What are the duties of an insured after a loss?

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Conditions and Insured's Duties – New Appleman on Insurance Law Library Edition, Chapter 20

All insurance policies impose certain duties on the insured.  In some instances, state law - the common law, state statutes and regulations, or both - supplement those duties.  In order to perfect the claim and obtain insurance proceeds, the insured must comply with the various duties or establish that he or she was excused from compliance.  This chapter identifies and addresses the range of issues concerning the insured's duties, including their source, how to comply with them, when compliance with certain duties may be excused, and the consequences of an unexcused breach.

An insured presenting a claim for insurance coverage must satisfy two types of requirements established by the subject insurance policy.  First, the claim must satisfy the terms of coverage; that is, the claim must fall within the policy's coverage grant and not within an exclusion.  Whether the claim satisfies such coverage terms is determined by the circumstances of the loss or underlying liability claim, and not by any action or inaction of the insured after the loss or claim.

Second, all insurance policies impose certain conditions on the parties.  In contrast to what might be termed the "substantive" coverage terms described above, policy conditions do not purport to define the scope of coverage afforded by the policy.  Instead, conditions impose "procedural" duties on the contracting parties.  Most of those duties, and those that are the subject of this chapter, require the insured to take certain steps after the insured event occurs to perfect the coverage claim.  A failure to comply with those duties may preclude the insured from receiving the benefits of coverage.  Policy conditions, and the duties they impose on the insured, are critically important to the attorney or insurance professional working on behalf of the insured, because a breach of such duties may deprive the insured of coverage benefits that would have been owed but for a post-loss misstep by the insured during the claim process.

The most important source of the insured's duties is the policy itself.  Although the insurance industry makes extensive use of standardized forms, there remains substantial variation among the various coverage lines and policy forms in use.  Each of those coverage lines and forms may impose different duties on the insured.  Accordingly, a careful review of the governing policy language is a critical first step in evaluating the insured's duties.

The two most important duties of the insured, measured by their universal presence and the volume of coverage disputes they generate, are:  (1) the duty to notify the insurer of a loss or claim; and (2) the duty to cooperate with the insurer.  Section 20.01 addresses the various aspects of the duty to notify the insurer of a loss or claim.  The insured should assume that the insurer must promptly be notified, in writing, of any casualty loss, third-party liability claim, or occurrence that could give rise to a liability claim.  The duty to cooperate is addressed in Section 20.02.  The insured should operate under the assumption that the insurer must be timely notified of all material facts concerning the loss or underlying claim, and that the insured must respond fairly to all reasonable insurer requests for information and documentation.

The consequences of late notice and breach of the duty to cooperate vary with the type of policy at issue and the jurisdiction.  Under occurrence-based liability policies and first-party property policies, the majority rule is that the insurer will be excused from its coverage obligation only when the insurer proves that the delay in notice or failure to cooperate resulted in prejudice to the insurer.  Prejudice in this context means concrete harm to the insurer's ability to investigate the loss, defend a liability claim, or develop a defense to coverage.  A minority of jurisdictions is less forgiving and require no showing of prejudice.  The prejudice rule is discussed in Sections 20.01[6] and 20.02[6].

When evaluating the insured's notice obligations and the consequences of late notice, it is critically important to draw a distinction between occurrence-based liability policies and first-party property policies, on the one hand, and claims-made-and-reported liability policies, on the other.  Under claims-made-and-reported liability policies, notice to the insurer of an underlying claim is not a condition (precedent) of coverage; i.e., it is not a "procedural" duty whose breach may be excused in the absence of prejudice to the insurer.  Instead, notice is a material term of coverage that is part of the insuring agreement or coverage grant under such policies; consequently, late notice is a material breach that discharges the insurer from any coverage obligation. The distinction between occurrence-based and claims-made-and-reported policies is discussed at Section 20.01[5][a].

An underappreciated duty of the insured under first-party policies is created by so-called "suit- limitation clauses," which are discussed in Section 20.03.  Such clauses, which are present in virtually all first-party policies (and are very rarely included in liability policies), provide that any lawsuit against the insurer must be brought within a specified period after the discovery of the loss.  The time period for bringing suit under such clauses is typically either 12- or 24-months after the inception of the loss -invariably far shorter than the governing statute of limitations for disputes on written contracts.  Although a suit-limitation clause may be thought of essentially as a substitute statute of limitations created by contract, the accrual analysis is markedly different -statutory limitations periods generally commence upon the insurer's denial of coverage, while suit-limitations periods almost universally run from the commencement of the loss itself, without regard to when the insurer allegedly breaches the insurance contract.  Moreover, the overwhelming majority rule is that such suit limitations are enforceable and that the insurer need not show prejudice as a result of the failure to file suit within the prescribed period.  Accordingly, in the event of a coverage dispute under a property policy, an insured who fails to file suit against the insurer within the 12- or 24-month suit-limitation period likely will have forfeited his or her coverage rights. 

Section 20.04 discusses another important category of duties of the insured:  those created by liability policy terms requiring the insurer's consent to incurring defense costs and consent to settlement of an underlying claim.  An insured's breach of such consent terms usually will not provide the insurer with a strong defense to coverage, as most jurisdictions require the insurer to prove it was prejudiced by the insured's failure to obtain consent.  However, these duties underscore the importance of maintaining an appropriate level of communication with the insurer during the course of an underlying liability claim.  An insurer that refuses consent after having been provided with a compelling case for undertaking particular defense efforts, or for settling a case for a particular amount, will be hard pressed to mount an effective prejudice defense.

Consent-to-settle clauses implicate the broader topic of the liability insurer's right to control settlement of underlying claims against the insured, and the limits of that right.  A full discussion of the insurer's right to control settlement is beyond the scope of this chapter.  However, an overview of the topic, with cross-references, appears at Section 20.04[2].

All first-party property insurance policies contain a term requiring the insured to take all reasonable steps necessary to prevent further damage after a loss is suffered. A common example would be to effect temporary repairs to a roof following storm damage to prevent water intrusion in the period of time before permanent repairs can be made.  Most such policies impose that obligation by means of a variation on the ancient "sue-and-labor" clause, which is a separate grant of coverage under the policy that requires such loss-mitigating steps and also provides that the costs of those steps will be covered under the policy.  The sue-and-labor clause and its implications are discussed in Section 20.05.          

Section 20.06 addresses the insurer's right of subrogation.  Under the equitable remedy of subrogation, a first-party insurer that pays its insured for a loss usually is entitled to recover against any tortfeasor that caused that loss.  Similarly, a liability insurer that pays a claim on behalf of its insured may be subrogated to the insured's claims, for contribution or indemnity, against other liable parties.  Subrogation rights are significant because the insured has a duty not to impair the insurer's subrogation rights.  Whenever an insured is asked to do anything that would preclude its insurer from recovering against a tortfeasor - whether that request comes before a loss, in the form of a request that the insured agree to a limitation-of-liability or remedy term in a contract, or after the loss in the form of a release of claims against such a tortfeasor - the insured must carefully evaluate whether the requested act would constitute an impermissible impairment of the insurer's subrogation rights and lead to a forfeiture of coverage.

Section 20.07 addresses the insured's duty to pay the insurance premium.  It should come as no surprise that one of the insured's duties is to pay for the service - risk transfer - that the insured purchases in the form of the insurance policy.  The obligation to pay the premium, although straightforward on its face, can give rise to complex issues.  An insured whose coverage claim is met with the defense of nonpayment of premium, and resulting cancellation of the policy, should examine the policy, the governing state insurance statutes and regulations, and the substantial body of case law that establishes limitations on the insurer's ability to reject a proffered late premium payment or to cancel a policy for nonpayment of premium.  In particular, many states require that insureds, including additional insureds, receive written notice of cancellation, and an opportunity to cure, before the policy may be cancelled.  In other cases, the insurer may be precluded from accepting a late payment by application of the estoppel doctrine.

Franklin D. Cordell is a partner in the Seattle law firm of Gordon Tilden Thomas & Cordell LLP. His practice emphasizes policyholder-side insurance coverage advice and litigation. He writes and speaks frequently on a broad range of insurance and business litigation topics. Mr. Cordell is a graduate of the University of Virginia and a 1991 summa cum laude graduate of the Washington & Lee University School of Law in Lexington, Virginia. He served as law clerk to the Hon. H. Emory Widener, Jr., of the United States Court of Appeals for the Fourth Circuit.

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