (Forget About Me): The Purpose, Force, and Effect of

Don’t You (Forget About Me): The Purpose, Force, and Effect of Insurance Policy Conditions (Notice, Voluntary Payments, and Cooperation) and Case Law Update

By

Stephanie L. Grassia, CPCU1

Jessica E. La Londe2

Hao Nguyen3

“Don’t You (Forget About Me).” What does the song from the 1985 movie The Breakfast Club have to do with the law of insurance policies? Well, aside from the song being performed by a band whose name probably has been used to describe opposing counsel from time to time (you may have to look that one up and extra points if you don’t), it conveys an important lesson for insureds and insurers alike. Most insureds and insurers know that an insurance policy tells you what is covered and what is not, but both often overlook another very important aspect of the policy: the conditions. While the conditions in a policy vary depending on the type of coverage, the insurer, and the particular policy form, here we will briefly discuss three of those conditions that we often see in insurance policies: notice, voluntary payments, and cooperation provisions. Each of these conditions can make a significant difference in whether there is coverage under an insurance policy and how a claim is handled. So, it’s important that both insureds and insurers not forget about them. This article tries to help you with that.

I. Notice Provisions

A. What They Are, What They Mean, and When They Come Up

Notice provisions can take many forms, but standard language is often something like the following: “You must see to it that we are notified as soon as practicable of an ‘occurrence’ of an offense which may result in a claim . . . .” You might also see “as soon as practicable” replaced with “as soon as possible,” “promptly,” “immediately,” or a similar temporal word.

1 Stephanie L. Grassia is a partner with Helsell Fetterman LLP in Seattle, Washington and is the leader of the firm’s insurance coverage practice group. Ms. Grassia represents policyholders in litigation with insurance companies over all lines of property and casualty coverage. Before becoming a lawyer, she spent 12 years as a property and casualty commercial insurance broker, managing accounts in the hospitality, construction, transportation, and real estate arenas.

2 Jessica La Londe is a partner with Duane Morris LLP in San Francisco, California. She is a trial lawyer with significant experience counseling and representing insurance companies with respect to several lines of coverage on a wide range of issues.

3 Hao Nguyen is a Senior Associate with Thompson Coe & O’Meara, LLP in Los Angeles, California. She practices in the area of professional liability, insurance litigation, and labor and employment law.

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The issue that often arises is that an insured will provide notice to the insurer that the insurer believes violates this provision – in other words, the insurer believes that notice to the insurer was not provided “as soon as practicable” after an “occurrence” or other triggering event. Can the insurer deny coverage? Insurers generally and historically have argued that the plain terms of the insurance policy should apply – that is what the insured and insurer agreed to in contracting – and, therefore, if notice was provided “late,” no coverage should apply. Insureds generally and historically argue that this amounts to a “technical forfeiture” that has nothing to do with the coverage terms of the policy and has no detrimental effect on the insurer.

Below, we discuss the general approaches by courts around the country and highlight key and recent case law on the topic.

B. How Courts Have Handled Notice Provisions in Insurance Policies

It is generally recognized that there are two overarching categories of jurisdictions on this topic: those jurisdictions that require the insurer to demonstrate prejudice to enforce the notice condition (“notice-prejudice states”) and those that enforce the notice requirement without a showing of prejudice (“no-prejudice states”). Some courts apply one or the other approach based on whether the notice provision is a condition precedent in the policy. Also, New York presents a special case with more recent developments and so is discussed in further detail below. We also discuss the effect of these notice rules on claims-made policies.

1. Notice-Prejudice Approach

The majority of states in the United States are notice-prejudice states. Therefore, in most states, the insurer has the burden to demonstrate both that: (1) notice was not provided “as soon as practicable” (or whatever language the policy contains in its notice provision); and (2) that the insurer was actually prejudiced by such failure. See, e.g., California (Collin v. American Empire Ins. Co., 21 Cal.App.4th 787 (1994)); Colorado (Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005)); Florida (Bankers Ins. Co. v. Macias, 475 So.2d 1216 (Fla. 1985)); Maryland (Sherwood Brands, Inc. v. Hartford Acc. & Indem. Co., 347 Md. 32, 698 A.2d 1078 (1997)); Nevada (Las Vegas Metro. Police Dep’t v. Coregis Ins. Co., 256 P.3d 958 (Nev. 2011)); Pennsylvania (Brakeman v. Potomac Ins. Co., 371 A.2d 193 (Penn. 1977)); Texas (Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 174 (Tex. 1995)); Washington (Or. Auto Ins. Co. v. Salzberg, 535 P.2d 816 (Wash. 1975)). The prejudice requirement may apply not only to late notice but to a complete failure to give notice. See, e.g., California (Flintkote Co. v. Gen. Acc. Assur. Co. of Canada, 480 F. Supp. 2d 1167, 1175 (N.D. Cal. 2007)).

Generally speaking, courts have had difficulty delineating what exactly prejudice looks like, and it can feel like a “we know it when we see it” approach. Most cases addressing the topic find that there has been no prejudice, and so there are many more cases discussing what prejudice is not than what it is. However, courts have provided some guidance.

Most jurisdictions agree that prejudice is generally a question of fact. See, e.g., Lawler v. GEICO, 569 So.2d 1151, 1153 (Miss.1990) (prejudice a question of fact); Clarke v. Allianz Global Risks U.S. Insurance Company, 639 F. Supp. 2d 751, 756 (N.D. Tex. 2009) (“Texas courts generally treat prejudice as a question of fact”); U.S. Fire Ins. Co. v. Green Bay

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Packaging, Inc., 66 F. Supp. 2d 987, 1001 (E.D. Wis. 1999) (“determination of prejudice regarding untimely notice is a question of fact for the trier of fact”). In addition, some put the burden on the insurer in the first instance, while others presume prejudice against the insurer and then the burden shifts to the insured to demonstrate a lack of prejudice. See, e.g., Colorado (Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005)); Florida (Bankers Ins. Co. v. Macias, 475 So.2d 1216 (Fla. 1985)).

But what qualifies as prejudice? In some states, the prejudice standard is specifically set out in a statute. Under New York law, for example, when the prejudice standard applies (see discussion below), it is set forth by statute: “The insurer’s rights shall not be deemed prejudiced unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim.” N.Y. Ins. Law § 3420(c)(2)(C).

Other jurisdictions have developed the prejudice standard through case law. For instance, California’s standard has been articulated as follows: prejudice is shown when there is a “substantial likelihood that, with timely notice, and notwithstanding its denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured’s liability.” Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715, 763 (1993). This is a difficult standard to meet. In fact, under California law, entry of a default judgment against the insured does not itself establish prejudice. See, e.g., Belz v. Clarendon Am. Ins. Co., 158 Cal.App.4th 615, 630 (2007).

The Seventh Circuit has recently stated that “[i]n order to show prejudice resulting from a late notice, the insured has to show a likelihood of success in defending liability or damages if those opportunities had been available.” Kmart Corp. v. Footstar, Inc., 777 F.3d 923, 933 (7th Cir. 2015) (internal quotations and citations omitted).

What becomes clear from reading the case law is that prejudice usually requires something more than the insurer stating that too much time has passed for it to do a proper investigation (e.g., because memories have dimmed) or that it missed the opportunity to engage in earlier settlement negotiations. See, e.g., Nw. Title Sec. Co. v. Flack, 6 Cal.App.3d 134, 141-142 (1970) (while delay may have prevented the insurer from promptly investigating and having its own counsel represent it early on, there was no prejudice because there was no showing the delay affected the outcome of the action against the insured or that it prevented the insurance company from settling the claim for less than what it ultimately settled for).

In one California case, the court found that the insurer had been prejudiced because the judgment had been entered against the insured that was much larger than actual damages. Collin v. Am. Empire Ins. Co., 21 Cal. App. 4th 787, 819 (1994). The court stated that: “Had American been able to propound discovery in the case, it is reasonable to assume that American could have established that the Collins’ conversation damages were only $55,763.30 [and not $100,000] as reflected in the Greenspan report.” Id. The court also pointed to the fact that the insureds were found liable for “conversion” when there was no evidence of conversion: “A concession by the judgment-holder that it had no evidence of liability must surely constitute prejudice.” Id. at 820.

There is a recent Southern District of New York case that is currently up on appeal and may ultimately shed light on the prejudice factor in that state. Old Wausau Underwriters Ins.


Co. v. Old Republic Gen. Ins. Co., No. 14-CV-3019 JMF, 2015 WL 4720285, at *10 (S.D.N.Y. Aug. 7, 2015) (on appeal). In this case, the court held that the insurer had to demonstrate actual prejudice; the court stated that: “Old Republic’s failure to identify any actual evidence of prejudice is in stark contrast to those cases in which Courts have found prejudice due to late notice.” Id. at *11. As an example of prejudice, the federal court in New York cited Atl. Cas. Ins. Co. v. Value Waterproofing, Inc., 918 F. Supp. 2d 243 (S.D.N.Y.) aff’d sub nom. Atl. Cas. Ins. Co. v. Greenwich Ins. Co., 548 F. App’x 716 (2d Cir. 2013). In that case, the demolition of a building after a roof collapsed prior to notification to the insurer completely impaired the insurer’s ability to investigate the cause of the roof collapse, which constituted prejudice.

In some jurisdictions, notice of a suit after a default judgment is final will constitute prejudice as a matter of law. See, e.g., Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex. 1993) (“We agree that an insurer that is not notified of suit against its insured until a default judgment has become final, absent actual knowledge of the suit, is prejudiced as a matter of law.”).

2. No-Prejudice Approach

In only a few states is prejudice not required for an insurer to invoke the late notice defense. See, e.g., DC (Travelers Indem. Co. v. United Food & Commercial Workers Int’l Union, 770 A.2d 978, 991 (D.C. 2001)); Idaho (Viani v. Aetna Ins. Co., 501 P.2d 706 (Idaho 1972)); Virginia (Dabney v. Augusta Mut. Ins. Co., 710 S.E.2d 726 (Va. 2011)). In the past year, a Georgia court confirmed that it was a no-prejudice state in Joseph v. Nw. Mut. Life Ins. Co., No. 7:13-CV-96 HL, 2015 WL 1309648, at *8 (M.D. Ga. Mar. 24, 2015) (“Georgia law is clear on this point and does not require an insurance company to show prejudice to bar coverage for late notice.”).

Illinois has developed a special approach. Prejudice is not required to defeat coverage for late notice but is a factor in determining whether or not notice was late at all. See, e.g., Country Mut. Ins. Co. v. Livorsi Marine, Inc., 856 N.E.2d 338, 346 (Ill. 2006). This was confirmed this past year by First Chicago Ins. Co. v. Molda, 36 N.E.3d 400, 418 appeal denied, 39 N.E.3d 1001 (Ill. 2015).

Some jurisdictions have developed different rules depending on the type of coverage. For instance, some jurisdictions apply different rules to a primary and excess policy, different rules to uninsured (or underinsured) motorist policies, and different rules to reinsurance policies. See, e.g., Midwest Emp’rs Cas. Co. v. E. Ala. Health Care, 695 So.2d 1169, 1173 (Ala. 1997) (no prejudice required for primary insurer but prejudice required for excess insurer); Brandon v. Nationwide Mut. Ins. Co., 97 N.Y.2d 491 (2002) (notice-prejudice rule applies to SUM coverage); Unigard Sec. Ins. Co. v. North Riv. Ins. Co., 79 N.Y.2d 576 (1992) (notice-prejudice rule applies to reinsurance policies).

3. Condition Precedent Approach

Yet a third group of jurisdictions strictly enforce the notice provision if it is a “condition precedent” to coverage (i.e., they don’t require a prejudice showing), but require prejudice when the notice provision is not a condition precedent. See, e.g., Fireman’s Fund Ins. Co. v. Care


Mgmt., Inc., 361 S.W.3d 800, 805 (Ark. 2010) (“[I]t is well-settled law in Arkansas that an insured must strictly comply with an insurance-policy provision requiring timely notice where that provision is a condition precedent to recovery. Failure to do so constitutes a forfeiture of the right to recover from the insurance company, regardless of whether the insurance company was prejudiced by the failure. On the other hand, if notice is not a condition precedent, the insurance company must show it was prejudiced by any delay in notice in order to be relieved of liability.”); Michaels v. First USA Title, LLC, No. A14-0931, 2015 WL 1514018, at *5 (Minn. Ct. App. Apr. 6, 2015), review denied (June 16, 2015) (“Because the policy language at issue made coverage contingent on notice as a ‘condition precedent,’ National Union does not have to show actual prejudice.”).

In Anco Insulations, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 787 F.3d 276, 283-284 (5th Cir. 2015), the Fifth Circuit, summarized Louisiana law:

The general rule in Louisiana is that when “the requirement of timely notice is not an express condition precedent [to insurance coverage], the insurer must demonstrate that it was sufficiently prejudiced by the insured’s late notice” in order to deny coverage. This general rule, however, is subject to an exception: When timely notice is an express condition precedent to coverage, “Louisiana law enforces provisions of insurance contracts which require notice as a condition precedent without also requiring the insurer to make a particular showing of prejudice.” In MGIC Indemnity Corporation v. Central Bank of Monroe, Louisiana, we analyzed a line of Louisiana cases following Hallman v. Marquette Casualty Company and Payton v. St. John, and concluded that, when a policy requires the insured to comply “fully” with all the terms of the policy as a “condition precedent” to coverage, and, the policy obligates the insured to notify the insurer immediately after a claim is made or suit is brought against the insured, the insured’s failure to notify the insurer of the lawsuit promptly relieves the insurer of any obligation for costs expended by the insured in defending the action.

Again, the district court found that Anco first tendered defense of the underlying lawsuits on April 23, 2009. The Policy required that Anco “immediately” forward any claims, suits, or process received by Anco, and stated that “[n]o action shall lie against the company unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy.” In line with our precedent and that of the Louisiana courts, we hold that Anco’s failure to comply with the notice provision of the policy precludes coverage of its untimely tendered lawsuits. Moreover, because Louisiana law does not require an insurer to demonstrate prejudice as a result of late tender when timely notice is a condition precedent to coverage, we reject Anco’s contention that the district court erred in not requiring National Union to show prejudice. Rather, the district court correctly determined that Anco breached the terms of the Policy by failing to tender its claims immediately. Neither did the district court err in concluding that Anco’s failure to comply with the timely notice provision relieved National Union of its obligation to reimburse Anco for costs incurred on or after April 23, 2009 in defending lawsuits filed between 1987 and 2008. (internal citations omitted).


4. New York

New York presents a special case and has recent relevant case law, so we separately discuss it here. Historically, at common-law, New York was a “no-prejudice” case, enforcing the notice provisions of insurance policies if notice was not provided as soon as practicable, without requiring a showing of prejudice. See, e.g., Briggs Ave. LLC v. Ins. Corp. of Hannover, 11 N.Y.3d 377, 381 (2008) (“[A]n insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage, whether it is prejudiced by the delay or not.”). In Briggs, a case in which the policyholder had a sympathetic case, the policyholder tendered the claim to the insurer as soon as it learned of a lawsuit, but ten months after the lawsuit had first been served by substitute service. Id. at 380-381. The policyholder argued that it had not learned of the lawsuit when served because it had not updated its address with the Secretary of State. Id. at 381. In a brief, six-page opinion, the Court of Appeals (the highest state court in New York) responded to a certified question from the Second Circuit Court of Appeal and found that there was no coverage based on late notice, and that no showing of prejudice was required: “We have long held, and recently affirmed, that an insurer that does not receive timely notice in accordance with a policy provision may disclaim coverage, whether it is prejudiced by the delay or not.” Id. at 381-382.

Under this common law rule, very short periods of time have been found by New York courts to constitute late notice as a matter of law. For instance, in American Home Assurance Co. v. Republic Ins. Co., 984 F.2d 76, 78 (2d Cir. 1993), a 36-day delay in notifying the insurer had been found to preclude coverage. See also Nabutovsky v. Burlington Ins. Co., 81 A.D.3d 615 (N.Y. App. Div. 2d Dep’t 2011) (coverage was precluded because of a 3-month delay).

New York has a statute that provided that:

No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors . . . .

N.Y. Ins. Law § 3420(a). Effective January 17, 2009, New York added a subsection (5) to this section, which provides that the following provision must be in such policies:

A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer, except as provided in paragraph four of this subsection. . . .

N.Y. Ins. Law § 3420(a)(5). There are many New York decisions that have found that, because the amendment to the statute is effective January 17, 2009, policies issued before that date are subject to the common law no-prejudice rule and not the new statute requiring prejudice. See, e.g., Briggs Ave. LLC v. Ins. Corp. of Hannover, 11 N.Y.3d 377, 381 (2008).


In a more recent case, however, a court for the first time addressed whether the common law no-prejudice rule or the statutory rule applied to policies neither issued nor delivered in New York (subsection (a) of 3420 provides that it applies to policies “issued or delivered in this state”), even if the policy was issued after January 17, 2009. Indian Harbor Ins. Co. v. City of San Diego, 586 F. App’x 726 (2d Cir. 2014). After finding that the policy was not “issued” in New York, the Second Circuit rejected the insured’s argument that the amendment to the statute had created a new public policy. Id. at 728-729. Because the statute did not apply, the common law no-prejudice rule applied to the policy, precluding coverage. Id. at 729.

The effect of this decision is that the notice-prejudice rule only applies to policies as specified in the statute (e.g., to policies issued or delivered in New York) but that the common law no-prejudice rule will apply to other policies. It should be noted that the statute also specifically takes other types of policies outside of its purview (e.g., marine policies) and thus the common law no-prejudice rule will also still apply to those policies.

5. Claims-Made Policies

There is an entirely separate body of law when it comes to claims-made policies. Let us first start with the basics, and identify what is different about claims-made policies.

Occurrence policies are generally triggered by bodily injury or property damage occurring during the policy period, regardless of when a claim (like a lawsuit) is made against the insured. Therefore an insured and insurer’s exposure can come long after the bodily injury or property damage has occurred and the policy expired. As many are familiar with in the case of asbestos or environmental liabilities, such exposures can arise decades later. In contrast, claims-made policies require that a claim be made against the insured during the policy period and, very often, also includes the requirement that the claim be reported to the insurer during the policy period (or a set timeframe after). It has been explained that one advantage of the claims-made policy is that insurers are better able to close their books on policies and, so, are able to provide policies at lower premiums to their insureds. Therefore, when the insured has not reported a claim within the timeframe set forth in a claims-made policy the question arises: does an insurer need to demonstrate prejudice to deny coverage in such instance?

In the context of claims-made policies that require the insured to report a claim during a defined period, courts have overwhelmingly found that there is no prejudice requirement – even if those courts have established a prejudice requirement in the context of “notice as soon as practicable” conditions of occurrence policies. See, e.g., Helfand v. National Union Fire Ins. Co. of Pittsburgh, Pa., 10 Cal.App.4th 869, 888 (1992) (holding that the notice-prejudice rule does not apply to policies requiring that claims be both made and reported to the insurer during the policy period).

A recent and well-reasoned example is Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951 (Colo.) opinion after certified question answered sub nom. Craft v. Philadelphia Indem. Ins. Co., 599 F. App’x 846 (10th Cir. 2015). In that case, the Colorado Supreme Court held as a


matter of first impression that Colorado’s notice-prejudice rule4 did not apply to the requirement in a claims-made policy that the insured must give notice of claim “not later than 60 days” after expiration of policy. Id. at 953. The court reasoned that in a claims-made policy “the date-certain notice requirement defines the scope of coverage. Thus, to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract.” Id.

Similarly, in HB Dev., LLC v. W. Pac. Mut. Ins., 86 F. Supp. 3d 1164, 1180 (E.D. Wash. 2015), a Washington federal court strictly applied the claims-made policy’s reporting requirements, despite that Washington is a notice-prejudice state.

This same logic may apply to other parts of coverage that have similar time limits. For instance, in Venoco, Inc. v. Gulf Underwriters Ins. Co., 175 Cal.App.4th 750 (2009) the policy included a pollution buy-back provision with a 60-day notice provision. The court held: “Where the policy provides that special coverage for a particular type of claim is conditioned on express compliance with a reporting requirement, the time limit is enforceable without proof of prejudice.” Id. at 760.

As relevant to the discussion here, it should be noted that many, if not most, of claims-made policies have a second notice requirement in the conditions of the policy that requires that notice be provided “as soon as practicable,” similar to that condition seen in an occurrence policy. Most courts find that this condition is still subject to the prejudice requirement.

An exception to this is the recent case of Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A., No. A-4516-12T1, 2014 WL 2533810, at *5 (N.J. Super. Ct. App. Div. June 6, 2014). In Templo Fuente, the claims-made policy required the claim to be reported to the insurer within a set timeframe and also required that notice be “as soon as practicable.” Id. at *2. The insured had provided notice within the policy period but 6 months after the complaint was served on them and, admittedly, not “as soon as practicable.” Id. The New Jersey appellate court held that, despite that New Jersey is generally a notice-prejudice state, it would not apply a notice-prejudice standard to the “as soon as practicable” requirement of the claims-made policy, relying on the distinction between occurrence and claims-made policies. Id. at *5. The Supreme Court of New Jersey is currently reviewing the case. Templo Fuente de Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, P.A., 101 A.3d 1082 (N.J. 2014).

C. Practical Application

So what is an insured and insurer to do with the different approaches and nuances to those approaches discussed above? How can these rules be applied ahead of time instead of after-the-fact?

4 On the notice-prejudice rule, the Craft court stated: “We first adopted the rule in the context of an underinsured motorist policy in Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223, 230 (Colo. 2001). We later applied it to a liability policy in Friedland [v. Travelers Indem. Co., 105 P.3d 639, 643 (Colo. 2005)].” Id. at 952.


As a practical matter, it can sometimes be difficult for an insured or insurer to know which state’s law will apply to its dispute and, therefore, it could be dangerous to presume the outcome of a notice issue. How a court will decide the enforceability of a choice of law provision or the outcome of a conflicts of law determination may be difficult to predict. Therefore, an insured would be wise to not “bank” on a particular state’s law on the notice provision in deciding whether or not to provide notice to the insurer. Generally speaking, an insured should promptly notify the insurer of an occurrence (or other precipitating event). Deciding not to in reliance on a particular state’s notice-prejudice rule risks that the insured could be wrong on whether prejudice must be established and what is required to demonstrate prejudice.

By the same token, when an insured has provided what the insurer deems to be late notice, the insurer may not want to assume that a notice-prejudice rule applies (it may not). It will often be prudent for an insurer to raise the possibility of a late notice defense with the insured at the first possible moment (and, in some jurisdictions, may want to or have to file a declaratory judgment action), lest the insurer risk waiver or estoppel – i.e., the inability to rely on a late notice defense.

II. Voluntary Payment Provisions

A. In General and Its Purpose

Liability policies typically contain what is known as a “voluntary payment” clause or “consent” clause which prohibits an insured from making voluntary payments, assuming any obligation, or incurring any expense without the insurer’s consent. A standard provision is similar to the following: “the insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense… without our consent” or “the insured shall not assume or admit liability, make any payment, consent to any judgment, settle any claim…”

A voluntary payment provision in a liability policy provides that no loss expense or legal expense shall be incurred on behalf of the insured without the insurer’s consent. Belz v. Clarendon, 158 Cal.App.4th 615 (2007). The policy condition provides that any insured who makes voluntary payments without the insurer’s consent assumes such obligations at the insured’s own expense. California Insurance Law Handbook § 58:3. Voluntary Payment Provision (2016). Insurers typically point to this provision in support of their decision to deny reimbursement of settlement amounts obtained without their consent in violation of the no voluntary payment provision.

The rationale supporting the doctrine has been couched in terms of protecting the insurer’s right to a fair adjudication of the insured’s liability and preventing collusion between the insured and injured party. The purpose of such provisions “is to prevent collusion as well as to invest the insurer with the complete control and direction of the defense or compromise of suits or claims.” Gribabldo, Jacobs, Jones & Assoc. v. Agrippina Versicherungers A.G., 3 Cal.3d 434, 449 (1970).


B. How Courts Have Handled No Voluntary Payment Provisions

An issue that arises with respect to the application of a “voluntary payment” clause is whether the insurer must establish prejudice in order to make out a coverage defense. Courts’ treatment of no voluntary payment provisions or consent clause fall under the following categories: (1) jurisdictions where the provisions are enforced without a requirement of prejudice; and (2) jurisdictions that require a showing of prejudice. Still, the lines can be blurred where the insurer is providing a defense under a reservation of rights. A discussion of the various treatment is below:

1. No Showing of Prejudice Requirement

A large number of states have held that a violation of a “no voluntary payment” clause does not require a showing of prejudice by the insurer to preclude coverage under the voluntary payment provision. See e.g. California (Belz v. Clarendon, 158 Cal.App.4th 615 (2007)); Maryland (Perini/Tomkins Joint Venture v. Ace American Insurance Co., 738 F.3d 95 (4th Cir. 2013)); Massachusetts (Augat v. Liberty Mutual Ins. Co., 410 Mass 117 (1991)); Michigan (Tenneco v. Amerisure Mutual Insurance Co., 281 Mich. App. 429 (2008)); New York (SI Venture Holdings, LLC v. Catlin Specialty Ins., 2015 WL 4637856 (S.D.N.Y 2015)). These courts have articulated a plain reading of the unambiguous language of the insurance provision to enforce the no voluntary payment condition.

Typically, no voluntary payment provisions are at issue where defense costs were incurred by the insured before notice to the carrier. As explained in the previous section on insureds’ duty to give notice of claims, the majority of jurisdictions require a showing of actual prejudice for declination of coverage in a late notice situation. However, application of the no voluntary payment provision can limit the insurer’s exposure, even if the insurer cannot demonstrate prejudice, in jurisdictions that do not require a showing of prejudice before the insurer can refuse to pay benefits.

California courts consistently enforce no-voluntary payment provisions without a requirement of prejudice. See Faust v. The Travelers, 55 F.3d 471, 472-473 (9th Cir. 1995); see Croskey et al, Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) ¶¶ 7:407 to 7:439.5 to 7:439.10, pp. 7A-140 to 7A-142. In Jamestown Builders, Inc. v. General Star Indeminty Co., 77 Cal.App.4th 341 (1999), a developer spent over $1.4 million to repair water intrusion defects to a residential development. The insurer declined to reimburse for the repair expenses, and the developer filed a bad faith action. The court of appeal affirmed the trial court’s dismissal of the action on demurrer stating: “California law enforces such no-voluntary payments provisions in the absence of economic necessity, insurer breach or other extraordinary circumstances…They are designed to ensure that responsible insurers who promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim…” The California Court of Appeal went on to explain that unlike the treatment of a notice provision or a cooperation clause, a no-voluntary payment provision can be enforced without a showing of prejudice: “[T]he existence or absence of prejudice to [the insurer] is simply irrelevant to [its] duty to indemnify costs incurred before notice. The policy plainly provides that notice is a condition precedent to the insured’s right to be indemnified; a fortiori the right to be indemnified cannot relate back to payments made or obligations incurred before notice…”


A breach of the no-voluntary payment provision usually occurs before the insured has

tendered the defense to the insurer. See Truck Ins. Exchange v. Unigard Ins. Co., 79 Cal.App.4th 966 (2000). In Low v. Golden Eagle, 110 Cal.App.4th 1532 (2003), the California court dealt with the rare case where the insured tendered the defense and then negotiated a settlement. The court explained that public policy would compel no different result post tender. The Court further reasoned that language from a leading Supreme Court decision indicates that such a provision is enforceable post tender until the insurer wrongfully denies tender. “[I]t’s only when the insured has requested and been denied a defense by the insurer that the insured may ignore the policy’s provisions forbidding the incurring of defense costs without the insurer’s prior consent and under the compulsion of that refusal undertake his own defense at the insurer’s expense.” Id., citing Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G., 3 Cal.3d 434, 449 (1970).

In SI Venture Holdings, LLC v. Catlin Specialty Ins., 2015 WL 4637856 (S.D.N.Y 2015), the court was presented with an issue of first impression under New York Law – whether a voluntary payment provision that requires an insured party to seek approval from its insurer before expending funds for environmental clean-up costs is void against public policy.

SI Venture Holdings (“SI”) discovered that one of its properties in Staten Island was contaminated with petroleum.5 The level of contamination was such that SI believed that it was obligated, based on its understanding of New York Law, to transport the soil to a disposal site in New Jersey and embarked on the soil disposal without seeking its insurer’s consent. Afterwards, SI sent a notice of claim to its insurer requesting coverage of the clean up costs.

SI’s policy with Catlin Specialty Insurance (“Catlin”) contained a voluntary payment provision which provided “…the Insured shall not assume or admit liability, make any payment, consent to any judgment, settle any Claim or Protective Third Party Claims Expense without prior written consent of the Insurer, which consent shall not be unreasonably withheld. The Insurer shall not be liable for any expense, settlement, assumed obligation of admission to which it has not consented.” Both parties moved for summary judgment – SI asked the court to set aside the Consent Provision and reimburse its costs and Catlin asked the Court to enforce the Consent Provision. According to SI, the Consent Provision conflicts with environmental regulations and leaves the insured in a position in having to finance clean-up costs without the benefit of reimbursement. In practice, SI argued if an insured must seek approval from its insurer before incurring clean-up costs to comply with environmental regulations expeditiously, the practical effect will be that less clean-up takes to the public’s detriment.

The court reasoned as follows: First, SI’s position would effectively “revolutionize” New York insurance law. Consent to settle provisions are routinely enforced under New York law under their plan and ordinary meaning. In 2008, the New York Court of Appeals enforced a

5 Often, an insured will comply with statutory clean up obligations, or will voluntarily agree to pay cleanup costs prior to being pursued in a lawsuit or legal action. There are a series of cases which discuss whether such cooperation with public authority and undertaking of clean up expenses, violates a voluntary payment clause. See e.g. Champion Spark Plug Co. v. Fidelity & Casualty Co. of New York, 116 Ohio App.3d 258 (6th Dist. 1996).


consent-to-settle provision against Bear Stearns in connection with a settlement that it entered into with the Securities and Exchange Commission (“SEC”) without requesting its insurer’s consent. See Vigilant Insurance Co. v. Bear Sterns Cos., 10 N.Y.3d 170, 177-178 (2008). Notably, the Court did not require the insurers to demonstrate prejudice from Bear Stern’s decision to settle without the insurer’s consent. Second, the position advanced by SI would be unfair to insurers because it would preclude even reasonable withholding of consent to reimburse an insured’s party’s clean-up costs.

The court declined to revolutionize New York Insurance Law finding ample case authority in which consent provisions have been enforced. “The consensus among New York courts (and federal courts applying New York law) is clear – consent provisions are typically upheld to their letter.” SI’s position would effectively strip insurers of the ability to reasonably object to compliance-related expenditures that an insured party intends to make. The policy prohibits Catlin from “unreasonably with[holding]” consent; therefore, had SI requested Catlin’s consent, and had Catlin decided to withhold it, SI would have had legal recourse. The Court did note, however, that if the agreement at issue did not contain a clause prohibiting Catlin from unreasonably withholding its consent – “if Catlin had carte blanche, under the terms of the agreement, to refuse all reasonable requests – a different outcome might be well warranted.”

These decisions demonstrate that in jurisdictions where prejudice is not required, voluntary payment provisions can substantially affect coverage by limiting it or avoiding coverage altogether.

2. Actual Showing of Prejudice Requirement

In some jurisdictions, courts have held that the insurer must show prejudice by the insured’s conduct before the insurer will be relieved of its obligation to indemnify the insured. See e.g. Colorado (Stresscon Corp. v. Travelers Property Cas. Co. of America, 2013 WL 4874352 (Colo. App. Sep. 12, 2013)); Illinois (Fire Ins. Co. v. G. Heileman Brewing Co., 321 Ill.App.3d 622 (2001)); North Carolina (Bond/Tech, Inc. v. Scottsdale Ins. Co., 174 N.C.App. 820, (2005)); Texas (Lennar Corp., et al. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013)); Washington (Public Utility District No. 1 of Klickitat County v. International Insurance Co., 881 P.2d 1020 (1994)).

In Desert Mountain Properties Ltd. Partnership v. Liberty Mut. Fire Ins. Co., 225 P.3d 421 (Ct. App. Div. 1 2010), the Arizona Court of Appeal held that the insurer was required to establish prejudice in order to void defense and coverage obligations under the policy’s voluntary payment clause. The property developer brought an action against the insurer seeking reimbursement of, on average, $200,000 for repairs per home due to discovery of substantial soil issues and other construction defects causing cracks and other damage to the homes. Liberty Mutual argued that the repair costs were not covered because the developer undertook the repairs voluntarily without Liberty’s consent.

The court of appeal noted that in Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129 (1987), the supreme court observed that the purpose of this provision in the standard liability policy is “to protect the insurer’s right to a fair adjudication of the insured’s liability and to prevent collusion between the insured and the injured person.” The court held an


insured’s breach of the clause ordinarily would “relieve a prejudiced insurer of liability under the policy.”

In ruling that the insurer had not established prejudice for relief under the voluntary payment clause, the court explained:

Liberty Mutual does not take issue with the superior court’s decision, consistent with Helme, to instruct the jury that it could prevail on this defense only if it proved Desert Mountain’s “actions had an actual and substantial adverse [effect] on Liberty Mutual’s right to defend, settle or adjust the claim.” On appeal, Liberty Mutual contends Desert Mountain made repairs without asserting defenses it could have raised had the homeowners sued over the defects and did not obtain releases from the homeowners after repairs were completed. Without addressing whether Desert Mountain breached the voluntary payments clause, we hold there was sufficient evidence from which the jury could conclude that Liberty Mutual was not prejudiced by Desert Mountain’s actions.

Accordingly, because there was evidence from which the jury could have found that Liberty Mutual suffered no prejudice from Desert Mountain’s decision to undertake the repairs, the court concluded that the superior court properly denied Liberty Mutual’s motion for judgment as a matter of law under the voluntary payments clause.

In Public Utility District No. 1 of Klickitat County v. International Insurance Co., 881 P.2d 1020 (Wash. 1994), insurers refused to pay a settlement entered by the Washington Public Utility Districts because the insured did not receive the insured’s consent to the settlement reached for $580 million in bonds. The Supreme Court of Washington articulated:

“Much like cooperation and notice clauses, a no-settlement clause contains a condition the insured must fulfill to create the insurer’s obligation to pay under the policy. Such conditions designate the manner in which claims covered by the policy are to be handled once a claim has been made or events giving rise to a claim have occurred. They are clearly placed in policies to prevent the insurer from being prejudiced by the insured’s actions. To release an insurer from its obligations without a showing of actual prejudice would be to authorize a possible windfall for the insurers. Thus we find an insurer cannot deprive an insured of the benefit of purchased coverage absent a showing that the insurer was actually prejudiced by the insured’s noncompliance with conditions precedent such as those at issue in this case. The burden of showing actual prejudice is on the insurer, and it is a factual determination.” Id. at 1029. (citations omitted).

The Colorado courts utilize a notice-prejudice rule to address whether an insured’s breach of a no voluntary payment provision is a per se bar to enforcing the policy in the context of pre-suit settlement. In Stresscon Corp. v. Travelers Property Casualty Co. of America, 2013 WL 4874352 (Sep. 12, 2013), the Colorado Court of Appeal was asked to resolve the question as to whether an insured’s breach of a “no voluntary payment” clause will always bar the insured from receiving benefits. The case arose from a construction accident which resulted in the death of one construction worker and injury to another when a partially erected building collapsed.


Stresscon informed its insurer, Travelers Property Casualty Company of America (“Travelers”) of the claim. The insurer responded by sending two reservation of rights letters stating that its policy might not cover the delay damages sought by the general contractor. The insurer also sent a letter to the general contractor on behalf of the concrete company, which denied that the concrete company was liable. At this point, the general contractor entered into settlement discussions with the concrete company. The general contractor and concrete company entered up settling their dispute. The concrete company did not, before entering into the settlement, inform the insurance company of the settlement or obtain its consent. The concrete company then sued the insurer, which was the first time that the insurance company learned of the settlement.

The Court of Appeals confirmed an insured’s violation of the voluntary payments provision does not void coverage unless the insurer suffers prejudice from the settlement. Under the notice-prejudice rule, “(1) if an insured does not provide the insurer with notice of a claim until after the insured has settled, then (2) the insured will lose benefits after the settlement based on a presumption of prejudice; unless (3) the insured rebuts the presumption that the insurer’s interests were prejudiced by the lack of notice and the insurer does not provide that it was actually prejudiced by the lack of notice.” Id. at *1.

The Court confirmed the notice-prejudice rule applies to the voluntary payment provision of the policy – “the notice-prejudice rule should apply in these circumstances; (2) an insured’s pre-litigation settlement with a third party does not conclusively establish that an insurer was prejudiced; and (3) sufficient evidence was presented at trial to support the jury’s finding that the insurance company was not prejudiced.” Id. at *4.

3. Has the Dust Settled Yet? Insurer Providing Defense Under a Reservation of Rights

Courts have taken different views as to whether an insurer loses its right to consent to settlements when it is defending under a reservation of rights. Recent case decisions indicate that denying coverage or reserving rights are indistinguishable and may affect an insurer’s right to consent.

In an issue of first impression, the Pennsylvania Supreme Court held in Babcock & Wilcox Company, et al. v. American Nuclear Insurers, et al, 2015 WL 4430352 (July 21, 2015), held that an insurer defending under a reservation of rights must pay for an insured’s fair, reasonable and non-collusive settlement where it defended the policyholder under a reservation of rights, even if the insurer does not consent to the settlement.

The insureds were sued in a class action over alleged bodily injury and property damage caused by emissions from nuclear facilities. The insurer (which issued $320 million in coverage) provided a defense to the insured under a reservation of rights, asserting that the policy did not cover damages not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages. After an initial verdict against the insureds of $36 million, a retrial was granted. During the course of litigation, the insurer refused to consent to any settlement offers presented to it believing the case could be successfully defended. The


insured then proceeded to settle with the class action plaintiffs for $80 million and then sued the insurer for reimbursement of the settlement amount.

In the trial court, the insurer argued that there was no obligation to reimburse the insured for the settlement because the insured had violated the consent to settlement clause. The insured urged the trial court to adopt United Services Auto. Ass’n v. Morris, 154 Ariz. 113 (1987), which held that, when the insurer has reserved rights, it should be liable for an insured’s settlement as long as coverage is found to exist and the settlement is “fair and reasonable” and entered into in good faith. The Court in Morris, treated the reservation of rights as akin to case where the insurer has refused coverage and defense. The insurer, on the other hand, argued that insurers should only be responsible for such a settlement under Cowden v. Aetna Cas. And Sur. Co., 389 Pa. 459 (1957), if the insurer acted in bad faith in refusing to settle. The trial court adopted the test advanced by the insureds and a jury determined that the insured’s settlement with the claimants was fair and reasonable. On appeal, the intermediate appellate court adopted an entirely different test (requiring the insured to have rejected the insurer’s defense and the insurer to have acted in bad faith in declining to settle) and remanded to the trial court for a new trial on these issues.

The Pennsylvania Supreme Court reversed the intermediate appeal court’s decision. Declining to strictly construe the consent to settlement requirement of the insurance policy and rejecting the test applied by the intermediate appellate court, the court opted for a modified Morris standard, holding that the insurer will be on the hook “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects the insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.” The court further held that the settlement must be “fair and reasonable from the perspective of a reasonably prudent person in the same position of [Insureds] and in light of the totality of the circumstances.” The court therefore reinstated the trial court judgment.

The dissent criticized the majority’s adoption of the “fair and reasonable” standard which the dissent articulated would allow an insured to breach the contract’s requirement that the insured must consent to settlement: “…allows an insured to breach the contract’s requirement that the insurer must consent to any settlement when the insured anticipates an excess future verdict and, as a practical matter, permits the insured to determine for itself (in the first instance) that the insurer acted unreasonably in refusing to settle.”

In Patrons Oxford v. Harris, 905 A.2d 819 (2006), the Supreme Judicial Court of Maine addressed coverage for an insured’s settlement where the insurer undertook the insured’s defense subject to a reservation of rights. The insured was sued for a car accident. The insurer undertook the insured’s defense, subject to a reservation of rights, as there was a question of whether the driver of the insured’s truck had permission to operate the vehicle. The parties entered into a stipulation for entry of judgment. The insurer argued that it did not have a meaningful opportunity to litigate the insured’s liability. The Court set forth the following rules addressing the competing interests of the insurer and insured:


[A]n insured being defended under a reservation of rights is entitled to enter into a reasonable, noncollusive, nonfraudulent settlement with ta claimant, after notice to, but without the consent of, the insurer. The insurer is not bound by any factual stipulations entered as party of the underlying settlement, and is free to litigate the facts of coverage in declaratory judgment action brought after the settlement is entered. If the insurer does not prevail as to coverage, it may be bound by the settlement, provided the settlement, including the amount of damages, is shown to be fair and reasonable, and free from fraud and collusion. The issues of the fairness and reasonableness of the settlement, as well as whether it is the product of fraud and collusion, may be brought by the insurer in the same action in which it asserts its coverage defense. If the claimant cannot show the settlement and the damages or the settlement amount are reasonable, the claimant may recover only that portion which he proves to be reasonable. If the claimant cannot prove reasonableness, the insurer is not bound. Likewise, if the settlement is found to be the product of fraud or collusion, the insurer is not bound. Id. at 828.

These decisions demonstrate the risks to the insurer in some jurisdictions in denying coverage or providing a qualified defense.


The insurance policy provision on voluntary payment and specific state law enforcement of the clause should always be considered. The application of no voluntary payment provisions indicate that the otherwise clear and unambiguous policy provision is not always automatically enforced. An insured would be wise to tender a claim as soon as possible and to not settle a claim without giving prior notice to the insurer and without the insurer’s consent. An insurer should analyze the voluntary payment provision to determine whether coverage failure by the insured to obtain the insured’s consent before settlement or payments of underlying claims exists, and be aware of potential restrictions to challenge consent, such as where the insurer has issued a reservation of rights.

III. Cooperation Provisions

A. What They Are, What They Mean, and When They Come Up

As with notice and voluntary payment provisions, cooperation clauses vary in content, but a typical cooperation clause reads as follows, this one from an inland marine policy: “You must cooperate with us in performing all acts required by this policy.” The Insurance Services Office (“ISO”) cooperation clause in the standard commercial general liability policy reads: “You and any other involved insured must . . . [c]ooperate with us in the investigation or settlement of the claim or defense against the ‘suit’”. CG 00 01 04 13. Another clause deals with an insurer’s subrogation rights, which only become effective after an insurer actually pays a claim: “You and any other involved insured must: . . . [a]ssist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.” Id. Cooperation clauses can and do appear anywhere in insurance policies, but as you can see, they tend to crop up most


frequently in the Loss Conditions6 section of policies.7 Policyholders and their counsel should be aware of them to ensure that they reasonably comply with any cooperation clauses in their policies and to avoid a potential forfeiture of coverage.

The duty to cooperate generally applies during the period of time after notice of a loss, claim, or suit and prior to the insurance company’s determination of its liability. Amn. Guar. and Liab. Ins. Co. v. Chandler Mfg. Co., Inc., 467 N.W.2d 226 (Iowa 1991) (duty to cooperate begins after notice of loss, claim, or suit). Thus, if the policyholder is not aware about a claim or lawsuit, cooperation is likely not required. Cincinnati Ins. Co. v. Irvin, 19 F. Supp. 2d 906 (S.D. Ind. 1998) (Permissive user’s flight from scene of accident and disappearance were not willful and intentional breach of cooperation clause in automobile insurance policy, even if he or she violated state law, where nothing indicated that insured user knew about claims and lawsuits).

Cooperation clauses were created by insurance companies, primarily for insurance companies’ benefit. However, when an insurance company undertakes a policyholder’s defense, it is usually in the policyholder’s best interests to cooperate in that defense. In addition, counsel should remember that courts have held the duty to cooperate to be reciprocal. Amn. Guar. and Liab. Ins. Co. v. Chandler Mfg. Co., Inc., 467 N.W.2d 226 (Iowa 1991); State Farm Fire & Cas. Co. v. First Nat. Bank & Trust Co. of Pekin, 2 Ill.App.3d 768, 277 N.E.2d 536 (1972); Ogunsuada v. General Acc. Ins. Co. of Am., 695 A.2d 996 (R.I. 1997) (cooperation involves not only good faith of insured but good faith of insurer as well). The fact that the duty runs to the policyholder from the insurance company is often overlooked or perhaps collapsed into the general duty of good faith.

There are two main purposes cited for the existence of cooperation clauses:

1. To ensure that the defending insurance company, who has an interest in the outcome, has all information necessary to present a vigorous defense and to settle the claim on favorable terms. E.g., Belz v. Clarendon America Ins. Co., 158 Cal.App.4th 615, 626 (2007) (“Without … cooperation and assistance the insurer is severely handicapped and may in some instances be absolutely precluded from advancing any defense”).

2. On the more cynical side, courts have noted that cooperation clauses are designed to protect insurance companies from collusion between claimants and policyholders. E.g., Founders Ins. Co. v. Shaikh, 405 Ill.App.3d 367, 374 (2010) (“An assistance and cooperation clause enables an insurer to prepare its defense to a loss claim and prevents collusion between the insured and injured party”). Some courts have criticized this “rationale.” See, Rockwell Int’l Corp. v. Aetna Cas. & Sur. Co., 26 Cal.App.4th 1255, 1264-66 (1994).

6 These sections are often entitled, “What Must Be Done in Case of Loss” or in the CG 00 01 form, “Duties in The Event of Occurrence, Offense, Claim or Suit.”

7 Although cooperation clauses can appear in any type of policy, this paper will focus primarily on such conditions in liability policies.


Obviously, because cooperation clauses are located in policies’ loss provisions, they arise after a loss has occurred. Although a policyholder’s breach of a cooperation clause may relieve an insurance company of its obligations for a claim, there are several circumstances where courts will not enforce them. In addition, courts limit how far insurance companies can take cooperation clauses to compel their policyholders to take certain actions. This paper will discuss both sides of the coin.

B. How Courts Have Handled Cooperation Clauses in Liability Insurance Policies

Cases on various types of cooperation clauses are myriad, and one can find entire sections of treatises devoted solely to the “duty to cooperate” in general, including subsections explaining the nature of the duty to cooperate; the breach of the duty, including measure and consequences; what constitutes the failure to cooperate; excuses for noncompliance; waiver and estoppel acting as a bar to enforcement of lack of cooperation as a defense; and requirement of prejudice as a result of breach. This paper, which doesn’t begin to cover even the tip of the proverbial iceberg, will cover some of the ways an insurance company or policyholder can breach a cooperation clause and how a policyholder can thwart a “non-cooperation” defense.

1. General Rules Regarding Cooperation Clauses

So what happens if a policyholder breaches a cooperation clause? Generally, these are the consequences:

1. Lack of cooperation could result in a preclusion of coverage. Wilson v. Farmers Ins. Group, 2003 ND 8, 655 N.W.2d 414 (N.D. 2003) (holding that a breach of a cooperation clause by an insured generally will operate to relieve the insurer of liability under a policy).

2. Lack of cooperation releases an insurance company from its responsibilities. E.g. Davila v. Arlasky, 857 F. Supp. 1258 (N.D. Ill. 1994); Tran v. State Farm Fire and Cas. Co., 136 Wn.2d 214, 961 P.2d 358 (1998). These responsibilities can include an insurance company’s duty to defend. Amn. States Ins. Co. v. National Cycle, Inc., 260 Ill.App.3d 299, 197 Ill. Dec. 833, 631 N.E.2d 1292 (1994) (excess liability policy).

However, as will be discussed below, most jurisdictions require that the insurance company demonstrate prejudice before an insurance company can rely on a lack of cooperation defense.

In each situation, the policy must be consulted to determine the scope of the cooperation clause and what the parties are required to do. It is common for cooperation clauses to require the following from a policyholder:

1. To tender the defense to other insurers who provide coverage. Amn. Country Ins. Co. v. Kraemer Bros., Inc., 298 Ill.App.3d 805, 232 Ill. Dec. 871, 699 N.E.2d 1056 (1998).


2. To produce documents. Medical Protective Co. v. Bubenik, 594 F.3d 1047 (8th Cir. 2010) (Under Missouri law, terms of medical malpractice policy’s cooperation clause, which required that insured dentist “fully cooperate” and “assist in the preparation and trial of any such claim,” unambiguously included the duty to assist insurer in its defense strategy in malpractice suit against insured, provide relevant documents, answer interrogatories, submit to depositions, and testify at trial if necessary, even though the clause was general).

3. To forward suit papers. Anderson v. Slayton, 662 S.W.2d 575 (Mo. Ct. App. W.D. 1983) (breach of cooperation clause of automobile liability policy by failure to notify insurer of action and to send suit papers); Safeco Ins. Co. of Am. v. Rogers, 968 S.W.2d 256 (Mo. Ct. App. W.D. 1998) (breach of cooperation clause by failing to immediately send copy of amended petition).

4. To mitigate damages. City of Edgerton v. General Cas. Co. of Wisconsin, 172 Wis. 2d 518, 493 N.W.2d 768 (1992), review granted, 497 N.W.2d 130 (Wis. 1993), aff’d in part, rev’d in part on other grounds, 184 Wis. 2d 750, 517 N.W.2d 463, 48 A.L.R.5th 803 (1994) (insureds had duty to mitigate their Superfund damages by contracting with Department of Natural Resources to clean up and remediate the landfill).

A common litigated issue surrounding cooperation clauses is the scope of the clause and how far policyholders are required to go to satisfy insurance company’s requests. The sky is not the limit. Rather, insurance company’s requests for information must be “material” to the claim or loss. Tran v. State Farm Fire and Cas. Co., 136 Wn.2d 214, 961 P.2d 358 (1998); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wn. App. 712, 950 P.2d 479 (1997) (holding that an insured need not supply information unrelated to policy or investigation of claim to comply with policy’s cooperation clause; an insurance company can only require answers to material requests, that is, matters concerning a subject reasonably relevant and germane to insurer’s investigation as it was proceeding at time it made demand); Staples v. Allstate Ins. Co., 176 Wn.2d 404, 413, 295 P.3d 201 (2013) (holding that an insurer may not question a policyholder under oath during the adjustment of a claim unless the Examination Under Oath (“EUO”) is “material to the investigation or handling of a claim.” This case overruled Downie v. State Farm Fire & Cas. Co., 84 Wn. App. 577, 582-83, 929 P.2d 484 (1997), which held that an insurer “had an absolute right to at least one EUO.”)8

Another issue that courts examine is whether the policyholder must strictly comply with the cooperation clause or substantially comply. The courts are inconsistent on this issue, so you will need to check your particular jurisdiction to determine what is required. In most jurisdictions, only substantial compliance is required. DePicciotto Corp. v. Wallis, 177 A.D.2d 327, 575 N.Y.S.2d 881 (1991); Avarello v. State Farm Fire and Cas. Co., 208 A.D.2d 483, 616 N.Y.S.2d 796 (2d Dep’t 1994); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wn.App. 712, 950 P.2d 479 (1997). However, at least one New York court has required strict compliance, and courts have granted summary judgment where the policyholder’s failure to cooperate is not

8 To read more about this case, visit http://www.jdsupra.com/legalnews/washington-supreme-court-enhances-protec-07196/


adequately explained or excused. In re U.S.A. Electronics, Inc., 120 B.R. 637 (Bankr. E.D.N.Y. 1990).

One circumstance that affects a policyholder’s duty to cooperate is whether there is a conflict of interest between the insurance company and policyholder, such as where an insurance company agrees to defend a liability suit under reservation of rights. If a conflict exists, the policyholder is not required to give up control of the defense. Nelson Electrical Contracting Corp. v. Transcontinental Ins. Co., 231 A.D.2d 207, 660 N.Y.S.2d 220 (1997) (a tactical decision of policyholder’s counsel, without liability insurer’s consent, to not oppose co-defendant’s motion for summary judgment on its indemnification claims against insured did not breach policy’s cooperation clause, where counsel was independent one that insured had been entitled to choose due to existence of conflict of interest between insured and insurer as to relative liability of insured and co-defendant). In fact, notwithstanding the existence of even a specific voluntary payments clause, a policyholder may enter into an unauthorized settlement or stipulated liability. Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. Dist. Ct. App. 1978); Ins. Co. of North America v. Spangler, 881 F. Supp. 539 (D. Wyo. 1995) (where an insurance company reserved the right to deny coverage and therefore lost the right to control the litigation, a policyholder does not breach the duty to cooperate by entering into unauthorized settlement or stipulated liability); Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 389, 715 P.2d 1133 (1986) (“In a reservation-of-rights defense, it is the insured who may pay any judgment or settlement. Therefore, it is the insured who must make the ultimate choice regarding settlement.”).

2. Examples of Failure to Cooperate

The following are several examples where courts have held that an insured breached a cooperation clause.

1. Where a policyholder completely fails to communicate with the insurance company regarding an accident. Amn. Country Ins. Co. v. Bruhn, 289 Ill.App.3d 241, 224 Ill. Dec. 805, 682 N.E.2d 366 (1997), appeal denied, 174 Ill.2d 553, 227 Ill. Dec. 1, 686 N.E.2d 1157 (1997).

2. Where a policyholder colludes with a claimant in the claimant’s lawsuit. Wolff v. Royal Ins. Co. of Am., 472 N.W.2d 233 (S.D. 1991) (evidence supported trial court’s determination that stipulated judgment between insured and injured workers was unreasonable and arrived at in collusion and bad faith); Warren v. Amn. Nat. Fire Ins. Co., 826 S.W.2d 185 (Tex. App. 1992), writ denied, (Sept. 9, 1992), reh’g of writ of error overruled, (Nov. 18, 1992) (policyholder violated duty to take reasonable steps to avoid or minimize excess insurer’s liability by his lack of cooperation and improper collusive conduct on part of insured and his counsel); but see Valley Paint & Body v. Ins. Co. of Penn., 2011 Ohio 1307, 2011 WL 947034 (Ohio Ct. App. 2011) (Automobile insureds’ cooperation with repair shop, by assigning to repair shop the right to collect the difference between the amount paid by insurer, and the repair bill, did not constitute collusion, even though such co-operation substantially prejudiced a material right of insurance company).


3. Where a policyholder voluntarily submits to service of process in a locale where he or she is not otherwise subject to the court’s jurisdiction. Elliott v. Metropolitan Cas. Ins. Co. of N.Y., 250 F.2d 680 (10th Cir. 1957) (Insured’s conduct under automobile liability policy violated cooperation clause where the insured aided the injured person’s attorney in instituting a lawsuit in a neighboring state and falsely testified concerning his submission to process in such action in order to hide collusion). However, the general rule is that a policyholder does not violate a cooperation clause by waiving personal service of process. Glade v. General Mut. Ins. Ass’n of Des Moines, 216 Iowa 622, 246 N.W. 794 (1933).

4. Where a policyholder fails to suit against a third party and the policy includes such a duty, such as in the uninsured motorist context. Safeway Ins. Co. v. Collins, 192 Ariz. 262, 963 P.2d 1085 (1998). This situation usually arises where an insurance company is trying to secure subrogation rights. However, a policyholder does not violate the cooperation clause by failing to file suit within the statute of limitations where the subrogation provision only became operative upon payment by the insurer under the policy, and no payment had been made. State Farm Mut. Auto. Ins. Co. v. Holcomb, 9 Ohio App. 3d 79, 458 N.E.2d 441 (1983).

5. Where a policyholder fails to disclose important, material information. Dindo v. Whitney, 451 F.2d 1 (1st Cir. 1971) (breach of cooperation clause may occur where insured fails to give insurer a full and true account of accident); Boesel v. State Farm Fire and Cas. Ins. Co., 2014 WL 1101171 (9th Cir. 2014) (Under Arizona law, an insurance company could invoke the cooperation clause to deny the policyholder’s claim for the theft of jade carvings, where the policyholder did not attempt to identify the author of the certificate of authenticity for the jade carvings, and he failed to provide insurer with an individual’s contact information).

6. Where the policyholder makes a deliberately false statement. Peerless Ins. Co. v. Sears, 34 A.D.2d 725, 312 N.Y.S.2d 347 (1970), aff’d, 29 N.Y.2d 717, 325 N.Y.S.2d 753, 275 N.E.2d 336 (1971) (holding a breach of policy, as matter of law, where policyholder gave fraudulent information to police, Motor Vehicle Department, and insurance company). However, an unintentional mistake of fact does not establish a breach of a cooperation clause, even if the misstatement is not corrected before trial. Continental Ins. Co. v. Bayless and Roberts, Inc., 608 P.2d 281 (Alaska 1980) (where a policyholder’s attorney made no effort to correct a corporate officer’s deposition prior to trial, the insurance company could not rely on breach of cooperation to avoid liability).

7. Where a policyholder makes himself or herself unavailable to assist in his or her own defense. Ramos v. Northwestern Mut. Ins. Co., 325 So.2d 87 (Fla. Dist. Ct. App. 1975), aff’d, 336 So. 2d 71 (Fla. 1976) (insured failed to contact or in any way cooperate with insurer despite its diligent efforts to locate insured and bring about his or her cooperation); but see Pawtucket Mut. Ins. Co. v. Soler, 184 A.D.2d 498, 584 N.Y.S.2d 192 (1992) (insureds’ unexplained absence was not sufficient to raise inference of willful noncooperation where they could reasonably have believed they fulfilled their obligation to cooperate when they answered questions posed during fact-finding interview); Comm’l Union Ins. Co. v. Burr, 226 A.D.2d 416, 641 N.Y.S.2d 69 (1996) (insured timely responded to final notice sent by insurer, provided explanation for previous unavailability, and pledged full cooperation with investigation). In order to use this defense, an insurance company must prove that the attitude of an unavailable


insured constituted willful and avowed obstruction. Amatucci v. Maryland Cas. Co., 25 A.D.2d 583, 267 N.Y.S.2d 41 (1966).

3. Circumstances Where Courts Will Excuse Noncompliance

Even if an insurance company is able to prove that an insured materially breached a cooperation clause, the policyholder may provide a valid reason that will excuse noncompliance, such as:

1. Where the policyholder’s employment would be jeopardized by having to attend trial or other litigation proceedings. State Farm Mut. Auto. Ins. Co. v. Palmer, 237 F.2d 887, 60 A.L.R.2d 1138 (9th Cir. 1956) (An insured’s failure to return for trial is excusable where the insured, who had previously testified favorably to the insurer in his or her deposition, had notified counsel for the insurer that he or she was unable to return for the trial because he or she would jeopardize his or her job by leaving at that time, and asked that a postponement of the trial be arranged).

2. Where the policyholder is facing criminal proceedings. Thus, although a policyholder’s refusal to provide a statement regarding an accident was a breach, the disposition of criminal charges pending against him excused the policyholder from the breach. Wojna v. Merchants Ins. Group, 119 Misc. 2d 734, 464 N.Y.S.2d 664 (Sup. Ct. 1983).

3. Where the policyholder has a mistaken belief or lack of knowledge if the insured was not negligent and made an effort to discover the existence of coverage to satisfy a due diligence requirement. Simpson v. U.S. Fidelity & Guar. Co., 562 N.W.2d 627 (Iowa 1997).

4. Waiver or Estoppel as a Bar to Asserting Breach of Cooperation

If an insurance company denies coverage, the policyholder no longer has a duty to cooperate with the insurance company. E.g. Auto–Owners Ins. Co. v. NewMech Cos., Inc., 678 N.W.2d 477 (Minn. Ct. App. 2004) (an insured did not breach the cooperation clause of commercial general liability policy by entering into repair agreements with property owners, without the consent of the insurance, where the insurance company denied coverage prior to the insured entering into repair agreements). Notably, this rule applies to a conditional denial of liability as to defenses not reserved:

[A]n insurer’s unconditional denial of liability to its insured on the insurance policy is either a waiver of the latter’s duty to comply with policy conditions precedent dealing with notice of accident, forwarding of suit papers, and furnishing assistance and cooperation in the defense of the claim, or, if the denial is relied on by the insured to his prejudice, the insurer is estopped from raising as a defense to the insured’s claim against it noncompliance with policy conditions precedent. What is said as to an unconditional denial of liability applies also to a conditional denial of liability as to defenses not reserved. See Capece v. Allstate Ins. Co., 86 N.J.Super. 462, 207 A.2d 207 (1965); Washington v. National Serv. Fire Ins. Co., 252 S.C. 635, 168 S.E.2d 90 (1969); Womack v. Allstate Ins. Co., 156 Tex. 467, 296 S.W.2d 233 (1956); 8 J. Appleman, Insurance


Law & Practice s 4747 (1942, Supp.1972); 18 G. Couch, Insurance s 71:43 (2d ed. R. Anderson 1968); Annot., 18 A.L.R.2d 443, 491-494 (1951).

Burr v. Lane, 517 P.2d 988, 995 (Wash. Ct. App. 1974) (emphasis added).

5. Prejudice Required

As with Notice Provisions (discussed supra), the fact that a material breach of a cooperation has been established does not end the inquiry. In most jurisdictions, the insurance company claiming a breach of cooperation defense must establish prejudice. Tran v. State Farm Fire and Cas. Co., 136 Wn.2d 214, 961 P.2d 358 (1998) (actual and substantial prejudice); Charles v. State Farm Mut. Auto. Ins. Co., 192 W. Va. 293, 452 S.E.2d 384 (1994); Kronjaeger v. Buckeye Union Ins. Co., 200 W. Va. 570, 490 S.E.2d 657 (1997); O’Neill v. Long, 2002 OK 63, 2002 WL 1453969 (Okla. 2002); Brizuela v. Calfarm Ins. Co., 116 Cal.App.4th 578, 10 Cal. Rptr. 3d 661 (2004), review denied, (June 9, 2004) (It is the insurance company’s burden to demonstrate that it has been substantially prejudiced by an insured’s breach of cooperation clause in the investigation of a claim).

6. “No-Prejudice” Approach

In some jurisdictions, prejudice need not be shown for an insurance company to rely on a cooperation clause defense. United States Fire Ins. Co. v. Watts, 370 F.2d 405 (5th Cir. 1966); Wolverine Ins. Co. v. Sorrough, 122 Ga. App. 556, 177 S.E.2d 819 (1970); KHD Deutz of America Corp. v. Utica Mut. Ins. Co., Inc., 220 Ga. App. 194, 469 S.E.2d 336 (1996) (policy conditions on notifying and cooperating with insurer); Utica Mut. Ins. Co. v. Gruzlewski, 217 A.D.2d 903, 630 N.Y.S.2d 826 (1995); Shipp v. Connecticut Indem. Co., 194 Va. 249, 72 S.E.2d 343 (1952); Miller ex rel. Estate of Hott v. Augusta Mut. Ins. Co., 335 F. Supp. 2d 727 (W.D. Va. 2004) (Virginia law does not require an insurer to show prejudice in order to establish the defense of non–cooperation).

New York follows the “no-prejudice” rule, with the caveat that the insurance company asserting a breach of cooperation defense bears a heavy burden to show that the insured’s failure to cooperate was deliberate. Wingates, LLC v. Commonwealth Ins. Co. of America, 2014 WL 2048501 (E.D. N.Y. 2014).

7. Rebuttable Presumption of Prejudice

Other jurisdictions have taken the approach that if a policyholder breaches a cooperation clause, a rebuttal presumption of prejudice arises as a result. Wildrick v. North River Ins. Co., 75 F.3d 432 (8th Cir. 1996); Western Mut. Ins. Co. v. Baldwin, 258 Iowa 460, 137 N.W.2d 918 (1965); Simpson v. U.S. Fidelity & Guar. Co., 562 N.W.2d 627 (Iowa 1997). The policyholder may also prove that the failure to comply was excused. Simpson v. U.S. Fidelity & Guar. Co., 562 N.W.2d 627 (Iowa 1997). An insurer’s waiver of the breach will also excuse the policyholder from complying. Wildrick v. North River Ins. Co., 75 F.3d 432 (8th Cir. 1996). Generally speaking, the presumption of prejudice will bar recovery unless it is overcome by showing a lack of prejudice. Western Mut. Ins. Co. v. Baldwin, 258 Iowa 460, 137 N.W.2d 918 (1965) (insured’s burden to show lack of prejudice).


8. The Meaning of Prejudice

An insurance company cannot establish prejudice by merely stating they might lose money. The insurance company has to show that it has been materially injured, usually termed as “actually and substantially prejudiced,” in its ability to defend against the case because of the policyholder’s lack of cooperation. M.F.A. Mut. Ins. Co. v. Cheek, 66 Ill.2d 492, 6 Ill. Dec. 862, 363 N.E.2d 809 (1977) (proof of substantial prejudice required insurer to demonstrate that it was actually hampered in its defense by violation of cooperation clause).


As with any other type of condition in an insurance policy, such as a notice provision, one must first attempt to ascertain which state’s law will apply to its dispute, given the jurisdiction’s various treatment of cooperation clauses. If in doubt, each party should evaluate the “worst case scenario” and plan accordingly. Sometime this can prove to be difficult if the choice of law is hard to determine or if the law in a particular jurisdiction is not as developed as in others.

One thing that should be clear is that cooperation clauses are a minefield for the wary and unwary alike. The best approach in the event of a loss is to immediately consult the policy and locate any cooperation clauses and follow through with any reasonable requirements. From the insurer’s point of view, it must use great caution in not overreaching under the guise of cooperation clauses, as courts have not been kind when the insurer is appearing to request information for no other reason than to delay payment of the claim or harass the insured. As noted above, the requests for information must be material. In addition, insurance companies sometimes engage in the practice of repeatedly requesting the same information, whether intentional or not. Although the information might be material for purposes of a cooperation clause, the insurer may be violating a state’s unfair claims settlement practices regulations if it asks for the same information repeatedly. See, e.g., Wash. Admin. Code. § 284-30-330(11) (unfair claims practice to “[d]elay[] the investigation or payment of claims by requiring a first party claimant or his or her physician to submit a preliminary claim report and then requiring subsequent submissions which contain substantially the same information.”).

Whether an insurer is raising the breach as an affirmative defense or the insured is raising waiver or estoppel, careful detail to pleadings must be made. The failure to properly allege these defenses can result in a waiver.

IV. Conclusion

So, don’t you – insurers and insureds – forget about these important provisions in insurance policies. One or more of these may significantly impact available insurance coverage and the outcome of insurance coverage disputes.


Documents

Don't You (Forget About Me): The Purpose, Force, and Effect of