State Farm Fire & Casualty Company v. KING SPORTS, INC.
827 F. Supp. 2d 1364, 2011 WL 6062222, 2011 U.S. Dist. LEXIS 140441 (2011)
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Rule of Law:
An insurer is relieved of its duty to defend and indemnify an insured when the insured materially breaches a cooperation clause in the insurance policy by failing to communicate substantively with the insurer and its appointed counsel in the defense of a lawsuit, and also breaches clauses requiring consent for settlement and prohibiting assignment of rights, provided the insurer acted diligently and in good faith to secure cooperation.
Facts:
- In 2001, King Sports, a business that advertised and sold golf clubs online, applied for a business liability policy from State Farm, listing Jui-Chen “Jimmy” Chang as the owner.
- In December 2002, State Farm issued the business liability policy to King Sports.
- In November and December 2007, Callaway Golf and Nike, respectively, filed separate lawsuits against King Sports alleging trademark infringement of golf clubs and accessories.
- Through counsel hired by State Farm, King Sports settled the Callaway and Nike lawsuits, paying Callaway $18,500 and Nike $17,500.
- In June 2008, Cleveland Golf sent King Sports a cease-and-desist letter alleging that King Sports was violating Cleveland Golf’s trademarks by advertising and selling golf clubs that looked like Cleveland Golf’s products.
- Despite Cleveland Golf’s cease-and-desist letter, King Sports continued to advertise and sell the allegedly infringing products.
- On July 7, 2010, Andy Lee, identified as “owner” of King Sports, entered into a settlement agreement with Cleveland Golf without State Farm’s knowledge or consent.
- The settlement agreement included King Sports consenting to a $1,000,000 judgment and assigning any claims King Sports had against State Farm to Cleveland Golf.
Procedural Posture:
- In November 2007, Callaway Golf filed a trademark infringement action against King Sports in a California federal court.
- In December 2007, Nike filed a trademark infringement suit against King Sports in an Illinois federal court.
- On August 18, 2009, Cleveland Golf filed suit against King Sports in the United States District Court for the Northern District of Georgia, alleging multiple forms of trademark infringement and unfair competition.
- Shortly after filing, Cleveland Golf added Jui-Chen “Jimmy” Chang as a party-defendant in the trademark infringement suit.
- In January 2010, attorney Bruce Hedrick, hired by State Farm, filed an answer on behalf of King Sports and Chang in Cleveland Golf's suit after receiving numerous extensions.
- On March 9, 2010, Hedrick filed a motion to withdraw as attorney for King Sports and Chang, citing his clients’ complete lack of cooperation, which the Court granted on March 30, 2010.
- On July 15, 2010, in Cleveland Golf's case, the court entered a consent judgment in favor of Cleveland Golf and against King Sports in the amount of $1,000,000, in accordance with the settlement agreement.
- On January 15, 2010, State Farm filed a complaint for a declaratory judgment against King Sports and Cleveland Golf in the United States District Court for the Northern District of Georgia, seeking a declaration that its policy did not provide coverage due to policy exclusions and King Sports's failure to abide by policy conditions.
- Cleveland Golf, as assignee of King Sports, asserted a counterclaim against State Farm for breach of the duty to defend and indemnify King Sports, and also brought the same claim on its own behalf as a third-party beneficiary.
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Issue:
Is an insurer relieved of its duty to defend and indemnify an insured in an underlying trademark infringement suit when the insured fails to cooperate with its appointed defense counsel, ceases communication with the insurer, and enters into a settlement agreement assigning its rights without the insurer's knowledge or consent, even if the insured asserts the insurer acted in bad faith?
Opinions:
Majority - Timothy C. Batten, Sr.
Yes, an insurer is relieved of its duty to defend and indemnify an insured when the insured fails to cooperate in the defense of an underlying suit and breaches settlement and assignment clauses, provided the insurer demonstrates good faith and diligence in its efforts to secure cooperation. The court held that State Farm was entitled to summary judgment because King Sports and Chang materially breached the cooperation clause of their policy. Despite numerous attempts by State Farm and its hired attorney, Bruce Hedrick, King Sports and Chang failed to provide any substantive information regarding the trademark infringement lawsuit, severely hampering Hedrick's ability to defend them. The only individual Hedrick communicated with, Andy Lee, admitted he did not cooperate and eventually ceased all communication, despite continuing to communicate with Cleveland Golf. This material non-cooperation ultimately led to Hedrick's withdrawal as counsel. The court rejected Cleveland Golf's argument that State Farm acted in bad faith or manufactured a non-cooperation defense, citing State Farm's extensive and diligent efforts to contact the insureds via letters, phone calls, a physical visit to the business address (which was found vacant), and internal investigations. The court further found that King Sports willfully and fraudulently failed to cooperate, as evidenced by Lee's unilateral execution of a $1,000,000 settlement agreement with Cleveland Golf and assignment of claims against State Farm, without notifying State Farm or obtaining its consent. These actions directly violated the policy's settlement and non-assignment clauses. The court distinguished this case from situations where an insurer absolutely refuses any defense, noting State Farm provided initial counsel and a reservation-of-rights letter. It further held that State Farm was not required to hire replacement counsel after Hedrick's withdrawal, as it would have been an “exercise in futility” given the insureds' complete lack of communication. Finally, the policy's “right-to-bring suit” clause precluded Cleveland Golf’s counterclaim, as it required full compliance with all policy terms and either an “agreed settlement” (signed by all parties) or a judgment after an actual trial, neither of which occurred here.
Analysis:
This case reinforces the critical importance of cooperation clauses in insurance contracts under Georgia law. It clarifies that an insured's failure to provide substantive information and communication, even if some minimal contact occurs, constitutes a material breach, particularly when it impedes the defense. The ruling also underscores that an insurer's good faith and diligent efforts to secure cooperation are key to enforcing these clauses. Furthermore, the case highlights the risks insureds take when entering into settlements and assigning policy rights without the insurer's consent, especially after failing to cooperate, potentially nullifying coverage entirely and leaving them liable for large judgments.
