As I noted in one of the posts in my Nuts and Bolts series about the basics of D&O insurance, the typical D&O insurance policy includes not only obligations for the insurer, but also obligations on the part policyholder as well. Among these policyholder obligations is the duty to cooperate. In most claims, the cooperation duty is not an issue, as the insurer’s requirements and the policyholder’s responses do not lead to conflicts. Unfortunately, from time to time conflicts do arise with regard to the policyholder’s cooperation duty.
In a recent insurance dispute involving the cooperation duties under a CGL policy, the Fifth Circuit held that the cooperation requirements the insurer sought to impose on the policyholder exceeded the policy’s requirements. The decision raises a number of important implications about the cooperation requirement – and about its limits. The Fifth Circuit’s February 26, 2019 opinion in Mid-Continent Casualty Company v. Petroleum Solutions, Inc. can be found here. The Barnes & Thornburg law firm’s April 8, 2019 memo about the decision can be found here.
The underlying claim in this matter involved a faulty underground fuel storage tank. Petroleum Solutions, Inc. (PSI) installed the tank for Bill Head Enterprises in 1997. In 2001, Head discovered a tank leak. PSI notified Mid-Continent, its CGL carrier, of Head’s potential claim relating to the leaking tank. PSI believed the leak was caused by a faulty connector manufactured by Titeflex.
In 2006, Head sued PSI. Mid-Continent assumed PSI’s defense subject to a reservation of rights. PSI filed a third-party claim against Titeflex arguing that Titeflex was responsible for the leak. Titeflex filed a counterclaim against PSI.
In June 2006, Mid-Continent told PSI that Titeflex had offered to dismiss its counterclaim against PSI if PSI would dismiss its third-party claim against Titeflex with prejudice. Mid-Continent urged PSI to accept the settlement offer. PSI, concerned the proposed settlement would leave it without recourse against Titeflex, rejected the proposal.
The case then proceeded to trial, resulting in a jury verdict in favor of Head and Titeflex and against PSI. PSI appealed both judgments. The appellate court reversed and remanded the Head judgment and PSI ultimately prevailed on Head’s claim. Only the Titeflex judgment remained at issue.
Mid-Continent filed a separate insurance coverage action seeking a judicial declaration that there is no coverage under its policy for the Titeflex judgment. Mid-Continent argued that PSI’s rejection of Titeflex’s settlement offer represented a breach of the policy’s cooperation clause, thereby precluding coverage under the policy. Mid-Continent also disputed coverage on other grounds not discussed here.
The insurance coverage case proceeded to trial on the cooperation clause issue. The jury ruled in PSI’s favor, and Mid-Continent appealed, arguing that the trial court had erroneously instructed the jury that it could find that PSI complied with the cooperation clause ”if PSI’s conduct was reasonable and justified under all the circumstances that existed.” PSI cross-appealed, arguing among other things that the trial court erred in failing to rule as a matter of law that the cooperation clause cannot require PSI to settle its affirmative third-party claim.
The cooperation clause in PSI’s policy specifies requires PSI to “cooperate with [the insurer] in the investigation or settlement of the claim or defense against the ‘suit’.”
The February 26, 2019 Opinion
In a February 26, 2019 opinion written by Judge Catharina Haynes for a unanimous three-judge panel, the Fifth Circuit affirmed the lower court’s entry of judgment in PSI’s favor regarding the cooperation clause issue.
The appellate court said that Mid-Continent “offers no law to support its novel and dubious concept that the Cooperation Clause applies to an insured’s affirmative claims against a third party, and the direction of the law in this area is against such a conclusion.”
The appellate court went on to says that “even assuming arguendo that the Cooperation Clause could apply to affirmative claims in some theoretical circumstances, we reject Mid-Continent’s argument that the Cooperation Clause jury instruction was an abuse of discretion,” adding that the “reasonable and justified” language in the Cooperation Clause jury instruction “did not improperly guide the jury,” and therefore Mid-Continent’s Cooperation Clause argument “fails.”
While this case arises under the cooperation clause in a CGL policy, cooperation clause issues can and sometimes do arise under the equivalent provisions in D&O and other professional liability insurance policies.
In the typical D&O insurance policy, the cooperation clause is usually found in the defense and reporting section; a typical D&O insurance policy cooperation clause provides that “An Insured shall, as a condition precedent to exercising any right to coverage under this Coverage Part, give to [the Insurer] such information, assistance and cooperation as [the Insurer] may reasonable require.”
In the course of most claims, the cooperation requirement does not cause any problems, and the flow of information between the insured and the policyholder proceeds smoothly and the claim unfolds in a collaborative way between the insurer and the policyholder. However, problems can and sometimes do arise between the policyholder and the insured that can produce friction that can contribute to issues with the insurer’s payment obligations under the policy.
The most common source of cooperation clause problems are disputes about whether or not the policyholder has provided sufficient information about the underlying claim or provided the insurer with sufficient information about claims developments (including information about the claims defense and related defense expenses). There is probably no absolute guarantee that these kinds of disputes can be avoided but the possibility for these kinds of claims to arise can be significantly reduced if the policyholder makes insurer communications a priority; along those lines, the best approach is that if the insurer asks for information, answer the request. Many cooperation clause issues begin with a failure to respond to an insurer’s information request. For further discussion of cooperation clause disputes arising from communications issues, refer here.
The reality is that in the midst of complex or disputed claims, policyholders sometimes bridle at their insurer’s information requests or other requirements. Policyholders sometimes react badly to what they view as onerous requests, particularly in situations where the insurer has issued a lengthy reservation of rights letter or otherwise raised possible defenses to coverage. Some policyholders view requests for information or other cooperation under these circumstances as part of a pattern of stonewalling; when the claims dynamic reaches this point, things can quickly spiral downward. Under these circumstances, all of the participants in the claims process must work diligently to try to keep the claim from going completely off the tracks.
Where the cooperation clause issue can cause real problems is when the insurer takes the cooperation clause and tries to use it as a cudgel against the policyholder. That is what, in essence, seems to have happened in this case. The insurer in this case tried to argue in effect that PSI’s obligations to the insurer under the cooperation clause compelled PSI to relinquish its affirmative third-party claims against Titeflex, claims that were independent of the PSI’s contractual relationship with its insurer. The Fifth Circuit rightly called the insurer’s cooperation clause theory “novel and dubious.”
As the Barnes & Thornburg memo to which I linked at the top of the post puts it, “The cooperation clause is designed to assist the insurer in defending against the claim brought against its policyholder – not to allow the insurance company to bargain with the policyholder’s rights against others.”
It is worth noting in the context of the typical D&O insurance policy cooperation provision that the D&O policy provision, unlike the clause at issue in this case, expressly includes a reasonableness requirement. Whether or not a request for information or other cooperation is reasonable is, of course, the kind of thing that can become the subject of dispute; but the fact is that under the express language of the policy it is incumbent upon the insurer to ensure that its cooperation requests are reasonable, and policyholders are in fact entirely within their rights to refuse to comply with cooperation requests that are unreasonable.
Insurers rightly are entitled to information and assistance in order to ensure that claims are processed in an orderly, efficient, and rational way. However, the relationship between the insurer and the policyholder can quickly become adversarial when the insurer seeks to use the policyholder’s obligation to cooperate as a basis on which to seek to deny coverage for claims. There are limits to what the insurer can require of its policyholders in reliance on the cooperation clause. An insurer’s healthy recognition of these limitation will go a long way to avoiding unfortunate claims frictions.