Rethinking the Cooperation Clause in Standard Liability Insurance Contracts
Liability insurance literature has identified three central duties owed by the insurer to the policyholder that grow from the standard personal liability contract: the duty to defend covered claims against the policyholder, the duty to indemnify the insured against liability within policy limits stemming from covered claims, and the duty to settle those claims for a reasonable amount when feasible. The duty to cooperate stands opposite these as the central duty owed by the policyholder to the insurer. But while scholars have extensively examined, analyzed, and critiqued the insurer’s duties of defense, indemnification, and settlement, the insured’s duty to cooperate has not been adequately scrutinized. This Comment seeks to begin the scholarly discussion of the duty to cooperate by examining its impact on policyholder and insurer incentives, as well as on the resulting allocation of the costs of accidents. It goes on to propose several adjustments aimed at bringing the duty to cooperate back in line with its stated goals, as well as those of liability insurance in general.
Importantly, much of the harm this Comment seeks to eradicate arises when policyholders refuse to cooperate with their insurance companies when sued on a covered claim. While there are many breeds of non-cooperation, there is no indication—nor does this Comment suggest—that noncooperation is the prevalent policyholder reaction to being sued. Presumably, many policyholders comply with the requests of their insurers for reasons having little to do with their net worth: what the insurer requests may not present a burden, the policyholder may know the victim and affirmatively want to speed up the claims process, or the policyholder may simply believe that cooperating is the right thing to do. All of which prompts the question of whether this Comment ventures to fix that which, according to the old cautionary maxim, “ain’t broke.” But a system of liability insurance should not entrust its efficacy to the goodwill of its policyholders without an effective backstop of enforcement. If, as Professor Kenneth Abraham suggests, insurers can be “understood as the intermediary through which individuals motivated by concern for themselves become part of an enterprise that transforms selfish concern into altruism,” a structural defect in the policy that allows (indeed encourages) both the insurer and the policyholder to subvert that goal should not be forced to hang its remedial hopes upon an economically irrational goodwill. To be sure, voluntary policyholder cooperation serves liability insurance in many ways: it speeds up what is often a drawn out process, reduces costs to insurers who are not forced to track down the policyholder and coerce cooperation, and promotes the truth about the circumstances surrounding accidents. Relying on such voluntary cooperation, however, not merely to improve the delivery of insurance, but to hold the system together, is to beg divergent outcomes. This Comment proposes a duty to cooperate that instead relies on structural guarantees to serve the compensatory ends of the liability insurance system.