CHAPTER § 5.09 When a Claim Arises: Handling of Claims Negotiations

• Jurisdiction: United States

§ 5.09 When a Claim Arises: Handling of Claims Negotiations

[1] Reservation of Rights or Denial of Coverage

When an insurer receives notice of a claim or suit against its insured, the insurer typically takes one of the following actions:

(1) agrees to defend and indemnify the policyholder without restriction;
(2) agrees to defend under a reservation of rights to withdraw its defense and deny indemnification after investigating the claim;²²⁶ or
(3) denies the claim and refuses to defend or indemnify.²²⁷

Additionally, an insurer may bring a declaratory-judgment action to determine its obligations under the insurance policy.

If an insurer chooses to defend the action under a reservation of rights letter or by entering into a non-waiver agreement, three conditions must be met in order for the reservation of rights to be effective: "First, the insurer must communicate the reservation or non-waiver to the insured. Second, the insurer must fairly inform the insured of the insurer's position. Finally, the insurer must give timely notice."²²⁸

[2] Cooperation Clause

Many insurance policies contain cooperation clauses which state that the policyholder must "cooperate with [the insurer] in the investigation, settlement or defense of the claim or suit" and may not "voluntarily make any payment, assume any obligation or incur any expense."²²⁹ The cooperation clause allows the insurer "to obtain, promptly and while the information is still fresh, 'all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights to enable them to decide upon their obligations, and to protect them against false claims.'"²³⁰

To prove it acted in compliance with the cooperation clause, courts have required the insurer to show that:

it acted diligently in seeking to bring about the insured's cooperation; that the efforts employed by the insurer were reasonably calculated to obtain the insured's co-operation; and that the attitude of the insured, after his co-operation was sought, was one of "willful and avowed obstruction."²³¹

Although the failure of an insured to cooperate with the insurer with respect to material matters may preclude recovery under the policy, the insured's duty to cooperate is not without limitation.²³² For example, if the insured is unavailable or does not want to appear, "the insurer must make reasonable efforts to ensure his appearance before claiming breach by the policyholder."²³³ Also, after an insurer accepts a third party's settlement offer, the insured's "duty to cooperate does not extend to supervising the implementation of that offer."²³⁴ Moreover, the insured has a limited duty to cooperate when the insurer issues a reservation of rights letter (i.e., the insurer will defend, but will not pay damages for insured's intentional causing of injury).²³⁵

Due to the potentially adversarial relationship that may arise in this circumstance, an insured should always be careful not to disclose information that would otherwise be protected by the attorney-client privilege or work-product doctrine.²³⁶ Likewise, an insured should use caution in presenting any definitive amount of the loss at an early stage in the claims process, as the insurer may subsequently use such information to justify denying the claim.²³⁷ After an...