Breach of Cooperation Clause absolves insurer of liability (Missouri law)

In Heubel Materials Handling Co., Inc. v. Universal Underwriters Ins. Co., Heubel sold and serviced Raymond forklifts.  When Heubel was sued for negligence in the servicing of a forklift, it told Raymond, but not Universal.  Raymond controlled and paid for the defense of the action. 

Six months later, Heubel told Universal about the lawsuit.  Universal sent out a reservation of rights letter because of the late notice.  Later, Universal withdrew the reservation of rights letter, and agreed to defend Heubel, but wanted Heubel to cooperate by pursing an indemnification claim against Raymond. Heubel responded by claiming that “Universal's requirement that Heubel pursue and enforce indemnity [against Raymond] creates a potential or actual conflict of interest between Universal and Heubel,” which would entitle Heubel to select its own counsel and control the defense of the underlying suit. Heubel also added claims for breach of the insurance contract.Universal then claimed that Heubel's lack of cooperation absolved Universal of any duty to provide coverage. On cross motions for summary judgment, the district court held that Heubel had breached the cooperation clause of the Universal policy; that the breach was not excused by a conflict of interest or reservation of rights; and that the lack of cooperation substantially prejudiced Universal, absolving it of the duty to defend or provide coverage for the underlying suit. Heubel appealed and the Eighth Circuit affirmed.

No reservation of rights

Universal did not reserve “the right to later disclaim coverage,” , rather Universal offered complete coverage but refused to concede its indemnification claim against Raymond. Because Universal did not reserve the right to disclaim coverage of any damages that might be awarded or legal fees that might be incurred in the underlying suit, its action does not qualify as a reservation of rights.

No conflict of interest

The sole conflict of interest asserted by Heubel is that Universal's enforcement of the cooperation clause in the Universal policy would force Heubel to breach the competing cooperation clause in the Raymond indemnification agreement, depriving Raymond of its competing right to control the defense. Thus, Heubel and Raymond take the position that the Universal policy provides primary coverage for the Harris suit and yet, at the same time, the Raymond indemnification program provides primary control of the defense to Raymond. This is antithetical to the traditional principle that conflicting right-to-control clauses should be resolved in favor of the insurer with primary coverage. See, e.g., Dodge v. Firemen's Fund Ins. Co., 362 S.W.2d 767, 769 (Mo.Ct.App.1962) (“It would be unjust to [the insurer] to declare it has the duty to defend and the obligation to pay the judgments, if obtained, and still to permit [another insurer] to participate in the control of the defense.”). If Heubel and Raymond wished to obtain outside primary products liability insurance coverage while preserving the right of Raymond to control the defense of such a suit, Heubel should have bargained for (and Raymond's indemnification program should have required) an insurance policy that did not give the insurer the right to control the defense.

Prejudice

Because nothing in the Universal policy or the Raymond indemnification program precluded a third-party indemnification claim by Universal against Raymond in the Harris suit, Universal suffered substantial prejudice from Heubel's refusal to allow Universal to control the defense. As a result, Universal was justified in denying coverage based on Heubel's breach of the cooperation clause.

 

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