Illinois’ First District in Founders Ins. Co. v. Shaikh, 405 Ill.App.3d (1st Dist. 2010) recently examined various issues and obligations surrounding the duty to cooperate in a third- party liability defense case. Specifically, the Shaikh decision highlights the existence of dual cooperation obligations placed on the insurer and the insured, and provides a fairly detailed historical overview of Illinois’ stance on this topic.
In Shaikh, the First District affirmed a Cook County Court’s ruling which held in favor of Founders Insurance Company (Founders) on the issue of whether Founders’ insured (Kahn) cooperated with Founders during Founders’ defense of Kahn in a third party liability case in which Kahn was the defendant. The facts as revealed indicate that Kahn and Shaikh were parties to an automobile accident in which Shaikh was injured. After being served with Shaikh’s personal injury complaint, Kahn gave notice of the complaint to Founders and also provided Founders with his contact information including his address and telephone number. Founders, in turn ensured that it would be retaining a law firm to represent Kahn in the lawsuit and advised that the attorneys it would be retaining would be contacting Kahn to discuss the defense of the case.
After being assigned Kahn’s defense, the Founders’ retained attorneys tried persistently to reach Kahn to discuss the defense of Shaikh’s case. The attorneys tried numerous times to reach Kahn via correspondence and telephone, before eventually asking Founders to help them in locating Kahn so that the attorneys could appropriately defend Kahn’s interest. In response, Founders had its own representatives conduct person searches on the web, hire private investigators and even conduct in-person interviews with Kahn’s family members and friends in an effort to locate Kahn while the lawsuit was pending. Founders’ efforts were unsuccessful and Kahn was nowhere to be found.
While Founders and its attorneys were doing all they could to locate Kahn, the litigation involving Shaikh ensued. Eventually, because Kahn failed to answer discovery, the court entered a discovery order effectively barring Kahn from presenting any evidence at trial. The case then proceeded to arbitration. Kahn obviously did not participate at the arbitration and Shaikh was awarded $11,000 in damages. Because Kahn did not participate in the arbitration, the court barred Kahn’s attorneys from rejecting the $11,000 award and judgment was ultimately entered in Shaikh’s favor.
After being stuck with an arbitration award, which it could not reject due to Kahn’s non-participation in the arbitration, Founders quickly retained another law firm to pursue a declaratory judgment action against Kahn. In its declaratory judgment complaint, Founders alleged it did not owe the judgment obtained by Shaikh because Kahn had breached Founders’ policy by not fully cooperating with the defense of the case.
Since Founders had no idea where Kahn was located, it sought and was granted permission by the court to serve Kahn with its declaratory judgment complaint by publication. After duly serving Kahn by publication, Founders obtained a default judgment against Kahn which effectively relieved Founders of any obligation to defend and indemnify Kahn in connection with the Shaikh lawsuit. Hence, while Shaikh prevailed at arbitration and was awarded $11,000, the court ordered that Founders was not responsible for satisfying the judgment since Kahn failed to cooperate with the defense of the case. Shaikh, with nowhere to turn, appealed the ruling in Founders’ favor, in an effort to hopefully pocket the proceeds from his arbitration victory.
On appeal, the First District considered not only Kahn’s failure to cooperate, but it also examined whether Founders made reasonable diligent efforts to obtain Kahn’s cooperation during the course of the underlying case. While examining these issues, the court looked first to the “Assistance and Cooperation” provision set forth in the policy’s terms and conditions. That provision provided as follows:
5. Assistance and Cooperation of the Insured – Parts I [Liability], III [Physical Damage] and IV [Uninsured Motorist Coverage]. As a condition precedent to the Company’s duty to indemnify with respect to suits against an insured, the insured shall cooperate with the Company and, upon the Company’s request, assist in making settlements, in the conduct of suits and in enforcing any right of contribution or indemnity against any person or organization who may be liable to the insured ***; and the insured shall attend hearings and trials and assist in securing evidence and obtaining the attendance of witnesses. ***The insured must cooperate with us in the investigation, settlement or defense of any claim or suit, failure to cooperate fully will be deemed a breach of contract.
In examining the issues, the court reviewed the totality of circumstances surrounding not only the underlying claim but also Founders’ repeated efforts to obtain Kahn’s cooperation during the course of the litigation. While doing so the court was reminded that “an assistance and cooperation clause enables an insurer to prepare its defense to a loss claim and prevents collusion between the insured and injured party”. 405 Ill.App.3d at 374, citing Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178, 191 (1991). For an insurer to prevail on a cooperation defense, the insurer must prove that it exercised “a reasonable degree of diligence in seeking the insured’s cooperation and that the insured’s absence was due to a refusal to cooperate.” Id. Hence, the issue of non-cooperation double-sided. On one side, the court must weigh what the insured failed to do insofar as cooperating. On the other side, however, the court must also analyze what exactly the insurer did while trying to gain the insured’s cooperation. Id. To answer these questions, the court took a historical path and revisited a small handful of cases that previously addressed the issues before the court. Ultimately, the court held that Founders’ repeated efforts not only by its own representatives, but also by the attorneys it hired, in trying to track down its insured’s whereabouts showed the “reasonable degree of diligence” necessary to allow its cooperation defense to stand.
Specifically, the court looked at two cases, Johnson v. Wade, 47 Ill.App.3d 610 (1977) and Lappo v. Thompson, 87 Ill.App.3d 253 (1980) and compared the facts and circumstances of those cases to another decision, Gallaway v. Schied, 73 Ill.App.3d 116 (1966) to help it decide in Founders’ favor. Both the Johnson andLappo cases determined that the cumulative efforts of the insurers and the attorneys it hired to defend the insured in trying to obtain the insureds’ cooperation was insufficient to preclude the insured a defense and indemnification. While the attorneys in Johnson sent a letter to their client (the insured) advising of an upcoming trial, the attorneys (and the insurer) did absolutely nothing more to follow up with the insured to ensure the insured’s participation at trial. When the insured failed to appear at trial and the insurer sought to bar coverage pursuant to the policy’s cooperation clause, the court rejected the insurer’s cooperation defense. The Johnson court reasoned, when the insured fails to respond to the letters sent by his own attorneys which advised of a pending trial date, the insured’s nonresponsiveness should have served as “constructive notice that a problem existed,” which should have prompted the insurer and the attorney it retained to investigate further into what exactly was going on. Similarly, in Lappo, while the insurer’s actions were clearly more extensive than those illustrated in Johnson, the court still deemed that the insurer failed to adequately follow up on what should have served as “constructive notice” of a problem being present after the insured failed to respond to “numerous letters and mailgrams” that were sent to the insured advising of various court and deposition dates.
Contrary to Johnson & Lappo, the Gallaway court held the insurer exercised “reasonable diligence” in trying to secure its insured’s cooperation during the defense of a personal injury case. In Galloway, similar to the case at hand, the insured initially cooperated with the insurer but eventually disappeared to never be found again. Along the way, letters and telegrams were persistently left unclaimed and an investigator’s efforts to locate the insured were all for naught.
This significance of this decision is two-fold. On one hand, it reiterates the obligations that are placed on insureds insofar as cooperating with their insurer during the course of a claim investigation and a subsequent suit defense. On the other hand, it reminds the insurer that it cannot prematurely deny coverage to its insured without exercising “a degree of reasonable diligence” in securing the insured’s cooperation. If an insurer is quick to the draw in barring coverage under the cooperation clause, without utilizing reasonable efforts to secure its insured’s cooperation, the cooperation defense asserted by the insurer may not stand on very solid ground.