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(Article from Insurance Law Alert, December 2022)

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Affirming a Washington district court decision, the Ninth Circuit ruled that an insured breached its duty to cooperate and was therefore not entitled to coverage under a marine policy. United States Fire Ins. Co. v. Icicle Seafoods, Inc., 2022 WL 17424295 (9th Cir. Dec. 6, 2022).

A policyholder sought “loss of hire” coverage from its insurers for losses allegedly stemming from damage to a fish processing vessel. The insurers disputed coverage under their policies and also argued that the policyholder breached its duty to cooperate in the adjustment of the claim. The district court ruled that the policyholder breached an express duty to cooperate by withholding historical financial information sought by the insurers and that the insurers were therefore discharged of their coverage obligations. The Ninth Circuit affirmed.

The Ninth Circuit held that the district court misconstrued a specific loss mitigation provision as imposing a duty to cooperate, but concluded that the error was harmless because Washington law imposes an implied duty of good faith and fair dealing that obligates parties to cooperate with each other. The court noted that an insurer may be relieved of its coverage obligations if the policyholder fails to comply with a material request and the insurer suffers resulting prejudice, regardless of whether the duty to cooperate is expressly included in the contract or implied by law, as was the case here. The court concluded that this standard was met because the policyholder failed to produce material financial information relating to the underlying claim for more than a year, despite the insurers’ requests. The court further held that the insurers were prejudiced by the delay because the policyholder threatened administrative action and a bad faith claim if it did not receive payment in full for the claim. The court explained: “Insurers then faced a ‘Hobson’s choice’ of either paying the [unsubstantiated] claim, or exposing itself to bad faith liability.”