American Guarantee & Liability Insurance Co. v. Chandler Manufacturing Co.
1991 Iowa Sup. LEXIS 48, 1991 WL 36501, 467 N.W.2d 226 (1991)
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Rule of Law:
An insurer cannot deny coverage based on an insured's breach of a policy's cooperation clause unless the insurer first exercised reasonable diligence in attempting to secure the insured's cooperation.
Facts:
- A defective battery charger manufactured by Chandler Manufacturing Co., Inc. (Chandler) and distributed by Maxwell City, Inc. (Maxwell) caused a fire on March 13, 1982.
- At the time of the fire, Chandler was covered by a liability insurance policy from American Guarantee and Liability Insurance Company (American) which included a cooperation clause.
- Chandler went out of business in 1982 and filed for bankruptcy in 1984.
- Chandler never notified American of the fire or the subsequent products liability lawsuit filed against it.
- American first learned of the suit in October 1985 from Maxwell's attorney.
- American sent several letters to Chandler's president, George Chandler, in Illinois, asking him to cooperate with its lawyer in Iowa.
- George Chandler provided oral answers to interrogatories in one phone call but failed to sign and return the written documents and did not respond to further communications.
- George Chandler did not attend the trial for the underlying products liability suit.
Procedural Posture:
- A products liability suit was filed against Chandler and Maxwell.
- A judgment was entered against both defendants in the trial court.
- On a cross-claim within that suit, Maxwell obtained a judgment for full indemnification against Chandler.
- American, Chandler's insurer, then filed a declaratory judgment action in a trial court, seeking to have the policy declared void due to Chandler's breach of the cooperation clause.
- The trial court found American had failed to exercise reasonable diligence and denied its petition, effectively ordering it to cover the loss.
- American (as appellant) appealed the trial court's decision to the Supreme Court of Iowa.
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Issue:
Does an insurer have a duty to exercise reasonable diligence to secure its insured's cooperation before it can deny coverage based on the insured's breach of a cooperation clause?
Opinions:
Majority - Schultz, J.
Yes. An insurer cannot avoid its obligation on a policy due to an insured's breach of a cooperation clause unless it first exercises reasonable diligence in securing the insured's cooperation. The court adopts the majority rule that obligations under a cooperation clause are reciprocal; the insured has a duty to cooperate, and the insurer has a corresponding duty to use reasonable diligence in obtaining that cooperation. The insurer's diligence is a prerequisite to establishing the insured's breach. The court found that American's efforts, which consisted mainly of corresponding by letter from a distance, fell short of reasonable diligence. American was more concerned with creating a 'paper trail' to document noncooperation than with genuinely securing George Chandler's assistance, as it failed to use local personnel for contact, take his deposition, or formally request his presence at trial. Therefore, American cannot rely on Chandler's noncooperation to void the policy.
Analysis:
This decision formally adopts the majority rule in Iowa, establishing that the duties under an insurance policy's cooperation clause are reciprocal. This places an affirmative burden on insurers to actively and reasonably seek their insured's cooperation before they can deny a claim on that basis. The ruling shifts the initial focus in such disputes from the insured's conduct to the insurer's efforts, requiring courts to assess whether the insurer's attempts to secure cooperation were diligent and made in good faith. This precedent makes it more difficult for insurers to disclaim coverage, as they cannot simply rely on an insured's passivity or unresponsiveness without demonstrating their own proactive and reasonable efforts.
