Wildrick v. North River Insurance Co.

Robert Phillips (Robert), through his professional corporation (Phillips), performed accounting services for Lonnie Kent Wildrick’s (plaintiff) company, but an independent audit revealed irregularities. Wildrick sued Phillips in Iowa state court, alleging conversion, breach of contract, and professional-services negligence, all based on improper payments to Robert and Phillips, and another Robert-owned entity. North River Insurance Company (North River) (defendant), Phillips’s professional-liability insurer, agreed to defend Phillips, reserving the right to limit the defense to just covered claims. The policy excluded fraud coverage, required Phillips to cooperate in the insurer’s defense, and relieved North River of liability if Phillips failed to cooperate. For two years, Robert told North River’s hired counsel there was no fraud. Yet Robert then admitted embezzlement to the United States Attorney. Wildrick dropped the contract and conversion claims. Four days before trial, North River withdrew its defense of Phillips, citing Robert’s failure to cooperate. Wildrick obtained a judgment against Phillips. Wildrick, as a third-party beneficiary and as Phillips’s assignee, sued North River in state court for breach of contract for withdrawing its defense of Phillips and other claims. North River removed the case to federal court. The court granted summary judgment to North River, holding that Phillips had failed to cooperate, which prejudiced North River. Wildrick appealed, arguing that North River knew or should have known of Phillips’s deception, waiving its right to assert a failure-to-cooperate defense.