Cooperation Clause and the Duty to Defend
April 29, 2013
The insured appealed an order from the district court granting summary judgment in favor of the insurer. The district court held that a breach of the cooperation clause in the insurance policy absolved the insurer's duty to defend. This case is Heubel Materials Handling Company v. Universal Underwriters Insurance Company, 704 F.3d 558 (2013).
Heubel is an authorized dealer of Raymond materials handling equipment, such as forklifts. Heubel participates in the Raymond Dealer defense and Indemnification Program, which is mandatory for all Raymond dealers. In the event of a personal injury lawsuit against a Raymond dealership, Raymond or its insurance carrier agrees to pay legal costs incurred in defense and indemnification to the fullest extent allowed by law. The program also holds that dealers maintain business insurance coverage as deemed appropriate.
Heubel obtained a general liability policy from Universal Insurance. While the policy was in force, Harris was severely injured while operating a Raymond forklift that had been serviced by Heubel. Harris filed a lawsuit against Heubel. Heubel gave notice to Raymond after the accident and Raymond paid for and controlled the defense. More than six months after the accident, Heubel finally gave notice to Universal. Universal agreed to defend, subject to a reservation of rights and a requirement that Heubel cooperate in pursuing indemnification from Raymond. Heubel filed a declaratory judgment action in response, saying that the requirement of cooperating in the pursuit of indemnification against Raymond creates a potential or actual conflict of interest between Universal and Heubel.
Universal counterclaimed for a declaratory judgment that Heubel's lack of cooperation absolved the insurer of any duty to provide coverage. The district court ruled in favor of the insurer and this appeal followed.
The appeals court noted that cooperation clauses are valid and enforceable under Missouri law. Also, the court said that in order to use the clause to deny coverage, 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.
Heubel claimed that when Universal refused Heubel's demand to forgo any indemnification claim against Raymond, the insurer in effect issued a reservation of rights which in turn, allowed Heubel to hire independent counsel to defend the underlying lawsuit. This then enabled the insured to obtain compensation from the insurer if the underlying lawsuit later was held to be covered by the policy. The court stated that Heubel's stipulation asked Universal to disclaim a right expressly recognized in the Universal policy, that is, the right to ask the insured to cooperate in pursuing indemnification from another party. The insurer did not reserve the right to disclaim coverage and so, its action did not qualify as a reservation of rights.
As for the claim of a conflict of interest, the court found that the sole conflict of interest asserted by Heubel is that Universal's enforcement of the cooperation clause would force Heubel to breach the competing cooperation clause in the Raymond indemnification agreement, depriving Raymond of its competing right to control the defense. The court said that this meant that Heubel and Raymond took the position that the Universal policy provides primary coverage and yet, at the same time, the Raymond indemnification program provides primary control of the defense to Raymond. The court found this to be antithetical to the traditional principle that conflicting right-to-control clauses should be resolved in favor of the insurer with primary coverage. Nothing in the plain language of the Universal policy suggests that the parties intended such a non-traditional arrangement.
Because no reservation of rights or conflict of interest entitled Heubel to select its own counsel while continuing to enjoy the coverage benefits of the Universal policy, the court decided that Heubel breached the policy by refusing to allow Universal to control the defense. And, as a result of Universal's inability to control the defense, it has been deprived of its ability to implead another party who is or may be liable for all or part of the plaintiff's claims. Universal suffered substantial prejudice from Heubel's refusal to allow Universal to control the defense and so, it was justified in denying coverage based on Heubel's breach of the cooperation clause.
The ruling of the district court was affirmed.
Editor's Note: The United States Court of Appeals, Eighth Circuit, upheld the cooperation clause as valid and enforceable. In this instance, the insured refused to cooperate with the insurer in the enforcement of the insurer's right to seek indemnification against a third party. This breached the contractual duty of the insured as clearly written in the insurance policy and that breach enabled the insurer to deny coverage.