In April of 2003, Shaikh had an automobile accident with Khan, in which Khan was injured. Shaikh had coverage under a Founders automobile policy. In 2005, Khan’s counsel demanded $20,000, the limit of Shaikh’s coverage, to settle the claim. Founders countered the offer with a $2,000 settlement offer, as Mr. Khan had an impressive track record of insurance claims. A year after those offers, Shaikh called Founders to notify them he had been served with a summons and complaint, and provided Founders with his address for his paperwork. That same day, Founders transferred the case to a law firm to represent Shaikh. Later that year, attorneys designated to represent Shaikh attempted to contact him. They learned his phone number was disconnected. A significant investigation ensued, as Founders sought Shaikh through former addresses, addresses near former addresses and family members’ addresses. Shaikh had vanished, but Khan’s lawsuit moved forward.
The circuit court ordered Shaikh to answer written discovery or be barred from testifying or presenting evidence in any subsequent proceeding. Shaikh failed to appear at the arbitration hearing, and the circuit court entered a default judgment. Founders filed a declaratory judgment. The circuit court entered a default against Shaikh for failing to file an appearance in the declaratory judgment action. Founders and Khan each filed cross-motions for summary judgment regarding the assistance and cooperation policy clause. The circuit court granted the cross-motion for summary judgment in Founders’ favor, and Khan appealed.
The appellate court affirmed the circuit court for two reasons. First, the insurer’s duty of good faith does not go so far as to settle a case such that the insured is never in jeopardy of a legal judgment. Second, the insured successfully showed that Shaikh breached the assistance and cooperation clause, and that resulted in substantially compromising the defense of Khan’s tort action. To breach the cooperation clause, an insurer must show it put forth a reasonable effort to secure the insured’s participation in the defense. The insurer must show that the insured refused to cooperate. The court noted that public policy requires that an insurer cannot be relieved of responsibilities under the policy unless it proves it was substantially prejudiced by the insured’s actions or conduct. Founders reasonably and diligently attempted to reach Shaikh to secure his cooperation with the investigation of the Khan suit. The court analogized these circumstances to another case where the insured initially cooperated with the insurer, but then disappeared and could not be located. Gallaway v. Schied, 73 Ill. App. 2d 116 (1966). Only Shaikh and Khan witnessed the accident, and the court noted that Founders’ defense of Shaikh suffered due to his absence.