From a liability insurer’s standpoint, a cooperative defendant is certainly desirable, but a noncooperative defendant may be even better. Liability insurers are obligated to provide a defense for their insured, but the insured owes the insurer a reciprocal obligation, under standard policy provisions, to cooperate with the defense. Failure to cooperate with the defense may result in forfeiture of coverage under the terms of the policy, which might represent a better outcome for the insurer than would be the case if the insured cooperates with an otherwise weak defense. This article will explore judicial attitudes toward this coverage defense, examining the specific fact patterns involved and apparent policy considerations at work.
WHAT CONSTITUTES NONCOOPERATION?
The most common scenario in noncooperation cases involves an insured-defendant’s failure to attend an important proceeding in the lawsuit, such as a deposition, arbitration hearing or even trial.1 The insured-defendant’s nonattendance is not dispositive of the noncooperation question. Instead, courts also consider the insurer’s efforts to ensure that the insured-defendant is present at proceedings in which his or her attendance is required, and other circumstances showing that the failure to attend was not tantamount to noncooperation. As stated in Lawler v. Merit Ins. Co., 27 Ill. App. 3d 150, 326 N.E.2d 529 (1975):
"In asserting the affirmative defense of noncooperation, the burden is on the insurer to prove that it acted in good faith to secure the attendance of the insured and that the insured’s failure to appear was due to his refusal to cooperate. [Citation.] An insured is not liable for a judgment rendered against its insured if the insured willfully failed to cooperate by refusing to appear at trial after receiving adequate notice. [Citations.] However, the insurer is liable if it was not sufficiently diligent in attempting to secure the insured’s appearance [citations] or if the insured’s failure to attend was not due to a refusal to cooperate."
Not surprisingly, where the insurer’s efforts to secure attendance are minimal or are undertaken at the last minute, courts readily reject noncooperation defenses. For instance, in Buckner v. Causey, 311 Ill. App. 3d 139, 724 N.E.2d 95 (1999), the record showed that the defense attorney assigned by the defendant’s insurer only notified the insured-defendant of trial three or four days in advance. The trial date had been assigned by court order entered over two months earlier. Additionally, the insured defendant claimed that he advised the defense attorney that he lacked funds for transportation to court. Although the defense attorney denied that the insured-defendant had made such a statement, the trial court credited the insured-defendant’s testimony. The trial court ruled that defendant’s failure to appear at trial did not constitute noncooperation and the appellate court affirmed, observing that the notice given could not be deemed "adequate" and did not represent "diligence" on the part of the insurer. Buckner, 724 N.E.2d at 100. Noting the insured-defendant’s claimed transportation difficulties, the Buckner court held that "[f]ailure to attend trial due to a lack of funds necessary to travel to court cannot be deemed a ‘refusal to cooperate.’" 724 N.E.2d at 100. That the trial court took a dim view of the insurer’s position on coverage is evident from the fact that the trial court imposed sanctions on the insurer under section 155 of the Illinois Insurance Code (215 ILCS 5/155) for its vexatious and unreasonable refusal to pay the judgment.
Johnson v. Wade, 47 Ill. App. 3d 610, 365 N.E.2d 12 (1977), illustrates that even notice by mail given well in advance of a scheduled proceeding, may not be sufficient if receipt is not confirmed. In Johnson, counsel sent the insured-defendant a letter on August 16, 1974, advising her that her case was listed on the trial assignment call for September 18, 1974. The letter requested that the insured-defendant contact defense counsel immediately to confirm her availability. Having received no response, on September 17, 1974, defense counsel attempted to contact the defendant by telephone, but was unsuccessful. Defense counsel then sent out two investigators to find the defendant. There was conflicting testimony as to whether either investigator made contact with the defendant. The insured-defendant testified that she did not recall receiving the letter advising her of the trial date.
In seeking to invoke a noncooperation defense based on the failure to appear for trial, the insurer contended that because the defendant had been cooperative in early stages of the litigation, the insurer was justified in believing that its letter to the defendant was sufficient to secure her presence at trial. The Johnson court disagreed, noting that the insured defendant’s failure to confirm her availability for trial, as requested in the letter, placed defense counsel on notice that the insured-defendant might not have received counsel’s letter. The court faulted defense counsel for waiting until the eve of trial to follow up on the matter, noting that had counsel acted earlier, it might have been possible to secure the defendant’s attendance by subpoena, to send her a reservation of rights letter, or to obtain a continuance. Johnson, 365 N.E.2d at 14.
The Johnson court also emphasized that even to the extent that the defendant may have manifested an unwillingness to cooperate, the insurer could not avoid coverage without establishing that the defendant had been clearly advised of the consequences of failing to cooperate. Johnson, 365 N.E.2d at 14 ("Because an unequivocal disclaimer is required [citation] the investigator’s [alleged] admonitions to appear in court without explaining the consequences of [defendant’s] failure to do so, were obviously inadequate.")
Even where insurers or defense counsel have undertaken significantly more active efforts to secure a defendant’s cooperation, courts have shown a definite reluctance to deprive the insured-defendant of coverage. In Lappo v. Thompson, 87 Ill. App. 3d 253, 409 N.E.2d 27 (1980), the insured-defendant failed to tender the defense of a personal injury suit to her insurer. When the insurer learned of the default judgment, it notified the defendant by certified mail that it would provide a defense notwithstanding her failure to tender. However, the insurer reserved its rights under the policy’s cooperation clause. Thereafter, defense counsel sent numerous letters to the defendant requesting that she appear on various dates for her deposition. The defendant failed to respond to the letters or appear for her deposition. The defendant was allegedly contacted by telephone and asked if she would attend a deposition. She allegedly responded that she could not attend. Defense counsel sent defendant mailgrams advising her of the original and rescheduled trial dates and informing her of her obligation to testify. The case was tried before a jury over the course of three days. The defendant did not appear, although defense counsel sent her three mailgrams during this time period. Despite the letters and mailgrams, the Lappo court, citing Johnson, found that defense counsel’s efforts were wanting:
"[W]e feel much more could have been done to secure [defendant’s] cooperation. Though numerous letter were sent informing her of various deposition and trial dates, little or no attempt was made to contact her personally. As noted in Johnson, [defendant’s] failure to respond to the letters within a reasonable time served as constructive notice that a problem existed. Additionally, the assured misspelled her name when she signed for a receipt of a certified letter. This created the possibility that she might have a literacy problem, a possibility never pursued by [the insurer] and one which might explain her failure to respond to the letters." Lappo, 409 N.E.2d at 28.
In Wallace v. Woolfolk, 312 Ill. App. 3d 1178, 728 N.E.2d 816 (2000), the defense attorney corresponded with the insured-defendant on a number of occasions. The defendant failed to respond to letters requesting assistance in the preparation of interrogatory answers. (She testified that she had informed the law firm defending her that she that she had not received these letters.) The defendant failed to appear for her deposition on two occasions. Although it appears she was not informed of the first deposition date, she was told of the second date, and had agreed to attend. On January 7, 1998, defense counsel wrote to advise the insured-defendant that an arbitration hearing was scheduled for January 14. The day before the arbitration hearing, the trial court found the defendant in default for failing to answer discovery or attend her deposition. The court struck the defendant’s answer, counterclaim and jury demand, and ordered the arbitration hearing to proceed on the issue of damages only. On that same day, the insurer sent the defendant the first of three reservation of rights letters. The defendant failed to appear at the arbitration hearing and an award was entered in favor of the plaintiff. The defendant was barred from rejecting the award, and judgment was entered. The appellate court rebuked the insurer’s effort to avoid coverage. The court observed that merely sending letters is not enough to satisfy the insurer’s duty to secure its insured’s cooperation. The court further noted that defense counsel continued to correspond with the defendant by ordinary mail after she had indicated that she had not received earlier correspondence by ordinary mail.
The Wallace court acknowledged that it was possible that the defendant had received defense counsel’s correspondence and simply ignored it. Even so, the court held that the insurer could not prevail on a noncooperation defense without exercising diligence to secure cooperation. Wallace, 728 N.E.2d at 820. This would suggest that noncooperation involves something more than complacency or laziness on the part of the insured-defendant; rather it would appear that an active, recalcitrant refusal to cooperate must be shown.
Even if an insurer meets the heavy burden of showing noncooperation, it must also establish prejudice in order to escape its coverage obligation. M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492, 363 N.E.2d 809 (1977). Prior to Cheek, a number of appellate court decisions suggested that prejudice need not be shown or could be presumed in some cases. E.g., Allstate Insurance Co. v. Keller, 17 Ill. App. 2d 44, 49, 149 N.E.2d 482, 485 (1958) (rejecting "as obsolete and impracticable the concept that a breach of the co-operation [sic] clause must be asserted and determined on the basis of an actual showing of prejudice or detriment to the insurer"); Gallaway v. Scheid, 73 Ill. App. 2d 116, 125, 219 N.E.2d 718, 722 (1966) (prejudice need not be shown where there is a "substantial or material lack of cooperation"); Mertes v. Ballard., 103 Ill. App. 2d 171, 173 242 N.E.2d 905, 907 (1968), (where the insured defendant fails to appear at trial "no court should conjecture that his indifference did not prejudice his case"); but see Rowalt v. Farmers Mutual Insurance Co, 305 Ill. App. 3d 93, 26 N.E.2d 903 (1940) (appellate court cited the lack of prejudice in rejecting a noncooperation defense based on the insured’s failure to truthfully identify the driver of the vehicle involved in the accident). Nonetheless, the Cheek court held that prejudice must be established. The court observed that "[a]lthough the majority of the appellate court opinions do not specifically recognize the prejudice test as such, nonetheless this appears to be the moving force in each of them." Cheek, 363 N.E.2d at 812. In the Cheek court’s view, the rule best serving the ends of justice and followed in most jurisdictions is that "unless the alleged breach of the cooperation clause substantially prejudices the insurer in defending the primary action, it is not a defense under the contract." Cheek, 363 N.E.2d at 813. "Substantial prejudice" exists where the insurer shows that it "was actually hampered in its defense by the violation of the cooperation clause." Cheek, 363 N.E.2d at 813.
The courts’ generally unfavorable attitude toward the noncooperation defense may be the product of a number of concerns. First of all, there is concern for the policyholder who has paid premiums for coverage and potentially faces financial ruin if exposed to a judgment without insurance coverage. Obviously this consideration only goes so far; one who wholly abdicates his or her role in defending against a liability claim may be said to bring this hardship upon himself or herself. But courts are properly vigilant in scrutinizing the efforts of insurers and defense counsel to obtain the necessary cooperation. Policyholders purchase insurance for peace of mind. They may lack a sophisticated understanding of the litigation process, and it is reasonable for them to expect that the attorneys who are retained to represent them will lead them through the process and impress upon them the importance of their role in the defense.
The spector of conflicting interests arising from the relationships between the insurer and defense counsel may also figure into the courts’ reluctance to deny coverage on the basis of noncooperation. It is noteworthy that in Buckner v. Causey, 311 Ill. App. 3d 139, 724 N.E.2d 95 (1999), upon learning that the attorneys assigned to defend the insured were employees of the insurer, the trial court ordered that the matter be brought to Attorney Registration and Disciplinary Commission’s attention. And in Lappo v. Thompson, 87 Ill. App. 3d 253, 409 N.E.2d 27 (1980), the record showed that one of the insurance company’s major stockholders (with a 25% to 33% holding) was a senior partner in the law firm engaged by the insurer to defend its policyholder.
The heavy burden placed on insurers seeking to avoid coverage in automobile cases also reflects the public policy in favor of compensating victims of negligent drivers for their injuries. This public policy finds expression in Illinois’ mandatory insurance and proof of financial responsibility statutes (see 625 ILCS 5/7—301 to 625 ILCS 5/7—329; 625 ILCS 6/7—601 to 625 ILCS 5/7—610), and has been recognized by the courts. As noted in M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492, 363 N.E.2d 809 (1977), "the public is the beneficiary of the automobile policy." The Cheek court further observed that, "‘insurance policies . . . are simply unlike traditional contracts, i.e. they are not purely private affairs but abound with public policy considerations, one of which is that the risk-spreading theory of such policies should operate to afford to affected members of the public—frequently innocent third persons—the maximum protection possible consonant with fairness to the insurer.’" Cheek, 363 N.E.2d at 813, quoting Oregon Automobile Insurance Co. v. Salzberg, 85 Wash. 2d 372, 376-77, 535 P.2d 816, 819 (1975).2
While insurers are certainly entitled to cooperation from the insured in the defense of liability claims, courts are generally wary of efforts to avoid coverage on this basis. For the sake of the policyholders and public generally, insurers are held to a high standard of diligence and good faith in attempting to obtain cooperation. Where an insurer’s efforts fall short, or where it suffers no prejudice, the insurer will not be relieved of its coverage obligation because of the insured’s failure to cooperate.
1 Noncooperation can take other forms. For instance some cases have involved noncooperation defenses based on the insured’s failure to truthfully identify the driver of an automobile involved in an accident or other false statements about the accident. See M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492, 363 N.E.2d 809 (1977), and cases cited therein.
2 State Farm Mutual Automobile Insurance Company v. Universal Underwriters Group, 182 Ill. 2d 240, 695 N.E.2d 848 (1998) raises the intriguing possibility that cooperation clauses may no longer be effective in automobile policies issued pursuant to Illinois’ mandatory insurance statute ((625 ILCS 5/7—601(a)). Universal Underwriters held that the provisions of the Illinois Vehicle Code governing insurance provided as proof of future financial responsibility (see 625 ILCS 5/7—317) also apply to insurance policies issued under the mandatory insurance law. Applying the financial reponsibility law provisions, the Universal Underwriters court held that the mandatory insurance law requires policies to provide "omnibus" coverage for drivers operating an insured vehicle with the named-insured’s permission. Arguably, the financial responsibility law may also preclude assertion of a noncooperation defense. Section 7—317(f) of the Vehicle Code states that "the liability of the insurance carrier under any such policy shall become absolute whenever loss or damage covered by the policy occurs and the satisfaction by the insured of a final judgment for such loss or damage shall not be a condition precedent to the right or obligation of the carrier to make payment on account of such loss or damage." (Emphasis added.) 625 ILCS 5/7—317(f). In Stollery Bros., Inc. v. Inter-Insurance Exchange, 15 Ill. App. 2d 179, 145 N.E.2d 768 (1957), it was argued that the "absolute liability" language precluded an insurer from denying coverage based on the failure of its insured to provide notice of the lawsuit. The appellate court rejected this argument on the basis that the insurance policy in that case was not issued as proof of financial responsibility. The outcome was the same in Mollihan v. Stephany, 52 Ill. App. 3d 1034, 368 N.E.2d 465 (1977), where a judgment creditor argued that the absolute liability language precluded an insurer from rescinding a policy based on a misrepresentation in the application for the policy. In light of Universal Underwriters, Stollery Bros. and Mollihan, may no longer be good law. In the future, the courts may have to confront the question of whether section 7—317(f)’s "absolute liability" language was designed to preclude coverage defenses based matters occurring after the occurrence giving rise to liability.
Michael B. Levy is a sole practitioner in Aurora, Illinois. His practice includes consumer bankruptcy, worker’s compensation, litigation and appellate law. Previously, he served as Law Clerk to the Honorable John L. Nickels of the Illinois Supreme Court and the Honorable James F. Quetsch of the Illinois Appellate Court, Second District.