Insured's Disappearance Negates Coverage
December 01, 2010
The 1st District Appellate Court recently held that an insured's disappearance and absence of communication with the insurer after notifying the insurer of a claim against the insured, constituted a breach of an automobile insurance policy's cooperation clause, thereby negating the claimant's right to recover, despite the fact that the insurer was earlier in control of settlement negotiations with the claimant. Founders Insurance Co. v. Shaikh, 2010 WL 4227791 (1st Dist. Oct. 22, 2010).
The claimant, Muhammad M. Khan, was represented by Dranias, Harrington, & Wilson. The Law Office of Shari Shelmadine represented the insurer, Founders.
The insured, Siraj A. Shaikh, and Khan were involved in a two-car collision in 2003, as the result of which Shaikh was ticketed for failure to stop. Shaikh at that time notified Founders, Shaikh's auto insurer, and Founders and Khan's insurer negotiated a payment of about $5,000 to settle Khan's property damage claim.
Thereafter, Khan asserted a claim for about $6,000 in medical care and another $600 for lost wages. Negotiations took place between Khan's attorney and Founders, during which Khan demanded the Founders policy limit of $20,000. Founders countered with an offer of $2,000.
Khan subsequently filed suit, of which Shaikh provided notice to Founders in 2006, along with suit papers. Founders retained counsel for Shaikh and counsel filed an appearance and answer on his behalf.
Later in the year, however, the attorney reported to Founders that correspondence sent to Shaikh returned undeliverable. At that point the matter was turned over to Founders' special investigation unit. Through that unit, Founders tried to track down the location of Shaikh, and in the process retained the services of a professional investigation firm.
The investigation took Founders to several addresses that were on file for Shaikh, and also to communication with Shaikh's son, who advised Founders that he had not been in contact with Shaikh for "years." At one point Founders was advised that Shaikh may be in jail, and Founders' investigator check three different sources through which it ultimately determined that Shaikh was not an inmate.
Founders also sent multiple letters to Shaikh at different addresses, requesting information and his cooperation. The correspondence, among other things, announced Founders' intention to file a declaratory judgment action regarding breach of the cooperation clause of the Founders policy. That clause required Shaikh to cooperate with Founders in the investigation, settlement or defense of any claim.
In the meantime, the Khan lawsuit was progressing, and the court set a deadline for discovery and mandatory court-sponsored arbitration proceedings. The arbitration was in May 2007, Shaikh did not appear, and an arbitration award and judgment were entered against him and in Khan's favor in the amount of $11,000, plus costs.
Shortly after the arbitration award, Founders filed the instant coverage action against Shaikh, in which Kahn also was named a party. It attempted to serve Shaikh at various locations, but ultimately sought and obtained a court order authorizing substitute service on the Secretary of State and by publication. In May 2008, the court entered a default judgment against Shaikh for failing to file an appearance in the declaratory judgment action.
Founders and Khan subsequently filed cross summary judgment motions regarding Shaikh's breach of the cooperation clause, with Khan in the process attempting to enforce his $11,000 judgment against Shaikh through the Founders policy. The trial court granted Founders' motion, denied that of Khan, and Khan took this appeal.
In an opinion by Justice Margaret Stanton McBride, the 1st District affirmed. She first addressed Khan's main argument on appeal that an insurer owes a duty of good faith to its insured to settle a case so that the insured is not in jeopardy of a legal judgment, and that in this case Founders made no reasonable effort to resolve Khan's claim for bodily injury and lost wages.
In McBride's view, Khan misstated the good-faith duty to settle as discussed in such cases as Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 675 N.E.2d 897 (1996), and Haddick v. Valor Insurance Co., 315 Ill. App.3d 752, 735 N.E.2d 132 (2000). Under those cases, McBride said, when a claimant has sued the insured for an amount in excess of the policy limit, the insurer may be liable for the full amount of a judgment unless it gives the policyholder consideration at least equal to its own, and acts in good faith in responding to settlement offers.
Under Cernocky v. Indemnity Insurance Co., 69 Ill. App. 2d 196, 216 N.E.2d 198 (1966), however, the insurer need not consider the interests of the insured where the recovery sought in an action may not exceed the policy limits. The bad faith cause of action against the insurer thus arises only where the insurer refuses to settle within the policy limit a claim for an amount in excess of that limit.
That principle was not relevant here, according to McBride, because Khan's medical and wage claims were only about half the policy limit and he never made a demand in excess of the policy limit. The facts here did not suggest that Founders ever had a duty to compromise with Khan due to the likelihood of a judgment in excess of Shaikh's policy limit.
Khan also argued that Founders failed to show that Shaikh's breach of the cooperation clause was willful, and that the breach substantially prejudiced the defense of the tort action.
McBride acknowledged that an insurer must use reasonable diligence in securing an insured's cooperation. She also noted that, as a matter of public policy, an insurer is not relieved of its responsibilities based on a breach of the cooperation clause unless it proves it was substantially prejudiced by the insured's actions or conduct in regard to its investigation or presentation or defense of the case. The requirement of prejudice is based on the fact that one of the purposes of liability insurance is to protect members of the public.
In this case, however, McBride found that Founders used reasonable efforts and diligently pursued contact with Shaikh, to the extent of retaining an outside investigative firm. The results of its persistent efforts suggested to McBride that Shaikh did not want to be found. She further concluded that Founders' defense of the Khan action was plainly and substantially prejudiced by the absence of the only known witness to the collision besides Khan.
The facts before the court therefore justified the summary judgment in favor of Founders as a matter of law, and the court affirmed.
