Risks in Denying Coverage Based Upon Failure to Cooperate: A High Bar in West Virginia
Risky business! Denial of coverage by an insurance carrier for failure to cooperate may result in extracontractual suits and claims for damages. 1 In West Virginia, when a policyholder substantially prevails and coverage is found to exist after a previous denial by the carrier, damages may be awarded. These damages may include attorney fees and consequential damages, such as economic loss and aggravation. Moreover, if the policyholder can prove actual malice2 on the part of the insurer, then punitive damages, pursuant to Hayseeds, Inc. v. State Farm Fire & Casualty,3 may also be awarded.4 Additionally, damages may be awarded for violations of section 33-11-4(9) of the West Virginia Unfair Trade Practices Act (“UTPA”).5
Of course, an insurer may be relieved from its duty to defend and indemnify where the insured fails to provide reasonable assistance during the litigation process. An insured’s failure to cooperate, in the first or third-party context, is a material breach of the contract,6 which the insurer may raise as an affirmative defense regarding coverage.7 However, to successfully assert this defense in West Virginia third-party cases, the insurer must demonstrate that the insured’s failure to cooperate was substantial and caused it to suffer actual prejudice in its defense of the claim.8 The possibility of future harm is insufficient; the insurer must “prove that it has been harmed by the insured’s uncooperative conduct.”9 In addition, before the insurer can deny coverage based upon an insured’s failure to cooperate, it “must show that its insured willfully and intentionally violated the cooperation clause.”10 In sum, when the insurer seeks to avoid liability under the policy based upon failure to cooperate, the burden is “a heavy one.”11
Importantly, because “an insured’s duty to cooperate is triggered only when the insurer demands such cooperation,” the insurer must request information or assistance before it may reasonably assert a breach of the policy’s cooperation provision.12 In seeking cooperation from its insured, the insurer has a duty to exercise “reasonable diligence.”13 Notably, some jurisdictions require only “substantial compliance” by the insured; it is not required that the insured fully cooperate. 14 Outright refusal, upon the insurer’s request, to submit to examination or produce documents are clear cases of an insured’s failure to cooperate. 15 But other cases are not so clear. For example, in Stover v. Aetna Casualty& Surety Co., the insured brought suit against his insurer to recover policy proceeds. The insured acquiesced in and appeared for examination, answering the majority of questions posed. 16 Ultimately, however, the court determined that because the insured provided either “no response, or gave vague, general answers” to a specific line of questioning regarding a potentially “key component” of the case, he failed to cooperate as anticipated by the terms of the policy.17
Yet an insured’s filing of suit on a policy, even during the insurer’s investigation and prior to any repudiation of coverage, does not constitute failure to cooperate as a matter of law.18 Even an insured’s disappearance before and nonattendance during trial, depending on the intensity and extent of the inquiry undertaken by the insurer to locate him, may not establish a failure to cooperate. 19 In Pennsylvania Threshermen & Farmer’s Mutual Casualty Insurance Co. v. Owens, even though the insurer contacted the insured’s mother, wife, and pastor, the court found the efforts insufficient.20 The court acknowledged that “[n]o inquiry was made from the police or at [the insured’s] place of employment where his employer or fellow workers might possibly have given a clue to his whereabouts, or at the Post Office to learn if he had left a forwarding address.”21 The court concluded that “[r]equiring such additional efforts would not seem to impose an unreasonable burden” on the insurer.22
Due to the hurdles in establishing a failure to cooperate, denial of coverage based upon the same may result in extracontractual suits and claims for damages. For example, in Felman Production, Inc. v. Industrial Risk Insurers, the insured brought claims against its insurer for bad faith and violations of the West Virginia UTPA based upon the insurer’s failure to pay under two separate policy provisions.23 In elaborating upon the availability of extracontractual claims to insureds, the United States District Court for the Southern District of West Virginia explained:
[A]n insured who substantially prevails on a coverage claim may seek additional damages for aggravation, inconvenience, net economic loss, and attorney fees under Hayseeds . . . . The insured does not need to prove bad faith on the part of the insurer to recover Hayseeds damages, but may do so in order to seek punitive damages. . . . [An insured may also raise claims] based on violations of the unfair claim settlement provisions of the West Virginia Unfair Trade Practice Act (WVUTPA). This so-called “Jenkins” cause of action does not depend upon a successful contractual claim for coverage. Instead, a Jenkins plaintiffmust show that the insurer violated one or more of the unfair claims settlement provisions and that such violations entail a general business practice on the insurer’s part. Damages may include increased cost and expenses, including attorney fees, as well as punitive dam- ages. Proof of violations may come from “multiple violations . . . occurring in the same claim.”24
In conclusion, insurers should be cognizant of the potential hazards in claiming the lack of coverage based upon an insured’s failure to cooperate in order to avoid bad faith liability and attendant damages. While an insured’s lack of cooperation may be raised by the insurer as an affirmative defense regarding policy coverage, denial of coverage could lead to extracontractual suits. Insurance professionals and their counsel should be aware of the legal standards and requirements applicable to denying insurance coverage based upon the failure to cooperate, which, as described above, can be “risky business” in jurisdictions with standards akin to those in West Virginia.
1 See, e.g., Jones v. Am. Family Mut. Ins., Civil Action No. 15-cv-00631-WYD-MEH, 2017 WL 4350362, *5 (D. Colo. Feb. 22, 2017);Summit Bank & Tr.v. Am. Modern Home Ins. Co., 71 F. Supp. 3d 1168, 1175–76 (D. Colo. 2014); Felman Prod., Inc. v. Indus. Risk Insurers, Civil Action No. 3:09-0481, 2011 WL 4543966 (S.D. W. Va. Sept. 29, 2011); Nupro Indus. Corp. v. Lexington Ins. Co., Civil Action No. 08-4809, 2009 WL 10687684, *1–2 (E.D. Pa. Oct. 14, 2009); Rounick v. Fireman’s Fund Ins. Co., No. CIV. A. 95-CV-7086, 1996 WL 605128, *1 (E.D. Pa. Oct. 18, 1996); see generally 14 S TEVEN P LITTETAL., COUCHONINSURANCE. § 205:1 (3d ed. 2017) (“Where the breach [of failing to defend] is deemed unreasonable, in some jurisdictions, it is also deemed to violate the covenant of good faith and fair dealing, for which tort remedies for ‘bad faith’ may be rendered.”).
2 Malice in this instance means “that the [insurance] company actually knew that the policyholder’s claim was proper, but willfully, maliciously and intentionally denied the claim.” Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 330–31, 352 S.E.2d 73, 80–81 (1986).
3 177 W. Va. 323, 352 S.E.2d 73 (1986).
4 An insurer may “be held liable for punitive damages by its refusal to pay on an insured’s property damage claim . . . [if ] such refusal is accompanied by a malicious intention to injure or defraud.” Id. at Syl. Pt. 2.
5 For example, damages may be awarded when an insurer refuses “to pay claims without conducting a reasonable investigation based upon all available information,” fails “to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed,” does not “attempt [ ] in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear,” or attempts “to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.” W. VA. CODE § 33-11-4(9)(d), (e), (f ), (h). Importantly, to assert a claim under § 33-11-4(9), the insured must demonstrate that the carrier committed or performed one or more of listed violations “with such frequency as to indicate a general business practice.” W. VA. CODE§ 33-11-4(9). “More than a single isolated violation of W. Va. Code, 33-11-4(9), must be shown in order to meet the statutory requirement of an indication of a ‘general business practice.’” Syl. Pt. 2, Jenkins v. J. C. Penny Cas. Ins. Co., 167 W. Va. 597, 280 S.E.2d 252 (1981), overruled on other grounds by State ex rel. State Farm Fire & Cas. Co. v. Madden, 192 W. Va. 155, 451 S.E.2d 721 (1994).
6 See Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 159 (S.D. W. Va. 1987) (“[T]he failure of an insured to cooperate with the insurer has been held to be a material breach of the contract and a defense to a suit on the policy.”).
7 17A COUCHON INSURANCE § 254:100.
8 Syl. Pt. 1, Bowyer by Bowyer v. Thomas, 188 W. Va. 297, 423 S.E.2d 906 (1992).
9 Soyoola v. Oceanus Ins. Co., Civil Action No. 2:13-cv-08907, 2014 WL 4215515, at *8 (S.D. W. Va. Aug. 25, 2014) (emphasis in original) (internal quotation and citation omitted).
10 Syl. Pt. 2, Bower, 188 W. Va. 297, 423 S.E.2d 906.
11 17A COUCHON INSURANCE § 254:100.
12 14 COUCHON INSURANCE § 199:20.
13 Syl. Pt. 7, Charles v. State Farm Mut. Auto. Ins. Co., 192 W. Va. 293, 452 S.E.2d 384 (1994); see 14 COUCHON INSURANCE § 199:21.
14 14 COUCHON INSURANCE § 199:16.
15 See Stover, 658 F. Supp. at 159–60; see also Felman, 2011 WL 4543966, at *4.
16 Stover, 658 F. Supp. at 160.
18 See Felman, 2011 WL 4543966, at *5 (“[A] plaintiff’s failure to cooperate may void a policy by its contractual terms, but there is no basis for the argument that filing suit is a failure to cooperate as a matter of law.”).
19 See Pa. Threshermen & Farmer’s Mut. Cas. Ins. Co. v. Owens, 238 F.2d 549, 551–52 (4th Cir. 1956).
20 See id. at 551.
23 Felman, 2011 WL 4543966, at *6.
24 Id. (internal citations omitted).