Knowledge of Counsel May Be Imputed to Insurer, Judge Rules

By Don R. Sampen, published, Chicago Daily Law Bulletin, March 4, 2025

The U.S. District Court for the Northern District of Illinois, construing Illinois law, acknowledged that knowledge of an insurer’s attorneys might be imputed to the insurer for purposes of determining if the insurer had waived its coverage rights.

Ultimately, however, the court found fact issues requiring that a final decision on waiver and other issues be delayed.

The case is Norguard Insurance Co. v. MB Real Estate Services, Inc., No. 22 C 3007, 2025 U.S. Dist. Lexis 17679 (Jan. 31). The insurer, Norguard, was represented by Cozen O’Connor of Chicago. Best, Vanderlaan & Harrington of Naperville represented the insured, MBRE. Litchfield Cavo of Chicago represented a second insurer involved in the litigation, Continental Insurance Co.

An employee of MBRE, Martin Kraslen, fell on MBRE’s property in 2016, resulting in an injury. MBRE’s workers’ compensation insurer, Norguard, provided coverage for the injury.

Kraslen, however, brought suit against various other entities he claimed were partially responsible for the injury. MBRE was brought into the litigation as a third-party defendant, for whom Norguard provided a defense by hiring the firm of Sanchez & Daniels.

During the course of the litigation, Kraslen learned that MBRE received video footage of his fall but failed to preserve it. As a result, in an 11th amended complaint, Kraslen brought a direct action against MBRE for spoliation.

Sanchez & Daniels thereafter continued to defend MBRE apparently without notifying Norguard of the spoliation claim. It was not until nearly five months later that Norguard learned of the spoliation claim through other sources. At that point it agreed to continue defending MBRE but pursuant to a reservation of rights.

A few months later Norguard brought this declaratory action seeking a determination of its coverage obligations on the spoliation claim.

Thereafter Kraslen voluntarily dismissed his original lawsuit and filed a second suit naming MBRE in a single count for spoliation. At that point Norguard denied coverage.

Following Kraslen’s second lawsuit, MBRE filed a third-party claim against its commercial general liability carrier, Continental, as part of this pending declaratory action, seeking alternative coverage for spoliation. All parties then moved for summary judgment.

Possible Estoppel

In an opinion by Judge Sunil R. Harjani, the court denied all motions except Continental’s, which the court granted.

Harjani first addressed Norguard’s coverage obligations to MBRE on the spoliation claim. He observed that spoliation clearly was not covered under Norguard’s workers’ compensation policy. The real issue, however, was whether, by continuing to defend MBRE for spoliation for five months in Kraslen’s first lawsuit without a reservation of rights, Norguard was estopped, or waived its right, to deny coverage for MBRE in the second lawsuit.

For Harjani, that issue turned primarily on whether MBRE could be said to have been prejudiced by Norguard’s defense through the Sanchez & Daniels firm. MBRE argued it was prejudiced by various actions of the firm, such as by failing to oppose a good-faith finding by a settling co-defendant.

Harjani acknowledged the possibility that some of the actions by the firm may have resulted in prejudice, but found further that MBRE had not established prejudice with clear and unequivocal evidence. On the other hand, neither had Norguard shown that establishing prejudice was a futile endeavor. Thus, fact issues existed.

Waiver and Other Issues

Harjani then considered whether, instead of being estopped, Norguard had waived its right to raise a defense to coverage by not defending the spoliation claim with a reservation of rights in place from the outset. Norguard argued no waiver because it had no actual knowledge of the claim until after the five-month period had passed. Once it became aware, moreover, it timely reserved its rights.

MBRE, however, contended that through reasonable diligence Norguard should have become aware of what its own appointed counsel were doing.

Harjani appeared to agree that an insurer’s constructive knowledge may be sufficient to form the basis of waiver even if actual knowledge was absent. He also pointed to authority for the proposition that an insurer has a duty to keep abreast of the progress and status of litigation, which here could weigh in favor of a waiver.

Nonetheless, he found many questions about what had happened during the five-month period and concluded, once again, that without more information there was no basis on which to grant summary judgment to either party.

Finally, Harjani addressed coverage for the spoliation claim under Continental’s CGL policy. Kraslen asserted spoliation based on MBRE’s negligent failure to preserve a “DropBox download link” to video footage of his fall and injury.

Harjani initially opined that a video link is not tangible property that would be covered under the terms of a CGL policy.

MBRE nonetheless argued that the court should consider the video file itself as the damaged property, in response to which Harjani pointed out that the Continental policy explicitly excluded “electronic data” from the definition of tangible property. He further wrote that the video data file clearly constituted electronic data that was excluded from coverage.

The court therefore granted summary judgment in favor of Continental. It denied all other motions based on the existence of fact issues.

Key Points

• Depending on the circumstances, information known by insurer-appointed counsel for an insured may be imputed to the insurer for purposes of determining whether the insurer waived its right to assert a reservation of rights.
  
• Depending on the policy terms, a CGL policy may provide coverage for a spoliation claim against an insured, if the spoliated evidence consists of tangible property not otherwise excluded.