Insurer’s Declaratory Judgment Complaint Plausibly Alleges Violation of Cooperation Clause at Motion to Dismiss Phase

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that an insurer’s complaint plausibly alleged that the insured had breached the terms of the policy’s cooperation clause. Nat’l Fire & Marine Ins. Co. v. Glencrest Healthcare & Rehab. Ctr., Ltd., 2022 WL 3026933 (N.D. Ill. Aug. 1, 2022).

The insured, a senior care facility, was sued in connection with breaching the standard of care expected of nursing homes. The insured retained defense counsel, who regularly communicated with the insurer about the status of the underlying lawsuit. However, three years into the litigation, the insured chose to retain substitute counsel. Substitute counsel allegedly failed to provide the insurer with any reports about the underlying lawsuit or defense strategy, despite the insurer’s numerous written requests for the information. Substitute counsel also agreed to waive the insured’s jury demand, consented to the claimant’s untimely expert witness disclosure, and failed to identify expert witnesses in support of the insured’s defenses—all without informing or consulting with the insurer. Even after the insurer asserted its right under the policy to assume control over the defense of any claim, substitute counsel made misrepresentations to the court in the underlying lawsuit that resulted in the court denying the insured’s motion for a continuance of trial and a motion to identify an expert witness. Ultimately, the court entered a final judgment against the insured and awarded the claimant a total of $934,232.12 in damages, fees, and expenses.

The insurance policy at issue required the insured to “fully cooperate” with the insurer in the defense of third-party legal actions. Following entry of the judgment against the insured, the insurer filed a declaratory judgment action seeking a declaration that it did not owe a duty to defend or indemnify the insured in connection with the underlying lawsuit based on the insured’s breach of the policy’s cooperation provision. The insured moved to dismiss the complaint for failure to state a claim.

In denying the motion to dismiss, the court held that the insurer’s complaint contained facts that would allow a plausible inference that the insured had breached the terms of the policy’s cooperation clause. In particular, the court noted that the insurer had alleged that the insured “(1) failed to present a competent defense to [the underlying] claim; (2) waived its jury demand without first consulting [the insurer]; (3) consented to [the claimant’s] untimely disclosure of expert witnesses; (4) failed to identify expert witnesses to support its defenses; (5) failed to timely and competently report on the status of the underlying case . . . ; (6) undermined [the insurer’s] position before the . . . court . . . ; and (7) made misrepresentations to the state court.” The court noted that the insurer alleged that these actions prevented it from proceeding to a jury trial, compelled the insured to confront the claimant’s expert witness, who should have been barred as untimely disclosed, and foreclosed the insured from presenting its own expert testimony at trial. The court concluded that “these allegations suffice to raise a reasonable expectation that discovery will reveal evidence to support [the insurer’s] claims.” The court rejected the insured’s arguments that dismissal was warranted because the policy did not define “fully cooperate.” Moreover, concluding that there were issues of fact, the court rebuffed the insured’s arguments that the complaint should be dismissed because the insurer never advised against waiving a jury trial, the insured properly attempted to reduce the attorneys’ fees incurred, and the policy did not contemplate the insurer’s withdrawal of coverage in the event of noncooperation.

The court also held that the insurer’s complaint contained sufficient facts to allege a breach of the implied duty of good faith and fair dealing against the insured as to the cooperation clause. Specifically, the court found that the complaint alleged that the insured had discretion over the handling of the legal defense because it selected its own defense attorney, agreed to waive a jury trial, and developed its own trial strategy without the insurer’s input. The court further found that the complaint plausibly alleged that the insured exercised its discretion unreasonably or in a manner inconsistent with the parties’ reasonable expectations.

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