TORT AND INSURANCE LAW
BY MARC R. LEVY, KEVIN CHENEY, AND HEATHER HACKETT.
This article discusses new CRS § 10-3-1118, which addresses the "failure to cooperate" defense in first-party insurance claims.
Before the enactment of CRS § 10-3-1118 (the Act) in September 2020, Colorado law had long recognized that an insurer could deny an insurance claim if the insured failed to reasonably cooperate in the investigation, handling, or defense of a first-party or third-party claim. This rule, premised on a policy's specific language, makes sense in the context of both a first-party claim (e.g., if you want your car damage repaired, you must allow the insurer to inspect it) and a third-party claim (e.g., to protect the insured person from a lawsuit, the insurer must be able to sp eak with him or her to determine the facts). Surprisingly, however, the "failure to cooperate" defense was not explicitly defined, there was no fixed standard for applying it, and no pattern jury instruction existed for this defense. This lack of clarity resulted in a collection of trial court orders applying the defense in potentially inconsistent ways. For example, some, but not all, courts held that the defense required some notice and opportunity to cure.
With the enactment of CRS § 10-3-1118, an insurer's assertion of the failure to cooperate defense is clarified, standardized, and subject to certain pre-litigation requirements. The Act defines the failure to cooperate andrequires an insurer to satisfy specific requirements before asserting an insured's failure to cooperate as a defense to a claim for benefits.1
This article covers the historical use of the failure to cooperate defense, recounts the Act's legislative history, and summarizes the Act's new requirements.
Evolution of the Cooperation Requirement
In the past, an insured's duty to cooperate arose from an insurance contract's express language. For example, uninsured/underin-sured motorist insurance policies typically set forth the cooperation requirements in two different clauses:
(1) Medical Reports
The injuredpersonmaybe required to take medical examinations by physicians we choose, as often as we reasonably require. We must be authorized to obtain medical reports and other records pertinent to the claim. We may also require any person making a claim to submit to questioning under oath and sign the transcript.
(2) Assistance and Cooperation of the Insured
An insured person must cooperate with us in the investigation, settlement, and defense of any claim or lawsuit. If we ask, thatperson must also help us obtain payment from anyone who may be joindy responsible.
Before the Act, Colorado law remained mostly silent as to die applicability of die failure to cooperate defense, leaving courts to address on a case-by-case basis whether an insured's action or inaction constituted a failure to cooperate. Thus, trial courts did not interpret cooperation clauses consistently, and they typically required the insurer to bear the burden of proving that die insured failed to cooperate, such failure was accompanied by the insured's bad faidi, and die insurer suffered substantial and material prejudice. It remained unclear whether a finding of a failure to cooperate would result in the insured losing all or part of a policy's benefits. And while it was generally understood tiiat die failure to cooperate defense must be predicated on die insured's failure to comply with an insurer's reasonable request,2 it has been argued that such request is not required. This point of contention is important because Colorado courts have generally held tiiat an insured may lose all benefits by failing to comply with a reasonable request, though no case requires that result.3
The Case Law Construction
The Colorado Supreme Courthas not specifically addressed the failure to cooperate defense4 since the 1949 case Farmers Automobile Inter-Insurance Exchange v. Konugres.5There, die Court held tiiat
[o]bviously it is not every failure to accede to die company's request for assistance that will have the effect of defeating the rights of the assured under his policy. Generally speaking, to constitute a breach of the co-operation provision of the contract, til ere must be a lack of co-operation by the assured in some material and substantial respect, and any formal, inconsequential, or collusive lack of co-operation will be immaterial.6
Thus, under Farmers, to breach the failure to cooperate requirement, the insured must knowingly fail to cooperate in some material or substantial respect, and only after a reasonable request is made.7
Since Farmers, Colorado courts have taken a case-by-case approach to evaluating whetiier particular conduct constitutes a failure to cooperate under particular policy language, construing substantial and material prejudice to occur only where the insured's actions prevent the insurer from performing a reasonable investigation or leave the insurer without the means to investigate die validity of die insured's claim.8
More recendy, in 2001, die Colorado Court of Appeals addressed die specific allegation tiiat an insured's refusal to submit to an examination under oath without his co-insured spouse supported the insurer's denial of benefits. The Court held tiiat the insurer's denial of all benefits was improper because the policy did notrequire an examination under oath without die co-insuredspouse.9 The Courtnotedtiiathad die insurer intended to require examinations under oath to take place without anyone else present, it could have set forth that condition in the policy.10 A commonsense example of a failure to cooperate is illustrated in State Farm Mutual Automobile Insurance Co. v. Secrist, where, in a third-party case, the Court confirmed tiiat an insured breached die duty to cooperate by discharging his retained counsel, failing to respond to die insurer's request for information, and admitting liability without the insurer's consent.11
In recent years, insurers have asserted die defense more frequendy and in unexpected circumstances, without an underlying change in typical policy language. In many cases, the insurer made no mention of the alleged failure to cooperate during the claim process or in its reservation of rights communications.12 Rather, it first asserted die claim as a defense to die litigation. This can present unique practical concerns, particularly where the insurer did not give notice before filing of its intent to...