Cooperation of Insured Is Required
Medical Protective Company (MPC) brought a declaratory judgment action against its insured (Bubenik), contending that it had no duty to defend the insured in an underlying medical malpractice lawsuit. The insurer claimed that Bubenik had materially breached the conditions section of the policy. This case was before the United States Court of Appeals, Eighth Circuit. The case is Medical Protective Company v. Bubenik, 594 F.3d 1047 (2010).
Malpractice actions were filed against Bubenik by the Johnstons. During the course of the litigation, Bubenik invoked his Fifth Amendment privilege against self-incrimination and refused to offer any testimony. MPC informed the insured that his refusal to testify might jeopardize his insurance coverage due to a breach of the cooperation clause in the insurance policy, and sent a letter to the insured to this effect. Bubenik told the insurer that the case was defensible but that he was unwilling to discuss how it could be defended. He also refused to release to MPC a state dental board report. Neither Bubenik nor his attorney responded further to the insurer. The insurer filed a declaratory judgment action and the trial court granted judgment to the insurer. This appeal followed.
The insured asserted that MPC failed to make the showing required by Missouri law to deny coverage for breach of a policy cooperation clause. Also, the claim was made that MPC waived this defense and should be estopped from denying coverage. The appeals court noted that cooperation clauses such as the one at issue in this case are valid and enforceable under Missouri law. However, to deny liability coverage under such a provision, the insurer must prove: a material breach of the cooperation clause; the existence of substantial prejudice as a result of the breach; and the exercise of reasonable diligence to secure the insured's cooperation.
In this instance, the court found that the cooperation clause was not ambiguous. A common sense interpretation of the policy language requiring the insured to fully cooperate and assist in the preparation and trial of any claims included the duty to assist MPC in its defense strategy, provide relevant documents, answer interrogatories, submit to depositions, and testify at trial if necessary. The court said that Bubenik's actions were clearly a material breach of the cooperation clause.
As for the substantial prejudice requirement, the court said that in determining whether the failure of an insured to cooperate was prejudicial to the insurer, courts in general have considered the importance of the insured's testimony to the defense. In this case, Bubenik's refusal to testify did substantially prejudice the insurer because he could have provided the defense valuable information not available from any other source. Moreover, his refusal to testify made it impossible for MPD to produce an expert witness, and in fact, Bubenik's actions impacted the ability of any to testify in his defense. The insurer did suffer a substantial prejudice as a result of the insured's breach of his duty to cooperate.
The final element that MPC had to prove was that it exercised reasonable diligence to secure Bubenik's cooperation. MPC had to present evidence to show what steps it took in order to secure his cooperation in defending the action. The record reflected that MPC contacted Bubenik by telephone and by letter on multiple occasions requesting his cooperation. When these requests went unanswered, MPC provided repeated notices of the duty to cooperate and the consequences of the failure to do so. Thus, the facts proved that the insurer did exercise reasonable diligence in its efforts to secure cooperation by the insured.
The insured tried a final way to get coverage by claiming that the insurer waived denying coverage or should be estopped from it because the insurer knew that Bubenik was invoking the Fifth Amendment but continued to defend him without issuing a reservation of rights letter immediately. The court said that MPC's conduct prior to issuing a reservation of rights letter was consistent with the insurer's stated belief that Bubenik would change his mind and cooperate in defense of the underlying lawsuit. Although MPC continued to defend Bubenik despite his persistent noncooperation, it did not take inconsistent positions on the matter; its continued defense of Bubenik was in accord with MPC's contractual duty to defend.
The judgment of the district court was affirmed.
Editor's Note: This is a classic example of the result when an insured violates his duty to cooperate with the insurer in the defense of a claim against the insured. The insurance policy is a contractual agreement between the insured and the insurer, a written agreement that places duties on both the insured and the insurer. A refusal to abide by the contract's duties can lead to the contract being voided. In this instance, the facts showed that the insured breached his duty to cooperate in his defense, the insurer proved it tried to obtain that cooperation, and the court ruled that the breach allowed the insurer to deny any coverage for the insured.