Noncooperation defense, propriety of sanctions illustrated in Alcauter case

American Access Casualty Co. v. Alcauter, 2017 IL App (1st) 160775, provides a useful illustration of a case where sanctions under Illinois Supreme Court Rule 137 were properly imposed and upheld on appeal. Alcauter also provides a good starting point for a discussion about the challenges faced by an insurer trying to defeat coverage on the grounds that its insured failed to cooperate. We’ll start with the coverage issues in this post and finish tomorrow. The Rule 137 issue will be the subject of a third installment.

AACC alleged that its insured, Jose Alcauter, failed to cooperate in the defense of an auto accident suit brought against him by Kimberly Krebs. If the court agreed, AACC would be excused from paying Krebs for the judgment against Alcauter.

Krebs obtained a $10,000 arbitration award against Alcauter in May 2013, according to the Circuit Court Clerk’s electronic docket in case no. 2012 M2 2067. Alcauter did not appear for the arbitration, according to the Appellate Court’s opinion, the arbitrators noting “that ‘no evidence was presented’ at the hearing and that Alcauter did not appear ‘despite having received’” a Rule 237 notice to appear (2017 IL App (1st) 160775, ¶7). Although a notice of rejection was filed, in August 2013, judgment was eventually entered on the award.

A few months later, in October 2013, AACC filed the declaratory action that gives rise to the reported opinion. Alcauter’s failure to appear was touted as a violation of his contractual duty to cooperate in the defense of any case brought against him. Alcauter did not appear in the declaratory case and was defaulted (2017 IL App (1st) 160775, ¶9). This is not unusual (United Automobile Ins. Co. v. Buckley, 2011 IL App (1st) 103666, notwithstanding): The real party in interest in these cases is typically the underlying plaintiff/judgment creditor. The tortfeasor’s liability policy is the only likely source of funds to satisfy the judgment.

AACC moved for summary judgment. The centerpiece of coverage counsel’s motion was the affidavit of a supervising partner in the firm that AACC had retained as trial counsel. In the affidavit, the partner detailed his firm’s regular procedures for notifying insureds of upcoming trial or arbitration dates. Two letters would be sent to the insured’s last known address advising of his obligations; then, the day before the arbitration, a phone call was made to the insured’s last known telephone number. Moreover, the attorney attested, because there was no motion to continue the arbitration in the file, the file “showed that, ‘based upon [his firm’s] practice and procedures, [the firm] called Jose Alcauter the day before the arbitration and confirmed his attendance’” (2017 IL App (1st) 160775, ¶11). The trial court denied the summary judgment motion.

Understandably, given its focus on the Rule 137 sanctions subsequently imposed by the trial court, the Alcauter court does not go into detail as to why the trial court denied the summary judgment motion, noting only the trial court’s remark “that it still had ‘some unanswered questions * * * that raise issues of fact as to the notice,’” (2017 IL App (1st) 160775, ¶12).

However, the reported cases make it clear that non-cooperation is not an easy defense for an Illinois insurer to establish.

Illinois has long recognized that the “character” of an automobile insurance policy is different from other types of contracts. In M.F.A. Mutual Ins. Co. v. Cheek, 66 Ill.2d 492, 498 (1977), the Illinois Supreme Court noted that “the public is the beneficiary of the automobile policy.” According to the M.F.A. Mutual court, an automobile liability policy “is more than a private agreement between the insured and the insurer against losses sustained as a result of the negligent operation of a motor vehicle” (66 Ill.2d at 499-500). Quoting a Washington case with approval, the M.F.A. Mutual court added (66 Ill.2d at 500) that automobile liability 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.” See also, Central Mutual Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339, ¶103 (quoting M.F.A. Mutual and differentiating “the character of the automobile insurance policy” from the policy at issue in that case).

On the other hand, cooperation clauses in insurance contracts serve a useful purpose by preventing “collusion between the insured and injured and [enabling] an insurer to prepare its defense to a claim,” American Access Casualty Co. v. Alassouli, 2015 IL App (1st) 141413, ¶17 (citing Cheek). “Typically an insurer has little to no knowledge of the relevant facts, and is therefore dependent upon its insured for fair and complete disclosure. * * * While an insured has no duty to assist an insurer in any effort to defeat a proper claim for recovery, the insured must disclose all facts within his knowledge and otherwise help the insurer determine coverage under the policy.” Founders Insurance Co. v. Shaikh, 405 Ill.App.3d 367, 374 (1st Dist. 2010), citing Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178, 204 (1991).

Thus, the Illinois courts have struck a balance between the private contractual purpose of the cooperation clause and the public nature of liability insurance policies (particularly auto liability policies) by holding that, in order to establish non-cooperation of its insured, an insurer must prove “a breach by the insured (i.e., a showing that the insurer ‘exercised a reasonable degree of diligence in seeking the insured’s participation’ and ‘the insured’s absence was due to a refusal to cooperate’) and resulting substantial prejudice to the insurer” (Direct Auto Ins. Co. v. Reed, 2017 IL App (1st) 162263, ¶25, quoting Shaikh, 405 Ill.App.3d at 374). And in Direct Auto, addressing a situation similar to Alcauter where the insured failed to show up for the arbitration and an order was subsequently entered barring the insured from rejecting the award, the Appellate Court expressly held, 2017 IL App (1st) 162263, ¶37, “substantial prejudice to an insurer does not automatically flow from the issuance of a debarring order preventing the insured from rejecting an unfavorable arbitration award.”

The Direct Auto court attempted to explain that it was not saying that an insurer is never prejudiced by the failure of its insured to attend a mandatory arbitration hearing... but, in all honesty, the court injected some presumably unintended confusion when it added, 2017 IL App (1st) 162263, ¶38, “In so holding, we do not foreclose the possibility that an insurer might, under the circumstances of a particular case, be able to demonstrate actual, substantial prejudice from the issuance of a debarring order itself. But such a showing must be based on evidence that the insured would have obtained a better result at the trial than the insured obtained at arbitration.”

Addressing that potential confusion – and, in the course of same, addressing when and how an insurer is prejudiced by the failure of a non-cooperative insured to appear for a mandatory arbitration hearing – will be the subject of tomorrow’s post.