An insured's duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer's ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.
In Staples v. Allstate Ins. Co., a van belonging to the insured John Staples that contained a large collection of tools was stolen. Staples reported the theft to the police, telling them that the van was a work truck and the tools were worth $15,000. In submitting a claim to his insurer Allstate, Staples represented that the tools were worth $20,000 - $25,000, and were for his personal use. Based on these apparent inconsistent statements, Allstate requested certain documents from Staples, including proof of ownership and a sworn statement in proof of loss, among others. Allstate took two recorded statements form Staples, neither of which was under oath.
The sworn proof of loss and other information was not provided by Staples until nearly three months after the loss. Apparently unsatisfied with the information received, Allstate requested that Staples appear for an examination under oath, which it was entitled to under the cooperation clause of the policy. After difficulties scheduling the examination through a perceived lack of cooperation by Staples, Allstate denied the claim. In a suit by Staples against Allstate for breach of contract and bad faith, the trial court ruled in favor of Allstate on summary judgment, holding that coverage was barred because Staples breached the cooperation clause by failing to appear for an examination under oath. The Court of Appeals affirmed, and the case was appealed to the Washington Supreme Court.
The Washington Supreme Court reversed, finding material issues of fact as to (1) Staples' compliance with the cooperation clause and (2) whether any prejudice was actually incurred by Allstate as a result of Staples' alleged lack of cooperation. As to the first issue, the court held that "[b]reach of a cooperation clause is measured by the yardstick of substantial compliance." Staples' appearance for two recorded interviews and production of many of the documents requested by Allstate was enough to demonstrate a genuine question of material fact as to the adequacy of Staples' "cooperation."
The court further held that an insurer must show prejudice before it can rely on breach of a cooperation clause to deny a claim. A showing of actual prejudice requires "affirmative proof of an advantage lost or disadvantage suffered as a result of the [breach], which has an identifiable detrimental effect on the insurer's ability to evaluate or present its defenses to coverage or liability." Id. (quoting Dien Tran v. State Farm Fire & Cas. Co., 961 P.2d 358 (Wash. 1998)). The court explained that the burden to show prejudice is on the insurer, and is an issue of fact that will seldom be established as a matter of law. Prejudice will be presumed (as a matter of law) only in "extreme cases."
In short, for an insurer to deny coverage based on breach of the cooperation clause, the insurer must show a substantial and material breach of the cooperation clause that results in actual prejudice.