Insurance Coverage Update - Illinois Appellate Court Rejects Insurer's Cooperation Clause Defense Absent Due Diligence and Substantial Prejudice
The Illinois Appellate Court, in American Access Casualty Company v. Alassouli, 2015 IL App (1st) 141413, recently reaffirmed the difficult standard insurers must meet in Illinois when disclaiming coverage based on the breach of a policy’s cooperation clause.
In Alassouli, the court recognized the importance of the “cooperation clause” to prevent collusion between the insured and the claimant, and assist the insurer in its claim investigation. Nevertheless, the court recognized that an insurer wishing to disclaim coverage based on the insured’s lack of cooperation must establish that (1) it exercised a reasonable degree of diligence in seeking the insured’s participation in a claim investigation, and (2) the breach caused substantial prejudice to the insurer in defending the underlying action.
Alassouli stemmed from an auto accident caused by the insured that injured the underlying claimant. The claimant made a claim for damages against the insured’s American Access Casualty Company (“AACC”) insurance policy. In an effort to investigate the accident, the insurer telephoned the insured, who hung up after being told the call would be recorded. The insurer placed four more phone calls and left detailed messages for the insured, but the insured never answered or responded. The insurer then conducted a skip trace, but that did not reveal the insured’s whereabouts. In total, the insurer’s investigation lasted 13 days and included five phone calls and a skip trace. Years later, the insurer hired a personal investigator to locate the insured, but this search was also unsuccessful.
The insurer then filed a declaratory judgment action against the insured and the claimant, seeking a finding that it owed no duty to defend or indemnify the insured for the accident because the insured breached the cooperation clause. The cooperation clause in the AACC policy required, among other things, that the insured (1) assist in making settlements and securing and giving evidence, (2) allow the insurer to take signed and recorded statements, and (3) submit to examinations under oath.
The insured failed to appear or answer the complaint in the coverage lawsuit, so the trial court entered a default order against him. The claimant, however, opposed the insurer’s declaratory judgment action. The claimant argued that the insured did not breach the cooperation clause because the insurer did not show that it had been substantially prejudiced by the breach or that it exercised due diligence in attempting to contact him. The trial court found in favor of the underlying claimant, and the insurer appealed.
Affirming the trial court’s ruling, the Illinois Appellate Court held that the insurer failed to exercise reasonable diligence in seeking the insured’s cooperation. The court relied on Founders Insurance Co. v. Shaikh, 405 Ill. App. 3d 367 (1st Dist. 2010), for the standard an insurer must meet in order to establish that it exercised reasonable diligence in attempting to secure the insured’s participation in its claims investigation.
To locate the insured, the insurer in Shaikh telephoned the insured, repeatedly visited the insured’s last known addresses, hired an investigation firm to conduct additional visits, and talked to family members. The Shaikh court found the insurer’s efforts were “sufficiently broad and successful at producing leads, and [the insurer] pursued and exhausted every lead it generated.” The court also noted that the insurer used sources that were likely to disclose the insured’s whereabouts, and began an investigation “[w]ithin mere days of being alerted to a potential problem.” The insurer also kept an active search—both itself and through the use of independent investigators—for nearly a year.
Contrasting the efforts made in Shaikh with those made in Alassouli, the appellate court found that the insurer’s five phone calls, a skip trace and, much later, the retention of a private investigator, were insufficient to demonstrate reasonable diligence. The court rejected the insurer’s argument that the due diligence standard set forth in Shaikh does not apply when the insured has gone missing and refuses to cooperate. The court noted that the insurer made no attempt to visit the insured, send letters, or make an ongoing effort to talk to or find him. Consequently, the court determined that because the insurer’s efforts were cursory, the insurer did not meet its burden of establishing that it acted with reasonable diligence to secure the insured’s cooperation, or that his failure to cooperate was willful.
The appellate court in Alassouli also found that the insurer failed to establish that it had been substantially prejudiced by the insured’s failure to cooperate. The court noted that, under Illinois law, to establish substantial prejudice the insurer must demonstrate that the insured’s violation of the cooperation clause hampered the insurer’s investigation. In Alassouli, the court determined that the insurer could not establish substantial prejudice in its investigation because it failed to conduct a proper investigation. The court noted that the insurer had access to other sources of information, such as the police report for the accident, but presented no evidence that it had made use of these alternatives. The court refused to find prejudice in the absence of a more exhaustive investigation.
The court ultimately affirmed the trial court’s order granting summary judgment in the underlying claimant’s favor because the insurer failed to establish that it exercised reasonable diligence in obtaining the insured’s participation, or that it was substantially prejudice.
Comments: The success of the cooperation clause as a coverage defense will hinge entirely on the facts and circumstances of a particular case. Insurers must be cognizant of the fact that a breach of this policy condition, however, does not necessarily constitute a valid defense to coverage. In Illinois, an insurer invoking the cooperation clause must conduct a proper and thorough investigation, and exhaust all leads and potential avenues to secure the insured’s cooperation. The insurer must also prove that the insured’s failure to participate substantially prejudiced the claims investigation or defense of the suit.
If you have any questions about this Insurance Coverage Update, please contact Amber O. LaFevers at firstname.lastname@example.org or the Aronberg Goldgehn coverage attorney with whom you normally consult.
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