Direct Auto Insurance Co. v. Reed
2017 IL App (1st) 162263
Ill. App. Ct.2017Background
- On Oct. 31, 2010 Angela Reed (insured by Direct Auto) was involved in a car collision; multiple suits were filed and consolidated for mandatory court-annexed arbitration.
- Reed, though represented by counsel, did not personally attend the March 18, 2014 arbitration; an award entered against her and the trial court subsequently entered an order debarring her from rejecting the award.
- Direct Auto sued for a declaratory judgment (coverage action), alleging Reed breached the policy cooperation clause by failing to attend arbitration and that Direct Auto was substantially prejudiced.
- At bench trial Direct Auto presented testimony from its claims manager and a defense attorney (who did not attend the arbitration) asserting the absence hampered defense; Reed defaulted on an amended answer and was not an active participant.
- The trial court granted defendants’ motion under 735 ILCS 5/2-1110, finding Direct Auto failed to prove substantial prejudice; the court relied on United Automobile Ins. Co. v. Buckley and later entered judgment for defendants.
- On appeal the court affirmed: a debarring order alone does not establish substantial prejudice as a matter of law, and Direct Auto’s evidence was speculative and insufficient to meet its burden.
Issues
| Issue | Plaintiff's Argument (Direct Auto) | Defendant's Argument (Claimants) | Held |
|---|---|---|---|
| Whether a debarring order (entered because insured failed to appear at arbitration) establishes "substantial prejudice" to insurer as a matter of law | Debarring order itself demonstrates prejudice because insurer was prevented from rejecting the arbitration award and thus from fully defending | Debarring order does not automatically establish substantial prejudice; insurer must prove actual, substantial prejudice | Held: No. A debarring order alone does not establish substantial prejudice; insurer must prove actual, substantial prejudice. |
| Whether Direct Auto presented sufficient evidence of substantial prejudice from Reed’s absence at arbitration | Reed’s absence prevented rebuttal of other driver’s account and hampered contesting liability and damages; defense testimony supports prejudice | Testimony was speculative, mostly from persons not at arbitration; no proof that insured’s live testimony would have produced a better outcome | Held: No. Evidence was nonspecific and speculative; trial court’s finding that Direct Auto failed to show substantial prejudice was not against the manifest weight of the evidence. |
| Standard of review for trial court’s 2-1110 ruling | De novo for legal questions; manifest-weight for factual/weighing determinations | Same: defer to trial court on evidence weighing and credibility | Held: Mixed. De novo review applies to the pure legal question (effect of debarring order); manifest-weight review applies to the court’s factual weighing of the prejudice evidence. |
Key Cases Cited
- M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492 (Ill. 1977) (insurer must show actual substantial prejudice to deny coverage under cooperation clause)
- Founders Insurance Co. v. Shaikh, 405 Ill. App. 3d 367 (1st Dist. 2010) (prima facie elements for breach of cooperation clause: breach and substantial prejudice)
- People ex rel. Sherman v. Cryns, 203 Ill. 2d 264 (Ill. 2003) (two-prong analysis for 735 ILCS 5/2-1110: prima facie then weighing/credibility)
- Kokinis v. Kotrich, 81 Ill. 2d 151 (Ill. 1980) (trial court may negate some prima facie evidence during weighing stage)
- Rhodes v. Illinois Central Gulf R.R., 172 Ill. 2d 213 (Ill. 1996) (definition of manifest weight of the evidence)
- Hinkle v. Womack, 303 Ill. App. 3d 105 (1st Dist. 1999) (party represented by counsel who does not personally appear at arbitration does not automatically waive right to reject award)
- Martinez v. Gaimari, 271 Ill. App. 3d 879 (1st Dist. 1995) (court may debar party from rejecting arbitration award if failure to appear is not in good faith)