Illinois Coverage Litigations Beware! Attorney’s Failure to Properly Investigate Results in Severe Sanctions

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In American Access Casually Co. v. Alcauter, 2017 IL App (1st) 160775, the Illinois Appellate Court, First District, affirmed the district court’s imposition of sanctions against the plaintiffs, American Access Casually Company (AACC) and its coverage counsel, James Newman, pursuant to Illinois Supreme Court Rule 137. Specifically, the Appellate Court held that there were sufficient grounds to uphold the sanctions because of the plaintiffs’ failure to properly investigate the continuing validity of their lawsuit, their failure to turn over pertinent information, and their proceeding to trial despite knowing that the lawsuit no longer enjoyed factual support.

As background, in September 2011, the defendants, Alcauter and Krebs, got into a car accident with each other. At the time of the accident, Alcauter was covered under an automobile insurance policy with AACC, which included a cooperation clause requiring Alcauter to assist in the conduct of any legal proceeding in connection with the subject matter of the policy. Failure to cooperate with AACC in any legal proceeding would act as a bar to coverage. Alcauter failed to appear at a mandatory arbitration hearing, resulting in award to Krebs of $10,000. In October 2013, AACC filed a declaratory judgment, alleging that it notified Alcauter of the date and time of the arbitration hearing, and Alcauter’s failure to appear constituted a material breach of the cooperation clause. Alcauter also was not present at the declaratory judgment hearing, where AACC alleged that it sent at least two letters to Alcauter regarding the arbitration hearing, and that Alcauter’s counsel called him 24 hours prior to remind him of same. AACC moved for summary judgment, as Newman asserted that he received a call about twenty-four hours before arbitration in which Alcauter confirmed his attendance. However, the district court denied the plaintiffs’ motion for summary judgment, holding there were still unanswered questions raising issues of fact regarding the notice.

At trial, Krebs introduced documents from the Illinois Department of Corrections (IDOC), which showed that Alcauter had entered into IDOC custody on March 13, 2014, and that those records were available to the public via the IDOC website. The district court ruled that AACC owed coverage, as Krebs’ documents proved that Alcauter was in jail at the time of the arbitration hearing. Subsequently, Krebs moved for the court to impose sanctions against the plaintiffs pursuant to Rule 137. Krebs argued that the plaintiffs failed to conduct a proper investigation regarding Alcauter’s whereabouts because if they had, the plaintiffs would have found out that Alcauter was incarcerated. Thus, Krebs contended that the plaintiffs pursued a lawsuit that was not grounded in fact, and made claims without conducting a reasonable inquiry into the basis of the claim. Notably upon learning of Alcauter’s incarceration, the plaintiffs made a settlement offer for the full $10,000, but declined to add costs and interest, which Krebs rejected. Even though the plaintiffs argued that they did not learn about Alcauter’s incarceration until the “eve of trial,” the evidence established the plaintiffs learned about Alcauter’s whereabouts over three weeks before trial.

The district court granted Krebs’ Rule 137 motion, sanctioning the plaintiffs for $12,678.75 in attorney fees and $865.95 in costs. The court held that once the plaintiffs learned of Alcauter’s possible incarceration, they were under a duty to withdraw the action, instead of proceeding to trial. It found that the plaintiffs knew of Alcauter’s imprisonment as early as six weeks before going to trial, and when Newman put on his evidence, he knew it “was comprised of smoke and mirrors.” The court reasoned that Newman had easy access to Alcauter’s location via the IDOC website.

On appeal, AACC argued that sanctions were improper, as Newman was unaware of Alcauter’s incarceration at the time he signed the motion for summary judgment, and thus, none of the pleadings could be interpreted as a misrepresentation. However, the Appellate Court rejected such a narrow interpretation of Rule 137, as Newman should have brought Alcauter’s imprisonment to the court’s attention as soon as he learned of it, and instead of proceeding to trial, he should have either dismissed his suit, or at the very least, asked for time to investigate his claim. But instead, Newman proceeded to trial knowing that he had no factual basis to support AACC’s position. Therefore, the Appellate Court held that the trial court did not err in concluding that the plaintiffs violated Rule 137 when they failed to bring Alcauter’s incarceration to its attention and subjected Krebs and the trial court “to the time and expense of proceeding to trial.” It reasoned that the plaintiffs’ failure to reasonably investigate the possibility of Alcauter’s incarceration for six weeks, and failure to move for a continuance to properly investigate its claims and the information they received from Krebs’ counsel before proceeding to trial is the “kind of vexatious and unreasonable behavior that Rule 137 is aimed to punish.”

Further, the Appellate Court rejected AACC’s argument that because it offered to pay Krebs the full $10,000 it was excused from its failure to tell the court of Alcauter’s incarceration.

This judgment is important for Illinois coverage litigators, as it illuminates the burden each practitioner has to fully investigate the merits of his/her pleadings and papers submitted to the court. This judgment also reminds that attorneys have a duty to inform the court that a claim is not well-grounded in fact even if the parties are not scheduled to appear in court for a time — it is incumbent upon the attorneys to speak up.