When an injured third party brings an action against an insurer, the insured's lack of cooperation is generally a valid defense if the insurer can show that its position was prejudiced by the lack of cooperation. However, if the insurance policy was issued in compliance with a compulsory liability insurance statute (such as those automobile financial responsibility laws that require a showing of minimum insurance before the car can be registered) the insurer is often held responsible even if the insured fails to cooperate. Compulsory liability insurance laws are enacted to protect third parties, a purpose that would be defeated if the insured's noncooperation could void coverage. Even so, because state statutes differ, the answer to the question posed here may differ from the majority rule.

An example of the majority rule is found in Tibbs v. Johnson, 632 P.2d 904 (1981). In this case, a Washington court of appeals held the insurer liable when its insured failed to cooperate after a liability suit was filed against him as a result of a car accident. Copies of the summons and complaint were mailed to the insurer, and the insurer defended the action under a reservation of rights because of the insured's failure to cooperate. The insurer had not been able to locate the insured after one contact with a company adjuster.

At trial, a police officer's affidavit was submitted that concluded that the accident occurred because the insured failed to stop at a stop sign and stated that he was charged with driving under the influence of alcohol.

The state financial responsibility statute contained a provision stating that the insurer's liability became absolute whenever injury or damage covered by a policy issued pursuant to the law occurred. The statute also provided that a violation of the policy would not void coverage. The court concluded that these provisions must be read into all insurance contracts affected by the statute, so a third party's coverage could not be defeated by the insured's lack of cooperation when the law applied to the policy.

Other cases taking a similar position on the effect of the insured's noncooperation include Young v. Allstate Ins. Co., 282 S.E.2d 115 (1981), decided by the Supreme Court of Georgia, and Rowley v. Dairyland Insurance Co., Inc., 605 P.2d 1356 (1980), decided by an Oregon court of appeals.

Not all jurisdictions agree with this position, however, as evidenced by the decision in Ratcliff v. National County Mutual Fire Ins. Co., 735 S.W.2d 955 (1987). In Ratcliff, a Texas court of appeals held that the state financial responsibility act had not abolished insurer defenses against claims by third parties. The insurer was thus entitled to assert the defense of breach of the notice condition against a default judgment when the insurer was not notified of the case against its insured by either the insured or the third party.

The case was brought against the insured without notice to the insurer even though the injured party was in contact with the insurer's claims representative. The third party first notified the company of the default judgment more than thirty days after judgment was obtained.

The Texas statutes contained two relevant provisions, one dealing with all motor vehicle operators and one applicable to assigned risk insureds. The one applicable to all operators stated that all motor vehicles were subject to the state minimum liability limits. The State Board of Insurance had also instituted a requirement that the insurer show prejudice when not notified of a suit before the lack of notice defense could be used. The assigned risk statute specifically eliminated all policy violations as a defense to insurer liability. The court found that defenses could be asserted in cases involving insureds who were not in the assigned risk group because the statute did not specifically eliminate insurer defenses in such cases. The court also found that the insurer was prejudiced due to lack of notice because it had lost its opportunity to cross-examine the claimant about his alleged damages.