Court Opinion

ID: 4543413
Source: CourtListenerOpinion
Date Created: 2020-06-23 19:00:45.230091+00
Date Added: 2024-06-11T08:01:08.605889
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                               File Name: 20a0370n.06

                                          No. 19-1926

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT

NATIONAL CONTINENTAL INSURANCE                      )                         FILED
COMPANY,                                            )                     Jun 23, 2020
                                                    )                 DEBORAH S. HUNT, Clerk
       Plaintiff-Appellee,
                                                    )
                                                    )
v.
                                                    )
                                                    )      ON APPEAL FROM THE UNITED
NURBEK AIAZBEKOV; ROAD
                                                    )      STATES DISTRICT COURT FOR
CARRIERS, INC.,
                                                    )      THE WESTERN DISTRICT OF
       Defendants,                                  )      MICHIGAN
                                                    )
ZEF LJAJCAJ,                                        )      OPINION
       Defendant-Appellant.                         )
                                                    )

       BEFORE: MERRITT, MOORE, and MURPHY, Circuit Judges.

       MURPHY, Circuit Judge. Zef Ljajcaj was injured in a trucking accident and sued the other

driver, Nurbek Aiazbekov, along with Aiazbekov’s trucking company, Road Carriers, Inc., in state

court. While that suit was pending, Aiazbekov fled the country. After Ljajcaj settled with Road

Carriers, he obtained a $2.6 million default judgment against the missing Aiazbekov. This federal

diversity case asks whether Road Carriers’ insurer, National Continental Insurance Company, must

pay that state-court judgment. National Continental says it need not pay because Aiazbekov, by

fleeing the country, breached a provision in Road Carriers’ insurance policy that required him to

cooperate in the defense. The district court agreed, and we affirm.
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

                                                 I

       Around 2:00 a.m. on October 19, 2016, Ljajcaj was driving his semitruck across Indiana’s

border into Michigan in the middle lane of Interstate 94. At the same time, Aiazbekov, driving a

load of watermelons in another semi, attempted to merge onto the interstate from Michigan’s Wel-

come Center. Aiazbekov suddenly stalled and “jackknifed” into the middle lane. He also did not

have his lights on. While Ljajcaj saw Aiazbekov’s truck jackknife, he could not avoid hitting the

back of Aiazbekov’s trailer. Ljajcaj says that he suffered head, back, and shoulder injuries that

required multiple surgeries and caused lasting physical and mental harms. In July 2017, he brought

a negligence suit against Aiazbekov and Road Carriers (the Illinois company that owned the truck)

in Michigan state court.

       National Continental, Road Carriers’ liability insurer, paid for separate counsel to defend

both Road Carriers and Aiazbekov. By January 2018, however, Aiazbekov had disappeared. His

counsel made many efforts to reach him, including through a private investigator, but learned that

Aiazbekov had fled to “Asia or Russia.” Counsel moved to withdraw from the case in late May,

which the state court allowed after a hearing. Two weeks later, Ljajcaj agreed to a $500,000 set-

tlement with Road Carriers (which was half of the $1,000,000 coverage limit under National Con-

tinental’s insurance policy). While Aiazbekov had disappeared by the time of this settlement (and

likely would not pay any judgment), the settlement agreement did not release Ljajcaj’s claims

against Aiazbekov. Given Aiazbekov’s absence (and his lack of counsel), Ljajcaj later obtained a

default judgment of roughly $2.6 million against Aiazbekov.

       Eighteen days after Aiazbekov’s counsel withdrew and several weeks before Ljajcaj moved

for a default judgment against Aiazbekov in the state-court case, National Continental brought this

diversity action against Aiazbekov, Ljajcaj, and Road Carriers. National Continental sought a

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

declaratory judgment that, under the terms of its insurance policy with Road Carriers, it had no

duty to defend or indemnify Aiazbekov in connection with Ljajcaj’s pending state-court claims.

That insurance policy, which otherwise covered Aiazbekov, states that National Continental “ha[s]

no duty to provide coverage under this policy unless there has been full compliance with” certain

duties in the event of a lawsuit—including a duty to “[c]ooperate with [National Continental] in

the investigation or settlement of the claim or defense against the ‘suit.’” National Continental

argued that Aiazbekov had violated this “cooperation” provision by fleeing the country. Aiaz-

bekov and Road Carriers both failed to answer the complaint. Ljajcaj counterclaimed, asserting

that the cooperation provision was unenforceable under Michigan law and that National Continen-

tal must provide coverage for his state-court judgment against Aiazbekov.

       At the summary-judgment stage, the district court first held that Illinois law, not Michigan

law, applied to Road Carriers’ insurance policy with National Continental. See Nat’l Cont’l Ins.

Co. v. Aiazbekov, 2019 WL 2717221, at *2 (W.D. Mich. June 28, 2019). Applying Illinois law,

the court next decided that Aiazbekov breached the insurance policy’s cooperation provision be-

cause he did not cooperate even after National Continental took reasonable steps to locate him. Id.

at *2–3. And the court found that his failure to cooperate prejudiced National Continental’s de-

fense. Id. at *3. It thus held that National Continental need not indemnify Aiazbekov for Ljajcaj’s

judgment against him. Ljajcaj now appeals, and we review the district court’s decision de novo.

See Miller v. State Farm Mut. Auto Ins. Co., 87 F.3d 822, 824 (6th Cir. 1996).

                                                  II

       Ljajcaj argues (1) that a Michigan law invalidates the cooperation provision on which Na-

tional Continental relies to avoid its duty to indemnify Aiazbekov, (2) that, even under Illinois law,

National Continental failed to prove that Aiazbekov breached this cooperation clause, and (3) that

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

National Continental should be estopped from raising this argument. Ljajcaj may have forfeited

these arguments, but they fail on their merits in any event.

                                                 A

       Ljajcaj asserts that a provision in Michigan’s Financial Responsibility Act bars us from

enforcing the cooperation clause in Road Carriers’ insurance policy with National Continental.

The provision states that “no failure of the insured to give any notice, forward any paper or other-

wise cooperate with the insurance carrier, shall constitute a defense as against” a judgment creditor

like Ljajcaj. Mich. Comp. Laws § 257.520(f)(1). The Michigan Supreme Court recently held that

§ 257.520 applies only to a subset of liability insurance policies. Titan Ins. Co. v. Hyten, 817

N.W.2d 562, 569–70 (Mich. 2012). We need not decide whether that subset would include Road

Carriers’ insurance policy because Illinois law—not Michigan law—governs this dispute.

       To identify the state law that applies in a diversity case, we look to the choice-of-law rules

of the state in which the district court sits—here, Michigan. See Mill’s Pride, Inc. v. Cont’l Ins.

Co., 300 F.3d 701, 704 (6th Cir. 2002). The district court predicted that Michigan courts would

apply Illinois law to decide whether Aiazbekov breached the cooperation clause in Road Carriers’

insurance policy. See Nat’l Cont’l, 2019 WL 2717221, at *2. Yet Ljajcaj “barely mentions” this

preliminary choice-of-law question in his opening brief, relegating it to a footnote at the end.

United States v. Johnson, 440 F.3d 832, 845 (6th Cir. 2006). Even after National Continental

highlighted the choice-of-law question in its response brief, Ljajcaj’s reply said nothing more on

the topic. Ljajcaj’s lone footnote might not preserve any choice-of-law argument. See id. at 845–

46; cf. In re Anheuser-Busch Beer Labeling Mktg. & Sales Practices Litig., 644 F. App’x 515, 529

(6th Cir. 2016); Nicholson v. City of Clarksville, 530 F. App’x 434, 445 (6th Cir. 2013).

                                                 4
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

       Regardless, we agree with the district court that Michigan courts would apply Illinois law

under Michigan’s choice-of-law rules. The Michigan Supreme Court follows the Restatement

(Second) of Conflicts for contract cases like this one. See Chrysler Corp. v. Skyline Indus. Servs.,

Inc., 528 N.W.2d 698, 703 (Mich. 1995). Where, as here, the relevant contract contains no choice-

of-law provision, the Restatement tells courts to ask which state “has the most significant relation-

ship to the transaction and the parties under” the generic choice-of-law rules that apply in all suits.

Restatement (Second) of Conflicts § 188(1) (1988). Those general rules direct courts to consider,

among other things, the policies of the forum state and of other interested states, the expectations

of the parties, and the need for predictability and uniformity. See id. § 6. The Restatement next

identifies five factors for courts to consider specifically in contract disputes: “the place of con-

tracting,” “the place of negotiation,” “the place of performance,” “the location of the subject matter

of the contract,” and “the domicil, residence, nationality, place of incorporation and place of busi-

ness of the parties.” Id. § 188(2); Mill’s Pride, 300 F.3d at 708–09.

       Two cases—one from the Michigan Court of Appeals, the other from our court—show

how these factors play out in insurance cases like this one. We begin with the Michigan case:

Farm Bureau Insurance Co. v. Abalos, 742 N.W.2d 624 (Mich. Ct. App. 2007) (per curiam).

There, a Michigan driver hit an Ohio driver while traveling on Ohio’s roads, and the Ohioan re-

sponded with an Ohio tort suit. Id. at 625. The Michigan driver’s insurer then sued both sides of

this Ohio dispute in Michigan, claiming that the Michigander’s failure to cooperate with the insurer

eliminated the insurer’s duty to indemnify that driver from all tort liability. Id. at 625–26. After

recognizing that the case triggered contract (not tort) choice-of-law rules, the Michigan court ex-

plained that it must balance the expectations of the contracting parties (the insured and insurer)

and of the two states. Id. at 626–27. When doing so it found that the “happenstance” that the

                                                  5
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

accident occurred in Ohio did not overcome the contractually rooted factors favoring Michigan

law—namely, that the vehicle “was insured under a policy issued” in Michigan to Michigan resi-

dents. Id.

       We turn to our case: Mill’s Pride. There, a company brought a diversity suit against its

insurer claiming that the insurer failed to indemnify it against business-tort claims. 300 F.3d at

703. The insurer responded that it had no duty to indemnify the company because the company

had breached the contractual provision requiring both cooperation with the insurer and notice be-

fore a settlement. Id. The underlying tort (or “occurrence”) took place partially in Michigan, but

the company negotiated its contract with the insurer in Ohio and was required to report potential

claims to the insurer in that state. Id. at 706, 708. We found that Michigan courts would apply

Ohio law on these facts. Id. at 708–11. When doing so, we opted for more of a bright-line rule.

Id. at 710–11. The suit involved contractual provisions detailing the insured’s duty to cooperate

with the insurer, not those governing the insurer’s coverage of third-party claims. Id. We thought

a uniform “rule of nation-wide effect”—not a state-by-state rule that turned on where a claim oc-

curred—should govern these types of provisions delineating the parties’ duties to each other. Id.

       These cases forecast which state’s law should apply here: Illinois’s. Like Abalos and Mill’s

Pride, this case concerns an insured’s duty to cooperate in the defense of a lawsuit. And Ljajcaj

does not dispute any of the contract-related factors that the district court recited. Illinois was the

place of negotiation and the place of contracting. Restatement (Second) of Conflicts § 188(2)(a)–

(b). The subject matter was in Illinois, given that Road Carriers is an Illinois company with its

fleet there. Id. § 188(2)(d). Illinois was the “principal place of risk.” Abalos, 742 N.W.2d at 626.

Road Carriers is domiciled in Illinois, whereas no contracting party is domiciled in Michigan.

Restatement (Second) of Conflicts § 188(2)(e). And Illinois was the primary place of performance

                                                  6
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

(although it would occur wherever Road Carriers’ trucks travelled). Id. § 188(2)(c). As in Abalos,

the relevant Restatement factors favor the state of contracting, not the state where the accident

occurred. Abalos, 742 N.W.2d at 626–27. And as in Mill’s Pride, uniformity concerns favor that

state too. When determining the duties that Road Carriers and Aiazbekov owe National Continen-

tal, “one rule of nation-wide effect” should apply. Mill’s Pride, 300 F.3d at 711. Illinois law thus

applies here.

       In his lone footnoted response to this analysis, Ljajcaj argues that Michigan has an interest

in applying its law to allow a Michigan citizen to enforce a Michigan judgment from a Michigan

accident. But he relies on a decision using Michigan’s choice-of-law rules for tort claims. See

Hall v. Gen. Motors Corp., 582 N.W.2d 866, 868 (Mich. Ct. App. 1998). Michigan law treats

insurance policies as contracts. See Titan, 817 N.W.2d at 567. That means this suit is “strictly a

contract action” governed by contract choice-of-law rules. Abalos, 742 N.W.2d at 626. No matter

how a tort analysis might play out, the contract rules favor Illinois.

                                                  B

       Even under Illinois law, Ljajcaj next argues, National Continental failed to establish that

Aiazbekov breached his duty to “[c]ooperate with [the insurer] in the . . . defense against the

‘suit.’” This claim faces an immediate obstacle: Ljajcaj did not raise an argument under Illinois

law in the district court. National Continental’s summary-judgment motion argued that it was

entitled to judgment under Illinois law. Yet Ljajcaj did not address that argument—or cite a single

Illinois case—in any of his three summary-judgment briefs. He instead took his chances on win-

ning the debate over whether Michigan law applied. Even his motion for reconsideration—filed

after the district court ruled that Illinois law governs—focused only on Michigan law. Ljajcaj thus

did not preserve the Illinois-specific arguments he raises on appeal. “[T]he failure to present an

                                                  7
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

issue to the district court forfeits the right to have the argument addressed on appeal.” Vance v.

Wade, 546 F.3d 774, 781 (6th Cir. 2008) (citation omitted).

       We have “on occasion” excused this type of forfeiture “when the rule would produce a

plain miscarriage of justice.” Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 552 (6th Cir. 2008)

(citation and internal quotation marks omitted). But Ljajcaj’s forfeiture is hard to ignore because

he does not ask us to excuse it. His opening brief raises Illinois-based arguments without even

acknowledging that he did not make these arguments in the district court. National Continental

thus pointed out Ljajcaj’s forfeiture in response. Yet even in reply Ljajcaj says nothing on this

preservation issue. In effect, then, Ljajcaj not only forfeited his Illinois-law arguments in the dis-

trict court, he forfeited any argument that he did not forfeit these arguments in this court. Cf.

Johnson, 440 F.3d at 845–46.

       In any event, we again agree with the district court on the merits. See Nat’l Cont’l, 2019

WL 2717221, at *2–4. Under Illinois law, an insurer must meet two requirements to enforce a

cooperation provision. The insurer must first show that it “exercised a reasonable degree of dili-

gence in seeking the insured’s participation and that the insured’s absence was due to a refusal to

cooperate.” Founders Ins. Co. v. Shaikh, 937 N.E.2d 1186, 1193 (Ill. Ct. App. 2010). The insurer

then must prove that the failure to cooperate “substantially prejudice[d]” it. M.F.A. Mut. Ins. Co.

v. Cheek, 363 N.E.2d 809, 813 (Ill. 1977). National Continental satisfies both factors.

       Start with diligence. See Nat’l Cont’l, 2019 WL 2717221, at *3. Illinois courts have re-

quired insurers to undertake relatively rigorous efforts to satisfy this requirement. They have found

a lack of diligence when insurers merely called a few times or mailed a few letters over a short

period. See Am. Access Cas. Co. v. Alassouli, 31 N.E.3d 803, 835–39 (Ill. Ct. App. 2015); see also

Lappo v. Thompson, 409 N.E.2d 26, 28 (Ill. Ct. App. 1980); Johnson v. Wade, 365 N.E.2d 11, 14

                                                  8
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

(Ill. Ct. App. 1977); Mazzuca v. Eatmon, 360 N.E.2d 454, 457–58 (Ill. Ct. App. 1977). Alassouli,

for example, held that an insurer did not exercise reasonable diligence when its “efforts spanned

13 days and included 5 phone calls and a skip trace.” 31 N.E.3d at 806. The court noted that the

insurer “expended minimal effort to contact [the insured] personally and much more could and

should have been undertaken to procure his cooperation,” including mailing the insured letters or

personally visiting his last known address. Id. at 813. Even hiring a private investigator was not

enough, Mazzuca found, when the investigator spent only a few hours trying to locate the insured

and did not follow up on obvious leads. 360 N.E.2d at 457.

        Illinois courts, by contrast, have found that insurers were diligent when they undertook

expansive searches. See Founders, 937 N.E.2d at 1189–91, 1195–96; Gallaway v. Schied, 219

N.E.2d 718, 719–23 (Ill. Ct. App. 1966), abrogated on other grounds by Cheek, 363 N.E.2d at

812–13; see also Davila v. Arlasky, 857 F. Supp. 1258, 1264 (N.D. Ill. 1994). In Founders, for

example, after the insurer learned that the insured’s telephone service had been disconnected and

mail returned as undeliverable, the insurer began searching databases and visiting last-reported

addresses. 937 N.E.2d at 1196. The insurer then hired an outside search firm, which identified

possible new leads that ultimately turned out to be dead ends. Id. All told, these efforts showed

that it was the insured’s desire not to be found, not the insurer’s failure to look for him, that led to

the lack of cooperation. Id.

        This case is more like Founders than Alassouli. Aiazbekov’s counsel began his represen-

tation in September 2017, but Aiazbekov stopped responding to his communications in January

2018. Over the next several months, counsel made continued efforts to contact Aiazbekov through

U.S. mail, certified mail, telephone, and text message. He asked for assistance tracking Aiazbekov

down from an acquaintance who had been helping Aiazbekov during the suit.                     But that

                                                   9
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

acquaintance reported that Aiazbekov had not returned his calls, that other members of the com-

munity had not heard from him, and that Aiazbekov was “out of reach.” Counsel then hired a

private investigator to find Aiazbekov. This investigator conducted a computer search for property

records, court records, marriage records, prison records, bankruptcy records, and social-media ac-

counts associated with Aiazbekov. The search returned two possible residences. An investigator

went to those addresses. At one, the current resident had moved in six months before and did not

know Aiazbekov, although he did occasionally receive mail addressed to him. The property man-

ager also did not recognize Aiazbekov’s name. At the other residence, a “former friend” of Aiaz-

bekov’s said that Aiazbekov had never lived at the address and that he had “moved back to Asia

or Russia” months before. These facts show that “Aiazbekov’s counsel employed every available

means to contact Aiazbekov and exhausted every lead that was generated through the investigation

into Aiazbekov’s whereabouts.” Nat’l Cont., 2019 WL 2717221, at *3. National Continental thus

satisfies the diligence element as a matter of law.

        Turn to prejudice. To establish that the insured’s failure to cooperate substantially preju-

diced an insurer, the insurer must “demonstrate that it was actually hampered in its defense.”

Cheek, 363 N.E.2d at 813. That is so, the Illinois Supreme Court has said, because insurance

policies are designed not just to protect the insured but also to protect injured third parties. See id.

Illinois courts have found prejudice when a missing insured was “the only known witness to the

collision” apart from the injured party. Founders, 937 N.E.2d at 1196; Am. Country Ins. Co. v.

Bruhn, 682 N.E.2d 366, 372 (Ill. Ct. App. 1997). And they have found it when a missing insured’s

intent was relevant to the claim. See Davila, 857 F. Supp. at 1264. As the Illinois Supreme Court

said before Cheek, “[w]ithout the presence of the [insured] and his aid in preparing the case for

trial, the insurance company is handicapped, and such lack of cooperation must result in making

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

the action incapable of defense.” Schneider v. Autoist Mut. Ins. Co., 178 N.E. 466, 468 (Ill. 1931).

At the same time, Illinois courts have found no prejudice from a missing insured when the insurer

undertook an inadequate investigation even to find him. See Alassouli, 31 N.E.3d at 814.

       Here, as in Founders, National Continental’s defense “was plainly and substantially prej-

udiced” by a key witness’s absence. 937 N.E.2d at 1196; see Davila, 857 F. Supp. at 1264. Aiaz-

bekov’s counsel moved to withdraw under Michigan’s rules of professional conduct (a motion the

state court granted) precisely because Aiazbekov’s complete absence had made counsel’s repre-

sentation “unreasonably difficult.” See Mich. R. Prof. Conduct 1.16(b)(5); cf. Progressive Cty.

Mut. Ins. Co. v. Trevino, 202 S.W.3d 811, 817–18 (Tex. Ct. App. 2006). His absence led to a

default judgment without any defense either on comparative fault or on damages. See Schneider,

178 N.E. at 467. And Aiazbekov may have been able to provide favorable testimony, at least on

the injuries that Ljajcaj appeared to suffer at the time of the accident. While, for example, Ljajcaj

presented medical records of his injuries, the record also contains a contemporaneous police report

that states Ljajcaj “reported no injuries” after the accident. By hindering his attorney’s ability to

defend him to the point where the court granted counsel’s request to withdraw, Aiazbekov “hand-

icapped” National Continental’s defense to the point where it may enforce the cooperation provi-

sion. Schneider, 178 N.E. at 468; see Founders, 937 N.E.2d at 1196.

       Ljajcaj’s responses do not change things. On diligence, Ljajcaj faults National Continental

for failing to take several additional actions. But National Continental took many steps that Ljajcaj

claims it should have, including searching property records and social media. As for other actions

(such as contacting employers), Ljajcaj identifies no caselaw suggesting National Continental

needed to do more than it did under the circumstances: repeatedly call, text, and send mail to

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

Aiazbekov, hire a private investigator to conduct online searches of his records, and personally

visit his possible residences. Founders, 937 N.E.2d at 1189–91, 1195–96.

       On prejudice, Ljajcaj faults the district court for suggesting that Aiazbekov was the only

other witness to the accident. He notes that, unlike in Founders, a police officer on the scene and

two other witnesses could have provided testimony. But a police report existed in Founders too.

Id. at 1188. And we cannot agree that a party’s complete disappearance during a case—particu-

larly when that party was a key witness—would make no difference to the outcome. See Davila,

857 F. Supp. at 1264; see also Schneider, 178 N.E. at 468. Ljajcaj also does not explain how

National Continental could have prevented Aiazbekov’s counsel from withdrawing or how it could

have hired new counsel to represent an absent client. Regardless, Ljajcaj’s criticisms of the district

court’s analysis come too late. If he thought he could show that National Continental was not

prejudiced by Aiazbekov’s disappearance, he could have attempted to do so in the district court.

But again, he made no arguments under Illinois law there.

                                                  C

       Ljajcaj lastly raises an affirmative defense against National Continental’s claim that Aiaz-

bekov breached the cooperation clause. Ljajcaj says that National Continental should be estopped

from raising this meritorious claim because it violated its duty to defend Aiazbekov in the state

suit when his lawyer withdrew after he disappeared. We disagree.

       To begin with, Ljajcaj also forfeited this affirmative defense by failing to raise it in the

district court. See Vance, 546 F.3d at 781. Indeed, the district court nowhere even addressed this

estoppel argument. See Nat’l Cont’l, 2019 WL 2717221, at *2–4. And by raising estoppel for the

first time on appeal, Ljajcaj prevented National Continental from introducing responsive evi-

dence—such as evidence about its relationship to Aiazbekov’s counsel and about whether counsel

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

acted independently in choosing to withdraw from the state suit after Aiazbekov disappeared. Cf.

Murphy v. Urso, 430 N.E.2d 1079, 1085 (Ill. 1981); Am. Fam. Mut. Ins. Co. v. W.H. McNaughton

Builders, Inc., 843 N.E.2d 492, 498 (Ill. Ct. App. 2006).

       Regardless, Illinois courts would not apply estoppel here. Under Illinois law, an insurer

must defend a case if the case “potentially” falls within an insurance policy’s coverage. Crum &

Forster Managers Corp. v. Resolution Tr. Corp., 620 N.E.2d 1073, 1081 (Ill. 1993). Yet Illinois

law gives an insurer two options if it believes its policy does not apply. It can either (1) defend

the case under a reservation of rights or (2) deny coverage and file a separate declaratory-judgment

action (in state or federal court) seeking a declaration that the case did not trigger that coverage.

See State Farm Fire & Cas. Co. v. Martin, 710 N.E.2d 1228, 1230–31 (Ill. 1999); Westchester

Fire Ins. Co. v. G. Heileman Brewing Co., 747 N.E.2d 955, 965 (Ill. Ct. App. 2001). “If the insurer

fails to take either of these steps and is later found to have wrongfully denied coverage, the insurer

is estopped from raising policy defenses to coverage.” Emp’rs Ins. of Wausau v. Ehlco Liquidating

Tr., 708 N.E.2d 1122, 1135 (Ill. 1999). When the insurer takes the second path, its “duty to defend

is suspended” once it files the declaratory-judgment action, so “the filing of the declaratory judg-

ment action is . . . a means for the insurance company to avoid the estoppel in a subsequent suit[.]”

Those Certain Underwriters at Lloyd’s vs. Prof’l Underwriters Agency, Inc., 848 N.E.2d 597, 601,

604 (Ill. Ct. App. 2006). The insurer need not successfully obtain the declaratory relief before it

stops defending the insured in the underlying case. See Martin, 710 N.E.2d at 1231–32.

       Although a declaratory-judgment action suspends the duty to defend (and the risk of estop-

pel), an insurer may not deny a defense and then wait indefinitely to bring a declaratory-judgment

action. Providence Hosp. v. Rollins Burdick Hunter of Ill., Inc., 824 F. Supp. 131, 135 (N.D. Ill.

1993). It must seek a declaration of rights in a “timely” manner after its denial of a defense. Ehlco,

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

708 N.E.2d at 1138. What constitutes a timely declaratory-judgment action? The Illinois Supreme

Court has said that an action “is untimely as a matter of law” if the insurer waits to bring its de-

claratory-judgment action “until after the underlying action has been resolved.” Id. Beyond that

it has given no guidance. Other courts have adopted differing approaches. Some have said that

estoppel will not apply so long as the insurer files the action “before the underlying lawsuit is

resolved.” State Auto. Mut. Ins. Co. v. Kingsport Dev., LLC, 846 N.E.2d 974, 986–87 (Ill. Ct.

App. 2006) (citing cases). Others have “looked to whether a trial or settlement was imminent.”

Id. at 987 (citing cases). But the recent trend has been toward asking whether the insurer “filed its

action within a reasonable time of being notified of the underlying suit.” Id. (citing cases).

       We think the Illinois Supreme Court would adopt the reasonable-time test, which “allows

the court to decide each case according to its own facts and circumstances.” Id.; Pace Commc’ns.

Servs. Corp. v. Express Prods., Inc., 18 N.E.3d 202, 214 (Ill. Ct. App. 2014); Emp’rs Reinsurance

Corp. v. E. Miller Ins. Agency, Inc., 773 N.E.2d 707, 719–20 (Ill. Ct. App. 2002); cf. Hartley v.

Berry, 452 N.E.2d 97, 98–100 (Ill. Ct. App. 1983). Courts most often apply this test when insurers

deny coverage from the outset of a case. In that context, they have asked whether an insurer filed

the declaratory-judgment action within a reasonable time of notice of the suit. See Nautilus Ins.

Co. v. Bd. of Dirs. of Regal Lofts Condo. Ass’n, 764 F.3d 726, 733 (7th Cir. 2014) (five-month

delay reasonable); Kingsport, 846 N.E.2d at 988 (seven-month delay reasonable); see also Ismie

Mut. Ins. Co. v. Michaelis Jackson & Assocs., LLC, 921 N.E.2d 1156, 1166 (Ill. Ct. App. 2009).

       Here, National Continental followed the steps required by Illinois law. Unlike in most

cases where the insurer disputes coverage from a case’s outset, National Continental did not dis-

claim coverage from the start. Rather, it disclaimed coverage only after Aiazbekov disappeared

and breached the cooperation clause. At that point, it could choose between defending the absent

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

client under a reservation of rights or filing a declaratory-judgment action. See Martin, 710 N.E.2d

at 1230–31. It chose the latter course. We think it did so within a reasonable time. Aiazbekov

disappeared around January 2018. Aiazbekov’s counsel investigated for months to confirm that

Aiazbekov had abandoned the case, moved to withdraw on May 22, and withdrew on June 11.

National Continental filed this declaratory-judgment action on June 29, 18 days later. And the

state court granted its final judgment in the underlying case on October 1. We believe that Illinois

courts would find any delay here reasonable. Cf. Nautilus, 764 F.3d at 733; Ismie, 921 N.E.2d at

1166; Kingsport, 846 N.E.2d at 988. Because National Continental timely filed this declaratory

action, estoppel does not prevent it from raising its defense that Aiazbekov breached the coopera-

tion clause. See Martin, 710 N.E.2d at 1232.

       As his only response, Ljajcaj argues that National Continental needed to successfully “ob-

tain a ruling of no coverage . . . before the judgment was entered against Aiazbekov” in the state

suit. The Illinois Supreme Court rejected this exact argument in Martin. It reasoned that a rule

requiring insurers to successfully obtain a declaratory judgment before declining to defend an in-

sured would “render the declaratory judgment option illusory.” Id. An insurer would have “no

realistic choice” but to defend the case “or risk entry of a default judgment for which it would

subsequently be estopped from denying coverage.” Id. The court thus held that estoppel does not

apply “merely because the underlying case proceeds to judgment before the declaratory judgment

action is resolved.” Id. This rule applies here.

       We affirm.

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

       KAREN NELSON MOORE, Circuit Judge, dissenting. I agree with the majority that

Illinois contract law governs this action, but I would hold that National Continental Insurance Co.

(“National Continental”) is estopped from raising its defense to indemnification. National Conti-

nental ceded its non-cooperation defense by failing to seek a declaration excusing it of its duty to

defend its insured prior to withdrawing as counsel. For that reason, I dissent.

       National Continental hired counsel for Nurbek Aiazbekov to defend him in the underlying

state-court action, per the terms of his insurance policy. See Appellee Br. at 28. A few months

into the lawsuit, however, Aiazbekov stopped communicating with his counsel. R. 1-3 (Mot. to

Withdraw at 5–6) (Page ID #98–99)). Counsel hired a private investigator to track him down and

learned that Aiazbekov might have moved back to Asia or Russia. Id. at 6 (Page ID #99). When

it became clear that Aiazbekov likely had absconded, counsel moved the court for permission to

withdraw representation under Michigan Rule of Professional Conduct 1.16(b). Id. at 5, 7–8 (Page

ID #98, 100–01). The state court granted Aiazbekov’s attorney’s motion to withdraw. R. 1-4

(State Court Order) (Page ID #130–32). Within a couple of weeks National Continental then filed

a Complaint for a Declaratory Judgment in federal court to obtain a declaration that it has no duty

to defend or indemnify Aiazbekov. See R. 1 (Compl. at 7) (Page ID #7). While both proceedings

were pending, the state court entered a default judgment against Aiazbekov for Ljajcaj’s injuries,

awarding Ljajcaj $2,642,408.06 in damages. See R. 23-3 (Default J.) (Page ID #487).

       National Continental argues that it was relieved of its obligation to defend or indemnify

Aiazbekov once he breached the insurance policy’s non-cooperation clause, which states that Na-

tional Continental “ha[s] no duty to provide coverage under this policy unless there has been full

compliance with the following duties: . . . [b](3) Cooperate with us in the investigation or settle-

ment of the claim or defense against the ‘suit.’” R. 1 (Compl. at 4–6) (Page ID #4–6) (quoting R.

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

1-2 (Ins. Policy at 53) (Page ID #70)). That conclusion is at odds with Illinois law. Ljajcaj is

correct that National Continental breached its duty to defend Aiazbekov in the underlying action

and, as a result, is estopped from asserting its non-cooperation defense in these proceedings.1

        Under Illinois law, an insurance company owes two distinct duties to the insured: “(1) the

duty to defend him if a claim is made against him; and (2) the duty to indemnify him if he is found

legally liable.” Chandler v. Doherty, 702 N.E.2d 634, 637 (Ill. Ct. App. 1998). “The oft-repeated

refrain of Illinois insurance law is that an insurer’s duty to defend is ‘much broader’ than its duty

to indemnify.” Landmark Am. Ins. Co. v. Hilger, 838 F.3d 821, 824 (7th Cir. 2016). If the facts

alleged in the complaint even potentially fall within the policy’s coverage provisions, the insurer

has a duty to defend. Id. (citing Crum & Forster Managers Corp. v. Resolution Tr. Corp., 620

N.E.2d 1073, 1079 (Ill. 1993); Ill. Emcasco Ins. Co. v. Nw. Nat’l Cas. Co., 785 N.E.2d 905, 909

(Ill. Ct. App. 2003). “[T]he insurer taking the position that the complaint is not covered by its

policy must defend the suit under a reservation of rights or seek a declaratory judgment that there

is no coverage.” Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d

1092, 1098 (Ill. 2005). It “may not simply refuse to defend the insured.” Emp’rs Ins. of Wausau

v. Ehlco Liquidating Tr., 708 N.E.2d 1122, 1134 (Ill. 1999). “If the insurer fails to take either of

these steps and is later found to have wrongfully denied coverage, the insurer is estopped from

        1
          It is true that Ljajcaj raises arguments based on Illinois law for the first time on appeal,
but I would not apply forfeiture in this case. One, the issue here is purely a question of law. Two,
Aiazbekov has absconded and likely is judgment-proof, so indemnification by National Continen-
tal is Ljajcaj’s only real chance at relief. Therefore, if this court does not take up the issue, Ljajcaj
will be denied a substantial justice because he will likely never recover any of the over $2 million
award to which he is entitled. Three, the district court had the opportunity to consider Illinois
insurance law at least from National Continental’s perspective. And it was that body of law that
formed the basis of the district court’s opinion. For each of these reasons, I would decline to apply
forfeiture and instead would reach the merits on this question.

                                                   17
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

raising policy defenses to coverage.” Id. at 1135; see also Country Mut. Ins. Co. v. Badger Mut.

Ins. Co., No. 1-17-1774, 2018 WL 3235360, at *8 (Ill. Ct. App. June 29, 2018) (applying estoppel

where insurer filed for a declaratory judgment relieving it of its duty to defend after default judg-

ment was entered in the underlying action).

       “The estoppel doctrine has deep roots in Illinois jurisprudence. It arose out of the recog-

nition that an insurer’s duty to defend under a liability insurance policy is so fundamental an obli-

gation that a breach of that duty constitutes a repudiation of the contract.” Ehlco, 708 N.E.2d at

1135. Estoppel is the “penalty designed to induce insurers to protect clients who are at risk, rather

than to sit idly while the underlying suit proceeds.” Am. Safety Cas. Ins. Co. v. City of Waukegan,

678 F.3d 475, 486 (7th Cir. 2012). The only significant limitation on estoppel is that it will not

apply when the duty to defend has not been triggered, including “where the insurer was given no

opportunity to defend; where there was no insurance policy in existence; and where, when the

policy and the complaint are compared, there clearly was no coverage or potential for coverage.”

Ehlco, 708 N.E.2d at 1135. But “[o]nce the insurer breaches its duty to defend, . . . the estoppel

doctrine has broad application and operates to bar the insurer from raising policy defenses to cov-

erage, even those defenses that may have been successful had the insurer not breached its duty to

defend.” Id. (emphasis added). At that point, the only defense that can defeat estoppel is a conflict

of interest between the insurer and the insured. See Am. Fam. Mut. Ins. Co. v. Savickas, 739 N.E.2d

445, 450–51 (Ill. 2000) (citing Thornton v. Paul, 384 N.E.2d 335, 343–45 (Ill. 1978)).

       National Continental does not dispute that the underlying action was covered under Aiaz-

bekov’s policy or that it had an opportunity to defend Aiazbekov. It therefore had a duty to defend

him. If National Continental wanted to assert a non-cooperation defense, it was required either to

seek a declaration freeing it of its duty to defend or to continue representing Aiazbekov under

                                                 18
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

reservation of its rights. Instead, it simply withdrew, citing to rules of professional conduct. And

predictably, the case ended in a default judgment against the abandoned Aiazbekov. Under Illinois

law, National Continental is now estopped from raising its non-cooperation defense to coverage.

        National Continental does not grapple with the estoppel doctrine, let alone the insurer’s

distinct and near-insurmountable duty to defend. Instead, it makes three unpersuasive attempts to

get around Ljajcaj’s argument entirely. National Continental’s primary argument is that duties to

defend or indemnify are beside the point—because Aiazbekov does not even qualify as an “in-

sured.” See Appellee Br. at 20–21. Aiazbekov ceased to be an insured, National Continental

argues, when he breached the policy’s cooperation clause. See id. at 16. The case that National

Continental cites for this argument is Founders Insurance Co. v. Shaikh, 937 N.E.2d 1186 (Ill. Ct.

App. 2010).

        The Illinois Court of Appeals stated in Shaikh that, “[i]n order to establish breach of a

cooperation clause, the insurer must show that it exercised a reasonable degree of diligence in

seeking the insured’s participation and that the insured’s absence was due to a refusal to cooper-

ate.” Id. at 1193. The insurer must also prove that “it was substantially prejudiced by the insured’s

actions or conduct in regard to its investigation or presentation or defense of the case.” Id. Based

on the scenarios discussed in Shaikh, the district court here concluded that National Continental

was reasonably diligent and substantially prejudiced. I do not doubt that National Continental was

reasonably diligent and substantially prejudiced. But National Continental relies on Illinois con-

tract law and is bound to follow it. That body of law does not permit National Continental to ask

for absolution after the fact.

        The analysis that National Continental asks us to perform is supposed to be done before

counsel withdraws. Any defenses to coverage (other than a conflict of interest) are now estopped.

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No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

Even in Shaikh, National Continental’s key case, the insurer was seeking exemption from its duty

to defend while the action was ongoing—and not as some post-facto reprieve from liability after

judgment had been entered. See id. at 1188–91. If National Continental wanted to head off liabil-

ity, it should have raised its non-cooperation arguments in the state-court proceeding and either

sought a declaration or defended Aiazbekov under reservation of rights. At its own peril, it with-

drew as counsel and left Aiazbekov to meet his inevitable doom at default judgment. It cannot

now complain.2

       Even applying the reasonable-time test proposed by the majority, I disagree that Illinois

courts would find National Continental’s delay here reasonable. “[T]he ‘reasonable time’ test is a

[] flexible approach that allows the court to decide each case according to its own facts and cir-

cumstances,” including “the status of the underlying suit.” State Auto. Mut. Ins. Co. v. Kingsport

Dev., LLC, 846 N.E.2d 974, 987 (Ill. Ct. App. 2006). Courts should consider, for instance, when

the insurance company received notice of the suit and whether trial or settlement was imminent.

Id. at 987–88.

       As the majority acknowledges, Illinois courts that have applied the reasonable-time test did

so where the insurance company denied coverage from the outset and filed for a declaratory

       2
          National Continental makes two additional arguments in the alternative. First, and amaz-
ingly, it claims that it never “actually withdrew from the defense of Aiazbekov.” See Appellee Br.
at 28. Aiazbekov’s attorney withdrew, “[b]ut, while Aiazbekov’s attorney was hired by National
Continental [and] . . . [w]hile National Continental paid for that Counsel’s work on behalf of Aiaz-
bekov, [Ljajcaj] has presented no evidence that the decision by that attorney to withdraw was made
by National Continental.” Id. (emphasis added). That is meritless. Second, National Continental
argues that Ljajcaj lacks standing to raise a duty-to-defend argument on Aiazbekov’s behalf. See
Appellee Br. at 26–27. In its view, Ljajcaj has standing only to argue for indemnification and has
no personal stake in Aiazbekov’s defense. But the entire purpose of estoppel is to protect the
injured party where the insurer fails to defend the insured or to seek a declaration that excuses it
from doing so. These backup arguments do not persuade.

                                                20
No. 19-1926, Nat’l Cont’l Ins. Co. v. Aiazbekov, et al.

judgment sometime after it learned of the lawsuit. In those cases, several months of delay were

deemed reasonable. See Nautilus Ins. Co. v. Bd. of Dirs. of Regal Lofts Condo. Ass’n, 764 F.3d

726, 733 (7th Cir. 2014) (five-month delay reasonable); Kingsport, 846 N.E.2d at 988 (seven-

month delay reasonable); Ismie Mut. Ins. Co. v. Michaelis Jackson & Assocs., LLC, 921 N.E.2d

1156, 1166 (Ill. Ct. App. 2009) (collecting cases). But here, National Continental had long been

on notice of the lawsuit and the proceedings were accelerating toward a close. In Kingsport, the

Illinois Court of Appeals distinguished a case in which an insurance company had already

acknowledged a duty to defend from the case at hand, in which the insurance company “ha[d]

consistently taken the position that it d[id] not have a duty to defend.” 846 N.E.2d at 988. The

former case was “inapposite.” Id. There is a difference in the amount of delay that is reasonable

for an insurer that has acknowledged a duty to defend and one that has not. Well into this case,

counsel for Aiazbekov withdrew without first seeking a declaration that it may do so without pen-

alty. I would hold that this delay was unreasonable.

       I would reverse the district court’s grant of summary judgment for National Continental

and hold that it is estopped under Illinois law from raising its non-cooperation defense.

                                                21