A liability policy typically requires the insured to cooperate with the insurer. Under the provision, the insured must, among other things, cooperate with the insurer in investigating or settling of the claim. Breach of the cooperation clause by the insured relieves the insurer of liability under the policy. But the insurer must show the breach caused "substantial prejudice." 22 E. Holmes, Holmes' Appleman on Insurance 2d (2003) sec. 138.6 [A]. Further, prejudice to the insurer is not presumed as a matter of law from the insured's breach. Instead, the insurer "shoulders a heavy burden" to establish that the insured acted willfully to obstruct the insurer. Id.
In Deguchi v. Allstate Ins. Co., Civil No. 07-00144, 2008 U.S. Dist LEXIS 34368 (D. Haw. April 9, 2008), the federal district court interpreted Hawaii's law on the duty to cooperate. The insureds held a marine insurance policy issued by Allstate for their boat. The policy required the insureds to cooperate in any investigation, including submitting to an Examination Under Oath (EUO) if requested by Allstate. The boat sank under suspicious circumstances while in route from Hilo to Honolulu. The insureds made a claim and Allstate hired an investigator.
Allstate eventually requested an EUO of the two insureds. One insured submitted to an EUO, but refused to attend a second EUO. On instructions from his attorney, the second insured refused to answer basic questions, such as "When did you start looking for a boat? or Why did you pick this boat to buy?" Allstate refused to go forward with the EUO and eventually denied coverage.
The insureds sued Allstate based on breach of insurance contract, bad faith and other claims. Allstate moved for summary judgment because the insureds failed to cooperate with the investigation. The federal district court noted that under Hawaii law, the requirement that the insured submit to an EUO was part of the duty to cooperate and a condition precedent to the insurer's obligation to pay benefits. The court predicted the Hawaii Supreme Court would hold that an insured breaches a policy's requirement to cooperate by failing to answer material questions during an EUO or to attend a second EUO. Therefore, the insureds breached their duty under the policy to submit to examinations under oath as reasonably required by Allstate, relieving Allstate of its duty to pay the insureds under the policy.
One further note on the duty to cooperate. If the insurer denies coverage, all bets are off. Once coverage is denied, the insured is no longer under an obligation to comply with the cooperation clause. By denying coverage, the insurer waives as a matter of law its rights under the policy, including the right of cooperation. 22 Appleman sec. 128 [A].
