## Facts

- Robert Phillips, through his accounting professional corporation, provided accounting services to Lonnie Kent Wildrick’s company from 1983 to 1986.
- When Wildrick prepared to sell the company in 1986, an independent audit indicated Phillips’s financial statements overstated accounts receivable by at least $100,000 and that improper payments were made to Phillips or related entities.
- In 1988, Wildrick sued Phillips in Iowa state court for conversion, breach of contract, and professional negligence, based on the improper payments.
- Phillips was insured under a professional-liability policy issued by North River Insurance Company covering professional negligence, excluding dishonest or fraudulent acts, and requiring insured cooperation in the defense.
- North River undertook Phillips’s defense under a reservation of rights.
- For about two years, Phillips repeatedly told North River’s defense counsel there had been no fraud or embezzlement, but later admitted to the U.S. Attorney that he had embezzled from Wildrick’s company.
- After the admission, Wildrick dismissed the contract and conversion claims and proceeded only on professional negligence.
- Four days before trial, North River withdrew its defense of Phillips, invoking the cooperation clause and asserting prejudice from Phillips’s misrepresentations.
- Wildrick obtained a state-court judgment of roughly $427,500 against Phillips.
- Wildrick then sued North River, asserting breach of contract (as third-party beneficiary and as assignee), breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and bad faith.
- The district court dismissed the third-party beneficiary theory for failure to state a claim and later granted summary judgment to North River on the remaining claims; Wildrick appealed.

## Issues

1. Whether Phillips’s false statements about embezzlement constituted a material failure to cooperate that entitled North River to withdraw the defense under the policy.
2. Whether North River was required to show, and did show, prejudice from Phillips’s noncooperation under Iowa law.
3. Whether North River waived, or was estopped from asserting, the cooperation-clause defense because it allegedly knew or should have known of Phillips’s deception earlier.
4. Whether Wildrick could recover against North River as a third-party beneficiary or, alternatively, as Phillips’s assignee, including on extra-contractual theories such as bad faith.

## Decision

- The Eighth Circuit affirmed the dismissal of the third-party beneficiary claim and the grant of summary judgment for North River on all remaining claims.
- The court held Phillips failed to cooperate as a matter of law by materially misrepresenting whether he had embezzled.
- The court concluded Phillips’s noncooperation prejudiced North River’s ability to defend and evaluate coverage and settlement.
- The court rejected waiver and estoppel arguments, finding insufficient evidence that North River had the requisite knowledge or acted inconsistently with enforcing the cooperation clause.
- Because North River’s withdrawal was contractually justified, Wildrick’s assignment-based contract claims and his fiduciary-duty, implied-covenant, and bad-faith claims failed.

## Legal Principles

- An insured’s duty to cooperate includes providing truthful, complete information material to defense and coverage; deliberate misrepresentation of material facts can constitute noncooperation.
- Under Iowa law, an insurer invoking noncooperation generally must show prejudice; prejudice may be found where misstatements cause the insurer to structure a defense on false premises and impair late-stage defense and settlement decisions when the truth emerges.
- Waiver or estoppel of a cooperation-clause defense requires evidence the insurer had sufficiently clear knowledge of the breach and intentionally relinquished the right, or induced reasonable reliance; continued defense while relying on the insured’s denials does not alone establish waiver or estoppel.
- A plaintiff suing as assignee takes only the insured’s rights; if the insured is barred by a valid cooperation-clause defense, the assignee is likewise barred.
- Extra-contractual claims premised on wrongful refusal to defend or indemnify fail where the insurer acted within contractual rights and asserted a valid policy defense.

## Conclusion

The court held that North River could withdraw its defense because the insured’s material misrepresentations about embezzlement breached the cooperation clause and prejudiced the insurer, and Wildrick could not recover—either directly or as assignee—absent waiver, estoppel, or a viable independent contractual right.


Wildrick v. N. River Ins. Co., 75 F.3d 432 (8th Cir. 1996)